Are maximum prices for food in the supermarket a good idea?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macroeconomist and expert strategist at APG, on whether introducing maximum prices for food in the supermarket will work.

Following in France’s footsteps, the British government is reportedly looking to impose a maximum price on supermarket products like bread and milk. The aim of the plan is to curb high (food) inflation in the United Kingdom. Supermarkets would be allowed to decide for themselves whether to participate in the plan. A laudable idea, but in practice there are quite a few drawbacks, Kalshoven believes. “The moral of this story is that you should not take the pricing mechanism too lightly.”

Eastern Bloc situations
“If you intervene in the market, there is a risk of creating Eastern Bloc situations,” warns the macroeconomist. “There, bread had a guaranteed price, but if the baker couldn’t produce it at that price, the shelves would remain empty. There is the story of a communist leader who once came to a Western capital and saw all kinds of bakeries with different kinds of bread. He wondered who was in charge of the bread supply. But in a market economy, of course, no one is in charge of the overall bread supply. Prices are there precisely to steer producers’ and consumers’ decisions.”

Based on price, consumers can choose what is economical or expensive for them, Kalshoven continues. “It stimulates or inhibits demand. And on the supply side, when the price of bread is high, producers can decide to invest in their business, for example, in a new oven or in sowing more grains. It is the price that drives people’s behavior.” Here, the story of Scottish philosopher Adam Smith (1723-1790) comes to mind. “He wrote that grain speculators in his time had a bad name, because their warehouses were full of grain, while people were starving. But according to Smith, they actually had a very useful social function. For they foresaw a grain shortage in the long run, so they stockpiled it. As a result, the price rose and people moderated their bread consumption. Should there be a meager grain harvest at a later time, at least there was still grain in stock. That would not have been the case if people had consumed all the grain earlier at a low price. The moral of this story is not to take the price mechanism lightly.” 

Autonomy
But what can a government do, then, to prevent people from going hungry? According to Kalshoven, the solution lies more on the income side. “That’s why we have unemployment and welfare benefits in the Netherlands. That is the path the government chooses to ensure a certain subsistence level. With such benefits, consumers retain autonomy over where they spend their money. This is an advantage over an allowance specifically targeted at food, for example. We have also found in the Netherlands that the administration of allowances can be problematic. Of course, it is true that people can get into trouble when food prices suddenly rise sharply, as is the case now. The fact that we have so many food banks in the Netherlands also indicates that the current price increases are causing problems. That is why it is good that there are food banks.”

The British government’s plan undoubtedly stems from good intentions, but it could have an unpleasant ripple effect, Kalshoven argues. “The rental housing market is an example of this. It is stipulated that a social housing unit has a maximum rent per month. But that does mean that, especially in the big cities, you sometimes spend over 10 years on a waiting list for such housing. So be careful about intervening in the market. And if you want to do something as a government, do it through the income side.”

Pork cycle
Often the market solves its own problems itself, because “the best solution to the problem of high prices is high prices.” Sometimes this goes by fits and starts and you get the so-called pork cycle. “When pork is expensive, many farmers decide to fatten up extra piglets. But then there ends up being so much pork on the market at the same time that prices drop again. Then farmers conclude pigs are not profitable and switch back to another animal or crop. So you constantly get a cycle of more and less supply and thus of low and high prices,” Kalshoven concludes.