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.”