What the Economy of a Just War Should Be
It is only in the intellectual and political environment of an unfree society that wartime price controls can be easily justified. Two recent articles can serve to illustrate the conventional wisdom and its contrary. One story, by the Financial Times European economics commentator, imagines a speech that political leaders should deliver to accomplish “their chief task of preparing the public for the unavoidable hard choices to come” in the Russian war on Ukraine (Martin Sandbu, “Western Leaders Must Prepare Public for a War Economy,” Financial Times, May 1, 2022). It starts with “My fellows citizens,” and includes:
Something like a wartime economy is being imposed on us — not of our choosing, but we must not shrink from it. That requires all of us to put the common good first. … We may have to ration some essential goods.
That’s the conventional approach to war. We could rephrase: “My dear children: You’ll have to suffer. Everything will be controlled, including prices and yourself.”
The second article, in The Economist of last week, is inspired by the Ukrainian government and suggests a refreshing approach (“Much of Ukraine Is Paralyzed by a Petrol Shortage,” The Economist, May 23, 2022):
For the past three weeks the country has found itself in the midst of an acute fuel shortage … On May 19th the 550km road from Lviv to Kyiv had just two working petrol [gasoline and diesel] stations. Each had a queue tailing back several hundred metres. …
With the war effort and agriculture taking priority, very little is left for anyone else.
The deficits have spawned a shadow economy in the best Ukrainian tradition. On the local equivalent of eBay, enterprising citizens are offering an array of fuel-related services. In Odessa 100 hryvnia ($3.38) an hour will get you someone to hold your place in queues outside petrol stations …
A senior manager at a big private fuel company says that price regulation has meant that suppliers are asked to sell petrol for less than it costs to supply it. The aim had been to keep fuel affordable for a struggling nation, but it removed any incentive to increase supply to the public, and it also introduced a black market.
The unusual news is the government has now backtracked and
acknowledged a need to “temporarily” suspend the controls, to allow retailers to regulate demand. Ms. Sviridenko [the economy minister] predicted the move would lead to increases in prices of 40%.
Disregarding the “temporarily,” they seem have an economy minister who understands the economy! The more general point is that markets are as efficient at allocating resources in wartime as they are in peace time; efficient in a world of scarce resources, they are even more needed in situations of more scarcity. The government of a free country in a just war would completely eschew price controls (and thus avoid shortages). To provide fuel to the armed forces and public services, the government would simply have to bid on the market like everybody else—albeit with taxpayers’ money. And if it is deemed that certain groups of consumers could not afford fuel at market-clearing prices, the efficient way to go would be to issue them tradeable ration coupons which any consumer could sell or supplement depending on the intensity of his demand and the real cost of the resource as signaled by its price (and the opportunity cost of the tradeable ration coupons).
I would however quibble about the magazine’s follow-up comment:
The price rise will have an immediate impact on consumption in a nation where disposable income is severely curtailed. But it is unlikely on its own to end the fuel crisis.
It will not end the crisis, of course, which will show up in higher prices; but it will certainly end the shortage (if ill-advised pressures don’t bring the controls back). That is, assuming that “crisis,” “high prices,” and “shortage,” and perhaps other words in the dictionary, are not all synonymous.