The political call for rationing

This week it was reported that the Swedish Prime Minister Stefan L?fvén had been talking to the Swedish retailer ICA about a potential rationing of goods if the situation should get worse. The reason behind this is Sweden's dependence on supply from foreign imports that they fear could eventually decline due to the on-going crisis.

Is rationing really a policy worth pursuing as a solution to product shortage?

As I have mentioned in earlier articles, demand incentives production.

If you tell people that they are only allowed to buy a certain amount of a good, let us say 2 packages of milk, it will cause the production side to recalculate adapt to the government's demand. The imperative is not longer to try to maximize production in accordance to customer demand but to conform to the rationing policy. So they will try to match that limit set by government bureaucrats.

What will instead happen if we do not ration?

The natural cause in a product shortage would be to let the prices adapt to the conditions to the market. In the event of good becoming more scarce the price of that good would just rise. Prompting some people to forego it and choose the alternatives. It would also lead companies to find new ways to satisfy people's needs and wants - to innovate. Rising prices gives producers an incentive to satisfy a demand and increase the supply.

One can assume that the government also wants to impose price ceilings (essentially price fixing) in order to keep the prices relatively the same in order to ensure price stability. That means that a can of Coke should cost the same amount of money over time. This is what people expect - despite the actual money being worth less due to monetary inflation.

Rationing might work when there is a fixed and determined amount of goods already available. But production is not fixed - there are always ways to produce more, in a different manner. It should not be limited by the government through manipulation of demand, which is what rationing is.

Another effect from rationing and price fixing is that it prevents local alternatives from springing up and fill the void that foreign imports has left. This is because they do not have the incentive due to prices being fixed and not subject to supply and demand. If we just let the market do it thing we will slowly shift to be less dependent on imports in areas where products can be produced locally, food products for instance. In this way, making the global market a lot more equal and stable overall.

Whether you limit the market or not, and it will provide eventually.

Look what some corporations, for instance Volvo, did when they shifted their vacant production to satisfy urgent need and demand for face protection masks. This was because they had the equipment and skills to do so. And that adaptation happened quite fast without politicians ordering them to.

When goods are scarce someone will want them enough for someone else being eager to provide them at a price that the other would accept. It is not unfair that something suddenly costs more, it is just an economic fact. In countries where certain goods have been limited or banned by the government black markets thrive, just because people so badly want the what they legally cannot obtain.

We should not forget that every political intervention, whether good or bad in its intention, comes at a cost that is not easily predicted since the market is so big. There is a risk that political intervention may cause a chain of unforeseen consequences that will leave more people worse off than the number that it actually will help. Therefore, we must ask whether it is moral to treat people like they are disposable chess pieces.

Rationing by government decree has never worked. It has always kept the subjects poorer by limiting voluntary interactions and trade.

I think that calling for rationing is a kind of virtue signaling. For politicians, it is more about giving a false sense of taking social and economic responsibility. The most of the political responses to this crisis have just been empty words in order to gain cheap points.

Updated May 2, 2020.