#ThrowbackThursday: M R Masani — Prices are like Water (1976)
In this week’s selection for #ThrowbackThursday, we have a piece by Minoo Masani, first published in Freedom First in 1976. In this piece, he talks about the dangers of inflation — tracing it fundamentally to the flawed economic policies of the government. Prices, like water — he remarks, are fluid — ‘ they insist on finding their own level; and are thus uncontrollable for long by artificial pressures.’
In my letter to Encounter magazine in London on October 30, 1975 I had warned that, if certain changes in economic policy were not made, “inflation will again resume its stride after a short pause”. In our editorial note on the Union Budget for the current year we had gone on to warn that the resort to deficit finance meant inflation being built into the Budget and that it would inevitably result in rising prices.
We did not have long to wait. Mr. Subramaniam, the Finance Minister, told the Lok Sabha on August 9 that there had been a 4.7 per cent rise in the wholesale price index between April and June 1976. A month later, the Governor of the Reserve Bank said that the index of wholesale prices at 311.3 on August 28 was as much as 10 per cent higher than the level five months ago on March 20, and that monetary expansion during the financial year had been running considerably ahead of last year-6.7 per cent compared with 3.5 per cent.
A couple of days earlier, speaking in Trivandrum on September 12, the Prime Minister had warned that “subdued inflation” was “just waiting around the corner to stage a comeback”.
These grave warnings make it all the more necessary for all of us, Ministers and citizens alike, to consider some fundamental facts about the nature of prices and inflation.
Water is liquid and fluid. As a consequence, water finds its own level. We learn this in school through experiments in our elementary science class. There is water at the same level in two adjoining glass vessels and there is a rubber pipe connecting the two receptacles. When the water in one vessel is pressed down by force, the level of the water rises proportionately in the other vessel. When the Back Bay Reclamation scheme pushed the sea back along the coast of South Bombay, erosion by the sea on the beaches at Versova and Juhu did not take long to materialize.
As it happens, prices are like water. They are fluid, they insist on finding their own level; and are thus uncontrollable for long by artificial pressures
The price of any particular commodity is determined by the demand for, and the supply of, that commodity. If supply rises and demand does not, the price level drops. Conversely, if demand rises and the supply does not rise to meet it, the price level rises. It is as simple as that.
Similarly, the general level of prices in a country depends on the correlation between the volume of currency or money in circulation and the total volume of goods and services in the country. If the volume of currency is static and the volume of goods and services increases, the price level drops. This is called deflation. When the quantity of goods and services is static and more money is put into circulation, the level of prices and the cost of living rise. This is called inflation.
Any attempt by administrative control to distort the laws of the market such as, for instance, the slogan about “stopping prices from rising” by administrative measures may work for a short while, but has no long term value. The only way to stop inflation is to avoid deficit finance, get investment priorities right and provide incentives to increased production.
In our August issue, in an editorial note entitled ‘Bread and Freedom’, we had pointed out how, when Mr. Gierek had tried in Poland to raise food prices by administrative diktat, it had led to workers striking and rioting, and the move had to be given up. Just as surely, when the trade is sought to be coerced by threats and penalties to keep prices of goods in short supply from rising, what happens is that the goods in question disappear from the market and find their way into what is described here as the ‘black market’ and in Soviet Russia as the ‘free market’, On 15th October the Times of India had a headline ‘Vanaspati In City Goes Underground’. Somebody recently wrote that “inflation is not a Soviet word” because, he said, when there are no goods in the market, the question of prices going up does not arise!
In 1960 or 1961, when Prime Minister Jawaharlal Nehru told the Lok Sabha that in a developing economy a little inflation is a good thing, I told him across the floor a story about a price administrator during the World War II whose job it was to hold the price line. A naive visitor, not unlike Prime Minister Nehru, called on this harrassed official and made the same bright remark. At that the Price Administrator scratched his head, thought a little and observed : “May be, John, you are right, but you see a little inflation is like a little pregnancy, it keeps on growing.” In 1974 it had grown to 30 percent a year. Mr. Graham Hutton, the British Liberal economist, in his little book on ‘Inflation and Society’ makes this point in an amusing manner by comparing a government trying to regulate prices by administrative diktat to a lady who goes to a plastic surgeon. The double chin disappears after the operation but, when she gets home and stands in front of a multi-faceted mirror, she sees the darned thing has come out as a bump at the back of her neck!
Many centuries back, King Canute tried to order the waves not to advance, but the perverse waves simply would not listen. Mrs. Partington tried the same game much later with a broom, but that didn’t work either. Politics, except momentarily, cannot defeat the laws of economics.
You can access the original article here. Visit indianliberals.in for more works by Indian Liberals dating back to the 19th Century.
