SHORTAGES AND CONTROLS
By PROFESSOR A. C. PIGOU
"SO long as there are shortages you must have controls." To some readers this sentence—it is taken from the Prime Minis- ter's address to the Labour Conference at Margate—may look like an innocuous restatement of the obvious. But in fact each of the two key-words in it, shortages and controls, and consequently the whole sentence, is highly ambiguous. Consider first shortages. Three more or less plausible uses of the term call for mention, but only to be ruled out. First, it might be said that a commodity is or is not in short supply according as the output of it this year (or month) is or is not significantly smaller than it was in the recent past. For our purpose this will not do. The annual output of muni- tions is now enormously less than it was three years back ; but nobody would say there is a shortage of munitions. On the other hand the output of milk in this country is much larger than in 1938 ; and yet, while there was no shortage then, there is a considerable shortage— at all events, there is a call for milk-rationing—now. The reason, of course, is that the state of demand has altered. History, then, cannot provide the standard of reference of which we are in search.
Secondly it might be said that there is a shortage of anything if the supply of it is less than people would like to have if it cost nothing at all. But this means that there always have been, and very likely always will be, shortages of most of the things in which we are interested. Indeed, according to one current definition, an economic good is just a good in respect of which there is a shortage in this sense. Obviously for us that use of the term shortage is futile. Thirdly, it might be said that there is a shortage of something if, on account of monopolistic policy or imperfect competition among producers, less of it is forthcoming than would be forthcoming, other things being equal, under conditions of thorough-going com- petition. But in the context of his speech the Prime Minister cer- tainly was not thinking about shortages of this kind. Moreover, to enter into a discussion of them—which could not fail to be lengthy— in this article would quite upset the balance of it. I shall, there- fore, put this sense of shortage aside, along with the other two, though for a different reason.
We are left, for our present study, with two types of shortage. First, there are price restriction shortages, i.e., the supply is less than the amount demanded at the ruling price. Secondly, there are what, for want of a better name, I shall call social shortages. There are, we may suppose, in given conditions certain minimum quantities of specified things which the general feeling of the com- munity, as interpreted by the Government of the day, deems it proper to devote to certain purposes or to the service of certain persons. If what is left over of the total supply after the other demands of the market have been satisfied is insufficient to meet these calls, there is a social shortage of the commodity in question.
So far of shortages. What of controls? Among these the most obvious broad distinction is between price controls and quantity controls. For practical purposes price control means that the State fixes for something maximum permissible prices below the price
that would rule, other things being equal, in the absence of such fixing. That is clear enough. We need not bother with the com- plication that in certain cases the legal maximum price, while below what would naturally rule in some markets, is above those proper to other markets. About quantity controls, however, there is more to be said. There is a sharp distinction between positive controls and negative controls. Positive controls provide that not less than so much of something is handed over for certain purposes or to certain persons. This is the sort of control exercised under the Education Acts as regards teaching and, in some cases, milk. Nega- tive controls provide that not more than so much of something shall be handed over for certain purposes or to certain persons. The " rationing " of essential foods or of petrol and the restrictions which forbid certain uses of building labour or of steel except under licence are negative quantity controls—quite different, of course, from the positive controls represented by the provision of " rations " for soldiers.
Thus we have distinguished two principal types of shortage— price restriction shortages and social shortages—and three types of control—price control, positive quantity control and negative quantity control. How far and in what circumstances is it true that, so long as there is one or other of these two types of shortage, you must (i.e., ought to) have one or another of these three types of control? Let us begin with the relation between price restriction shortages and price controls. It is evident that this sort of shortage can only exist if there is price control. For in the absence of such control, price is bound to rise to the point at which any threatened excess of demand over supply is destroyed. The converse of this is not, indeed, necessarily true ; for with monopolised goods price control only entails this kind of shortage in some circumstances. - But that is beside the present point. What matters is that a price restriction shortage cannot be generated otherwise than through price control. That being so, it would be nonsense to say that, so long as there is this kind of shortage, you must (i.e. ought to) have this kind of control. That would be like saying that, if you are feverish because of a dog-bite, you ought to have, as a remedy, the dog-bite that you have already got!
It is, however, by no means nonsense to say that, so long as there is this kind of shortage, you must (ought to) have negative quantity control. The reason for that is that otherwise, since the ordinary mechanism of market prices, by which demand is normally kept equal to supply, has been abolished, demand will exceed supply, and the decision as to what demands shall not be satisfied will perforce be left to luck, favouritism or the battle of the queues. This reason is not, of course, a decisive one. For many sorts of goods, most vegetables for example, the practical difficulty and cost of organising negative quantity controls outweighs, it is generally agreed, the dis- advantage of a chaotic system of distribution. For such things, though a case could be made for these controls, it is not true that " you must have them." With essential foodstuffs and the principal articles of clothing, broadly speaking, that is true. For chaos in distribution, entailing, as it might well do, near-starvation for the unlucky, could spell social disaster. Negative quantitative control is designed to prevent this. It must be stringent enough to cut down aggregate demand to the level of supply, so that no permitted demands are left unsatisfied. This does not mean that, with, say, the (maximum) butter ration fixed at 2 ozs. a week, everybody will necessarily buy 2 ozs. ; it means that everybody who at the official price wants 2 ozs. must find 2 ozs. available and anybody who wants less than 2 ozs. must find available such quantity as he wants.
About social shortages the issues are more complicated. Let us ask first in what circumstances a social shortage of anything warrants price control. If the shortage is due to a suddei violent disturbance, such as an abnormally bad world harvest, heavy shipping-losses or the absorption of resources normally devoted to making consumer goods into war services, the free play of the market would enable people fortunate enough to hold stocks of the short commodity, or to be equipped for producing it quickly, to make enormous windfall gains. This kind of thing, more especially in war-time, is highly undesirable, and the fixing of maximum prices is, from some points of view, the most satisfactory way—superior to high excess profits duties—of combating it. Moreover, for a brief emergency, the enforcement of reasonable maximum prices need not—apart from black-market activities--make supplies appreciably lower than they would be in any event. But from a long-run standpoint things are different. If a commodity is being produced by a monopolist strong enough to keep rivals out of the field, the imposition of a legal maximum price, intermediate between the monopoly price and the price proper to competition, will impel him to produce more, not less, output. In general, however, high price is an important spur to the entry of new producers into an industry ; so that to restrict it damages output. Thus, in general, the imposition of effective price maxima is not a remedy for—rather it tends to aggravate— social shortages. It is not the kind of control that " you must have." What is needed—if anything is needed—is one or another form of quantity control.
In a short-run emergency for which the aggregate supply of anything may be taken to be approximately fixed, provision can be made for meeting such demands as the Government deems vital almost as well by negative quantity control—as by positive control. But from a long-run standpoint whereas positive quantity control has no tendency to cut down supplies—it may, on the contrary, augment them—negative control, since it nullifies some demands, is bound to cut down supplies. This entails that with negative control the extra resources that the State requires to serve its chosen purpose are taken specifically from the task of pro- viding the commodity for those people who are subjected to control. Thus in order that a sufficiency of, say, sugar shall be available for the poor, better-to-do persons are compelled to cut their consumption of sugar ; they are not allowed to maintain it by bringing about a switch-over of production resources to sugar-making and cutting their consumption of other things. There is, in general, a direct social loss here. Moreover, in some cases, the restriction in the scale of output of the short commodity which negative control entails makes the average real cost of producing that commodity larger than it would otherwise be ; so that there is an indirect loss also. Thus, as a long-term corrective for social shortages the positive quantity controls—express State direction of resources to the uses in which it wants them—have substantial advantages over negative controls. This accounts for and justifies the fact that, apart from special cases, e.g., noxious drugs, negative quantity controls are rarely used except in emergencies ; whereas positive controls designed, for example, to guarantee certain minimum standards below which nobody shall be allowed to fall, play an important part in the normal life of this and a number of other countries.
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