There are assumptions and practices in our economic model which are so ingrained in our reflexes that we never think of questioning them. A good example is the practice of interest. This highly toxic element, which would be best described as a parasite in the financial system, has been upgraded to the status of “economic tool”, which accentuates its presence in all walks of life where money changes hands. People do not even lose time to question it. In the minds of economic operators, the amount of work and the vast amount of change which would be needed to erase interest from financial transactions is such a mountain to climb that it almost ossifies their brain. To be cynical, if I reason along the same lines, why should we try to develop cancer curing drugs at enormous economic costs and risks and whose efficiency would, at this stage, be only hypothetical, when we have a plethora of drugs that can deal with its symptoms, and we are content with varying their dosage to suit the requirements of patients? 

In the same manner, questioning the legitimacy of the law of supply and demand and going back to rational and objective thinking may put an end to abusive practices, but the world has preferred to take the easier route of adapting itself to this existing paradigm, which it considers as immutable. In actual fact, there are numerous flaws in the system which allow the few (generally the producers) to take full advantage of its imperfections to the detriment of the many (the consumers)

Is it really a natural law?

Or rather, is it a practice so impregnated in our system and behaviour that it has become an unwritten law set in concrete without economic operators even questioning it? Book economists will defend their patch and will insist that the market economy, left largely unbridled in the name of liberalism, is the best system practiced so far, as it establishes a correlation between supply and demand which regulates market behaviour and the level of prices in a rational manner. Their contention is that, the more demand outstrips supply, the more prices will rise and conversely, the more supply exceeds demand, the more prices will fall.

They say that excess supply reduces prices to an extent that forces producers with high costs of production to exit the market, as a result of being unable to adapt themselves to this new price configuration. Their contention is that ultimately, overall supply will stabilise itself to the level of actual demand, and by the same token, prices will remain stable. They also say that in case of scarcity of supply, prices will rise, and this will encourage producers to produce more, or allow the market to attract new producers until supply again meets demand and prices stabilise. This is theoretically what happens only in an ideal system where all other things remain constant (ceteris paribus).

Brakes to the smooth running of the law of supply and demand

In reality, nothing remains constant in any aspect of economic life. We must not forget one important brake to business which is called “barriers to entry” which new producers have to face and which place enormous constraints on the natural evolution of the level of supply to follow that of demand. These barriers include the huge financial resources needed to launch a new business, the necessity of having technical know-how and trained staff at short notice, the necessity of producing at competitive cost to make any venture profitable and the necessity of finding a market for a product which has yet to prove its credentials.

In addition to this, there exist what we call “tariff barriers” (import and excise duties if the product is manufactured overseas) and the very widespread practice of having to pay a hefty “commission” to obtain a production license. In addition, there are “non-tariff barriers”, which include all sorts of non-financial protectionist measures to prevent a new product from entering a territory from outside. The most common of these non-tariff barriers are related to health issues, authorized ingredients in food products, sanitary regulations and conformity of new products to existing “norms and standards”.

The market economy never has a free run, unhampered by obstacles.

We only have to imagine the difficulty of having a new medical product approved by the beast called “Food and Drug Administration (FDA)” when anybody wants to export a new product to America and to the many countries which have adopted the FDA approval as a requirement of their own domestic market, even though they operate outside the United States.

What makes the problem more complex is that a number of these barriers to entry have to be faced and tackled simultaneously, and this makes the launching of a new product and securing an entry into an existing market almost an insurmountable uphill battle. When we realise that all these entry barriers in fact protect existing suppliers, it is obvious that the market economy never has a free run, unhampered by obstacles, and that price levels are only seldom set by the correlation between supply and demand.

This supposed “law’ of supply and demand in a market economy is viable for products which are mere commodities (non-branded products like cereals, pulses, rice, flour, oil for electricity production, bulk fertilisers). In such markets, which are “price markets”, there is no brand loyalty and generally fewer barriers to entry. It is also viable for products which are not basic necessities, like precious metals, precious stones, luxury food items like caviar and lobsters and leisure products.

Another phenomenon which hampers the rational functioning of the law of supply and demand is “inelasticity of demand”. Under normal circumstances, the higher the price, the lesser people buy, if the product is not a necessity of life. But when it comes to products whose demand is not elastic to price, i.e. which people will always have to buy whatever be the price, like essential food items and lifesaving medicine, people will only be buying them at the cost of other privations. In extreme circumstances, when prices of such products rise beyond affordability, those who cannot afford high prices will eat less, or will eat products of lower quality or will suffer illnesses for lack of medication, and will stop investing in other essential things like the education of their children. In economic jargon, this is called “opportunity cost”, or a “trade-off” between two necessities.

The dictatorship of supply

The law of supply and demand also becomes flawed in its functioning when we are in a market dominated by powerful brands which command a loyalty from customers by virtue of their strongly established presence on the market for years. As an example, if the price of Coca Cola increases by 15% for whatever reason, who is the producer who can produce and sell an equivalent product, even with an identical taste at a lower price and find a place in the market?

In many cases where brand value (in luxury products or when a brand has traditionally dominated the market), acquired taste (especially in food items) or quality assurance (like in medicinal products) are very strongly established, the law of supply and demand is no longer a law, it becomes the dictatorship of supply. The supplier may raise its prices without suffering any loss in volume. There may even be worse: the supplier may raise its prices beyond its cost-inflation by surfing on a general price increase in all other sectors and book in additional profits. It is in such circumstances that we see one of the ugliest facets of capitalism. The producer, who in everyday life is not a capitalist but only a “free entrepreneur”, can easily become a repressive capitalist in the worst sense, in case of market imbalance, when a product becomes rare and his brand can still command a higher price without having to sacrifice volume. 

The creation of artificial demand and shortages of supply

Take the case of the world in the middle of the Covid-19 catastrophe. Prices of protective masks, food items, essential medication and other necessities soared because supply and transport facilities were lower than usual, but more importantly, because people who had means were mass buying and hoarding lots of essential goods, with the resultant that this hoarding, due to pre-emptive behaviour in the face of possible shortage of supply or “anticipation of future inflation” created excess demand.

There has been worse. Oil suppliers have, during Covid, created artificial demand by pushing intermediaries (brokers) to buy oil forward (at a price fixed today for delivery in 3 months) and prices of oil increased exponentially. These brokers then sold their “options to buy” a few days before the actual delivery date of the goods, at prices which had in the meantime increased tremendously by virtue of demand being manipulated.

Economists will say, in such circumstances, that “market forces” are pushing prices up, and they find this acceptable because this is what their textbooks say. In actual fact, this is a way of manipulating demand to pervert the proper functioning of the law of supply and demand by making supply appear to be outstripped by artificially increased demand. The sheer increase in visible demand pushes the price up. In this manipulation exercise, there is a blatant dictatorship of supply because demand does not, in actual fact, go up. This is not a text-book hypothesis.

It actually happened during Covid, as well as in the first year of the Ukraine war, as it concerns cereals, and the whole world fell victim to this market manipulation by a restricted few (suppliers and brokers). Another scourge is cartelisation among producers, to limit the level of supply so that it is never allowed to be outstripped by demand, to keep prices high, or simply to sit around a table and agree on production figures and final selling prices to the consumers.

Imbalances caused by adverse weather conditions

To be able to understand the problem better, let us come to realities of life which directly affect our own households. In cases of bad weather for example, all prices of vegetables go up because there is short supply. If we want to be clinical in our thinking, this means to say that, all through the good days, when climatic conditions were favourable, all the actors in the supply chain (planters, wholesalers, auctioneers, and retail vegetable sellers in the wet market) were earning their living normally. Now, because of reduced harvest, they want to earn their living as comfortably as in the good days. As a result, all of them, throughout the chain, increase their prices, and it is the consumer public which has to pay for the misfortune of changing weather conditions.

In the case of excess supply in good weather conditions, suppliers will have, by themselves, the reflex of reducing their production to incur less production costs and prevent prices from crashing. This artificially created situation in bad weather conditions is by no means a “law”. It is a perversion of the market and a clear dictatorship of supply because the system lacks regulation to protect consumers.

When there is an unexpected expenditure or a loss of revenue in a normal household (due to illness, loss of job, purchase of school material for children), salaried people cut on their normal expenses to be able to cope with the unexpected, that is, they live less comfortably. Nobody runs to their rescue. Why shouldn’t it be so with those engaged in vegetable production? Why do they expect that they should continue to live comfortably, by selling less at higher prices, because of an act of God which cuts down their production? The affluent will continue to buy, and the more they buy, the more prices will soar. The poor are simply deprived of buying, and they become those who take all the brunt of the scarcity. Is this a law? Or is it rather the dictatorship of those who are in control of the supply chain?

Business can be done much better and with better results with brains, passion and ethics.

The need to regulate the market

Laws are meant to be just and when they become irrational to the point of causing misery to a large majority, there must be counter laws to stop them from working with oppressive selectivity, causing harm to people. This is the basis of my contention that, in cases of shortage of basic necessities, regulators must step in to re-establish a balance in price levels. The necessity of this measure arises because as soon as an opportunity for profiteering appears, the internal regulator of greedy human beings, namely their conscience, stops functioning.

Government authorities must intervene to control prices and prevent hoarding and disallow suppliers from dictating prices or wilfully cutting down supplies. Price control should not merely ensure that producers get minimum profits. It must force them to accept a loss in hard times, because consumers are not responsible for adverse weather conditions. This is in no way repressive. It can be intelligently worked out to average out profits of producers over a measurable time period, for example one year.

What prevents the market from being regulated?

When salaried persons facing unexpected expenses find a hole in their budget, they either consume less, or borrow from their bank or plough into their savings. What makes the producer so special that he should not follow the same discipline and undergo the same hardship? But there is unfortunately a powerful brake to ensuring that the system is regulated.

Regulating the market needs the application of intelligence to particular problems of different nature, having an overall view of the whole economy, having a heart to understand the problems of those who are victims of the system and making a conscious effort to go outside the beaten track. But who is prepared to run that extra mile in this age where the general view is that computers or artificial intelligence are a valid alternative to effort, deep thinking and feeling the hardship endured by others?

In my book Business Inside-Out, I explain that business can be done much better and with better results with brains, passion and ethics, and be, at the same time, intellectually and morally rewarding. Until I am proved wrong, I will continue to make this my leitmotif. It is this attitude that allows me to get rid of the shackles of the beaten track and to think outside the box, and I am often viewed as a dreamer by those who find comfort in following an established trend. If we want to progress in any walk of life, the secret is to do things differently, and this often entails questioning what we call “conventional wisdom.”

I am in favour of free enterprise because there is no better vector of progress than material gain, but the appetite for profit, when it becomes harmful to others, should be bridled by the authorities in a democratic society. Imposing a dose of socialism in free enterprise prevents it from turning it into invasive and dominating capitalism. This is the single most important evil which is responsible for the present woes of the world. But when the world is run by multinationals behind the puppets that they place in power through what they call “free elections”, this battle can be very hard indeed.

The relationship between producers with a capitalistic mindset and the general consuming public is incestuous in many a way: consumers are their customers, their hope for the future on which they base their level of investments and they achieve growth, their milking cows and their worst enemies at the same time if they are allowed to dictate the market from the demand side.

By Mubarak Sooltangos

Mubarak Sooltangos is a business trainer, a strategy and management consultant and author of Business Inside Out (2018) and World Crisis – The Only Way Out (2020).

Courtesy: Conjoncture