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Thursday, 22 May 2008

Tear down the Price Control Act

What is the future for price control measures in Malaysia? The answer is none. Winston Churchill once said that “The further backward you look, the further forward you can see”. I want to bring all of you back to the year 1946 when the British introduced our Price Control Act.

The history

The British introduced our Price Control Act in 1946 after the World War 2 during the British Military Administration (BMA). It is understandable that the reason was to curb excessive profiteering on basic necessities such as food item especially during the post-war period where food was scarce and rare.

But towards the end of the 20th century much had changed especially on our economic contour. Business and trades had gone global and complex. In an economy as sophisticated as ours, people have to interact and exchange goods and services constantly, and the division of labour is so finely articulated that every household depends on commerce and simply to survive.

The end of the cold war in 1990s saw the collapse of the central planning beliefs in organizing a workable economy and further precipitate freedom of trades. In as much, our country too had benefited from the privatization programs, free trade and economic competition. I don’t want to delve much on the surging influence of capitalism but I need to emphasize on the importance for us to review back our 1946 Price Control Act.

Problems of today

Amid the spiralling inflation problems today (almost in every consumer products either it consumer goods or services), a lot of decisions had been made to counter the inflation effects. In 2006 and today, the non-stop oil price increase and “demand and supply” mode had cause every consumer products to inflate and government in power tried hard to abort all the negative ripple effects of those factors. One of the measures that we took was the Price Control Act 1946. The question should be asked is that are those options/ measure is right?

Under those stressful conditions of inflation, you can get short-sighted, ineffective, and often counterproductive especially in making policies. For the past two years we had went through turbulence time of countering inflation. But one need to ask whether that inflation had been inflates by which factor, either it “supply and demand” or just merely “speculation”.

If we look back at the past two years on the problems of food shortages (flour, cooking oil, milk, sugar and rice), these increase were driven by the market forces factor either it the increase of the production cost or supply below demand. None of it were contributes due to speculative action. By adopting the 1946 Price Control Act, we had went against the market forces which will only precipitate a chain reaction of endless new problems such as shortages, low quality of products and stagnating future development that will indeed stop the needs to have “creative destruction” (Please refer to Joseph Schumpeter for the definition).

Perhaps the best way I could explain on how market economies works (and in prescient way of explaining our nation food price hike) is by quoting Adam Smith from his well-known “The Wealth of Nations” book:

“It is not from the benevolence of the butcher, the brewer, or the banker, that we expect our dinner, but from their regard to their own interest”.

Please don’t get me wrong by saying that I said market should be let totally free, but what I do say is that market should be leave flexible as it can be. If there is no “creative destruction” in the market, then there is no impetus for methods of seeking profits with low cost of production. There will be no innovation and the economy will leave to stand still just for the sake of surviving. And that will require government to pump more money for subsidy that will never end and it will hinder future progress.

In dealing with the current inflations and shortages of food item (especially when the problems due to demand and supply), market should determine the price. By that it can prompt supply and deflate the price spike when the supply reaches the shelves of the consumer stores. In capitalism, you can’t tell when market is overvalued, and you can’t fight market forces.

In the current trend of trades and businesses, market economies moves in full speed (perhaps at the rate of a supersonic jet) and the free market itself proved to be self correcting (provided no intervention from “invisible hand” such as the price control measures). The data that you collected from consumers store or wet market today may not be useful tomorrow due to fast moving market economies and its flexibilities. We need to put trust on market.

By venturing into the price control measures especially to stem the food price hike, the government had created a moral hazard of its own. The 1946, Price Control Act is a form of safety net in market economies for Malaysian and the theory goes, the bigger the safety net, the greater the recklessness which people, businesses, or government will tend to behave.

Abolishing the Price Control Act is the way for us to nurture a competitive way of doing business. I know that competition is stressful because competitive markets create winners and losers. But we need to bear in mind also that the competitive market is the way to produce wealth and it does produce wealth more than the systems of government controlled market, and that’s where we need to focus.

Nowadays the world economy has become too complex and interlinked. Our policy-making process must evolve in response to that complexity. I need to say that for the future by enforcing Price Control Act whenever we are having problems of price hike or shortages of food products, it was like a Spanish literature of Don-Quixote attacking windmills. The idea is well-intentioned but misguided.

The market need to be the one who should set the price, and it will trigger the needed production that later will allocate products according to demand and supply (a clear illustration of the fundamental difference between a command in economy and a market economy). Allow rising prices to prompt an increase in supply.

Populist Policies

I know ever since our independence we had been influenced by the Fabians populist policies like Britain (pre-Margaret Thatcher). Economic populism imagines a more straightforward world, in which a conceptual framework (such as to abolish Price Control Act 1946) seems a distraction from evident and pressing need. In populist policies the principles are simple. If there is unemployment, then the government should hire the unemployed. If money is tight and the interest rates as a consequence are high, the government should put a cap on rates and print more money. If imported goods are threatening jobs, stop the imports.

Fabian populist socialism perceived market competition as economically destructive, aimed not to destroy capitalism but to constrain it. Government, they believed, should actively safeguard public welfare from the harsh competitiveness of the market.

But one need to bear in mind what Russian, China (pre-Deng Xiao Peng), Britain (pre-Margaret Thatcher) and Indian (pre-Man Mohan Singh) learned the hard way that material well being – that is, wealth creation – requires people to take risk. We can’t be sure our actions to acquire food, clothing, and shelter, for example, will succeed. But the greater our trust in the people with whom we trade, the greater the accumulation of wealth.

The problem is that the dynamic that defines capitalism, that of unforgiving market competition, clashes with the human desire for stability and certainty. And we seek stability and certainty through the implementation of the obsolete 1946 Price Control Act. The new commitment to a permanent presence of government in economic affairs distinctly downgraded the role of markets. I know it is not easy for us to ditch the Price Control Act because it had become part of our culture in dealing with price hike, but culture and economic well-being are destined to clash.

The 1946 Price Control Act is a wall for economic freedom, self-correcting economy and fair trade for all. We can build exclusionary walls around Malaysia to keep out the goods, services, and people that compete with domestic producers and workers. The result would be a loss of competitive spark, leading to stagnant and weakened economy. Our standard of living would fall and societal discontent would fester and rise, and we fell long way down the well through narrow minded thinking of nationalization of every private companies and bureaucratic problems and all that jazz.

My message to you all is clear, the 1946 Price Control Act is that wall and we need to tear down this wall.
Reference:
The Age of Turbulence - Adventures In A New World, by: Alan Greenspan. Allen Lane an imprint of Penguin Books, 2007.

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