Allow me to let you into a little secret about economics. It's a science. Yes, it's a social science, but a science all the same. For it observes reality and tries -- with varying degrees of success, just as with every other science -- to abstract rules about reality from that observation of events. Those rules must then be general, we need to be able to apply them to other, similar, events.
You know, like how physicists note that apples fall from trees, then suppose that pears also fall from trees. We've not discovered something about apples, or indeed pears, but about matter and gravity.
The most obvious, yet most misunderstood, of those findings of economics is that prices matter. No, really, they're not just some random nor arbitrary number applied. Nor are they the method by which the capitalists gorge on the corpses of the workers, not even something that bureaucrats can adjust at their whim. Prices are what makes an economy work.
One example, from this newspaper recently. Two comments from the same article: “Packaged sugar has disappeared from the market” and “despite the government fixing the maximum retail price.” The only thing an economist would say there is that the “despite” needs to be replaced with “because.” There's no packaged sugar around because the government has fixed the price.
This is one of those generalizable rules of economics. One of the things that makes it a science -- if you do this, then that will happen. Let go of the apple and it will fall. Fix prices and either supply or demand will go out of control. It's not an imposition of capitalists, free marketeers, or an oppression. It's just reality being described to you.
The reason is simple enough. There are people who are willing to work to supply something. There are people willing to consume that same thing. Where the level of willing supply meets that of demand, we get a price. That price doesn't have to be money, it can be anything -- the volume of mothers' smiles at their babies are not determined by cash but there is still supply and demand leading to some mutually acceptable level of them. This is one of these universal rules of the universe we inhabit. Supply and demand exist, prices exist and the three of them carry on a merry dance.
So, why's there no packaged sugar? Because the price has been fixed. As so often happens with price fixing there are few suppliers and many consumers -- and all the consumers have the vote -- so the price gets fixed to be “low to the benefit of the consumers.” Which just means there's less supply and so some to all consumers have to go without that thing. Which, you know, isn't of much benefit to consumers.
There are exceptions, of course there are. European governments realized that there were lots of small scale farmers who would like high prices for their production. So, they got them -- which led to the wine lakes and butter mountains of the past. It's possible to think that this might afflict the jute industry in Bangladesh right now. Lot's being produced, very few wishing to buy. Hmm … maybe the price has been set too high? For that's another thing with rules derived from that observation of reality. If we see the problem then we can work the logic backwards to the cause.
Which brings us to foreign exchange reserves: “Bangladesh's forex reserves dropped below $31 billion due to a significant fall in inward remittance flow in April.” Well, ok -- so, apply our rule here. Has someone been trying to fix the price? Yes, yes, indeed they have. The central bank has been really quite serious about not having a free market -- the definition of free market being one that balances supply and demand -- exchange rate. So, what happens? We get a shortage of supply.
We can even go on to use our rule to predict: “The government raised the retail price of bottled soybean oil by Tk12 per litre.” The government controls the price of edible and cooking oils, does it? Do we get shortages? You know, we think we do. Our theory has faced another test and passed it. Not allowing free market prices produces shortages and or gluts. For only the free market price is the one which balances supply and demand. Not because of capitalists, gouging, unfairness, or anything, but because that's the way the universe works. The free market price is, by definition, the one reached when supply and demand are in balance.
Economics really is a science and because it is there are certain hard and fast rules. Which also then leads to limitations on what can be done. Or, if you prefer, reasons why you can't achieve your goal this way, you've got to do it this other way.
For example, we'd like poor people to be able to have more sugar, or cooking oil. Great, tax the rich and give the money to the poor -- but whatever you do don't screw with prices. Not because that's immoral, illegal, or fattening, but because it simply doesn't damn work. Useful advice for those dealing with the foreign exchange rate. Fixing the price just means there isn't any rather than making it cheaper.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
