That basic economics, that’s Econ 101, is terribly, terribly simplistic is no big secret. Yes, it's true that the second year of university, Econ 201, largely starts by insisting that the first year was all lies to children. Simple stuff, so you grasp the basics, but now we're going to tell you why that's all wrong. Then Econ 301 tells why 201 was wrong and by the time you're doing a PhD you get to tell the professors which bits are actually wrong.
Well, yes, except Econ 101 really is about the basics, whereas 201 is about the exceptions. There are parts of those very first stumbling steps into economics which are true, which illuminate far more complicated parts of the subject even though they are indeed terribly simple. One is that in the supply and demand curve chart, which is on page two and three of every economics textbook ever, supply rises when prices do, demand drops and vice versa. Equally, prices will change with supply and demand.
This really is true and one of the implications of this -- a very strong implication -- is that we cannot have a shortage in a free market. We can have a shortage at a particular price, sure -- the world's very short indeed of gold at $1 an ounce -- but not an actual shortage. Because price changes so as to balance supply and demand.
Yes, Econ 201 goes on to tell us that this isn't always so -- Giffen and Veblen Goods exist (no, don't worry) but they are exceptions. At which point, currencies are not an exception and we can tackle this problem: “The Dollar crisis: No measures seem to bring prices down, increase inflow” -- well, no, that wouldn't happen. If we reduce the price then we reduce the supply, right? So we can’t do both things at once. We can have a lower price and less supply, we can have a higher price and more supply. But we can't have both.
We can go further too: “The taka continues to depreciate due to high demand for the dollar amid scarcity. In early August, the dollar crisis resurfaced in Bangladesh, despite price regulations.” There's one word wrong in that second sentence. It should be “because” not “despite.” We talked about this when we viewed the wreckage of the Sri Lankan economy. You can only have a shortage of foreign exchange when you're trying to fix the price of that foreign exchange.
We can also look to folklore to tell the same story. We English had a King, Canute (Cnut in the more modern spellings, but don't make errors with that one), a viking king of England in fact, also King of Denmark, Norway, and so on at the same time. It would have been interesting if that had continued, England as part of Scandinavia for the next thousand years. The East India company would certainly have been different with horned hats and double headed axes, dragon headed longboats, and shield walls in Bengal.
But Cnut's sons lost and so England became French under the Normans. But the story is about Canute. His courtiers said he was so powerful that the tides would obey his commands. So, he set his throne upon the seashore, courtiers lined up beside him, and commanded the tide not to come in.
Everyone got wet feet, of course.
Prices are like the tides -- we can command them but they will not pay much attention. It's possible to build walls against tides, of course it is, but it would then be pretty odd to complain about a shortage of seawater. And that is what is happening with the US dollar and the taka.
Sure, we can insist that the world would be nice if Tk100 bought $1, or Tk107, or Tk109, or whatever. But if the actual market clearing price is Tk119, just as an example, then our insistence is as with the tides. We can fix the price but not the amount that is. If we shift the supply curve for dollars by fixing the price too low then we will have a shortage of dollars. The only way we will not have a shortage of dollars is by having a higher price for them -- or, the same thing, a lower price for taka.
The reason there's a shortage of dollars is because the central bank is trying to insist on a price that is too low. This is by definition. The proof is that we have a shortage -- too many want to buy at that price, but not enough to sell.
Yes, it's even true that in the dreams of Econ 201 and 301 that there are reasons why the really clever people at the central bank should do this. But it's still true -- supply and demand works with currencies. The reason there's a dollar shortage is because, not despite, price fixing. The answer, obviously, depends upon which problem we want to solve.
If the powers-that-be think the price is the important thing then we all have to put up with the shortage. If the shortage is the problem then simply stop the price fixing. But it is one or the other, there is no solution for both here.
It's entirely true that I think free markets, pure and unadorned, are the solution to many more things than perhaps more sensible people do. But with exchange rates I am actually right. The only reason for a shortage of foreign currency is because the price is wrong. That is, because price controls, not despite.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.