In 1989, Russian President Boris Yeltsin took a famous trip to a grocery store in Texas. The event lives on in popular history because of this famous photograph.
Yeltsin was amazed by the food availability in the US, in contrast with the breadlines of the Soviet Union. Markets successfully catered to customers, whereas government central planning performed miserably by comparison.
Despite this recent example, politicians in the US have begun to wonder whether centrally planned grocery stores are superior. New York City mayoral hopeful Zohran Mamdani has recently proposed a municipal grocery store.
Previously, I wrote a story about Chicago’s plans to create a municipal grocery store. Luckily for residents of Chicago, the plan was scrapped, and the city has decided to focus on enabling private food vendors.
Let’s examine why municipal grocery stores are a bad idea and consider the potential impact if Mamdami implements the system.
The Power of Profit
The major difference between a municipal grocery store and private grocery stores can be summarized in one word: profit.
To make a profit, businesses must do two things: maximize revenue and minimize costs. Higher business revenue indicates customers are willing to spend more at the business. In other words, more revenue means more value provided.
In order to minimize cost, businesses must cut back on the number of scarce resources used, and this frees up the resources to be used elsewhere in the economy.
Profit represents the value a business creates for customers. If businesses make losses, the resources being used are worth more than the value being created. In other words, the business is destroying the value of resources. Thankfully, if a business makes losses for long enough, it must shut down, preventing further destruction.
Government-run grocery stores, on the other hand, have no legal owner. That means no individual or group collects profits. If a state-run store has revenues greater than the costs, those revenues must be spent on something. Why does this matter?
Profit is a means to evaluate decisions. For example, should a grocery store buy a new software system for more efficiently managing inventory and deliveries, or should it invest in a physical warehouse? Without profit and loss calculation, there is no rational way to make the decision.
A for-profit store can calculate profits and losses and evaluate if the chosen option creates more value than cost. Without profit, there is no way of telling ex-post if the decision was value-creating. This insight was pioneered by economist Ludwig von Mises and has been dubbed “the calculation problem.”
This is the major problem with Mamdami’s proposal.
What Will Happen?
You might think that this would mean an NYC municipal grocery store would go out of business, but the result would be worse.
In state-run enterprises, value can still be lost. If the costs of a grocery store are higher than its revenues, value has been destroyed, but the money to make up for the loss must come from somewhere. Private businesses can run out of money, but governments can tax their way out.
In the Soviet Union, where the economy was centralized, there wasn’t enough wealth sitting around to tax its way to success. In New York City, most businesses are private. That means there is plenty of money for the government to seize via taxation to keep inefficient operations afloat.
It gets worse. Since politicians and bureaucrats are not personally responsible for the losses created by their policies, they have no incentive to ensure stores operate at reasonable prices.
If all food at grocery stores were given away for free, there would be an obvious problem. The shelves would clear out, and there’d be no incentive to restock them. Charging money is necessary to incentivize the people associated with producing food.
Politicians and bureaucrats, contrarily, will have an incentive to manipulate prices to suit their political ends. If political desires drive prices too low, this could mean actual value-producing grocery stores will be unable to compete.
I can already hear people ask, “Well, wouldn’t it be good if prices were being lowered?”
No! Prices serve an important function. They compensate for work, they incentivize consumers to be conservative with consumption, and they communicate knowledge about the value of goods. Disturbing prices by government fiat ruins these functions and ultimately would require the city to increase taxes to make up for the losses.
It’s possible to create a municipal grocery store that leeches off the healthy economy, but it comes at a cost to taxpayers. The larger the state-run program becomes, the smaller the value-producing economy becomes. You ultimately run into Margaret Thatcher’s final constraint on socialism: “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 is at the intersection of political economy, development economics, and population economics.
