Dr ASHANTU Kijaji, Tanzania’s Minister for Industry, Trade and Investment has come out with all guns blazing calling the FCC (Fair and Competition Commission) to clarify on the three “WHYS” – why the shortage of soft drinks in the market, why the hike of prices of the same, and why the hike of prices for construction material like cement.
On the face value, these are politically good steps. In economic perspective, they are good steps without meaningful economic sense. In a free market economy like ours (at least from how we run it), solutions for business cycle problems of the economy when coupled with a crisis, do not emanate from the Why. They are addressed from the What, Why, How, Where, Who and When.
The minister before her, asked the same question but he did not succeed. On a very serious note, the economy is sick not because of shortage of soda or the rising cement prices but the systemic mismanagement in production and productivity.
The current inflation in our economy is not a question of two or three commodities but the entire price system. Covid-19 just came to rub salt into the wound.
In one of the WhatsApp group discussions, a question rose about the minister’s reaction and how can the current quagmire be solved from the silent inflation view point. It’s against that background I argue why the minister is wrong.
The questions about silent inflation are clinical in as far as the silent inflation is concerned.
Ignoring “silent inflation” can only prove that this is one of the areas where public opinion and economic sense always disagree.
Silent inflation plays a great role here, you can only disregard it if you want to play in a public opinion match. And this is “a why.”
The minister’s statement presupposes that there is something immoral; unconscionable, usurious and unethical. She has a point because these acts have a name in economics, and it is called PRICE GOUGING.
It occurs when a seller increases the prices of goods and services to a level much higher than is considered reasonable or fair. It is at this point, economies apply LAW AS A MACRO-ECONOMIC TOOL. This is where we find our FCC.
However, the minister does not ask herself the most important question, which is; Is price gouging always an immoral act?
In a pure praxeological economic sense, price gouging is not always unethical. It is just a reaction to supply and demand usually after a crisis.
But, the problem is when prices in an economy have consistently been rising without increase in welfare variables like wages, price of utilities and food security( in a Food Price Index measures) which leads to SILENT INFLATION.
Unfortunately, the minister does not put that into consideration. Her solution is good optics but bad economics. Any economist assuming that he/she can prescribe a solution by ignoring silent inflation is simply doing voodoo economics.
Our economy is from a downturn, so one would think that price gouging will act as a tool to clear the market price as it always do in a free market economy.
CLEARING THE MARKET PRICE means the price at which the quantity demanded of a certain product or service, equals the quantity supplied, thus ensuring no surplus or shortage exists in the market.
Or we say, it is the price that corresponds to the point of contact of the demand and supply curve. But remember, it is about A CERTAIN PRODUCT not the products in an economy. Our problem is about the products in our economy which are intersected in silent inflation.
More importantly, the government has embarked on spending model of stimulating the economy in its struggle to turbocharge it. It is a good measure but it lacks economic merit.
For it to be effective, it has to be associated with production and productivity on one side and entrepreneurship on the other side.
Short of that, you create MONEY ILLUSION which the government has created, that’s why a section of economic propagandists are singing “VYUMA VIMELEGEA.” It is not true.
It would be true if price gouging were acting as a necessary adjustment to clear the market. In this case, if production and entrepreneurship exist as per the depth in spending stimulus, the demand of the said commodity will be high to the extent of causing a domino effect along the supply chain and communicates that more is required. In economic management, it is called the BULLWHIP EFFECT.
The net effect would be the increased production and supply of the commodity. Thus, increased demand leads to increased job creation, which in turn revamps the economy.
In this trajectory, the shortage in supply of the commodity that had triggered the supply increase is normally reduced by the increased production. At this point, prices will be normalized to levels before the turmoil.
This is not what is happening. There is confusion between what the government is intending to achieve and what it is doing. Resultantly, the economy is on autopilot.