It’s funny that people always talk about inflation vs deflation and never mention what would happen with a fixed price for everything
Its mentioned pretty early when learning economic theory, and its disastrous, which is why it isn’t suggested as a policy to put into place, though from time to time some governments do, and its, as expected, disastrous.
Lets imagine you’re a livestock farmer and there is a fixed price for two types of meat you produce: Beef and Frogs. In our theoretical country of FakeLand, we use the SuperCoin (SC) currency I just made up.
It costs you 5 Supercoins (SC) to produce a unit of beef, an the fixed price of beef is 10 Supercoins (SC).
It costs you 4 SC to produce a unit of frog, and the fixed price of frog is 8 SC.
You produce equal amounts of beef and frog on your farm.
Now, you (and most people) like eating beef and very few people like frog. So the start of the Year 1 opens and your beef sales are VERY busy, and you’re selling just a tiny tiny big of frog. If this keeps up, you’re going to be out of beef very quickly, and you’re going have LOTS of spoiled frog meat. In a normal economy, you would reduce the cost of frog from 8 SC, to possibly 5 SC making it half the cost of beef, so you could clear out your inventory of frog before it goes bad, BUT YOU CAN’T IN FAKELAND, because the prices are fixed! So for Year 1, nearly all your frog meat goes unsold and spoils and you lose 4 SC for every unit of frog you didn’t sell. You sold all your beef, but with your losses on frog meat, you’re near poverty because you essentially only earned 1 SC when you sold a unit of beef because you had to cover the losts of 4 SC for a unit of unsold frog meat.
So next year, you learn your lesson, right! Less frog meat, and more beef!
Year 2
It costs you 5 Supercoins to produce a unit of beef, an the fixed price of beef is 10 Supercoins.
It costs you 4 SC to produce a unit of frog, and the fixed price of frog is 8 SC.
You plan produce 10 of beef and for every 1 of frog on your farm.
You still can’t do anything with the prices you sell for, because Fakeland sets the fixed prices.
So you’re all ready to make tons of SC on beef, except there is a disease that wipes out 90% of everyone’s herds before it goes to market. In a normal economy supply and demand would make the cost of beef rise to maybe 20 SC or 30 SC to recognize the scarcity of beef, but here in Fakeland the prices are fixed.
In the first month of Year 2 selling, you sell out of beef lightning quick because beef is still relatively cheap at only 10SC! Because of the shortage of beef, people also willing to buy your frog meat. Since you only made 1/10th of that this year, you don’t have that much of it either. In a normal economy supply and demand would let you raise prices on frog too way above 8SC to maybe 10 SC or 12 SC to help you cover your beef losses, but in Fakeland prices are fixed, so you can’t. You sell out of frog in the first month too.
So, you now have another 10 months or so with nothing to sell. Further, you have money, but there’s no food to buy from anyone because it all sold cheaply from fixed prices.
Just to complement this whole idea. The economic crisis in Venezuela was setup when the currency got their prices fixed. Essentially making exchanging currencies illegal without government approval. This threw our economy into disarray and made us 100% dependent on oil sales, as it was the only consistent influx of dollars. When the global prices of oil crashed in 2014, they pulled the currency exchange prices with them, we got the highest inflation in history ever and our economy collapsed. In response, the government fixed prices of everything, specially food, not just the currency. The result was an even worse crisis, death and hunger.
The whole thing has been somewhat stabilized by now by, as you would guess, liberating the prices and letting the economy behave normally again.
Isn’t price fixing different from 0 inflation though?
I suppose looking through some very narrow lenses perhaps, but practically speaking I don’t think they’re different in their effect on consumer behavior. Inflation occurs when sellers control their prices. Price fixing technically doesn’t allow inflation. I say technically because nearly all systems where strict monetary policy occurs, economics is still active and buyers and sellers resort to black markets or the barter system. So in those places inflation can still run rampant even if official prices are fixed.
Its mentioned pretty early when learning economic theory, and its disastrous, which is why it isn’t suggested as a policy to put into place, though from time to time some governments do, and its, as expected, disastrous.
Lets imagine you’re a livestock farmer and there is a fixed price for two types of meat you produce: Beef and Frogs. In our theoretical country of FakeLand, we use the SuperCoin (SC) currency I just made up.
Now, you (and most people) like eating beef and very few people like frog. So the start of the Year 1 opens and your beef sales are VERY busy, and you’re selling just a tiny tiny big of frog. If this keeps up, you’re going to be out of beef very quickly, and you’re going have LOTS of spoiled frog meat. In a normal economy, you would reduce the cost of frog from 8 SC, to possibly 5 SC making it half the cost of beef, so you could clear out your inventory of frog before it goes bad, BUT YOU CAN’T IN FAKELAND, because the prices are fixed! So for Year 1, nearly all your frog meat goes unsold and spoils and you lose 4 SC for every unit of frog you didn’t sell. You sold all your beef, but with your losses on frog meat, you’re near poverty because you essentially only earned 1 SC when you sold a unit of beef because you had to cover the losts of 4 SC for a unit of unsold frog meat.
So next year, you learn your lesson, right! Less frog meat, and more beef!
Year 2
You still can’t do anything with the prices you sell for, because Fakeland sets the fixed prices.
So you’re all ready to make tons of SC on beef, except there is a disease that wipes out 90% of everyone’s herds before it goes to market. In a normal economy supply and demand would make the cost of beef rise to maybe 20 SC or 30 SC to recognize the scarcity of beef, but here in Fakeland the prices are fixed.
In the first month of Year 2 selling, you sell out of beef lightning quick because beef is still relatively cheap at only 10SC! Because of the shortage of beef, people also willing to buy your frog meat. Since you only made 1/10th of that this year, you don’t have that much of it either. In a normal economy supply and demand would let you raise prices on frog too way above 8SC to maybe 10 SC or 12 SC to help you cover your beef losses, but in Fakeland prices are fixed, so you can’t. You sell out of frog in the first month too.
So, you now have another 10 months or so with nothing to sell. Further, you have money, but there’s no food to buy from anyone because it all sold cheaply from fixed prices.
This is how government setting fixed prices on things that the cost and popularity vary on can play out. If you want to see real life recent examples. Here’s where the Venezuelan government in 2020 fixed prices on foods and how disastrous it was.
Just to complement this whole idea. The economic crisis in Venezuela was setup when the currency got their prices fixed. Essentially making exchanging currencies illegal without government approval. This threw our economy into disarray and made us 100% dependent on oil sales, as it was the only consistent influx of dollars. When the global prices of oil crashed in 2014, they pulled the currency exchange prices with them, we got the highest inflation in history ever and our economy collapsed. In response, the government fixed prices of everything, specially food, not just the currency. The result was an even worse crisis, death and hunger.
The whole thing has been somewhat stabilized by now by, as you would guess, liberating the prices and letting the economy behave normally again.
Isn’t price fixing different from 0 inflation though?
I suppose looking through some very narrow lenses perhaps, but practically speaking I don’t think they’re different in their effect on consumer behavior. Inflation occurs when sellers control their prices. Price fixing technically doesn’t allow inflation. I say technically because nearly all systems where strict monetary policy occurs, economics is still active and buyers and sellers resort to black markets or the barter system. So in those places inflation can still run rampant even if official prices are fixed.
Do you have a different take?