THE FINAL WORD BY TIM WORSTALL

A controlled chaos

If you sue and threaten to fine people who aren’t allowed to raise prices then you’ll end up with shortages

Sometimes the answers to a question are there right under our noses. For example, this question asked in this newspaper just recently: “How did soybean oil completely go out of stock from stores right after Eid?” The answer is right here in this very newspaper as well, but in another piece: “The Bangladesh Competition Commission, responsible for encouraging competition in the market, has sued eight edible oil companies on charges of limiting or controlling manufacturing, distribution, technical development of the market and investments.”

If you sue and threaten to fine people who aren’t allowed to raise prices then you’ll end up with shortages. You can, as is being done, then threaten to sue and fine those who won’t help with those shortages, but that would just make matters worse. 

The correct solution is to allow people to raise prices so that there aren't shortages. 

We start with one fact: Events in Ukraine have increased the global price of edible oils. The country is a major source of sunflower oil which now cannot be shipped and next year might not even get planted. This raises the price of sunflower oil because there is now less of it to go around.

But this also raises the prices of all other edible oils because they are, to greater or lesser extents, substitutes for each other. Depending upon what is being made and, at a pinch, rapeseed, soya, palm, or even olive oil can be used in place of sunflower oil. So, less sunflower oil means the prices of all of those others also change.

We need to apply one theory here as well: The market price of something is, by definition, the price at which supply and demand meet. If supply falls then the price must rise in order to reduce that demand. If the price is not allowed to change then supply and demand will not meet -- there will be either a glut or a dearth. In this case, if the global supply of sunflower oil is low, then the prices of all edible oils must rise so that people use less of them. If that price is not allowed to change then there will be shortages of edible oils in general. 

Yes, it is true that economics can become even more complicated at times than the first few pages of those introductory textbooks that we call “econ 101.” But the lessons from econ 101 are still true, that’s why we put those very basic lessons at the beginning of all the textbooks. Prices vary so as to balance supply and demand.

We now call into consideration our second fact: Bangladeshi authorities have been trying very hard to make sure that no one raises the price of edible oils. I pointed this out in an op-ed earlier this year. I also said back then that attempts to keep that price nice and low were going to, inevitably, lead to shortages. Why? Because prices vary to match supply and demand. There’s just less edible oil around that can be consumed, therefore the price must change or there will be shortages. 

Of course the Competition Commission isn’t going to allow any of that to sway their activities. The oil supply companies are acting entirely sensibly. The global price has gone up and yet they’re not allowed to raise their own. So, of course they’re reducing their production. At which point the commission is suing them for doing what the price controls enforced by the government push them into doing to begin with.

It is, in theory, possible for a wise, omniscient, and beneficent government to make our lives better by controlling parts of the economy. By making sure that prices are nice and reasonable for essentials and so on -- again, in theory. Then we look at what actually happens and start to wonder. Why is the government suing people for the consequences of their own actions?

For there is a true and accurate answer to that first question, “why are the stores out of oil right after Eid?” Because the government has been trying to control the prices of oils. 

As I say, economics can -- and indeed does -- become more difficult than it already is. But price fixing always leads to either gluts or dearths, that’s why the lesson is put on those first few pages of every textbook.

Which leaves us with the societal task in front of us, I guess. Trying to force those who rule us to read just those first few pages of introductory economic books. Or, as we might put it in one colloquial form of English, perhaps we could demand that they get a clue about the real world?

 

Tim Worstall is a senior fellow at the Adam Smith Institute in London

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