What is Price Scissors?
Price scissors is a term that refers to a sustained change in the terms of trade between different goods or classes of goods. Often this can involve a country's drop in the price received for a developing economy’s agricultural exports, while its manufactured goods imports rise in price or remain relatively stable. This phenomenon can cause chaos as individuals do not expect prices to take such wild and opposite directions from the norm, and the rural agricultural population sees simultaneous decline in incomes and rising cost of living.
- Price scissors is a sustained divergence in the prices of different goods or classes of goods, which is commonly used to describe high industrial output and low agricultural prices.
- This divergence can cause the producers of agricultural commodities to suffer as their incomes fall and cost of living rises.
- The original use of the term price scissors was in reference to a policy-induced economic crisis in the Soviet Union in 1923.
Understanding Price Scissors
Price scissors draws its name from its graphical illustration; it was coined by Leon Trotsky, while describing the diverging trend lines of agricultural and industrial price indexes. With time on a horizontal axis and price level on a vertical axis, the plotting of industrial and agricultural prices on the graph will look like a pair of scissors, meeting at a juncture and then sharply moving in opposite directions.
The substantive economic effects of this are best illustrated with an example: If a country is a net exporter of dairy products and a net importer of clothing, a large price drop in the worldwide value of milk combined with a sharp increase in the price of textiles would create a price scissors. In this case, the domestic economy struggles to cope with the burden of paying much more for clothing and other textiles, while being unable to sell dairy products at the prices with which they are accustomed. Incomes for dairy farmers and those in related industries will fall, while their cost of living will rise because of higher clothing prices.
Historical Examples of Price Scissors
The Scissors Crisis in the Soviet Union is the primary historic example of the price scissors phenomenon. From 1922 to 1923, during the New Economic Policy (NEP), the prices of industrial and agricultural goods shot in opposite directions, reaching peak divergence at agricultural prices falling 10% lower and industrial prices rising 250% higher than prices a decade earlier. Russian peasant farmers’ incomes fell, making it even harder for them to buy manufactured goods. Many farmers stopped selling their produce and moved to subsistence farming, which sparked renewed fears of famine after the 1921–22 famine had already killed millions.
The Scissors Crisis had a few causes, rooted in Soviet mismanagement of the economy and the destruction following the Bolshevik revolution. For one, the government, in a misguided attempt to address the threat of famine, fixed grain prices at artificially low levels. This obviously led to low agricultural prices. Furthermore, there was a surplus of agricultural products to industrial products; agricultural production had rebounded quickly from the famine and civil war that followed the revolution of 1917. In contrast, industrial capacity and basic infrastructure had been damaged or destroyed by the war, significantly slowing industrial production. The Scissors Crisis sparked widespread worker strikes within major Russian cities as rival communist factions agitated against Lenin’s mixed economy policies and blamed the crisis on the NEP. The government eventually cut industrial production costs through rationalization, wage-cutting, layoffs, and promotion of consumer cooperatives. This lowered industrial output prices and the divergence between agricultural and industrial prices subsided.