Bastiat’s Bastions

In my class, I tell students that there are two causes of shortages, price controls in a market and bureaucratic or state control of the marketing of a good, where those who control the price have no incentive to raise prices.  Since scarcity is a constant problem of humanity, there is less available of everything than we would like, scarce resources (things used to make goods and services that we want to use) and scarce goods and services must somehow be rationed.  

Prices do a better job of rationing scarce goods and resources than anything else, because not only do they provide a good incentive for people to use things for their more important uses and refrain from putting things toward lower valued uses, they also provide an incentive for people to cut back in face of increasing scarcity.  More importantly, prices also give suppliers an incentive to provide more of a good that people want more of.  It gives both buyers an incentive to look for alternatives, for substitutes, and sellers an incentive to produce substitutes.  It is important to see that prices ration scarce goods and services (remember, if it is not free, it is scarce). If prices are not allowed to adjust to what economists call “the equilibrium price,” where the amount people want to buy at that price comes into equality with the amount that the producers want to produce at that price, shortages ensue, and something other than price must ration the scarce good. 

Often, we use first-come-first-served, or waiting lines to ration things.  This is what I think of as a “default” rationing device.  If something is in short supply, and we do nothing else, usually sellers will sell to whoever gets there first.  Sometimes sellers might use some other rule, though, for deciding who gets things.  The main point here is that price controls are one reason for shortages and, if they do anything at all, will result in a shortage. 

In socialist regimes, such as Venezuela, Iran, and Zimbabwe, prices are not controlled by people who stand to profit from increasing prices in the face of shortages.  Instead, the price signaling device in the economy, the mechanism that gets consumers to cut back in the face of increasing scarcity, or sellers to produce more if buyers want more, is “disconnected.”  Prices are set to please the rulers.  If the rulers depend on some popularity to maintain power, as is the case with many dictators, prices are often set low.   If you take a look at this photo gallery, and read the captions, you will see just how cheap gasoline, or “petrol,” is in Iran these days.  As you can see, the price of gasoline is set well below what it is in the rest of the world.  If sellers in Iran were motivated by the profit from the sale of gasoline, they would either raise price in Iran or export it where they could get a better price.

Since Iran has little capacity to refine crude oil into gasoline, they import most of their gasoline.  With the threat of economic sanctions from the UN because of Iran’s defiance of the international body’s orders to stop their nuclear program, Iran expects their may soon be a sharp reduction in gasoline for Iran to buy, so they are trying to stockpile gasoline to reduce the punch from any sanctions in the form of a gasoline embargo. Now, Iran’s President Ahmadinejad is facing some problems, because he has over-extended his promises to the people of Iran with his demagoguery (you should note H.L. Menkin’s famous definition of a demagogue: “one who preaches doctrines he knows to be untrue to men he knows to be idiots.”).  Ahmadinejad, unlike Zimbabwe’s Mugabe and Venezuela’s Chavez, has no one in his country to lay blame on, but can still blame the Americans.  

In a market economy, prices rise in the face of a shortage.  In a socialist regime such as Iran, where individual owners control the prices of their goods, prices are set by the government.  If the rulers see low prices as a way of placating citizens and staying in power, prices will be set to satisfy political goals instead of profit goals.  However, if rationing is suddenly instituted, people become upset over the rationing, the way they would over a sudden rise in prices. As a result, citizens in Teheran rioted a few weeks ago, setting fires to gas stations.  See the story, “Iran curses Ahmadinejad over petrol rationing,” by Colin Freeman in  ndon’s Telegraph and the story by Nazila Fathi and Jad Mouawad  in the International Herald Tribune.So, as I noted earlier, there are two basic ways to create a sustainedor persistent shortage, institute a price control or do the same thing with socialism, or bureaucratically administerd prices. 

–MC

This entry was posted on Wednesday, July 4th, 2007 at 2:09 pm and is filed under General, Political Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.