By TK Chua
When we talk about the free market system, we must be sure what we are talking about. I am referring to the news item, “Price of goods: Minister says govt supports free market system”.
Free market is not just based on demand and supply per se. Before demand and supply can play their roles to determine prices, there are other factors that must be considered.
To begin with, is there enough competition in the market place? This would involve the number of suppliers or distributors as well as their barriers of entry and exit. If the number of suppliers and distributors is restricted through excessive licensing or regulations, it is likely that the market is not competitive, which will lead to predatory pricing and profiteering among traders.
Sometimes, we deliberately allow monopolies to thrive, for example by issuing import permits only to certain individuals or companies. Two consequences are likely to follow. First, those given import permits are not always the most efficient or cost-effective players. Second, with monopoly power, the tendency will be for them to control the market for their own benefit.
The manner in which we dish out privatisation projects also plays a part in cost of living. Tolled roads and power generation projects are two typical examples. These are “natural monopolies”, and unless privatisation agreements are fairly and properly negotiated and agreed upon, there will be abuse as we see today. Whether we like it or not, tolled roads are monopolies, and high toll charges are a major contributor to our cost of living.
What about high cost of living as the consequence of ill-conceived monetary policies? There is an observation credited to Milton Friedman that says, “Inflation is always and everywhere a monetary phenomenon”, in the sense that inflation is caused by quantity of money increasing more rapidly than output. Maybe it is time to consider that the high cost of living in Malaysia is a reflection of the ringgit losing its value.
In reality, free market rarely exists in Malaysia. We create distortions that stifle competition and free market on one hand and we impose regulations and price control on the other, thinking that this is the best approach to containing the cost of living.
However, price control is sometimes counterproductive, more so when costs have escalated. Similarly, price control and enforcement would be ineffective when the rising cost of living is in fact a reflection of the ringgit losing its value.
Cost of living requires the intricate management of many factors. Ensuring robust competition and free market is one factor.
For products and services that are “natural monopolies”, prudent regulations and control is necessary.
Consumer education and personal financial management are also important. “The more you spend, the more you save” is actually oxymoronic. We end up buying lots of things we do not need.
Finally, inflation management by the authorities is of utmost importance. We can’t contain prices either through free market or regulations when in actual fact it is the ringgit losing its value.
TK Chua is an FMT reader.
The views expressed are those of the author and do not necessarily reflect those of FMT.