Weak regulation of markets, or the policy of ‘market fundamentalism’ that market knows best, and left mostly on its own market failures will sort themselves, under the overall wave of neoliberal policy over the last four decades or so, both overall globally and in the country, has significantly increased information asymmetries, and, in turn, substantially enhanced transaction costs, which are ‘search and information’-related costs.
This has primarily happened, given the strong influence of ‘Chicago boys’ neoliberal or ‘Washington Consensus’-styled policy thinking, and a similar bent of International Monetary Fund (IMF) programme conditionalities.
One of the main concerns for the government should be a significant reform of price discovery, for which there should be a consensus ‘price policy’ in the country; which means that both the federal and provincial governments having a strong buy-in on this policy so that country-wide price regulation is ensured on a desirable and a same criterion for better monitoring, and evaluation of results purposes.
The policy should not only proactively deal with market failures, but the government should be an effective partner of private sector in market creation.
International renowned economist, Mariana Mazzucato, in her book ‘The entrepreneurial state: debunking public vs. private sector myths’ underlines the need for public sector to play a greater role in markets, as follows: ‘According to neoclassical economic theory that is taught in most economics departments, the goal of government policy is simply to correct market failures. In this view, once the sources of failure have been addressed… market forces will efficiently allocate resources… But that view forgets that markets are blind, so to speak. They may neglect social or market concerns. And they often head in suboptimal, path-dependent directions that are self-reinforcing. …In addressing these challenges, the State must lead – not by simply fixing market failures but by actively creating and shaping (new) markets, while regulating existing ones.’
There is a need to see the economy as one ‘whole’, whereby the suggested ‘price policy’ is not limited in its concern to the real sector –the pricing of goods in the wholesale, and retail markets like the agriculture, or the industrial sector – but also covers the price of labour, that is wages/incomes, and pricing in the financial sector, that is the price of capital, or policy-, or interest rate, including the mortgage rate, and the price of loanable funds for the private sector as a whole.
Currently, the presence of high information asymmetries, not only in the real sector, but also in the labour market, and in the financial sector, price discovery is highly compromised, mainly because of highly sub-optimal level of economic institutional quality, mainly through significant below-power existence of governance-, and incentive structures.
A consequence of this has been high level of transaction costs, which hurt spending power at the individual consumer level, and significantly contribute to costs of doing business at the producer level.
As a consequence of weak economic institutional quality, both in terms of lack of regulation of markets to effectively deal with market failures, but also virtual absence of public and private sectors coming together is any mission-oriented, and purpose-driven way to co-create better functioning markets and production hubs such as the special economic zones (SEZs), or far more effective functioning of state-owned enterprises (SOEs)– for example, SOEs taking the shape of mixed-ownership enterprise (MOE) like in China – there has been a rampant increase in price gouging, and greedflation; especially in the wake of shocks like Covid pandemic, the more frequent natural disasters due to fast-unfolding climate change crisis, and geo-political induced economic crises.
For instance, prices rose, on one hand, rose a lot more in the wake of global supply shock in the wake of the pandemic than they needed to be, while on the other hand, there was lack of price increases in the labour market to safeguard against inflationary pressures; while wrong pricing policy in the monetary/financial sector, under the overall over-board practice of monetary austerity policy, the price of capital, or interest rate increased, and for much longer than it should have.
Overall, the lack of over-arching ‘price policy’ has not only not allowed much better determination of prices, but also the scope of pricing in the financial and labour market did not properly, and more robustly internalized the price rise in the real sector.
Noted economists James K. Galbraith and Isabella Weber suggest the need for price controls, and the author believes that the ‘price policy’ being suggested should also include a strong emphasis on price controls, and not just for controlling price gouging and greedflation, but for also creating more effective markets, and better price discovery. Here, it may be pertinent for the suggested ‘price policy’ to include learning from China, which successfully used ‘dual-pricing’ model to control prices for positive consequences on the aggregate demand, and supply sides of the economy.
In their August 22 article in ‘The Boston Globe’ titled ‘Harris’s fight against price gouging is good economics’, the two economists pointed the need for price controls, especially in the wake of pandemic, as follows: ‘Most of the time, price gougers are exceptional and can be dealt with case by case. But there are moments when gouging becomes the rule. If basic costs spike, as they did in 2021-2022, business plans are disrupted.
Uncertainty and fear take hold. Some businesses will react by raising their margins – because they can, without sticking out. Their goal may be to lay in a cushion in case costs jump even more. Others may take advantage –as the big egg companies did –to get what they can. But then their customers are squeezed and a scramble for margins ripples through the supply chain. That is when general price controls or guidelines can help.’
Copyright Business Recorder, 2024
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7
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