Saturday, March 19, 2011

Price Controls and The Boy That Burnt His Hand

I don't watch a lot of TV. When I do, some things come as a pleasant surprise. Like a creative new ad. But this morning the surprise was not pleasant at all.

News channels apparently show market prices of grocery items in the mornings. At least Saturday mornings. A reporter was standing in the middle of a shop full of vegetables and he was quoting prices for the viewers. Inevitably the studio anchors asked the question "why are prices so high?"

The reply was as ignorant as it could ever be. "The government should make sure these prices are controlled and it should make sure wholesalers provide the listed price... blah blah blah!"

I have a problem with this kind of thinking. It should be readily apparent to anyone who has studied rudimentary economics, that price controls inevitably lead to a faulty market. And if, as is the case of the market in Pakistan, the market cannot be policed efficiently, traders will pull up their prices to better mirror their costs. This is far from a free market however. Because of the restraints put upon traders, and because of their unionization, prices are still very skewed. In a free market, with free competition prices would automatically regulate themselves. This is not just a laissez faire concept. This is what the Prophet Mohammad (SAWS) advocated! He forbid monopoly.

Prices became high in the Prophet's (SAWS) time and people asked him to fix prices for them, he replied
“Allah is the One Who fixes prices, Who withholds, Who gives lavishly, and Who provides, and I hope that when I meet Him none of you will have a claim against me for any injustice with regard to blood or property.” (Reported by Ahmad, Abu Daoud, al-Tirmidhi, Ibn Majah, al-Dari and Abu Y'ala.)

Some people maintain an exception to the rule quoted here, that when there is extensive hoarding and monopolization of goods, price controls become permissible to establish justice. I disagree. Hoarding and monopolization are themselves not permissible. These are methods of artificial restriction of supply. They should be rooted out first. The price police employed by the government should be controlling these factors instead of prices. Once you remove these blockages to supply, the issue of price fixing fades away.

There is a fruit shop near where I live. The prices of the fruit are always higher than in the regulated market. But the fruit is beautiful to look at, it smells great and it tastes even better. Why? The shopkeeper expends his energy to pick out the best fruit, clean it up and then sells it at a premium. He can do so, because price controls are lax in the city. If he were forced to sell at the market price, do you think he would maintain the same quality? No body forces me to buy from his shop. But I do so voluntarily, because I know that the fruit will always be good. And I can pay a few extra for that bit of luxury. This would simply not be possible in a price control situation.

Coming to the title of this post, and the real reason prices are increasing. The government's money printing press. This is the reason for all the inflation and all the price hikes in the country. The governments insatiable appetite for minting money and spending it on lavish cars and trips abroad at the expense of the common poor man. If the government tries to prevent price increases, which are thus inevitable within an inflationary policy, it is simply being absurd. Its like a little boy who plays with fire, and he puts his hand into it. Then when his hand starts to burn, he orders his hand not to burn and hurt so much.

The problem I have with these people on TV, is that they are completely ignorant. Not only of economics but of Islam as well! And they are spreading their ignorance on TV! Which is even worse. These ideas are so ingrained in our minds that we don't even think about them any more. We don't judge them in the context of Islam, as we should every single act.

May Allah forgive us and guide us to the right path.

2 comments:

abz2000 said...

masha-Allah - at last a refreshing common sense approach, which is totally in line with the Prophet (pbuh)'s teaching.
i was just reading an prominent islamic charity's article on this subject and they gave the same narration on price fixing - then went on to say there are exceptions in the cases of monopolization and unfairness.
any government that wants to fix prices uses that excuse - so basically the article is implying that it is totally allowed - when it's not.

THE ONLY PRICE CONTROL POSSIBLE IN THAT SITUATION IF IT IS PROVEN THAT THEY ARE DEFINITELY TRYING TO CORNER THE MARKET VIA FORCED MONOPOLY WOULD BE TO CONFISCATE IT AND HAND IT OUT FREE.
THAT SHOULD STOP THE ROCKEFELLERS OF OUR TIME.

ALLAH KNOWS BEST

Zohair said...

JazakAllah khair for your comment brother. This topic, among others related to econommics, are extremely obscure to most people. I agree that monopolies need to be broken. But confiscation is not the way. The Prophet Mohammad (SAWS) took action against the perpetrators of economic fraud by banning them from the market. This is fair because none of that person's property is stolen from him to be distributed. This is also enough of a punishment to prevent formation of cartels.