Déjà voodoo economics

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.
— Thomas Sowell

Ah, politics—the ancient and mystical art of convincing people that 2 + 2 can, in fact, equal 5 if you just believe hard enough.

Enter Kamala Harris, the latest political alchemist who thinks government decrees can magically stabilise supermarket prices. With a wave of the legislative wand, she’ll have Americans buying filet mignon on a hamburger budget.

But Kamala isn’t alone in her quest to defy the basic principles of economics. Her Australian counterparts in Labor and the Greens have long been chanting their anti-price gouging incantations.

What is price gouging, exactly? They never quite define it, but the term seems to cover any situation where prices rise inconveniently — such as during a pandemic, a natural disaster, or when there’s a supply chain disruption.

Price gouging implies something nefarious, but it’s usually just the market responding to increased demand or reduced supply. Blaming “greedy corporations” for price increases is like blaming the thermometer for a fever.

The belief that prosperity can be mandated by law is as timeless as it is ridiculous. History books are brimming with tales of governments that tried to wrestle the invisible hand of the market into submission, only to get sucker-punched by reality.

But today’s politicians aren’t the type to let a little thing like history get in the way of a good vote-winning soundbite.

Let’s dissect three of the most enduring economic myths that politicians keep resurrecting, no matter how many times they’ve been buried by reality:

1. Price Ceilings, Floors, and Other Broken Furniture

Minimum wage laws, rent controls, and price ceilings — these are the toys politicians play with when they want to break the laws of economics. Economic laws are like gravity: they don’t care about good intentions. As Milton Friedman famously quipped, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Setting prices by government decree ignores the complex dance between supply and demand. Price ceilings always lead to shortages, price floors to surpluses. Over the years, Australian governments have tried both and achieved little more than shooting themselves in the foot.

2. Housing Grants: Throwing Petrol on the Bonfire of the Housing Market

In Australia, federal and state governments are convinced they can solve the housing crisis by giving first-home buyers grants. This is about as effective as extinguishing a fire with petrol. When demand is already sky-high and supply is strangled by red tape, tossing money at buyers only inflates prices further. Meanwhile, the NIMBYs (Not In My Backyard) hold zoning laws hostage like a band of economic terrorists, ensuring the housing supply remains tightly constricted.

3. The Myth of the Free Lunch: Spoiler Alert—It’s Never Free

Australian politicians are obsessed with ‘free’ things — free healthcare, free education, free puppies for everyone! But as Friedman would remind us, “There’s no such thing as a free lunch”. Someone always pays the tab, and it’s usually the taxpayer — or worse, future generations stuck with a mountain of debt. Government handouts are the economic equivalent of a Ponzi scheme: they work until they don’t, and when they don’t, the mess is left for someone else to clean up. The grim reality is that when politicians start handing out ‘free’ lunches, the only guarantee is that we’ll all be left poorer when the bill arrives.

The tragedy of these economic myths isn’t just that they’re wrong — it’s that we’ve seen them fail spectacularly before.

The ancient Roman Emperor, Diocletian, set maximum prices for 1000 items including food, clothing, and transport. Violation of these price orders was punishable by death. Like modern politicians, Diocletian blamed the ensuing economic disaster on the greed of merchants.

The old Soviet Union, the worker’s paradise, fixed the prices of food. The result was mass starvation. New York City controlled rents, which created a severe housing shortage.

And here we are in 2024 trying them again, like a toddler who’s convinced that this time, touching the stove won’t burn.

Adam Smith had it right when he suggested that all we need for a prosperous society is peace, low taxes, and a justice system that’s not actively malicious. Everything else — price controls, subsidies, grants — is just bureaucratic noise. So, the next time a politician offers you an economic miracle, remember: if it sounds too good to be true, it probably is.

And if it comes with the promise of something for nothing, check your wallet — because chances are, you’re the one who’s going to pay.

Emeritus Professor Steven Schwartz is a Senior Fellow at the Centre for Independent Studies and former Vice-Chancellor at Macquarie, Brunel and Murdoch universities.