Professor Modigliani on Price Controls: The Baleful Influence of the Perfectly Competitive Model

Abstract

During the depths of the Great Depression, 1,028 economists signed a letter and sent it to President Herbert Hoover, counselling him against signing into law the Smoot-Hawley tariff. In the modern era, 562 practitioners of the dismal science sent an open letter to President William Clinton, warning him of the perils of price controls embodied in his health-care plan (Armen et al., 1994).

Both of these events are readily understandable, in view of the strong consensus among economists on these issues. For example, Frey et al. (1984) compiled American economists’ responses to 27 different public policy issues, and found the second greatest agreement with regard to the destructive effects of tariffs and import quotas, and the fourth greatest agreement as to the harmfulness of price controls. Block and Walker (1988) replicated this survey for Canadian economists, and found the greatest agreement with regard to the destructive effects of tariffs and import quotas, and the second greatest agreement as to the harmfulness of price controls. In the Frey et al. (1984) study, the highest consensus was achieved in opposition to rent control; for Block and Walker (1988), the same statement: “A ceiling on rents reduces the quantity and quality of housing available” achieved the third highest consensus of all 27 statements.