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Are Soviet-style price controls returning?
As the New York Times noted last week, food prices have been on a tear in Russia. With elections approaching, Vladimir Putin decided pricey potatoes and pierogies just wouldn't do. The solution: Soviet-style price controls.
I am a fan of Daniel Gross's Slate writings, but I don't think that claim is quite correct. What made Soviet-style price controls Soviet-style was the absence of normal residual claimancy. As David Levy has shown, the resulting incentive was to lower prices to deliberate shortage-inducing levels. Managers would then sell access for favors, often access to goods and services elsewhere. Therefore the incentive was to enforce the price control and limit access to the good. Shortages were virtually everywhere and much of the economy reverted to barter.
Today most Russian firms are private or at least involve residual claimants, and both managers and owners wish to accumulate money not favors. The incentive is to evade price controls, or to adjust the quality of the good to match the new specified price. Most markets will still clear, albeit in inefficient ways. These price controls are hardly a good idea, but their impact won't be one tenth as bad as the price controls of the older regime. Often the goal of such price controls is simply to lower the measured rate of inflation, or to allow the government to claim it is doing something rather than nothing. I'd be surprised if shoppers at the major Moscow supermarkets notice a major difference.
Posted by Tyler Cowen on November 1, 2007 at 07:25 AM in Current Affairs | Permalink
Comments
Excellent point about residual claimants.
I wonder how this will play into dollar denominated Russian debt and their local stock markets though.
Posted by: sa at Nov 1, 2007 8:05:56 AM
I bet the target of the controls isn't the "major Moscow supermarkets" (Stockman, Seven Continents, etc.) but the rinoks where the babushkas shop. These would be the target of Putin electioneering / vote gathering and there are enough thugs available to make price controls here quite effective.
Posted by: mike at Nov 1, 2007 8:08:08 AM
Who said this was Putin's idea? AFAIK it was the Prime-minster Zoubkov, who was concerned about increasing food prices. The major cause of this is slow production growth in the agriculture sector that cannot catch up on the increasing income. Partly because of monopolization. What's wrong with controlling monopolies?
Posted by: Vasily at Nov 1, 2007 8:44:47 AM
> I'd be surprised if shoppers at the major Moscow supermarkets notice a major difference.
That's true, no doubt, but there is more to Russia than just Moscow and its suburbs, an inconvenient fact which Muscovites tend to forget.
Vasily: don't make me laugh, such major policy stuff doesn't happen without agreement at the top, at least.
Posted by: A Tykhyy at Nov 1, 2007 9:04:37 AM
Gross forgot Zimbabwe and Venezuela. Rather than "soviet style" which IS so last century, I like "mugabenomics"!
Posted by: angus at Nov 1, 2007 9:13:22 AM
Points well taken but the same was true of gasoline in the U.S. in the 1970s and Americans certainly noticed a major difference. Don't let the terrible be an enemy of the very bad.
Posted by: Alex Tabarrok at Nov 1, 2007 9:19:24 AM
Yes, In Venezuela people in the goverment ruled "stores" are marked with a pen in order to allow them to buy only once a day. Most strores are tables in the streets with the armymen, generals included, selling sugar ( 1 kg,) milk ( 1 kg can) and 2 kg of poultry.You have to buy all together.My mother in law is diabetic and has to buy sugar to buy poultry.
In the private supermarket people is allowed to buy only one can of milk.The police and the national guard have to control people.Last week I see a woman knock another in the face because the latter was waiting his husband with the money.Then former "robbed" the milk.
You can not find milk, ketchup, sugar, toilet paper, eggs,salt or specially corn made cooking oil.Thanks to 5 years of price controls .
But the government says that George Bush is to blame for making etanol with corn.Also the high demand from China made milk unavailable.
On the other hand, in Colombia thanks to failing dollar food prices are going dowwn .The Vezuelan government says this new of the colombian television is a media campaign against his government
BTW:price are failling also because of to the contraband of venezuelan goods.In Venezuela is illegal ,since 1986 ,to take out of the country regulated price goods.
I have a 3 years old daughter so i have to buy colombian milk , 4 times the regulated price.
Posted by: Jules at Nov 1, 2007 10:20:46 AM
You both miss the point about Soviet prices. Calling them price controls implies that there was some intervention to prevent market clearing. Soviet prices were determined for almost all goods and services. They were systematically wrong too, they underpriced raw materials and over-priced industrial goods. This made the allocation of inputs across sectors grossly inefficient. It also meant that Soviet-type economies appeared to produce more value added from industry than they really did, distorting investment decisions, and wasting valuable primary inputs to produce low (or no) value industrial goods. Thinking about Soviet prices as price controls provides some insights, but they are second order. It misses the first order misallocation. And clearly, Putin's price controls are only second order. That is why the NYTimes article is wrongheaded.
Posted by: Barry Ickes at Nov 1, 2007 10:32:22 AM
"They were systematically wrong too, they underpriced raw materials and over-priced industrial goods. This made the allocation of inputs across sectors grossly inefficient."
In general I agree that the allocation was not correct for many goods and services in the Former SU. On the other hand,
It was relatively efficient in the sence of the tasks the Soviet authority formulated - space, nuke, rocketss,
oil, ... (For example, Sputnik and Gagarin).
Also, when I read about the sizes of yachts for oligarhs and top managers over the world I do not see this as a specially
efficient allocation. Everybody has own problems. The latter problem with luxury things is growing up.
Posted by: KIO at Nov 1, 2007 11:35:09 AM
By the way, reaction to price control in Russia is from economic textbooks -
people buy more realtively cheaper goods, shelves are empty. (Next - price will grow or no goods at all).
Politically,this is a lose-lose game for the authorities in Russia.
They have really privatized all economic success during the last 8 years and want now to nationalize
the first loss.
Posted by: KIO at Nov 1, 2007 11:44:39 AM
How does your argument relate to Zimbabwe where we see price controls too? The effect, as far as I saw on a brief visit there last month, is that some goods completely disappear (meat, milk, petrol, cellphone calls) but some other goods were still available. Of course, part of the reason that some stuff is still available is because government forces firms to produce, where many would have preferred not to. Most firms in Zim are still private so the argument about distribution of profits does not hold in this case.
By saying that most shoppers will not see any difference are you implicitly saying that the controls will not be enforced? In Putin's Russia?
Posted by: Owen Willcox at Nov 1, 2007 11:50:03 AM
I am not so sure Tyler is correct. The Russian government routinely intervenes and steals companies and investments, whether they are foreign owned or owned by politically dangerous oligarchs. In what sense is there really any residual claimancy? You can "enforce" your claim only if Putin allows you, and the best way for that is to be a political ally.
There is a lot of talk recently about the rival siloviki clans within the Putinocracy, and the rise in corruption specifically to enrich them. I have no doubt that a blackmarket will develop to offset the shortages caused by price controls, but I also have no doubt that only those black markets associated with the siloviki clans are unmolested.
Putin's actions make sense once you realize what his true purpose is.
Posted by: Chris Durnell at Nov 1, 2007 12:13:58 PM
The generic point about residual claims is powerful and also helps explain why privatisation is critical and why governments rarely price goods and services efficiently. Argaubly it is also a good reason for establishing ans maintaining robust property rights.
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