Economics education

The short-term measure will be giving food stamps to chosen people, while the long-term one is to set up large farms. Enill also hinted that action would be taken against supermarkets along the East-West corridor who, he said, were price-gouging.

One TV station asked people in the street what measures the Government should take. Between all the persons interviewed, there were two main recommendations: (1) raise wages; (2) put price controls on food.

These answers reveal that many persons think that money is itself a product, rather than a means of facilitating the exchange of goods and services. So they don’t get why raising wages across the board will result in a rise in the cost of living, or why price controls will make food scarce. But who can blame them when trade union leaders, politicians, and even some professional economists also pretend not to understand this connection?

Yet the link between higher wages and a higher cost of living is simple. Suppose you are a maker of wooden bangles. On average, you sell 100 bangles a week, at a price which gives you enough to meet your production costs (material, effort, and time) and earn a profit.

But now the Government has raised people’s wages, and it so happens that wooden bangles are the hot fashion accessory this season. So now you sell 100 bangles in one day, instead of a week, as do the other bangles-makers. As a result, wooden bangles become scarce. You now have three choices: keep making the same number of bangles and spend the rest of the week watching The Price is Right; produce more bangles, and buy a new stove; or raise the price of the bangles you produce, and buy a new stove and a saut? pan.

But you soon find out that Option Number One is no option at all, because, with everyone spending more, other businesses have already raised the prices of their goods and services – ie the cost of living has gone up. So no game shows for you, since you yourself now need more money in order to buy stuff. You can make more bangles, but there comes a point where the time and effort and materials put into making one more bangle (what economists call the “marginal cost”) exceeds the return in profits you will get for selling it. So, eventually, you end up raising your selling price yourself. Final result: cost of living up.

Which brings us to the second measure people want: keep prices down. But this cannot work, either. What happens if the Government passes a law saying that no bangle can be sold for more than $5, although the usual price is $10? People now have more money, so those who used to buy one bangle a week can now afford to buy three bangles. So again bangles become scarce.

But now bangle-makers don’t even have the option of making more bangles because, since they can’t sell them for more than $5, it isn’t worth their while to increase production. Indeed, many of them will get out of the bangle-making business altogether or start a black-market in bangles. Lastly, what about Government taking action against price-gouging? In respect to groceries, there is no doubt that the mark-ups on some items are well above any reasonable profit. But does this require government intervention or consumer education? Economics journalist Tim Harford in his book The Undercover Economist notes: “One common situation is for two supermarkets to be competitive for the same customers. But it’s hard for one to be systematically more expensive than the other without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices. That way, both can distinguish the bargain hunters from those in need of specific products, like people shopping to pick up ingredients for cookbook recipe they are making for a dinner-party.”

So the fact that there are different prices on different items in groceries does not necessarily indicate price-gouging across the board – and the fact that PNM spokesmen couched the allegation in the geographical code for race reveals that it is narrow politics, not economics, at play here– ie dem taking advantage ah poor black people again.

Harford continues: “The price-targeting strategy only works because supermarkets always vary the patterns of their special offers, and because it is too much trouble to go to both stores. If you want to outwit the supermarkets, simple observation is your best weapon. And if you can’t be bothered to do that, you really don’t need to save money.”

It is a pity that even intelligent laypersons often don’t grasp these fundamental market principles.

This allows policy-makers to get away with short-term political measures that do long-term economic harm.

For a country to prosper, however, politics must bow to economics. But the average person can hardly be expected to understand this when, as I discovered last week at a book launch at the Central Bank, leading Caribbean economists believe exactly the opposite.

E-mail: kbaldeosingh@hotmail.com Website: www.caribscape.com/baldeosingh