The Economics of Welfare

Pigou, Arthur C.
(1877-1959)
CEE
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Editor/Trans.
First Pub. Date
1920
Publisher/Edition
London: Macmillan and Co.
Pub. Date
1932
Comments
4th edition.
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Part II, Chapter XIII
STATE REGULATION OF SUPPLIES

II.XIII.1

§ 1. IT is not only in the matter of prices that the war afforded examples of Government interference with competitive industry. Extensive interference also took place with the free distribution of commodities among different industries, different firms within the same industry, and different ultimate consumers. This interference had to be undertaken in order to get over difficulties to which the price regulations described in the preceding chapter gave rise. For, when prices in competitive industries are artificially reduced below the level that they tend naturally to assume, the ordinary market influences regulating the distribution of commodities between different purchasers are thrown out of gear. When there are no price restrictions, at any price everybody buys for every purpose as much of a thing as, at that price, he wants, and this process exhausts the whole supply. But, when, in competitive industries, prices are artificially kept down, the sum of the demands of all purchasers for all purposes is greater, and may be much greater, than the supply. In the United States, where the wheat for the whole year comes from the national harvest, the result of price limitation unaccompanied by rationing was that everybody got all he wanted in the earlier part of the harvest year and had to fall back on substitutes in the later part.*26 There was, in short, a bad distribution through time. For most commodities, however, production as well as consumption is continuous. Thus, at no time can everybody get all he wants, but there is a continuous shortage. Distribution becomes, if nothing is done, the sport of accident, influence, and ability to stand for a long time without fainting in a queue. There is no reason to expect that the distribution reached through these agencies will be, in any sense, a good distribution. Consequently, when, during the course of the war, the policy of controlling prices was adopted, it was, in general, found necessary to control distribution also, and, with that object, to establish some criterion for fixing the shares available for different purchasers. It was not, indeed, only where prices were regulated that supplies to individuals were controlled. In some instances, where there was no price regulation, they were controlled in order to prevent private persons from absorbing for their own use an undue quantity of things and services urgently needed by the Government for war. Here the control limited aggregate private consumption and did not merely regulate the distribution of an aggregate already limited. The technical problems involved are, however, the same whether control of supplies is or is not associated with the fixing of maximum prices.

II.XIII.2

§ 2. When the commodity dealt with was a material that could be employed for several alternative purposes, the obvious criterion was relative urgency, from the point of view of national war service, of these several purposes. The simplest method of applying this criterion was to make rules cutting off the supply of material from the least urgent uses either in part or altogether, thus leaving more available for more urgent uses. Examples of this method were:

(1) The imposition of Treasury restrictions upon the investment of new capital abroad and, in a less degree, in civilian home industries.
(2) The enunciation of a rule that no building costing more than £500, and no building whatever containing structural steel, should be put up without a licence.
(3) The reduction of railway service for all forms of civilian, as distinguished from military, use.
(4) The prohibition of the use of petrol for pleasure.
(5) The withdrawal of materials, etc., from the less important tramways and light railways to others of greater national importance.
(6) The regulation of the use of horses in towns and on farms and the control of road transport generally.
(7) The prohibition of the use of paper for newspaper contents bills, and, under certain conditions, for traders' circulars, and the abolition of "Returns."
(8) The prohibition by the Timber Supplies Department against packing various articles in wooden cases and crates.
(9) The prohibition of the use of electricity for lighting shop fronts, and the order restricting the hours during which hotel and restaurant dining-rooms might use artificial light or theatres might remain open.

II.XIII.3

This method is entirely negative: the least urgent uses are ruled out, either by a general order, or by making a licence—refused to the least urgent uses—a condition of action.

II.XIII.4

§ 3. Obviously, devices of this character are of limited application. They take no account of the fact that uses other than the least urgent are not all of equal urgency. Consequently, if the material or labour available is insufficient for all the uses that are left when the least urgent uses have been cut off, it becomes necessary to arrange for some system of priority among those that are left. The simplest way in which this was attempted was as follows. The material was left in private hands, but a system of Priority Certificates was instituted, which only permitted sales to would-be buyers with certificates of lower urgency after those with certificates of higher urgency had been satisfied. Government work had the first grade of certificate, work of special national importance (e.g. export work deemed valuable for protecting the foreign exchanges) the next, and so on in successive stages. Iron and steel products were dealt with on this plan, and quarry stone and other road material on less elaborate, but substantially equivalent, lines. When the proportion of the available commodity that is needed for Government war work or other especially urgent need is very large, the plan of priority certificates by itself is not always safe. The Government may get less than it needs. To meet this risk it is tempted itself, either by purchase or requisition, to become an owner (or hirer) of so much of the commodity as is of specially urgent need. It may then hand over to firms engaged on Government work, or other specially urgent work, the supplies that are required for that work; but, even so, it will need to distribute the surplus on some system of priority to other firms. This plan was followed in a rough general way with imported leather and flax and with a number of metals.

II.XIII.5

§ 4. The application in these different forms of the criterion of comparative urgency among competing uses presented very considerable difficulties during the war. These difficulties, however, were necessarily much less than those which would have to be overcome if a similar criterion had to be applied to normal conditions of peace. For the comparative urgency of different uses in war time depends on the contribution which they severally make to national war efficiency. This provides a definite standard to which to work. It is obvious that food and munitions and the support of the armed forces must take precedence over everything else; and, though, as the rivalry between the demands of munitions and of ships for steel made plain, it is difficult, still it is not impossible, by conferences between representatives of the various Ministries, to work out a fairly satisfactory scheme of priorities. The reason for this is that everything is subordinated to a single relatively simple end. Under a régime of established peace—apart, of course, from possible "key" industries, for which the natural method of assistance is bounties or a tariff, and not the allocation of material—there is no single end of this kind. We have no longer to deal with the Government's wants for war service, but with the wants of an immense and varied population for necessaries, comforts and luxuries. In war time it is clearly more important to bring steel into the country than it is to bring paper, and to manufacture army baking ovens than private kitchen ranges. But in peace time simple propositions of this kind cannot be laid down. Those things ought to be made which are most wanted and will yield the greatest sum of satisfaction. But the Government cannot possibly decide what these things are; and, even if it could decide what they are at one moment, before its decision had been put into effect conditions would very probably be changed, and they would have become something entirely different. It is not easy to see how this obstacle to a permanent policy of rationing materials among the several industries of the country could be satisfactorily overcome.

II.XIII.6

§ 5. To allocate materials to different uses according to the comparative national urgency of these uses was not a complete solution of the war problem. Within each grade of use purchases are sought by a number of rival firms anxious to work up the material into the finished product. Normally price would have established itself at such a level that each firm obtained the quantity of material which, at that price, it desired. With restricted prices it is necessary to provide an alternative basis for distribution among these firms, as well as among the different categories of urgency. The basis adopted by the British Government was that of comparative pre-war purchases. It is illustrated by—

(a) The regulation of the Cotton Control Board (1918), limiting the proportion of machinery that any firm might keep at work on American cotton;
(b) The condition imposed on importers by the Paper Control, that they should supply their customers (i.e. manufacturers) in the same proportions as in 1916-17. In highly organized trades, like the cotton industry, there was no technical difficulty in applying regulations on these lines. But in many of the metal trades a special organization had to be created for the purpose. It is clear that this basis of allocation could not be employed in connection with any policy designed to last for more than a short period. For an arrangement, which tended to maintain the various firms engaged in an industry always in the same relative position as they occupied in an arbitrarily chosen year, would constitute a quite intolerable obstacle to efficiency and progress.

II.XIII.7

§ 6. When the prices of finished products as well as of their raw materials were limited by regulation, a problem exactly analogous to the above had to be faced as regards distribution among ultimate consumers. To organise a plausible basis for this is only practicable in connection with commodities in wide, regular and continuous consumption. The basis aimed at here was, not comparative pre-war purchases, but an estimate of comparative current need. For coal, gas and electricity an objective measure of this was sought in the number and size of rooms and the number of inhabitants in different people's houses. For food products, while some differentiation was attempted by means of supplementary rations to soldiers, sailors, heavy workers, invalids and children, in the main the knot was cut by assuming the needs of the general body of all the civil population to be equal, and rationing all alike. This sort of distributional arrangement is fundamentally different from the other two kinds. The passage from war to peace does not destroy or render violently unsuitable the criterion adopted for it. Plainly, however, in peace, as indeed in war also, its necessarily rough and arbitrary character constitutes a very serious objection to it. "The proportion in which families of equal means use the different 'necessaries of life' are very different. In ordinary times they distribute their expenditure among the different necessaries in the manner which seems best, some getting more bread, some more meat and milk, and so on. By equal rationing all this variety is done away with; each household is given the same amount per head of each commodity; allowance for age, sex, occupation and other things can only be introduced with difficulty."*27 There can be little doubt that British Food Rationing during the war, in spite of this disability, led to a much more satisfactory result than would have been attained from the scramble—a scramble in which rich people would have been able to exercise various sorts of pull upon tradesmen—that must have resulted had food prices been limited but distribution left to take care of itself. In peace time, however, when presumably the alternative to rationing would be less intolerable, the inconvenience and inequalities attaching to it have correspondingly greater weight.

II.XIII.8

§ 7. If we are content to regard the various arrangements which I have been describing as merely supplementary to price restrictions already decided upon, it is plain that, though they may affect the size of the national dividend, as it were, at the second remove—if, for example, they grant priority to steel for making machinery rather than motorcars—they cannot affect it directly or fundamentally. They modify the way in which certain elements in the dividend are shared out, but not the quantities of the elements contained in it. These are modified by the price regulations in the way that was explained in the preceding chapter. They are not modified further by any distributional supplements to those regulations. Consequently, from the standpoint of the present Part, no further analysis is required; though in Part IV., where the distributional relations of rich and poor are examined, something more will have to be said about the rationing of food.


Notes for this chapter


26.
Cf. Supplement to American Economic Review, March 1919, p. 244.
27.
Cannan, Economic Journal Dec. 1917, p. 468.

Part II, Chapter XIV

End of Notes


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