During his 1989 visit to the United State, Boris Yeltsin, then a member of the Soviet Union’s Parliament, made an unscheduled stop in a Houston grocery store called Randall’s. He was stunned to find a huge array of food stacked in rows, aisle after aisle. He could not believe such abundance was enjoyed by everyday Americans, a luxury unavailable even to high ranking Soviet officials. It was a turning point in Yeltsin’s faith in the Soviet Union and communism. “When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort,” he later wrote in his autobiography, “for the first time I felt quite frankly sick with despair for the Soviet people.” Two years later the Soviet Union ceased to exist, and Boris Yeltsin was elected the first President of post-communist Russia. (OK, maybe Randall’s grocery didn’t topple the Soviet Union all by itself . . . but it helped.)
In contrast to Yeltsin, Americans tend to think of a well stocked grocery store as almost a natural phenomenon, no more remarkable than branches growing from a tree. So let’s recall why Russians stood in lines to shop in grocery stores with almost empty shelves, while Americans then and today enjoy a level of affluence that floored a Russian leader when he saw it.
In the USSR, the government was in charge of the groceries. Government officials told farmers what to farm, truckers what to truck, canneries what to can. Bureaucrats in Soviet Russia had mountains of information about who needed what, and where and when and how much. It was all rational, organized, coordinated . . . and a miserable failure.
In America, the economy is not organized by any authority. There are public safety controls and laws against fraud and theft, but government officials do not issue production orders and set prices, as they did in Soviet Russia (and do today in Venezuela, Cuba and other impoverished places that are so admired by Bernie Sanders and his supporters). A farmer grows kidney beans, the cannery puts them into cans, the truck driver drives the cans to the grocery, the store owner stacks the cans on the shelves, and the whole enterprise is coordinated by . . . nobody. In free market economies, people work together without anyone knowing what others in the system are doing. Nevertheless, despite no one in charge, and everyone largely ignorant of how it is happening, you and I can walk through the doors of a grocery store tomorrow morning and buy organic kale. Or maybe beer and tortilla chips.
But why does government control fail while free markets work? Two words are especially significant: Information and Incentives.
People express their preferences and needs when they buy and sell goods and services. In a government controlled economy, that information is gathered by bureaucrats who then decide the goods and services to be produced, and the prices that should be charged. It is a fair and rational approach that has never worked. The government committee, after poring through reports and studies and charts, may calculate that the nation needs X tons of kidney beans, to be sold at X price per pound, and Y tons of potatoes, to be sold at Y price per pound. Farmers and grocery store operators follow the directives. But later, when people start buying more kidney beans and fewer potatoes, there will be a shortage of kidney beans and lots of rotting potatoes. And farmers, being paid only to follow the government directives, will keep on growing too few kidney beans and too many potatoes.
In a free market, though, the price system quickly delivers information arising from millions of decisions made by millions of people through millions of transactions. It is an immense economic ecosystem, pulsating with prices signals. When people start buying more kidney beans and fewer potatoes, the price of kidney beans goes up and the price of potatoes falls. The information pulsates through the system: grow fewer potatoes and grow more kidney beans. It works so well and so efficiently that we would be stunned, like Boris Yeltsin in reverse, if we walked into our local grocery and found it was out of kidney beans.
The best government committee in the world can’t match the unplanned and uncoordinated free market when it comes to gathering and using information about people’s wants and needs.
A government order to produce kidney beans is pitifully weak as a motivating force. What is the incentive to produce more kidney beans, or better kidney beans, or to produce them more efficiently? Why would the farmer put in that extra effort? There is no reason. So the farmer produces the minimum he is required to produce.
A free market, on the other hand, motivates people to produce goods and services. Those cans and cartons of food that Yeltsin saw on the shelves of that Houston grocery were the result of people’s efforts to produce something for others, not because a government official told them to, but because they wanted to make money so they can buy things to meet their own wants and needs.
The farmer grows kidney beans. When he sells them, farmer takes that stored-up value of what he produced, that money, to a shoe store and buys a pair of shoes. And the shoemaker then takes that money and buys a new radio. And on and on and on. Lots and lots of “incentivized” people means lots and lots of goods and services. A free economy creates huge amounts of wealth.
This does not mean government is bad. In fact, government is necessary to a free market economy. Government creates the infrastructure to ship goods, enacts laws to ensure fair dealing and prohibit fraud, and sets up courts to enforce those laws. You can’t have a real free market without government.
But when government controls the economy, the results are shortages, poverty and misery. Boris Yeltsin saw the value of free markets with his own eyes in a Houston grocery in 1989. Those who enjoy the benefits of free markets should sometimes stop and see it too.