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Capping energy prices will leave us all worse off

4 October 2017

3:09 PM

4 October 2017

3:09 PM

We have a couple of hundred years of economic history to tell us that some things are just a really, really bad idea. Printing loads of money, for example. State control of industries. Punitive taxes. Subsidies. But of all the really terrible polices a government can put in place, the very worst of all is price controls. The trouble is, that also seems to be the most popular idea in British politics right now.

Last week, Labour announced what amounts to price controls on credit cards, with a cap on the interest rate that can be charged. It is already in favour of controls on rents. Today, Theresa May stepped in with her own contribution, unveiling a plan for controlling the price of energy. And it is still only Wednesday, so who knows where we will end up by the end of the week. All the main parties may be chipping in pledges to control the prices of everything from train fares, to petrol, to food, or clothes, or whatever else happens to trend on Twitter for a few hours.

But hold on. That is crazy. In fact, we already have a very good mechanism for controlling prices. It is called competition. And it is by far the best way to make stuff more affordable and better at the same time.

Price controls have a certain simplistic appeal, which may explain why, despite all the evidence they don’t work, they keep bouncing back. Companies can be demonised as greedy and predatory, and the market can be accused of failing the consumer. A benevolent government can step in, and force though price cuts, and portray itself as the champion of ordinary working people.

True, there may be markets that are not sufficiently competitive, although usually far fewer than sometimes claimed. Credit cards are certainly not one of them (check the junk mail on your doormat if you want a reminder of just how many different providers there are out there). Neither are rents. There are an estimated 1.75 million landlords out there, all vying for your business, and if property is too expensive that has a lot more do with planning restrictions than anything else. Energy is slightly more debatable but we already have perfectly good mechanisms in place for controlling that industry. In fact, far from ripping off consumers, the energy business is now so competitive that it can be quite a difficult to make money. Only last year GB Energy Supply, which claimed to be the cheapest supplier in the market, collapsed. If it was price gouging, it wasn’t doing it very well.

The real problem, however, is that once we open the door to price controls we won’t know where to stop. After all, if all you had to do reduce the price of something, and make everyone better off, was to pass a piece of legislation, it would be silly to stop with credit cards or energy. You might as well control the price of everything. Once you go down that road, however, you end up with a command economy. If that was so great, the Soviet Union would have worked a lot better, and not collapsed after seven decades of failure.

All price controls really do is protect incumbents, and ossify a market, and make innovation and entrepreneurship impossible – and those are the only things that genuinely make a product cheaper. What a Conservative Prime Minister really needs to do is defend the role of free markets and competition in delivering that. Otherwise we will all end up a lot poorer very quickly.


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