This Just In:
Price Controls Cause Shortages

February 2, 2001

Another "Dog Bites Man" story has once again taken the American press corps by surprise.

California's electricity crisis is treated in the media as if it were some sort of natural disaster, like a hurricane. But the only fact of nature operating here is the hard-and-fast rule that whenever you come across a screw-up this big, you know the government is behind it.

The California Legislature created this problem about five years ago when it deregulated the wholesale market for electricity but fixed prices at the retail level, a policy that has made Cuba the happy, prosperous country that it is today.

Needless to say, eventually wholesale prices soared, but the utilities were prohibited from passing their increased costs onto consumers. Buy high, sell low! (Isn't that what they teach you in business school?) Since the California utilities are about to go bankrupt on the governmentally imposed "Buy high, sell low" strategy, no one will sell them electricity. So now there's no electricity in California — but at least it's cheap!

You are probably wondering how it is that multibillion-dollar corporations with highly paid business school graduates populating their corporate risk-management departments could have failed to anticipate price fluctuations in the electricity market and entered into long-term contracts.

The answer is: A screw-up this big could only be caused by the government. California actually prohibited utilities from entering into long-term contracts. (The California Legislature came up with many other idiotic ways to mess up the electricity market; this is just the highlight reel.) If California utilities had relied on evil, blood-sucking hedge-fund managers rather than the California Centralized Committee to Fix Prices and Plan Markets, they'd have plenty of electricity now.

To summarize: The California Legislature fixed prices at which electricity could be sold to consumers and prohibited utilities from entering into long-term contracts to hedge the electricity market, leading like night into day to wild fluctuations in the price of electricity, but the utilities couldn't recoup their costs because the government had fixed prices in the retail market.

In the mainstream media, this is known as "deregulation."

In point of fact, the California electricity crisis resulted from government policies that are the opposite of deregulation, the antimatter of deregulation, as antithetical to deregulation as the rule of law is to Bill Clinton.

If the California Legislature had helped the Soviet Union with its transition from communism to a market economy, they'd be experiencing their 84th year of "bad weather" wrecking the crops again this year. Instead, only California utilities had a "bad weather" year. The utilities signed on to what was a politically attractive package at the time, and now it turns out they stepped on a rake and the rake has hit them in face. Dog bites man!

It is remarkable that it is this difficult for so many people to grasp the concept of a free market at this point in history. It's never going to get any easier than this.

Only a little over a decade ago the centralized planning of the Eastern Bloc was exposed as having created a squalid, poverty-stricken abyss. Meanwhile, corrupt running-dog lackeys of the capitalist system managed to produce a society in which the poorest Americans have refrigerators, televisions, VCRs, telephones, radios and 67 varieties of orange juice.

But no matter how many good products at low prices capitalism manages to provide, and no matter how spectacular the failures of government intervention are, some segment of the population continually lists toward distributing goods and services on the old Soviet bread-distribution model.

Evidently, the free market is an incredibly counterintuitive concept. People have to be constantly reminded how excellent the market is at distributing goods and services.

The basic idea of a free market is that the consumer and seller enter directly into mutually beneficial transactions. The consumer has the best information about what he wants and how much he is willing to pay; the seller has the best information about what he can provide and what it will cost him. That's how we end up with great stuff like reasonably priced Chia pets in the shape of Jerry Garcia's head.

The government bureaucrats rallying cry is: "Insert a middleman!" They simply cannot shake the conviction that they are in possession of the millions of constantly changing pieces of information that the market processes continually and effortlessly. If we ever let these bureaucrats run free, stores everywhere would run with the smooth Austrian precision of the Department of Motor Vehicles.

Naturally, the California government's solution to a problem created by the government is: more government! California voters ought to say what the Democratic Party is now gently trying to convey to Bill Clinton — thanks, but you've already done enough.