In 1989, Russian President Boris Yeltsin made headlines with a memorable visit to a grocery store in Texas. This event remains etched in the collective memory, primarily due to a striking photograph that captures his astonishment.
Yeltsin was taken aback by the abundance of food in the U.S., starkly contrasted with the breadlines of the Soviet Union. The efficiency of markets in meeting consumer needs stood in sharp relief to the failures of government central planning.
Fast forward to today, and some U.S. politicians are pondering whether centrally planned grocery stores might be a better option. New York City mayoral candidate Zohran Mamdani has recently put forth the idea of establishing a municipal grocery store.
Earlier, I covered a similar initiative in Chicago, where plans for a municipal grocery store were thankfully abandoned. Instead, the city opted to support private food vendors.
Let’s delve into why municipal grocery stores are a misguided idea and what consequences could arise if Mamdani’s vision comes to fruition.
The Profit Principle
The fundamental distinction between a municipal grocery store and its private counterparts can be distilled into a single word: profit.
To turn a profit, businesses must focus on maximizing their revenue while minimizing costs. Increased revenue signals that customers find value in what’s being offered; essentially, higher sales equate to greater perceived value.
To keep costs down, businesses must judiciously manage their scarce resources, enabling them to allocate those resources more effectively elsewhere in the economy.
Profit serves as a metric of the value a business provides to its customers. If a business consistently operates at a loss, it indicates that the resources being utilized are yielding less value than their potential. Fortunately, prolonged losses lead to business closure, preventing further resource wastage.
Conversely, government-run grocery stores lack a designated owner. This absence means no profits are collected by individuals or groups. Thus, if a state-operated store generates revenue exceeding its costs, that surplus must be allocated elsewhere. Why is this significant?
Profit functions as a decision-making tool. For instance, should a grocery store invest in a new software system for better inventory management or should it enhance its physical storage facilities? Without the profit and loss framework, making such choices becomes irrational.
A for-profit entity can evaluate its choices through the lens of profit and loss, determining whether a decision adds more value than it incurs in costs. Absent this metric, there’s no way to discern whether a decision was beneficial after the fact. This dilemma, known as “the calculation problem,” was first articulated by economist Ludwig von Mises.
This is the crux of Mamdani’s proposal’s shortcomings.
The Potential Fallout
You might assume that a municipal grocery store in NYC would inevitably fail, but the outcome could be even more troubling.
In state-run enterprises, value can still be eroded. If a grocery store’s costs surpass its revenues, that equates to a loss of value; however, the deficit must be compensated for somehow. While private businesses can declare bankruptcy, governments can simply raise taxes to cover their inefficiencies.
In the centralized economy of the Soviet Union, there wasn’t enough wealth to tax for survival. Conversely, New York City boasts a plethora of private businesses, meaning the government has ample funds to extract through taxation to sustain inefficient operations.
It gets worse. Politicians and bureaucrats, shielded from the consequences of their policies, have little motivation to keep grocery prices reasonable.
If grocery items were provided free of charge, it would create a dire scenario: empty shelves and no incentive to replenish stock. Charging for goods is essential to motivate production.
On the flip side, politicians and bureaucrats may be tempted to manipulate prices for political gain. If they drive prices too low, legitimate, value-generating grocery stores could be pushed out of the market.
I can already hear the counterarguments: “But wouldn’t it be wonderful if prices were lower?”
No! Prices play a crucial role. They reward labor, encourage consumers to be judicious with their consumption, and convey vital information about the value of goods. Disrupting prices through governmental decree undermines these functions, ultimately necessitating tax increases to cover the losses incurred.
While it is conceivable to establish a municipal grocery store that draws resources from a robust economy, it inevitably comes at the expense of taxpayers. As the state-run initiative expands, the value-producing economy contracts. This leads to the inevitable conclusion voiced by Margaret Thatcher: “The problem with socialism is that you eventually run out of other people’s money.”
Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. His research intersects political economy, development economics, and population economics.
