One of the ways that characterizes the traditional, socialist approach to solving economic challenges is to confuse symptoms with causes. This confusion then leads to forming policies that target the former instead of the latter. Unfortunately, the recent steps announced by the National Democratic Alliance government to target hoarders for steep spikes in onion prices are not very different.
Onions and potatoes have been included in the Essential Commodities Act, thereby placing ceilings on holding stock by wholesale traders and others. The previous government too, in what could be considered as a knee-jerk reaction to rising inflation, had announced several crackdowns on speculative hoarders who appeared to be causing supply bottlenecks and consequent price spikes. While those steps failed miserably, they showed us that political will, in and of itself, is not enough to deliver good governance. For a public policy to succeed, it must invariably be coupled with good economics.
It is true that in times of scarcity, such as that evident in onions, hoarders tend to corner the market. They restrict the supply of commodities in expectations of profiting from increased prices in future. But the magnitude of hoarding’s contribution to onion-inflation is highly debatable. For the sake of this discussion, even if we were to assume that hoarding does hurt prices substantially, there would still be no justifiable reason to target hoarders; it would constitute only a superficial solution. With scarcity hitting again, hoarders would be back in business, as they always have throughout history.
Since scarcity, present or expected, appears to motivate hoarding, it may make sense to implement steps that address the root causes of scarcity. Yet, this approach is rendered ineffective by the fact that those causes are often not man-made. In case of onions, for example, at least one factor responsible for underproduction is inclement weather. This is also a factor over which we have little control. One may reason that, since influencing poor monsoon is beyond our immediate control and since hoarders seize this opportunity to raise prices, we must use State-induced coercion to address hoarding.
This, however, is a distorted view of economics, for scarcity can only motivate hoarding if there are not enough sellers in the market. A truly competitive market characterised by free entry and exit, however, tends to discourage hoarding. If some hoarders restrict supply through raising their stock of onions in anticipation of poor monsoon, new sellers will enter the playing field to fulfill the lack of supply, thereby driving down prices that had earlier been increased by hoarders. Consumers can also import onions at lower prices to further break the nexus of hoarders. The present system of selling agricultural products is notorious for dampening competition among sellers, thus creating fertile ground for hoarders to thrive.
Finally, there’s very little justification for the State to intervene coercively in solving problems that could be better solved through using voluntary methods of the market. In words of the famous economist Milton Friedman, “The government solution to a problem is usually as bad as the problem.” By squandering limited national resources, most importantly time, on the futile task of cracking down on hoarders, government will make it harder for itself to implement real reforms to contain inflation.
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