Last week, for the Nth time, the Wall Street Journal had a story about shortages of Covid-19 tests ( “Covid-19 Testing Is Hampered by Shortages of Critical Ingredient,” September 25). An important topic. The journalist notes:
According to a survey last month by the American Association for Clinical Chemistry, which represents commercial, hospital and public-health laboratories, 67% of labs are having issues getting both reagents and test kits—the highest level since the group started querying labs in May.
Shortages of test kits have persisted for seven months. And there is apparently no explanation in sight. The president of the Riverside Health System in Virginia, Dr. Michael Dicey, echoes the general puzzlement:
This is a big country, and we still haven’t been able to settle the testing issue. It doesn’t make any sense.
In fact, it makes a lot of sense for anybody who knows something about economics—and does not push it under the rug for ideological reasons. During these seven months, prices of most goods produced in America have been under the legal threat of states’ “price gouging” laws and of the federal Defense Production Act. The latter does not formally control the prices of testing supplies, but the federal government has been doing it indirectly through the FDA, the CDC, and a few commissars who control the allocation of many Covid-19 related products. Among them are Peter Navarro, the so-called “equipment czar” (“‘This Is War’: President’s Equipment Czar to Use Full Powers to Fight Coronavirus,” Wall Street Journal, March 28, 2020), Admiral Brett Giroir, the “testing czar” (“Trump’s Covid-19 Testing Czar Claims Administration Is Doing ‘Everything That We Can Do’ to Increase Testing Capacity,” CNN, August 14, 2020), and Moncef Slaoui, the “vaccine czar” (“Trump Vaccine Czar Will Not Be Required to Disclose Pharma Ties, IG Rules,” The Hill, July 17, 2020).
The Soviet Union was also a big country and they too were unable to settle similar issues, such as shortage of automobiles, pharmaceutical products, or bread. It took between 8 and 12 years for an ordinary citizen to take delivery of a car after he ordered it. Shortages also hit pharmaceutical products; a New York Times story of 1977 (“Soviet Medicine Mixes Inconsistency with Diversity”) gives many examples. Another New York Times story, published a few years later, focussed on food shortages (“Soviet Food Shortages: Grumbling and Excuses,” January 15, 1982; OCR errors corrected):
The situation in late summer looked so bleak that the Kremlin began a nationwide campaign for the conservation of bread, and there are many cities and towns where bread purchases are restricted. …
In Moscow there is de facto rationing, limits set by store managers on the quantities that shoppers can buy. …
For years, top Soviet officials have attributed the nation’s poor agricultural performance to bad weather, and the leadership’s official New Year greeting to the people this year again stressed the climatic blight.
Legion of examples are available.
Strangely—for those who ignore standard price theory—shortages persisted until the whole system crashed. It was not because of a lack of commissars. Could the situation, by any chance, have something to do with the substitution of government allocation for free-market prices? And is it possible that what does not work in the United States right now is also, on a lower scale, the consequence of government interference in prices and allocation? Economic theory and observations strongly point to a positive answer.
The efficiency of decentralized markets and free prices in the allocation of resources was first clearly demonstrated by Adam Smith in his 1776 classic The Wealth of Nations. The invisible hand of voluntary cooperation works better than the visible fist of the state. (The featured image of this post shows Smith’s statue in Edinburgh.)
The well-known story reported by Philip Coggan in his recent book More (which I review in the current issue of Regulation) illustrates the incapacity of the collectivist mind to understand or to acknowledge that decentralized and free markets are more efficient than government price controls and allocation:
In the aftermath of the Soviet Union’s break-up, the economist Paul Seabright was contacted by a Russian official who was keen to learn about the workings of the markets. “Tell me, for example,” he asked “Who is in charge of the supply of bread to the population of London?”
READER COMMENTS
Jon Murphy
Sep 28 2020 at 12:58pm
Pierre-
I think you’ve hit on something very important here regarding central planning of any kind. If we combine the poor decisions that led to the shortages of testing with Roger Koppl’s expert failure thesis and entangled political economy, we get a rather disturbing issue:
Failure in one sector leads to failure in other sectors!
People tend to focus on different sectors as though they are irrelevant and unconnected to one another (eg, how often do we hear the claim “this is politics, not economics!”). But here we see how false that contention is. The invocation of price controls on the testing market predictably led to shortages of the tests. That much is seen. But what is unseen is the more disturbing part: the shortages likely led to the subsequent poor decision to not randomly test the population for COVID. If one is facing a shortage of tests, it may make more sense to allocate the tests into cases where people are likely sick. But the problem with that is: without randomized testing, we don’t have any good information about how widespread the disease is, infection rates, death rates, etc. In short, we cannot even get the necessary information to know how to deal with the virus! In turn, that failure led to the panicked reaction of politicos around the nation with ham-fisted lockdowns and crackdowns on civil liberties. That failure has led to a massive increase in mental health problems, economic uncertainty, etc etc.
Expert failure is a problem, and it is a huge problem.
Robert
Sep 28 2020 at 2:52pm
Imagine the public outrage which would have followed if the price of key ingredients for Covid-19 tests were allowed to rise to the point where it spurred new supply to appear. There isn’t a politician out there who would even attempt to defend that, no matter how strong or obvious the case may be. The headlines would be some variation of politician sides with business or politician puts profits over people.
Jon Murphy
Sep 28 2020 at 3:44pm
And now there’s outrage at the poor job the governments (even around the world) have handled COVID. Damned if you do, damned if you don’t, eh?
Pierre Lemieux
Sep 29 2020 at 10:36am
@Robert: It’s difficult to have consistent free-market policies with a socialist electorate. Let’s hope that by explaining this, many people will rethink their socialist ideas because they will see what the consequences are.
AJ
Sep 28 2020 at 3:06pm
Is it possible that the WSJ is using the word ‘shortage’ differently from the economist? To describe the scarcity of the product and not the technical economic definition of the gap between quantity supplied and quantity demanded?
Jon Murphy
Sep 28 2020 at 3:43pm
Given the quote at the beginning, it does appear that the WSJ is using “shortage” in the economist’s manner. The labs are having trouble getting necessarily supplies at current prices. Quantity supplied is less than quantity demanded.
AJ
Sep 28 2020 at 4:13pm
I read the article and didn’t get the impression that they were using it in the economist’s manner.
But this is the type of thing I find odd – I’ve seen countless blog posts, articles, and economics textbooks with examples that point out the ‘incorrect’ use of the word ‘shortage’ by the layman and point to their lack of economic background. What is accomplished by this? I think non-economists use the word ‘scarcity’ to describe something different than the economist’s technical definition of the word. The use is consistent with the dictionary terminology, too. So the excessive focus to latch on to the ‘incorrect’ usage of the word, I think, doesn’t add much to the conversation.
Jon Murphy
Sep 28 2020 at 4:47pm
The quote from the very top of this post:
That’s the economist’s meaning of shortage.
AJ
Sep 28 2020 at 4:53pm
Why does that quote imply binding price ceilings and not an unexpected shift in demand/supply curves?
Jon Murphy
Sep 28 2020 at 5:13pm
It doesn’t. The DFA and anti price-gouging legislation give us the price ceilings. The shifts in supply/demand would have resulted in higher prices and the shortage would have resolved itself by now, just like it does a million billion times a year (and has for commodities that were not subject to price ceilings).
Jon Murphy
Sep 28 2020 at 5:15pm
To answer your question as to why economists use a very precise definition of shortage and scarcity, the answer to your question “not an unexpected shift in demand/supply curves” tells us exactly why:
A shift in supply/demand curves do not result in shortages absent price controls, but they may signal increased scarcity of a good (if prices rise) or decreased scarcity of the good (if prices fall). Confusion of the two lead to much mischief.
AJ
Sep 28 2020 at 5:28pm
You asserted that the above quote is ‘the economist’s meaning of shortage’, which is binding price ceilings if I remember Rustici’s Econ 101 class correctly. But now you’re saying it doesn’t imply that?
This is semantics. The economist sees the word ‘shortage’ and interprets it in a particular lens and assigns a particular meaning to it. The layman may be using the word differently than the economist to describe difficulty obtaining a good. Calling something a ‘shortage’ implies government interference, where it certainly may be the case, but could also simply be the result of shifting curves, which the layman has no other word to describe that except for the word ‘shortage’.
Jon Murphy
Sep 28 2020 at 5:36pm
No. Binding price ceilings give us shortages, but they are not shortages themselves. They are price ceilings. Shortages are when quantity supplied is less than quantity demanded at a given price.
Yes, but that doesn’t mean it’s unimportant. As we can see from this example, the difference between shortage and scarcity is very important.
AJ
Sep 28 2020 at 5:44pm
This is nonsense. I pulled my old Econ 811 textbook from Hirshleifer, who says shortages are from effective price ceilings and is the gap between quantity supplied and quantity demanded.
My point is that the word ‘shortage’ invites many interpretations. The economist sees the word ‘shortage’ and declares particular conclusions, such as government interference (which is the cause of effective price ceilings). But the layman that uses the term may not be describing the what the economist actually sees. The economist may be interpreting something that isn’t actually true simply by seeing the word ‘shortage’. That’s what I’m suggesting here – the use of the word by non-economists may be different than what Pierre is suggesting.
Jon Murphy
Sep 28 2020 at 9:27pm
Yes, that is correct and exactly what I said: price ceilings cause shortages, but the shortages are the gap themselves. I assume you are referring to Price Theory and Applications? If you look on pages 46-47, you’ll see that he defines shortages as the distance between two points in figure 2.1:
Without price controls, any shortages would be transient. They can only be persistent if there are binding price controls.
See also the opening lines of Chapter 10 of this intro textbook written by Hirshleifer’s colleagues Armen Alchian and William Allen:
Cowen and Tabarrok (which is used by Boudreaux) has the following definition:
So, again, price controls cause shortages (or surpluses), but they are not the shortage or surplus themselves.
…
That’s true, but not unique to economics. Any science runs into that problem. “Bias” means something very specific in statistics, and it is not how non-statisticians use “bias.” You need a consistent jargon to be able to speak to one another. Thus, every science must carefully define its terms.
AJ
Sep 29 2020 at 7:10am
The shortage is the gap, but the gap is caused by government interference. To speak of the gap without the binding price ceiling is meaningless. To speak of binding price ceilings in equilibrium is meaningless.
I understand that each discipline must carefully define it’s terms and needs consistent jargon. No disagreement there. What I want to challenge, though, is the fact that when the economist sees the word “shortage” in, say, a WSJ article, or hears the word in the news, or hears someone talking about a “shortage” in gasoline, the economist will interpret that as government interference and look for other sources – such as those supplied in this post – to confirm that interpretation.
It could be true that the “shortage” as spoken of in the WSJ article is caused by various forms of price controls. It could also be true that the “shortage” is the layman’s way of describing a reality of shifting curves – “it is more difficult to obtain this good than it once was”. But in that situation, we have a false interpretation of government interference that clashes against a reality of shifting curves. Providing a few sources of interference in the movement of prices may explain what the WSJ is describing, but it may also not be relevant to what the layman is trying to describe. And attributing it to one’s illiteracy in this topic – which economists tend to do often – is disappointing.
Jon Murphy
Sep 29 2020 at 9:34am
No, not at all. The gap can exist (and frequently does) absent price controls all the time. Indeed, an example Walter Williams uses in Econ 811, which he got from Hirshleifer himself, is the grocery store:
If we were in equilibrium, then the grocery store would only have the products that you, the marginal consumer, want at that precise moment at the precise price you are willing to pay for those marginal goods. The shelves would not be stocked fully as there would be no need. The grocery store shelves fully stocked is evidence of a surplus, a gap between quantity demanded and quantity supplied where quantity supplied exceeds quantity demanded.
Shortages (where quantity demanded exceeds quantity supplied) are considerably rarer, but they can exist in a transient manner in the real world absent price controls. Indeed, you yourself cite a case: a sudden shift in supply/demand. A sudden shift can cause transient shortages. As you should recall, when there is a shortage, there is incentive for firms to raise prices in order to produce more and/or consumers to bid higher in order to obtain the goods they desire. Shortages tend to be alleviated in this manner fairly quickly. It is only binding price controls that prevent shortages from being bid away, making the shortages permanent.
I don’t know what you mean by this. “Binding” here is in reference to equilibrium. A price ceiling is only binding if it is below the equilibrium price.
Perhaps the poor economist will. The good, careful economist will read carefully to see how the word is being used. That’s what Pierre did in this post, as highlighted by the first quote which is referencing a technical shortage.
Pierre Lemieux
Sep 29 2020 at 11:25am
Thanks, AJ, for your questions; and thanks, Jon, for answering them. Let me emphasize an epistemological point. To make sense of and analyze the social world, precise concepts and vocabulary are necessary, and this is what economists are trying to teach. One can use any of the elementary concepts of economics to illustrate this, but let me just give two examples.
One can define “unemployed” as “not having a paid employment.” A full-time student, for example, will then be said to be unemployed. But economists will point out there is a difference between not having a job when you want one and not having a job because you do not want one or are not in a position to want one (like a baby or a long-term comatose patient or a stroke victim) and that this difference is useful to understand the social world. So for the economist, an unemployed is somebody who does not have paid employment and is in the labor force, being in the labor force meaning having paid employment or trying to find some.
Second example. One can define a shortage of good X as a situation where good X is difficult to obtain. According to this definition, there is currently, in America, a shortage of ammo, testing kit reagents, diamonds, and Ferraris. In the first two cases, it is because none is available at the posted price; in the second two cases, the reason is that their posted price is very high for most people. The problem with that definition is that there is a shortage of everything: for example, the price of beer is very high for a homeless; and the price of a sixth Ferrari is too high for Bill Gates, who would have to build a second garage to close to his usual swimming pool. For this reason, economists have devised a precise and limited concept of shortage (see also my “Don’t Confuse Shortage and Smurfage”). This distinction allows one to explain why, in the 1970s, there were gasoline queues in the US but none in Canada; and what is happening now in many countries.
And let me try an example in theology. Suppose I define God as “something much bigger than I.” (I might even claim that this is how the layman sees God.) Since the universe satisfies this definition, it allows me to claim to be a pantheist or some sort of deist. The problem is that my wife’s cousin and Michael Moore also meet the definition as they are much bigger than I. So there is an analytical need for a more precise definition of God.
Jose Pablo
Sep 29 2020 at 12:13pm
The mere fact of calling somebody “The x-ing Czar” is enough reason to worry …
And Covid19 has significantly increased the prevalence of “central planning” which somehow seems “the scheme of last resort” to solve catastrophes … why is so, is an interesting question.
This is (even) worse in Europe:
France is reimposing a 5 years plan following a scheme initially devised by Charles De Gaulle back in 1946. The resemblance with the USSR’s Gosplan is striking.
https://www.economist.com/europe/2020/09/05/emmanuel-macron-revives-a-post-war-institution-for-a-post-covid-era
The European New Green Deal that will be reinforced as a tool against Covid 19. Governments will be proposing “climate change friendly projects” to be financed with European Funds (a central planner wet dream).
In pure “central planner” fashion other idea is to use funds to develop the “digital world” and finance this initiative thru a tax on … digital technology!, so, you can get a double benefit: a) you direct the funds to the “really good” digital projects and b) you penalize the “really evil” digital initiatives
Central planners know what is best for us … they are not making Pareto very happy, though.
A lot of Czars these days …
Pierre Lemieux
Sep 29 2020 at 12:27pm
Good points, Jose. We might wonder if Covid-19 will not be the final nail in liberalism’s coffin. It would be only the final one because to use the Covid-19 crisis as an illustration of the beauty of government planning—despite the glaring government failures—the idea must have been already well-accepted. The fact that “price gouging” laws have been on the books for decades points to the same direction. (A list of the inception dates of these laws would be very useful, if it doesn’t already exist.)
Jose Pablo
Oct 2 2020 at 9:36am
Another “nail in the coffin” … or more, following your comment, another “realization of how we have been pretty busy nailing the coffin” since the 2008-9 recession:
https://www.economist.com/europe/2020/10/03/the-revenge-of-strategic-yogurt
Descending into a world in which making yogurt is a key national strategic industry … (kind of like “dancing short video applications”)
If The Economist is right on this (and I think they are) the country leading the “industrial policy philosophy” for the EU is an economic disaster …
Adapting Carville to the “Economy” of our era: “It is not the results, it is the narrative, stupid”
john hare
Sep 29 2020 at 4:40pm
is overtime pay price gouging? why not? would you work over 40 if time and a half was illegal?
Pierre Lemieux
Sep 29 2020 at 4:48pm
Interestingly, “price gouging” by employees appears to be totally legal. At least one state (New Jersey, just this summer) has added “services” to the “goods” subjected to price-gouging bans during an emergency, but this presumably includes only arms-length services, not labor services.
Jon Murphy
Sep 29 2020 at 5:32pm
I’ve been doing that all my adult life. I’m salaried.
john hare
Sep 30 2020 at 4:08am
no caps apologies, keyboard dying
and i as well, being self employed. i suspect that many of the outraged about gouging are happy to gouge for the extra hours and see no conflict.
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