Greed delivers command economy

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By Kuthula Matshazi

THE greed and unscrupulous behaviour by some of our businesspeople has unfortunately brought self inflicted misery unto themselves and the re-establishment of a command economy.

According to Andy Hodges, the Head of Treasury for the Zimbabwe Allied Banking Group, most businesses have been setting their prices for the goods in the last two months based on "future inflation forecasts".

This principle is not new but well recognised in economics. When people perceive that inflation will go up, they will generally tend to behave in a manner that actually pushes the inflation up. They will ask for rises in wages, in prices, etc.

Inversely, if they perceive that it will remain low they will likewise engage in behaviour that will keep the inflation low. This principle tends to be a self fulfilling prophecy. No government or policymaker should ignore such a principle in a market economy because by the very nature of the market economy it is intrinsic. The market economy is directed and responds to market forces.

But having said this, we must understand that a market economy and indeed these principles that underpin it are based on assumptions and not concrete and predictable laws and circumstances.

Take note, for instance, in the above self fulfilling prophetic principle that people just assume that inflation would increase and solely based on that assumption, they eventually engage in inflationary behaviour. Or we look at what Hodges says: that people set their prices based on "future inflation forecasts".

On the one hand, we can, with some extent of certainty, use some indicators to judge roughly the inflation trend, and on the other, be able to realise the untoward speculative behaviour influenced by greed and in some instances economic sabotage.

And once we notice the latter, then immediate corrective measures have to be taken to stem such behaviour. One such solution to this speculative behaviour could be applying the self fulfilling prophecy in reverse order. People should tell themselves that they need to stem inflation and therefore restrain their possible inflation increasing behaviour. If the entire chain from producer to retailer could keep the prices constant or within marginal increases, then we would not have to see these wild increases in inflation.

Market failure is an intrinsic part of a market economy and when it happens, government has the obligation to intervene to correct that failure. This is a standard mechanism championed by market economy advocates. In other words, when the market has failed to do what it set itself on doing, such as allocating resources efficiently or when it runs rampant and leaves ordinary people vulnerable then, governments should come in to sort the mess and ensure that the public as well as business interests are protected.

The Zimbabwe market economy has failed because of indiscipline and greed in some strategic areas of concern such as basic foodstuffs. It is therefore incumbent upon the government, as a people's representative, to take corrective action against the failure. We must also keep in mind that the economic activities are not an end in themselves but a means through which the needs of the larger majority of people is served.

Correcting a market failure, we must ensure that, firstly, businesses charge natural (equilibrium price) prices. That natural price should also take into consideration what Adam Smith calls the just price - price that everyone would freely agree to if they knew the consequences of the entire price structure. We have to consider the moral price, in this case the just price and indeed the natural price which is determined by the demand and supply equation, labour costs, rent and profit among other factors.

Second, government should enforce discipline to the market using no more than the legislative instruments at their disposal. In the current price standoff, government has taken measures to force businesses to charge prices that conform to the principles of pricing, and have also let the law descend on those transgressing national directives.

The problem arises when the supply side does not respond to these corrective measures as some have done now. Businesses have generally stopped producing or selling goods. On the demand side we have seem some relief by customers from the burdensome and ever increasing "future inflation forecast" prices.

There is a generally mistaken conclusion that is drawn about the end result of this stand-off: that this exercise can only be sustained over a short term only while the currently present goods are on the shelves. It is predicted that once these run out, there would be no more goods. Well, such a scenario could occur, but only to a certain extent where shortages are the norm. While we do not wish for that, unfortunately the situation on the ground forces us to consider having to go through such a phase since businesses are no longer interested in providing their services.

Businesses have either stopped producing or selling their products. But for how long can they withstand the boycott? They cannot hold us at ransom for too long because they too, are going to go under, sooner or later.

Meanwhile, the government should, parallel to this market failure, line up responsible and patriotic individuals to take up the vacuum created by those who think that economics is an end to itself. In essence, this is now command economy that we are reluctantly advocating for. Under the obtaining circumstances it is the right thing to do. While we want our businesses to thrive, they should also understand that their mandate is not solely to make excessive profit based on speculation.

Businesses should understand that they are operating on the goodwill of the people of Zimbabwe and that we can withdraw that goodwill at any time just as these businesspeople have done to their goods.

Associated Press quoted a business person suggesting that doing business in Zimbabwe was not a national duty. He said to think so would be suggesting that he is crazy. Well, this explains the attitude of the businesspeople. They think we just licence them to solely generate profit for themselves.

Well, privileging them with the licence, we are giving them the responsibility of assisting in improving the welfare of Zimbabweans. It would be proper for businesspeople with such sort of mercenary attitude to go and operate from a jurisdiction where businesses have no "national duty". It is doubtful whether there is such a place on earth, including the United States where incidentally the expectation of "national duty" is high. It is his national duty as well as a national privilege to be issued with a trading licence.

The fact that we are going back to a command economy is a necessary misfortune born out of chronic market failure. This is not to imply that the command economy will produce wonders, but to argue that government cannot sit idly by while the market forces run rampart. If businesses hold out then fine, they run the risk of undermining their livelihoods and will, in the process experience the same difficult circumstances other ordinary Zimbabweans having been living through.

Well, maybe this argument lacks objective consideration, it would be interesting for the business people to show how they come up with their speculative numbers. It will also be interesting to see how the future prices are forecast since there is now absence of official inflation data to work with. If businesspeople can show us their inflation and prices formulas we would be very happy to vigorously defend them against what would then be an overly interventionist government.

Kuthula Matshazi is a Zimbabwean journalist and a graduate development studies student writing from Canada. Visit his blog: http://kuthula.blogspot.com

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