Price Controls in Russia

Tyler Cowen:

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.

I agree with everything but the last sentence. I think they will notice, but generally the end user will not be greatly affected in the short run. It will cause problems in allocation of resources which if kept in place for long will add to instability in the economy. It will not work at its stated aims, it may, if not enforced aggressively, accomplish its political ones.

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