Command Economy Vs. Free Market (Round 1)

Winter Is Coming, and The Soviet Cupboard Is Bare

http://www.businessweek.com/stories/1991-11-03/winter-is-coming-and-the-soviet-cupboard-is-bare

International Business

WINTER IS COMING, AND THE SOVIET CUPBOARD IS BARE

Tensions are running high at Moscow’s sprawling Gastronom food store near Byelorussia Railway Station. With coupons ready, two dozen people are lined up at the counter to get sugar rations they were supposed to have had three months ago. Management claims there’s no sugar–but it turns out that 20 sacks of sugar have been hidden in the back. For hours, the angry crowd refuses to leave, forcing police to clear the store when closing time comes at 8 p.m.

As winter approaches, such scenes are becoming common. The question being asked in capitals from Brussels to Washington is: How bad will it get in the former Soviet Union? Mass starvation is unlikely. But a combination of poor harvests and breakdowns in food distribution will mean pockets of serious shortages throughout the country. The repercussions are being felt on world commodity markets. Plans are afoot for the U. S. to extend $1 billion in emergency food credits and aid, prompting American grain prices to shoot up.

Across the Soviet Union, cities loom as the most vulnerable spots. Perm, an industrial town in the Urals, already witnessed major protests when sugar supplies dried up. In Moscow, frustrated tipplers ransacked a liquor outlet that had no vodka. In Alma Ata and St. Petersburg, bread is running short. Most at risk are retirees, who struggle along on pensions of 140 rubles a month and can’t afford the plentiful but expensive food in private markets.

The biggest immediate threat is a poor grain harvest, which many expect to come in at 170 million metric tons–down 22% from last year. Of that amount, about 70 million metric tons were to have been sold to state distribution agencies run by Moscow. But in the aftermath of August’s failed coup, central authority has all but evaporated, allowing state and collective farms to sell what they please. By Oct. 1, they had sold only 35.4 million metric tons to the government.

The rest is being hoarded by farmers in hopes of selling it privately later at higher prices. Since spring, for example, grain prices have jumped from 900 rubles to 2,000 rubles a ton. And with the ruble losing value by the day, farmers are using grain to barter for consumer goods, cement, or other items they need.

Yet state and collective farms do not have adequate storage facilities and may face big grain losses, as Vladimir A. Tikhonov, a Soviet agricultural expert, told an Oct. 18 conference at the Geonomics Institute of Vermont’s Middlebury College. The resulting shortages could touch off food riots by spring, he says.

RUMBLING BELLIES. In Russia, the most populous republic, food supplies are tight. Meat purchases for the first nine months of the year were down 20%, and dairy sales sank 15%. In more than 50 Russian cities, meat, butter, and vodka are being rationed.

Finding additional supplies will be difficult. Now that they’ve declared their independence, such food-producing republics as Moldavia, the Baltic states, the Ukraine, and Kazakhstan are reluctant to ship food to Russia, since they want to feed their own people first. Russian cities in the heavily industrial Urals region, for example, used to get livestock from the Baltic states. But shipments have fallen off dramatically. The republics are supposed to adhere to their commitments to sell food or pay penalties in hard currency. But, says Tikhonov, “a period has come when no agreements can be relied upon.”

Western countries, fearful of the chaos that food shortages could spawn, are gearing up with emergency plans. The U. S., Japan, the European Community, and Saudi Arabia have earmarked $10 billion in aid and credits primarily for food. But last year, when the situation was less than dire, the Soviets cried wolf: Much of the emergency food aid sent by the West ended up wasted or absorbed by the black market. The question now is figuring out how to send help when it’s really needed–and before it’s too late. Rose Brady in Moscow and Peter Galuszka in Middlebury, Vt.

Questions:

How is the basic economic problem being handled by the use of coupons? Why might this be less successful than money?

The coupons are in a way a different form of currency for the people and businesses, since the coupon is being exchanged directly for a given product. Through the use of coupons there is the elimination of opportunity cost, as a coupon only entitles you to one given product. The reason this may be less successful than money is because the value of the product may increase as there is a shortage of supply, but a coupon entitles the person to the same amount of the product as before. This encourages those with the product to hoard it and sell it on the black market for immediate monetary gains and a greater profit then would have been received if the coupons were taken.

Suggest reasons why there may be a shortage of sugar?

  • The main reason there is a shortage of sugar is because the producers are hoarding the sugar. There are two markets in existence the black market and the coupon market. The producers rather sell in the black market to increase profit rather than sell in the coupon market, therefore the creation of shortage.
  • Another possible reason is that product is being used to barter for other product, this direct trade skips the use of coupons or the black market therefore not establishing a supply.
  • The final reason for a drop in supply would be the independence of former Soviet Union states not exporting their product

Use demand and supply diagram to explain why there is a shortage of some foodstuff.

Use a demand and supply diagram to demonstrate the surge in the price of food.

Does the article demonstrate the failing of the command or free market based solutions to the basic economic problem?

To an extent the article highlights what occurs when there is an economic transition from one system to another. The main issue that the article highlights is the undermining of the command economy system with the use of the black market. In essence the black market is a free market without regulation but with similar aspects such as equilibrium and price signals. The article mentions an immediate threat with the poor grain harvest, and the resulting surge in prices; this is not entirely an issue that only a command economy would face but also a free market economy. An example of this occurring in free markets can be noticed often when there is scarcity of a resource, what a command economy attempts to do by rationing is to reduce the issue of scarcity.

What can be noted about the transitioning economy is the behaviour of the sellers of commodities. Since there is no longer the regulation forcing them to give their produce to the government they are free to do with it as they like. So immediately they go for the short-term positive personal gain, rather than thinking about the greater community. This is why the black market prospers at this time, because the profit margin for selling in the black market is much greater than the margin in the transitioning economy; this relates back to the issue of the coupons.

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2 thoughts on “Command Economy Vs. Free Market (Round 1)

  1. Pingback: Winter Is Coming, and The Soviet Cupboard Is Bare – Command Economy Vs. Free Market (Round 1) | econ2day

  2. Pingback: Free market or Command Bonanza | dubaicollegeecon

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