Thursday, 12 April 2007

City traders need price controls to keep their drinks bills down

When commentators mythologise about evil capitalists charging unfair prices for their goods, they usually juxtapose them with some (economically) poor unfortunate who is unable to exercise choice and so is obliged to part with more of their hard-earned and scanty resources than is fair.

Outside the exercise of monopoly provision of essential services, there is little truth behind these claims. One must eat and drink, and one must be clothed, sheltered and warm. But one does not need a mobile telephone, so no matter how high the prices of mobile telephony, no purveyor of telephones or air-time can “gouge” the poor consumer: if one does not believe the price worth paying, one simply does not buy.

Nonetheless, the image of the poor consumer is an emotive one (“There but for the Grace of God go I”), and is often used to justify government intervention in pricing. Where natural monopolies obtain, regulators oversee prices, but since time immemorial there have been calls for price controls on goods that are freely traded in the market. Both the last years of the Ancien Regime and early Revolutionary France were rocked by battles over whether food prices should be capped; Britain and America experienced rent control (and wages control) in the middle of the last century.

Misguided though these policies are, food and shelter are at least essentials, and the supposed beneficiaries poor. But wine critics know little of poor people, and have their own constituencies (and their own livers) to worry about. Thus the call by wine critics cited in The Times today for a cap on the mark-up restaurants can charge for wine does leave a rather sour and flat taste in the mouth, lacking any overtones of oak or so much as a hint of summer fruits.

Price controls to protect the rich from being exploited are rather futile. Swillers of 1964 Petrus Pomerol Bordeaux operate in the ultimate luxury market. They are more than capable of determining whether an additional £2,900 a bottle is worth paying for dinner at the Dorchester Grill as opposed to Gordon Ramsay’s establishment down the road.

Fortunately, the call will fall on deaf ears. For one thing, it is too reminiscent of the Conservatives introduction and maintenance of the Corn Laws to protect the incomes of rich landowners. But more significantly, it exposes all the stupidities of price controls in any market.

Good wines have been laid down for a long time. Thus those who bought early benefit from their foresight. The owners of the Dorchester note that one could not buy bottles as cheaply as Mr. Ramsey is now able to sell them. He has made a shrewd investment. If the Dorchester were required to sell at a lower price, they might be unable to make any profit at all, and so would simply not sell the wine. Thus supply would fall. In more immediate products a similar problem exists: if one caps rental prices, fewer houses are made available for rent; if one caps sale prices, fewer are built.

In fact, the whole system is based on the assumption that there is a natural and fair price for a product. There is not, or at least if there is it is the price at which both seller and buyer are satisfied. Every purchase is an example of individuals happily swapping one resource (ultimately their labour) for another, and outside the essentials there is always an element of choice. Prices are dictated by supply and demand. Any attempt to interfere with that – to require that prices be kept lower or higher – will merely reduce either supply or demand. Some of us may choose to buy Fair Trade tea and coffee, but if all tea and coffee were elevated in price to ensure a larger income for farmers, consumers would simply drink less tea and coffee, either undermining the benefits of the elevated price or forcing some farmers our of the industry altogether.

Martin Isark may argue that excessive mark-ups “It discourages experimentation and dampens enthusiasm for trading-up”, but capping the mark-up to “£10 a bottle for most wines”, as Malcolm Gluck suggests, is likely to squeeze the middle out of the market. Restaurants will only keep cheaper wines on which they can make a good profit, and very expensive wines that do not fall foul of the new regulations. Thus trading up will be even more difficult, as a large chasm will open up in the middle that it is not worth restaurants servicing.

Ironically, the city traders who have been blowing record bonuses recently know all this. It is not they that are calling for price controls. They are probably getting their full £2,900 worth of value from the exclusivity that results from being able to pay vastly more than other people for an identical product. No genuinely poor people are suffering here. But perhaps the “relatively poor” – which in this case means wine critics struggling on mere five and six figure salaries – will have to accept that enjoying a 1982 Le Montrachet Bouchard Pere & Fils over dinner is simply not worth the price.

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