After removing prices from its menu earlier this year, a struggling Minneapolis restaurant announced it will close at the end of the year. According to the Star Tribune,
Owner Dylan Alverson, who has run the cafe on the corner of Chicago Avenue and E. 32nd Street for the past 15 years, announced the closure on Saturday morning.
“For the last six years, I’ve been trying to prove that Modern Times can continue to exist,” he posted on Instagram. I’ve exhausted every option without compromising the core fundamentals that make Modern Times what it is. Because of this, we have made the choice to close at the end of the year.”
Modern Times temporarily closed in July, then reopened in August “with prices back on the menu.” Yet, its fate was sealed.
The cafe has been struggling financially for years, so closure was probably imminent. But a price-free menu likely accelerated its demise, and here’s why.
In a world of limited resources, individuals and businesses must allocate finite goods efficiently. Prices give us the necessary information to do that.
In economic theory, high and rising prices communicate high demand (or scarcity), encouraging producers to increase supply. Entrepreneurs invest more time and resources to satisfy consumer demand. At the same time, consumers ration or switch to other less costly products, lowering demand. Over time, the interaction between demand and supply brings prices down, while avoiding shortages in the present.
Low prices do the opposite. They increase demand while incentivizing producers to switch and invest their resources in other markets. Over time, prices adjust as demand rises, bringing the market back to equilibrium.
Removing prices disrupts this crucial feedback loop, generating both shortages and waste. Without prices to coordinate production, price-free economies — such as the former Soviet Union — produce too much of what people don’t need while creating deficits of what they actually want. Consumers are forced to wait in long lines for basic goods and services, which, since they are free, are scooped up as fast as they are produced.
The end result is chaos, poverty, and, as in the case of 1960s communist China, mass starvation.
While Modern Times’ experiment did not result in mass starvation, the resulting operational chaos from its no-cost menu still offers an important lesson on why prices matter. According to the Star Tribune, after the restaurant eliminated prices,
Neighbors began to be crowded out of the restaurant by people who could not pay and who lingered around the restaurant all day. Complaints mounted of open drug use, theft, discarded needles in the alley and overdoses on the sidewalk.
While the demand for free food exploded, supply remained finite, as did the cafe’s operating space. Without prices to regulate demand, overcrowding (and consequently, closure) was the only possible result.
Unfortunately, the damage from this experiment extended beyond the cafe. Surrounding areas also paid, through less safety and reduced quality of life.