"Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place. The invisible hand of the market depended on the heavier hand of the state.' - 'The starving state: why capitalism's salvation depends on taxation," according to Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman.
One of the main failures of Neoliberalism is the idea that government can take a back seat, and the markets will clear themselves automatically with minimal government intervention, and that true price signals will be reached. Falling real wages, and rising income inequality, even in advanced economies, have quite clearly indicated that markets left on their own have largely allowed politico-economic elites to design institutional environment and control markets to make unjustifiable profits.
On one hand, markets have not valued 'effort' correctly, whereby some people in the supply chain in markets of goods and services, or in corporations - mostly executive level here - have received over-valued compensations relative to most others, who in turn have received under-valued incomes/wages, while on the other hand, creation of artificial supply conditions, mainly through hoarding, and also through smuggling, have also not allowed prices to settle at the natural interaction of demand and supply.
The current government has also not been able provide an institutional environment that pushes markets to reach correct prices. This is because the government has operated from a neoliberal perspective of 'limited government'. Given a developing country context of traditionally weak economic institutions and under-developed markets in Pakistan, the neoliberal approach of least government intervention has allowed all the more markets to remain easy tools by 'collusion' of the politico-economic elites to reach prices that allowed unjustifiable pricing.
The reason that the government has continued to take the neoliberal route is both to do with the academic and professional training in neoliberal tradition of many policymakers, but even more so because little meaningful role of economic institutions in regulating markets suits further perpetuation of the 'elite capture'.
Every economic sector has markets, which need to be provided a meaningful institutional environment of governance and incentive structures, which in turn allow reaching correct prices; it may be in the real sector for instance agriculture, or industry in terms of involved goods and services, or in the financial sector in terms of interest rate or cost of borrowing. This requires institutions or ministries/departments to create governance and incentive structures for markets to adjust correctly. Where need be, prices should be rationalized through subsidies to safeguard interests of vulnerable groups, and in supporting economic activity. For too long now, labour markets have not adjusted properly, whereby most people have not received due compensation for their work, which in turn allows them to consume necessary goods and services that satisfy at least their minimum requirement to enjoy a good standard of living and prosperity.
It is amazing that the term 'controlling' is used with prices in public discourse to check artificial rise in prices. Prices are reached through efficient and well-regulated markets that allow an active role of institutions in terms of providing needed governance and incentive structures to reach correct prices and ensure that the correct prices 'prevail' on overall uninterrupted basis. For this, the government will have to go beyond the current very limited way of ensuring these two objectives with administrative natured price control committees for controlling prices, and allowing too much leeway to private market players to reach prices with least transparency and governmental oversight.
The government should first of all amend the pricing mechanism to allow maximum basis of price calculation to be on the principle of true demand and supply signals, one that enables needed transparency, and provides for adequate oversight for ensuring that prices are reached properly and implemented consistently. After the World War-II, for instance, the government of the USA formulated an 'Office of Price Administration and Civilian Supplies (OPACS)' and supported it with adequate legislation like 'Emergency Price Controls Act (1942)'.
The government in Pakistan is therefore expected to create a similar dedicated office with a nation-wide mandate, which ensures that markets falling under every economic sector or institutions are reaching correct price signals - from prices of wheat, flour, sugarcane, sugar, in the agriculture sector to incomes and wages in the labour markets, to interest rates in the financial markets, to prices of health and education services, to profits in every segment of the supply chain. Such an office should also be tasked to recommend augmentation of the role and efficiency of both Competition Commission of Pakistan, and Pakistan Bureau of Statistics; both important organizations for proper functioning of markets. Moreover, it would make sense that this office suggests institutional reforms that minimize underlying transaction costs and information asymmetries in markets, along with reaching correct estimate of subsidies in economic sectors where such a support is warranted.
Correct prices will be reached only when governments will purge markets from the tyranny of Neoliberalism that allows perpetuation of elite capture. This requires adequate institutional reform, so that markets are efficiently run. Left on its own, the invisible hand of the market has favoured the deep reach of moneyed interests, which needs to be checked by the heavier hand of the government. Meetings at the highest levels of government's policy echelons, or volunteer forces can never have the needed depth and scope that strong and actively involved economic institutions can provide for proper functioning of markets.
(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund) He tweets@omerjaved7
Copyright Business Recorder, 2020
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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