Economics should add up. Any logical system should add up that is. This isn't about mere numbers, this is about the logic within the system. If this happens, then that -- so, if we see the second we should be able to track back and see that the first has also happened. Our logic should work both ways.
Now, strange as it might seem, there are those who insist that the simple supply and demand model doesn't work. The world's far more complex, or we can just pass legal rules to change that law. All sorts of odd claims -- like, if we have rent controls then people will still build the same number of houses, they'll just obey the law and charge less for them. Of course, they won't, but politicians all over the world say they will.
Or more locally we see endless attempts to fix the price of onions. Then expressions of surprise when there's a shortage of onions. At the extreme of course there's the case of Venezuela. The government there said that both chicken and toilet paper should be really cheap. Life would be better if they were both really, really, cheap. So, the law said they must be cheap. The entire and whole absence of both from the market was then blamed on the capitalist saboteurs. Rather than the simple supply and demand.
If our logic is to be robust, then we must also be able to track back from a change in demand to a change in prices. Which is what, very nicely, the example of the spice markets gives us.
This newspaper has investigated the wholesale -- and therefore downstream from there, the retail -- spice markets. There definitely appears to be a “hidden hand” operating in that market, perhaps out of Chittagong. Possibly a cartel within that wholesale market telling people the prices they should charge. Obviously, a cartel of sellers will try to raise prices and thus profits.
One of the things we can't tell, just from price movements, is whether these are “real” price changes or a result of manipulation. This is a general finding. Price movements in a totally free market and in a cartel manipulated one can look very much the same. However, that limitation doesn't matter to us here.
For we can use this as a test of our basic supply and demand model. Sure, we say that if prices rise then demand will fall. But does it? Here the allegation is that it's the cartel raising prices. So it's not more general economic changes that might be masking the result. It's bad people trying to cheat their customers.
So, what happens? “With various spices being sold at record-high rates right now,” Cardomom sales have dropped from regular 5kg purchases by a retail store to 2kg. Those who used to buy 10 types of spice now only buy five. Sales are half what they were. “seeing the high prices of spices, customers were buying less than what they used to. “As a result, sales are down.” This is a part of the supply and demand model that we all understand.
Prices go up, sales go down. But note this. This is even if it's true that there are evil manipulators in the system -- and also if there are not. Why prices have changed doesn't change the reaction to them. That prices have changed is all we need.
Which is a nice test of our original contention about the links between price and demand, no? About that basic supply and demand model. Why the thing is happening doesn't make any difference to that move in demand as prices change.
Now, take that insight back to those rent controls, those nice low prices for onions, toilet paper and chicken. Hey, maybe it really was true that it was the evil capitalists and speculators pushing the prices up. Could be -- we've found a cartel here in spices after all. But that doesn't matter. Because it's not the why that matters. The reaction to a change in prices is going to be the same, that's the other thing we've just shown. Lower the prices and we're going to get shortages …
Tim Worstall is a senior fellow at the Adam Smith Institute in London.