The statement from the title is well known to any graduate in economic sciences. Price control leads to scarcity. The effect turns into cause. As a result, a limitation (upwards or downwards) of prices generates distortions of demand and supply.
A limitation of the wheat supply attracts a rise in wheat acquisition price. Halving the water flow at the Danube’s point of entrance in our country increases operating costs of Portile de Fier hydro-electric power plant and kWh prices in the perspective. Wheat, as well as power, being production factors, generate a rise in costs unleashing an inflationist spiral. The new avalanche of price raises determines the search for new “scapegoats.” For instance, SNCFR decided to raise prices for travel tickets by over 8% to align prices to inflation. Drug stores increase prices for medicines because domestic currency keeps devaluating. Eggplants become more expensive because, due to the drought, water consumption increased. In markets, vegetables become more expensive because they are under the influence of speculators who organise genuine cartels.
Such motivations can be heard daily. One can expect a new wave of protests and social turbulence because salaries are not in line with inflation. Collective contracts are renegotiated, ignoring the classical interdependence between salaries and productivity.
An eloquent example is Roman Brasov. The administration “offers” an upward adjustment of salaries by 32 percent. Instead, trade unions “require” a raise by 50% (the original demand was a 100% increase). What economic arguments can be brought?
Labour productivity is the direct factor influencing the level of the nominal salary. But, it is a complex efficiency indicator determined by technical progress, organisation, labour conditions, the social climate within the enterprise, incentives provided to employees and staff motivation, natural conditions, etc. As a consequence, we cannot force the Management Board to allot the entire productivity rise to the “incentives” factor. The upsurge in production is due to the other factors as well, which are generally ignored in the case of negotiations. For this reason, managers of state-owned enterprises, with a high degree of labour force organisation into trade unions, should consult more often economists specialised in financial analyses. Better economically grounded arguments could be brought this way.
To gratify the electorate, capital city mayor Traian Basescu promises to reintroduce the “market price list,” namely price ceilings. This decision would drive producers away from markets, making them sell their products illegally, at street corners.
Try to think of demand and supply as of a process of mutual adjustment. When some goods become insufficient, that is the supply is lower than demand, their prices go up. Higher prices make customers buy less, leaving more for others and determining suppliers produce more.
For years, the price of a kg of wheat has been ridiculously low, “orienting” crops toward alternative goods with a higher value. Amid a downfall in demand and promotion of an acquisition price of 3,000 lei per kg, a premium of 500 lei/kg can stimulate producers again.
Domestic producers try to attenuate the effects of costs related to the level of prices. For instance, bakers prefer flour of Hungary (which is cheaper) to domestic flour. The same thing will happen in the case of poultry consumers. For a customer, the price of a product is its cost. The price of wheat is a cost for the miller, and the price of flour is a cost for the baker. As a result, buyers tend to regard price raises as a punishment. For the supplier, prices are income. Therefore, suppliers see the fall in prices as a threat.
This is probably the reason why many people do not appreciate the coordinating role price modifications play and for which, they often try asking the government to halt these modifications. Consequences will usually be completely contrary to intentions, because fixing prices leads to the suspension of the social coordination mechanism.
If the price of potatoes on Bucharest markets remains flat at 5,000-7,000/kg, buyers will want to acquire as much as suppliers are willing to sell. The market balances around the above-mentioned price. If Bucharest City Hall council decides that the price of potatoes cannot overshoot 3,000 lei/kg, the quantity supplied monthly will gradually decrease. As a consequence, Bucharest inhabitants will not get the quantity they want, even though they are willing to pay the price they are asked. Price ceilings are the cause of the deficit on the market.
These people blame high prices for their purchase power and act as if it could rise through tighter price control. Ad hoc polls conducted in markets show us the existence of such opinions. They are also obvious in the case of those who long for “the previous regime,” forgetting the fact that they were equal in poverty.
A product is insufficient any time it fails to give people what they want. The demand for houses is high and ANL, through the allocated funds (derived from subsidised interests, therefore through controlled prices), cannot meet it. As a result, certain criteria must be settled for solicitor discrimination to the end of deciding who will get a credit. Criteria might refer to age, income per family member, the wish to pay in cash and almost anything else. As a rule, we “rationalise” insufficient goods on the basis of the wish to pay in cash. But, sometimes, we use other discrimination criteria as well.
Each year, the Bucharest Academy of Economic Studies registers more candidates than it can include in the first year of study and therefore has to “rationalise” insufficient positions. It operates discrimination on the basis of admission and high-school final marks. Romania can have only one president at a time. Since the position is coveted by more than one person, an electoral law was drawn up, promoting discrimination criteria. For example, a candidate’s getting 300,000 signatures. Every four years we end by having a single satisfied candidate.
But, the other side of discrimination is competition. Once ASE announces discrimination criteria, first year candidates will enter competition to meet them. President selecting criteria are most attentively studied by trustful candidates, who compete to satisfy these criteria well ahead of the moment of elections. The campaign for the collection of signatures has already begun.
All the facts presented above obviously show that the competition process is the effect of insufficiency and that it can only be eliminated by eliminating insufficiency. Every time there is insufficiency, there is rationalisation.
This means allocation operated in line with certain discrimination criteria. Competition only occurs when people strive to meet the announced criteria. Of course, these criteria yield a certain differentiation. If the Romanian society operates rationalisation on the basis of the wish to pay in cash, the population will try to derive money. Should labour be used as a primary criterion, all those who are apt for work will try to get as good results as possible. If ASE uses admission and high school final marks as an important selection criterion, high school students will do their best to get good marks. They might compete for good marks to get other “goods” at the same time (a privileged statute among colleagues, access to scholarships, presents from parents, graduate education, a camp at the seaside, etc.). And then it seems strange to us when colleagues mock at “nerds,” when in fact their rationalisation criterion is the level of marks’ average itself.
But what will happen when some goods, such as potatoes, become more insufficient, if their price in cash is not allowed to go up? We will certainly witness increases in acquisition monetary costs because potatoes will become insufficient and for this reason they will have to be rationalised. This is why, the decision of mayor Basescu will generate the forgotten “miracle” of the communist regime, namely penury.