Reason of Price Rise and Consequences of Price Control

Inflation engrossing Individuals The skyrocketing prices of common commodities is becoming the main political issue around which, the BJP is trying to make their case against Congress lead government. It is true that government is responsible to the price rise, but can government control the prices or the price rise?
It is a common myth that producers, hoarders, speculators and dealers control the prices and tries to bring the prices as high as possible to make maximum profits at the expense of poor consumers who have no choice but to be exploited by such corrupt speculators, hoarders and dealers. It is certainly an irrational myth because to make maximum profits in a competitive market, the speculators, hoarders and dealers need to adjust selling their commodities at the minimum possible prices.

Who Decides the Prices?

The price of a commodity depends on its demand and its supply. Demand and supply being the amount of commodity the buyers are prepared to buy and sellers are prepared to sell, at all prices.

If supply is constant, The higher the price of a commodity, the lesser is its demand, the lower the price of a commodity, the higher is its demand.

As the speculators and sellers reduce the price of their commodity, the demand of that commodity increases. People obviously are willing to buy more shirts at Rs20/- per shirt and they will buy lesser shirts at price of Rs40/- per shirt. Since the lower price increases consumers, speculators and sellers tend to decrease the price to the minimal possible value so that they can outcompete the other speculators and sellers. Most of the consumers will opt to buy from that seller who is asking the least prices and hence, that seller will make maximum profits. Obviously, a speculator cannot decide price for his stored commodity any less than the actual cost of that commodity plus cost of its storing and his share of profit.
Thus, it should be clear that speculators could not decide the price variation of a commodity as price is directly proportional to the demand of consumers. A speculator or a seller may merely speculate the increasing or decreasing trends of the demand of a commodity and adjust the supply of commodity by either storing it or flooding the stored quantity of the commodity in market in accordance with their share of profit.

Can Government decide and control the prices?

Speculators cannot decide and control prices because they cannot force anybody, they cannot use violence against anybody. So, if a speculator decides to sell stored commodity at higher prices, he will loose his consumers, as they will have choice to go for that speculator and seller that provides the commodity at lower prices.
Yet, government can decide and control the prices because government do not need to look for the supply of a commodity, on the other hand, government works under the pressure of vote banks. In order to obtain maximum of the vote bank, government can actually decide the prices of various commodities lower than the cost of production and storage of those commodities. That is why, just in order to gain maximum vote bank, government can promise to sell wheat or rice at a price of Rs2/- per kg, or even at free of price. This is absolute corruption and fraud because the cost of production of any commodity or service is always higher than the price dictated by the government and hence government always works at loss that ultimately burdens the poor consumers, voters. Government can control the prices too because it has monopoly on violence, government can force all speculators and sellers to sell the product at the dictated prices; it can illegalize speculating and selling and may control selling services completely by collectivizing the market. Government can jail speculators, sellers and dealers if they do anything against the monopoly of government, government can kill them too by means of police force.
Obviously, government has no responsibility or need to look for the quantity, quality and supply of the commodities of which it dictates the prices because the basic means of government income is confiscatory, compulsory taxation. Yet, when supply of a product reaches too much lower and the demand increases too much higher, government succumbs under the pressure of demand and supply and resorts to increase the prices, that again creates havoc for the consumers.

Reason of Price Rise and Consequences of Price Control

In order to hide its irresponsibility and fraud, government often suggests that the reason of price rise is population explosion and scarcity of products. Yet, it is again a myth. It is true that Indian population increased almost 4 times since 1947, yet the thing to be noted is, Indian production increased 100 times (or more). So comparably, production is too much more in relation with present population than what it was in 1947 in relation with the population of 1947.
Price rise is direct consequence of Inflation1 . As government has monopoly on printing fiat currency out of thin air, it keeps increasing the fiat currency. As a result, the purchasing power of citizens increases. Since the purchasing power of consumers’ increases, their demand also increases and it exceeds the quantity of available supply.
Whenever the quantity of demand of consumers’ increases than the quantity of supply the producers and sellers can provide, the situation of shortage occurs where the consumers are willing to buy, but the sellers and suppliers cannot provide, they have nothing to sell.
Such situations creates tensions within the society and may erupt in violence as every consumers suddenly comes to realize that although they have fiat currency, they have no wealth, they have been robbed and they are poorer than what they were years before. To avoid such situation, government feels forced to increase prices of commodities because price rise actually solves out the problem of shortage. At higher prices, demand of consumers decreases and tends to come closer to the quantity of supply available in market. Yet again, government may loose vote bank because of price rise, hence it resorts to price control again.
Price control is again a fraud and creates chaos in market. Due to lower dictated prices, demand of consumers remains high irrespective of the supply and that increases wastage of scarce products causing shortage. As production and supply never meets the demand of consumers in such scenario, the consumers suffers.

Solution of Price rise and Shortage

Gold Currency As price rise is result of Inflation and government’s monopoly on printing currency2 , the solution of price rise obviously is a denial of fiat currency and acceptance of 100% gold standardized currency and end of government monopoly at issuing currency3 . The increase in supply of such money would always be ineffective and small and would be limited by the high costs of mining additional quantities of gold.
Price rise became a chronic social problem because government replaced the Gold standard of currency by unworthy paper currency whose quantity can be raised without limit and without cost. There is no other solution for this chronic problem.
In addition, the problem of shortage and all the frustrations, corruption and violence attached with it is because of the government control over prices. In order to avoid any shortage of any commodity in market, it is necessary for government to leave the market and pricing system free of any interventions and let the producers, sellers, speculators, hoarders and dealers take care of the pricing system.
Speculators and hoarders saves the consumers from shortages by speculating any change in the trend of demand and supply and adjusting the prices to that level at which, the demand of consumers decreases or increases to the equalizing levels of the available supply.
When demand is higher and supply is less, speculators increase the prices and hence decreases the demand to equalize it with the supply and hence saves the consumers from the frustrations of not being able to buy, and thus avoids any wastage and shortage.

  1. Story of Money, What Causes Inflation? []
  2. Story of Money, What Causes Inflation? []
  3. Fiat Money Versus Gold Standard, Privatization of Currency []

4 comments for “Reason of Price Rise and Consequences of Price Control

  1. November 12, 2009 at 2:35 am

    Well only thing I seem to gather from your article is that it would be worthier to return to the old method of mineral coins rather than the modern currency. You certainly make me think everytime Unpretentious

  2. sarmad
    July 3, 2010 at 2:05 am

    first of all thanx mr author.all i could extract from ur article is that govt should become intervening when required after being more vigilant.

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