Ask a layperson what he or she thinks of the definition of economics. If they do not say it is the art of making money, many of them will mention that it is a study of supply and demand.
In truth, economics is larger than either popular but otherwise misleading definitions. More accurately, it is a study of human behavior. A slightly more restrictive definition would lead to what students of economics typically understand it: economics is a study of the use of scarce resources.
While economics is more than able to explain and rectify the problem of production, distribution and consumption of resources, economic lesson may unfortunately have been lost on the federal government.
The manner in which the government responds to the issue of sugar availability may reveal how poorly they understand economics or, at least, how economics is being ignored by them.
This is not the first time Malaysians are facing a sugar shortage. Almost yearly, the issue keeps returning to the limelight.
The government previously blamed smuggling activities as the cause of sugar shortage. They still do. They have blamed suppliers and other players in the sugar supply chain of profiteering without shame. At other times, they blame Malaysians for consuming too much sugar.
This year, while the official line has yet to be made clear, the government-controlled media is blaming Malaysians yet again. According to them, consumers are panicking and rushing to the stores to get all the sugar they can get. The term that is gaining traction is panic-buying.
At this rate, I wager it would not take long before somebody claims that sugar monsters have been raiding warehouses all around the country.
Lest I am unfairly accused of being hopelessly partisan, that it is always the fault of the Barisan Nasional (BN), there are individuals and groups in both BN and Pakatan Rakyat governments that buy the panic-buying storyline.
Regardless of who is buying what, how does the government try to solve the problem?
The efforts to solve the problem are as wanting as the explanations: wider inspections to catch profiteers, greater enforcement at the border to discourage smugglers, and a campaign to encourage Malaysians to live a healthier lifestyle by consuming less sugar.
Yet, the problem recurs without fail, much like how Malaysians can expect the haze to be a yearly affair. In the past weeks, news in the mainstream media suggests that the same efforts, which have clearly failed, will see implementation again.
There is a reason why the problem of shortage keeps recurring and it is because the government refuses to admit one important aspect of the problem — the government is the problem. Specifically, it is the price control mechanism.
All other issues — be it profiteering, smuggling or overconsumption — are direct consequences of the control mechanism. All previous efforts have failed because they are only symptoms of an inefficient market and not the cause. The act of removing the inferior policy will remove the cause of the problem and address all the symptoms in one swift stroke.
Without doing so, apart from flooding the market with sugar through massive subsidization, the shortage will be a repeating phenomenon. This, by the way, happened frequently in the former Soviet Union, a communist state that implemented wide-reaching price and supply control mechanisms.
To understand how price control causes the shortage, one has to realize that prices act as signals to market participants, be it producers or consumers. Given a particular level of starting price, if it increases, it reflects growing scarcity in the market. That then it suggests that producers should or could produce more, or consumers should or could consume less, or both. If price decreases, it reflects growing abundance and that suggests that producers should or could produce less, or consumers should or could consume more, or both.
When the government imposes a friction in the market by placing a rigid price structure like the price control mechanism, it disconnects prices from levels of scarcity and, effectively, eliminates its function. This is a failure of pricing resources correctly. That failure then causes inefficient allocation of resources and in this case, sugar.
It is easy to identify how the term panic-buying is the failure of pricing and ultimately, a failure of government. It is an act of unneeded market intervention by the government, which causes unnecessary hardship to Malaysians.
The euphemism ”panic-buying” unfortunately strips the real cause of the shortage and shifts the blame from government to individuals. Really, panic-buying is simply an increase of demand. Increase in demand happens all the times before a huge occasion like Ramadan. There is nothing special about it.
In a free market, the possibility of shortages is tremendously reduced because prices adjust to reflect reality.
Prices simply go up to discourage consumers from going to the store and hoarding everything; the market punishes the so-called panic-buying by making it progressively more expensive to do so. In a controlled market, that possibility is ever a concern because sugar remains cheap when panic strikes. In a controlled system such as Malaysia’s, there is no feedback mechanism to counter the panic buying.
Oh, I am sorry. There is a feedback mechanism to counter panic buying. The government actually uses the mainstream media to convince consumers that there is ample supply of sugar and Malaysians should calm down. It is raining sugar, baby!
It is insulting to listen to that.
The real solution is to free the sugar market and, indeed, dismantle the control mechanisms imposed on consumer goods by the government. According to a 2008 list obtained by Reuters from the Information Ministry, 11 items have their prices controlled and another 20 items have their supply controlled. It is no accident that these items — among them flour, yet another item that Malaysians have to hunt for from time to time — are susceptible to shortage.
The control mechanism is typically defended as a mechanism to protect consumers. How creating a shortage protects consumers will be an interesting take.
Shortages only reduce Malaysians’ welfare. In fact, shortages should only occur in less developed countries, with communist or socialist markets.
Even if one does not believe in economics, for some reason preferring to believe in the existence of sugar monsters, then at least take note that all past explanations and efforts have failed. It is time to try a new approach.
First published in The Malaysian Insider on August 18 2009.