At the end of 2021, German economist Isabella Weber unleashed a shit storm among fellow economists because she argued in a Guardian article for price caps to counter rising inflation. An unorthodox view among economists; Nobel laureate Paul Krugman called it “stupid” on Twitter — for which he has since apologized . Variations of a gas price ceiling are now being introduced throughout Europe. Weber came to Berlin from the US, where she is a professor at the University of Massachusetts at Amherst, to be part of the ‘ Gaskommission ‘, the committee commissioned by the government to shape the German ‘Gaspreisdeckel’ (‘gas price cover’). . Weber’s proposal, derided a few months ago, is now seen as inescapable – although governments now often see it as a necessary measure to maintain citizens’ purchasing power. “The war hadn’t started at the end of last year,” says Weber (Nürnberg, 1987) in a cafe in Berlin, “but in the US, food and energy prices skyrocketed.” Weber’s research focuses on the effect of major, structural economic upheavals on price stability, for example the transition from a planned economy to a free market economy, or from a war economy back to a regular economy. Her book, How China Escaped Shocktherapy, was included in a list of the most interesting books of 2021 by the Financial Times . Because that switch takes a long time, the price of cars shoots up. We saw something similar when the lockdowns were lifted: from an economy that had been severely curtailed by measures, we went back to ‘normal’. Demand went up, but supply stalled due to all kinds of supply problems, so prices went up.” Photo Gordon Welters Why is a price cap a good idea in such a situation? “When the prices of essential goods skyrocket due to scarcity, price ceilings were often used in the past to control those prices. As we are now seeing, gas prices are difficult to control simply by raising interest rates. If you adjust the interest rate upwards, you suppress the dynamics in the entire economy, while it is mainly the gas price that matters. Many sectors cannot function without gas, and many households can only save to a certain extent. You can turn the heating low, but without heating at all is a very big hardship at certain temperatures. So demand remains at a certain level, while gas prices are extremely high. The price will be very random. That is why you need an instrument that keeps the price under control where demand is not flexible, for example for basic maintenance in households, and that keeps the price flexible for anything above that.” Also read: German government allocates 200 billion euros extra for energy compensation This is arranged in the German gas price cover in such a way that from March 2023 the gas price ceiling will apply to 80 percent of the consumption of 2022. For everything that is consumed on top of that, you pay the market price. Thus, this gas price cover rewards frugality. Because the price cap cannot be implemented before March 2023, everyone will be reimbursed for approximately one month of consumption from 2022 in December. The price cap will last until the spring of 2024. Why are many economists so allergic to the idea of a price ceiling? “It is a fundamental problem: virtually all schools of economics today are based on the flexibility of prices, starting at the point where supply and demand meet, which is really the first commandment of economics. So when you say that point needs to be fixed, you’re really saying to economists, your tool isn’t working.” Also read: Anger between member states over slow EU response is increasing, will the energy summit become ‘a little bit of a fight’? The criticism in Germany of the gas price lid is that it is too much ‘with the watering can’: everyone is compensated, even those who do not need it. The explanation is that this was not possible due to lack of time. The IMF is demanding ‘targeted and temporary’ measures, which the German package therefore does not meet. Does that broad gesture still have a positive effect, namely that it builds trust? “High gas prices don’t just affect people on welfare or those with the lowest wages. The problem is that far into the middle of society people have problems paying their bills. 40 percent of Germans have no savings and will immediately run into problems if there is an additional tax of 1,500 euros on the energy bill. That people can’t pay their bills, that landlords can’t pay the energy supplier, and that they then collapse: those fears are real. I think it is important that citizens with this package have certainty that basic needs such as heating and hot water will continue to be available at a stable price. With a one-time payment, which many economists insist on, citizens can pay higher prices. But a one-off payment may also lead to higher prices and more inflation.” In Germany, more than 20 percent of the added value comes from industry. Is that why Germany operated separately from Europe for the gas price ceiling? “It is true that Germany is much more dependent on industry than many other European countries; in France, for example, it is 13 percent. But no, I do not think that Germany should operate independently, and I would be in favor of something similar to be done at European level as in Germany: that the part of the market where flexibility is needed, for example for LNG [liquefied gas], should be remains, and that other parts of the market should be stabilized through coordinated European measures.” A version of this article also appeared in the newspaper of October 20, 2022