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Supply & Demand Determine PriceRare Insight
15 Dec 2012
If ever there is a competition for stupid excuses I can bet my life PAP will win it hands down. The people of Singapore will take first prize for gullibility as well. After all, they voted PAP in for five decades and lapped up the nonsensical reasonings for their self interested government policies. This is not to claim that every single government policy is self interested but rather genuine government policies for the good of the public are rare and far in-between.
There are some things in life that are so obvious only a fool or idiot will attempt deceiving others with it. That the fool and/or idiot got away with it for so many years only proved that Joseph Goebbels, the infamous and notorious Reich Minister of Propaganda for Nazi Germany, is right. He articulated the theory that a lie told often enough seems like the truth.
If I have a budget of S$100,000, no amount of hand wringing, chest thumping, table banging, etc. can help me buy a brand new Mercedes Benz with it. The COE itself would have cost close to my budget if not already exceeded it by now. No matter how you slice and dice it the fact of the matter is that supply and demand determine the total price you will pay for your car.
Supply and demand is so basic in a market economy even the dumbest housewife can understand its effect without having to attend Economics 101. All things being equal when there is a shortage of vegetables, the housewife knows that prices will be going up. This is not a bad thing per se as the government would like you to believe whenever it suited them. When prices go up the supplier of vegetables will be incentivised to produce and supply more vegetables and this action will result in prices coming down again in the next period.
The increase in price may be painful initially for the housewife but she can expect prices to revert to the mean soon enough if the market is allowed to function normally.
However, if the market is distorted or interfered with by a third party, supply and demand will be out of sync and the wrong signals will be transmitted in the market. It is these interference and market distortions that are harmful to the economy by delaying the inevitable.
At first glance one would feel that any government action to reduce price is a good thing for the public. It might have a semblance of truth if our government were consistent in suppressing or stabilizing prices across all economic sectors. Unfortunately, this government has been stabilizing prices to benefit only selected industries and companies. Usually these prices are on the cost side of the production function and those selected industries or companies comes from GLCs or Temasek Holdings.
With a reduced cost function such companies will make the CEOs look good. Looking good means higher pay for such lucky CEOs year in and year out even though they are doing a lousy job. These CEOs’ higher pay will in turn give rise to higher pay for Ministers whose income includes a formula based on the top earners in Singapore.
Once you understand this chain of events you will understand why our government is incentivised to protect the income of all the stakeholders and supporting cast propping up our dysfunctional economy. Ours is not a sustainable economy as long as it is based on this flawed idea of appropriating the major share of the reward from the economy for the benefit of a few people.
Coming back to our discussion on supply and demand, an example of government dictate is the artificial suppression of prices ensuring suppliers are not allowed to charge a higher price than those before the vegetables shortage. If there is such a government dictate you can be sure suppliers will be reluctant to produce and supply at a price they deemed unfair and unprofitable.
In this situation, the government can keep the market supplied at the old price by importing vegetables from another country. Although they are not perfectly homogenous, as climate and soil conditions will determine quality and taste, it is a convenient substitute. The end result of third party government intervention in a market economy is local producers will be marginalised by foreign imports which are able to supply at a lower price because its cost structure is different and much lower.
Just imagine the vegetable suppliers are the local workers: cleaners; bus drivers; service workers; etc. At the price where they will not be able to survive or have a decent lifestyle in Singapore they will naturally avoid such menial jobs and seek out better paying jobs in other sectors. Of course, their action will impact other sectors as well. They do it by upgrading themselves and going back to school for higher qualifications. This will also help drive down wages there. Hence, when one market sector goes out of sync there are unintended consequences all down the line.
As an aside there are only so many ‘good jobs’ available in the market and after a while you will end up with an economy full of PhDs driving taxis when they realised there is no place for them in the job market. Over qualification is a waste of resources but few economists fully appreciate or understand its implication. This is a story for another day.
The only occupational sectors that will not be affected are those that have entry barriers like licensing, monopoly, first mover advantage, etc. A good example will be the jobs of ministers and their supporting cast. These people have a monopoly and there is no market competition for their jobs. This monopoly is protected fiercely every day via media propaganda and political gerrymandering. For all intent and purpose it is no different from price fixing and market gouging.
Coming back to our simple supply and demand model it can be shown that everybody has a price. At a price high enough anyone can be bought. For some people the price is fame. Some prefers hard cash or material wealth. Others may want power. Whatever it is there is only one truth: there is a price where anyone can be bought.
The only person that doubted this is George Yeo and his colleagues. He claimed that the medical service is unique. The more the supply of doctors the higher will be price for medical services. His argument was since there are more doctors they would not be able to make a decent living because of greater market competition resulting from an increased supply. Hence, these doctors will resort to ordering more unnecessary tests, procedures, etc. to earn higher income. He obviously doesn’t have very much confidence in the honesty and professionalism of the Singapore doctors.
Putting that aside he is assuming such quack doctors will not be found out and may even lose their medical licence to practise. Perhaps, from experience he knew that doctors are a highly cohesive and protective lot of their own colleagues.
Today, we found out the hard way that George Yeo’s pseudo economic theories about supply and demand doesn’t work. We have massive shortages of trained medical people and we are importing ‘foreign talents’ from all over the world. He has proven to be a complete idiot going with the flow and berating others for not respecting him and his point of view. How one can respect such a gutless unprincipled man is beyond me.
It is not just George Yeo in the ruling party that has been peddling snake oil economic cure for so long. The silly mantra that we can never find enough Singaporeans to work in undesirable jobs is so idiotic I wonder why there are not more economists coming out to debunk it. If there are not enough people in undesirable jobs it means the market price for such work is too low.
I can solve this problem overnight simply by paying cleaners and other menial workers S$10,000 a month. Of course I exaggerate. But it was to make a point. The point is when the price is right there will be workers.
What this mean is that we are not paying the right price for unpleasant work done on our behalf. As a result there is a mass exodus out of the unpleasant job market. To argue that we can’t find workers at any price is stupid. This can never be true. What is true is that by paying these workers a higher wage it will have down line effects driving wages up in other economic sectors as well.
Overall, it will increase cost of labour for business. But this doesn’t mean business will no longer be viable. Far from it.
Giving labour a greater share of the cake will mean reducing profits for business owners. Business owners who are earning super normal profits will continue to do business at the new profit norm as long as their Marginal Revenue is greater than their Marginal Cost.
Those at the margin will realise they can still survive if they restructure their cost structure. One way to do that is to shift income accruing to administration and management by moving them to the down lines: people on the factory floors, etc. As an example of this, at SMRT where 60% of the total labour cost comes from the bus drivers and the rest accrues to management and administration, it doesn’t take a genius to figure out how to maintain the costing status quo and yet increase the wages of bus drivers enough to attract Singaporeans.
This has been a long discourse but in truth you can ignore all the above by simply understanding the basic rule of supply and demand: high price equals more supply and less demand; low price equals less supply and more demand. Economics is the study of incentives. All else is bullshits!