Wednesday, July 25, 2007

'Emperor' Mugabe's War on Price Inflation and Adam Smith's Theory of Prices

Economics tutors looking for first year in-class assignments (I’ve never been fond of out- of-class assignments because I’m never sure who wrote them) they could visit here and ask the class to discuss the ‘economics’ of Zimbabwe hyper-inflation as represented by a young Zimbabwe ‘journalist and a graduate development studies student writing from Canada”, Kuthula Matshazi, here.

He/she writes “Greed delivers command economy”, of which the gist is that the inflation problems (over 1,000 per cent) are the fault of greedy Zimbabwe businessmen basing their prices on "future inflation forecasts" and, menacingly, ‘untoward speculative behaviour influenced by greed and in some instances economic sabotage’. This leads him/her to advise: ‘It is therefore incumbent upon the government, as a people's representative, to take corrective action against the failure.

Well, there is plenty more like that as a supporter of the Zimbabwe government, presumably embarrassed by the news coming out of Zimbabwe to the safe environs of Canada, lashes out in apparent total ignorance of the causes of rampant hyper-inflation, way back to Roman times. (Perhaps, he or she is on a government-funded grant paid for his/her ‘good behaviour’.)

Governments cause hyper-inflation by printing the damn money unrelated to any requirements in the economy. If Zimbabwe’s government wants to stop price rises on the scale the country experiences, it should switch off the printing presses.
Anyway, the article contains this:

Correcting a market failure, we must ensure that, firstly, businesses charge natural (equilibrium price) prices. That natural price should also take into consideration what Adam Smith calls the just price - price that everyone would freely agree to if they knew the consequences of the entire price structure. We have to consider the moral price, in this case the just price and indeed the natural price which is determined by the demand and supply equation, labour costs, rent and profit among other factors.”

Comment
Smith’s price theory has nothing to do with the medieval idea of the ‘just price’. Smith’s (and others’) idea of the ‘Natural’ price was based on the price that happened to reward the factors land, labour and capital, or ‘neither more nor less’ what it costs to bring the product to market (Wealth Of Nations, pp 72-4).

But the sellers do not determine the price of anything unilaterally; buyers also have an input; they do not have to buy by paying any price that the seller asks or demands in competitive markets. That is why Smith focused on ‘Market’ prices, which are determined by demand and supply.

The idea that buyers would agree to the ‘just price’ if ‘they knew the consequences of the entire price structure’ is absurd. Ask your students: ‘how that would work in a practical sense?’

As for the ‘moral price’, the ‘just price’ and the ‘natural price’, I think there is a lot of confusion here. This is revealed in the statement of Kuthula Matshazi who says that the ‘Natural price’ “which is determined by the demand and supply equation, labour costs, rent and profit among other factors”. Natural prices are not determined by demand and supply equations – except the theoretical coincidence of a particular set of them (to which actual market prices gravitate around but never quite reach). The ‘other factors’ – ‘labour costs, rent and profit’ - are all subject to other prices.

As for Zimbabwe’s government, and its current laws against price increases, which will empty the shops faster, perhaps they (and Kuthula Matshazi) should read up on the Roman Emperor Diocletian, who in 301, tried to cure rampant inflation with an Edict on Maximum Prices, which fixed prices for goods and wages, and imposed the death penalty to merchants who overcharged.

It didn’t work, of course. Neither will 'Emperor' Mugabe’s.

12 Comments:

Blogger Nurhisham said...

I was absolutely horrified when I read the news last night. If there is anyone who can justifiably be accused of "greed and...economic sabotage", it's the present (mal)administration of Zimbabwe - it's a stretch to call them/him a government.

3:40 am  
Blogger Gavin Kennedy said...

Thank you for your comment. I entirely agree with your observation, except to suggest Mugabe's regime is a government and not all governments are pleasant institutions.

His interventions, including the use of extra-state mobs, have driven the economy into destruction.

6:42 am  
Blogger Kuthula said...

Gavin,

I realise your arguments are more convincing based on the fact that you are criticising a "young Zimbabwe ‘journalist and a graduate development studies student writing from Canada”.
And "a supporter of the Zimbabwe government, presumably embarrassed by the news coming out of Zimbabwe to the safe environs of Canada".
Why would you predicate your arguments, through nominalisation and ridicule instead of engaging facts. Also, you suggest that I support the government and am probably paid for by it. Well, if its what informs your positions on issues: what you get from government or your disposition towards it, then I am different. I am moved by facts and pragmatism.
If you are going to strip me bare based on facts then I am more than delighted to engage you, hoping of course that you realise that I basd on my argument on the still-yet-to-be-disputed fact announced by Andy Hodges (and my daily contact with my colleagues in Zimbabwe) that businessmen base their prices on "future inflation forecasts".
But I understand your classical economics approach and would be very glad to engage you all the way out. But of course based on reason and not your contempt of the young. I could simply say too that its an argument on old tired classical economist who is still entrenched in the claasical economics era and who can't keep pace with the realities of the world. He is trying to apply a set of economic assumptions based on medial information and information irrelevant to Zimbabwe's current situation.
Its so interesting that while you can try to diagnise the Zimbabwean situation (whcih you might also know very little of) from the confines of the UK, you hypocritically do the same thing: arguing from the confines of the UK. But of course you should be right because you see things differently!!!

Kuthula Matshazi

12:57 am  
Blogger Kuthula said...

A Paradigm Shift in Economics

The Tipping Point is Fast Approaching says Robert Costanza

It’s called an investment trap: an investor keeps putting money into a losing proposition because they can’t bear the idea of losing it all. The same applies in academia. Professors can’t give up on a particular school of thought because they’ve spent decades learning and teaching it. In the larger, rational picture, one shouldn’t consider sunk costs; that’s the past. But that’s what most of us, including economists, tend to do. They determine that since they’ve invested so much time and effort into their careers they can’t risk throwing it all away. Even if you hold them down and say “Don’t you see that this really doesn’t fit?” they’ll still resist. They can see the flaws in their worldview and assumptions, but they shrug their shoulders: “You’re right, but what am I going to do? I have to keep going. I know how to teach economics, that’s what I do for a living. What do you want me to do? Start over?”
Investment traps are part of a large class of phenomena called social traps that occur when local, short-term incentives are out of whack with global, long-term goals. Once one is caught in an investment trap it is very difficult to get out. It usually takes a major outside intervention or something perceived by the players as a major event to cause them to rethink. Drug addiction is a form of investment trap, as are arms races and the persistence of academic paradigms long beyond the point when they have outlived their usefulness.
Clearly the perseverance of the mainstream economics paradigm usually referred to as ‘neoclassical economics’ is a case in point. The assumptions of neoclassical economics about human behavior (the all-knowing rational actor’s only goal is to maximize utility), about the limits of technology (that it will solve all future problems), about the near perfection of markets (most are far from perfect) and several other assumptions have been clearly and frequently shown to be so far from reality as to be laughable. Often the policies that flow from these assumptions have also been shown to be ineffective or counterproductive. But the discipline persists because it’s a huge investment trap. Tens of thousands of individuals have built their careers on this paradigm, and hundreds of major institutions exist to serve it. Western society has a lot invested in the neoclassical paradigm and its practitioners are understandably loathe to simply say “oh well,” and start over.
Escaping from an addiction or an investment trap is not a trivial or easy operation. Any smoker can attest to that. But tobacco use declined dramatically in the West once its health hazards became abundantly clear. Likewise, the evidence against the neoclassical paradigm has been building for a long time, and eventually the tipping point will come, triggered by who knows what. It will tip when those with the big investments finally realize that it is pointless to continue further and when we as a society realize that the paradigm is hurting not only the practitioners, but also the rest of us who have to inhale it second-hand. It will tip when we can counter the ‘Joe Camel’ image of mainstream economics with the facts about its ill effects on individuals and society. It can and will happen if we are persistent and continue to build the case. One can already perceive the signs of change: the burgeoning cadre of ecological economists, increasing calls for true-cost pricing, the post-autistic economics movement. Hopefully the tipping point will happen before it’s too late. Just keep pushing.

Robert Costanza is the director of the University of Vermont’s Gund Institute for Ecological Economics. He is the author or co-author of more than 350 scientific papers and 18 books, and his work has been cited in more than 2,500 scientific article.

1:45 am  
Blogger Gavin Kennedy said...

Hi Kuthula

Thank you for your comments.

My attention was drawn to your article by your references to Adam Smith and his theory of natural prices. My interest in Zimbabwe and the rampant inflation your article discussed, blaming the situation on ‘businessmen’, when the cause of hyper-inflation is the government that prints the money, was secondary to your misattribution of ideas to Adam Smith which he did not hold.

I apologise if my article appeared to be patronising of you as a young graduate. My comments were not personal in that sense; I was trying to find a reason why you should be so wrong about Adam Smith, and why you were so certain that Mugabe was right in his handling of a problem he has created and which the experience of all hyper-inflations in history since Roman times confirm; the money supply causes hyper-inflation and governments control the printing presses, or the coinage.

If they order the presses to print, or debase the currency (or in the case of Spain and Portugal, import – in their cases ‘stolen’ gold from their colonies) to pay their armies, police, administrative apparatus, their imports of luxury goods, and their ‘extra-paramilitary’ forces and supporters, they will promote and fuel hyper-inflation.

If we do not agree about that I don’t suppose we will agree about much.

Of course, hyper-inflation once fuelled by the money supply, affects people’s behaviour. Of course, once underway future anticipations of price increases (by the week, then the days, then the hours, until money flight takes over as people revert to barter, with all its inefficiencies). But to blame the ‘businessmen’ or the ‘Markola Mammies’ in the Ghana food shortages some years ago, is the refuge of the government that causes the problem, as it tries to divert attention from its own failings.

Today, we have the handy scapegoat known as foreign governments and ‘globalisation’. But it always comes down to the government and its printing presses.

Now on the basis that I made assumptions about you, you have made assumptions about me. I was trained as a neoclassical economist and I taught it for most of my academic career. Hence, in referring to what Adam Smith actually wrote, I do not fear abandoning a lifetime’s investment in the neoclassical paradigm. As a retired academic that is not an issue.

Lost Legacy is about Adam Smith’s legacy, not about preaching Adam Smith as a solution to today’s changed world. How much of his approach is a guide to policy today is a matter of many divided opinions.

There are certain fundamentals that Adam Smith (and David Hume) taught us all: markets work when there is a degree of trust that contract will be honoured; that the legislature is separate from the judiciary; that the government is responsible in its management of public affairs; that there is certainty in taxation and prudence in government borrowing; that it will not resolve its cash crisis by printing money (or debasing the coinage); that property is secure, no exceptions, be they Zimbabwean ‘white’ farmers, or ‘black’ employers and workers belonging to a different viewpoint; that it is ‘safe’ to go about one’s private affairs and not be subject to the oppression of the forces of the state; and that ‘human rights’ are respected.

Absent these conditions, the people suffer most that have least materially. Whether you truly believe, as a Zimbabwe citizen, that what your government is doing and has done, meets these conditions is a matter for yourself. I do not vote in Zimbabwe and therefore it is not my personal business.

But Adam Smith’s legacy is my business. Your article quoting Adam Smith was not a fair treatment of Smith’s views. I responded, that’s all. I wish you well in your studies, though what sort of understanding you will reach about globalisation without a thorough grounding in political economy and the history of economic ideas, including Smith’s writings on the subject (Wealth Of Nations and The Theory of Moral Sentiments), remains to be seen.

7:56 am  
Blogger Kuthula said...

My apologies for the late response, but I have printed out your response and will look at it closely nd then respond.

3:57 pm  
Blogger Kuthula said...

Hi Gavin,

If I am guilty of blaming the situation entirely on business then you are equally guilty of excluding them and their speculative behaviours.
If you read my article carefully you will understand that I advance my argument based on Andy Hodges' position. Supposing I am wrong about my atribution to these nonsensical prices hikes, then what do you say about Hodges' claim? What implication do price increases have on inflation? To suggest that government is soley responsible for the inflation as you suggest, I think is wrong - in an economy with more than one person. Even if we accept that government is indeed responsible for the inflation through prinitng money, what other option do they have considering the neoliberal driven violence that is being unleashed on Zimbabwe because the country want to have its own home grown economic model that will not favour the UK and US companies at the expense of its citizens? Notice that I did not say "businessmen", but said some businesspeople.
I was convinced the government took the right decision based on what I wrote. I think I explained it in detail. Pleae read my article in full and carefully because this question you ask is addressed clearly. If you think its not, then ask me and I will elaborated further - paying particular attention to specific points you raise.
No one disputes that printing money causes inflation.The question is: what does government (which by your admission accept is legitimate and represents the people) then do to fulfill its mandatory obligations of providing for the nation when its sources of finances (such as balance of payments supports and lines of credit) have been systematicaly closed down? I think the problem with you is that you lack first hand experience of the obtaining situation in Zimbabwe? Have you not ever wondered why the very people you might seem to care for still give the same government, that you as a foreigner criticise for being reckless? If it was an illegitimate government we would understand but by your own admission in one of your postings you are one the very few who accepts the bitter fact.
To suggest that money is not completey well spent is to be rather over biased and you lose sight of the many social challenges that are present in Zimbabwe. Also, you lose sight of the fact that Zimbabweans (of course not all of them, but many) want to engage with the global governance managers and their institutions based on equality and not oppressive and violent relations that currently exist and inform the dominant neoclasical economics.
As I said and if you read my article, you would have realised that I perfectly agreed with your neoclassical economics theories (although I do not subscribe to them) and even predicate my pragmatic arguments based on these theories. However, I go further and demonstrate their limitations using the practical situation in Zimbabwe and also from a conceptual basis. I decry the inapplicability of these laws univerasally, yet some neoclassical economists are forcing these laws, which are in themselves based on assumptions, down the throat of everyone around the world regardless of their circumstances.
What you miss in your perspective is the practical situation in Zimbabwe: the bigger picture that is beyond the mere neoclassical economics rules.
If you think that foreign governments or globalisation (from above) have not played a role in the problems of Zimbabwe then its either you are disingenous or totally ignorant about the situation in Zimbabwe.
You see, what Adam Smith and Davis Hume said was right. But those principles and laws need a context - which neoclassical economists deliberately ignore because they know it would disturb their set of assumptions.
Your view of property rights is based on a narrow viewpoint. Zimbabwe went to war for almost 100 years: what were we fighting for? What had made us fight? Is it not the very property of rights issue that was shamelessly and violently disregarded by coloialists? You sound as if you are putting forward a Lockenian view of property right? I hope not because it would further weaken your case. Lock saw property only fit to be owned by a certain class while the majority had to living on the bearest minimum. Also Lock tells us that comes to own property when they have occupied a land and invested labour. When our forefathers were violently taken out of their homes and thrown into the reserves, what had happened to the Lockenian view of property? Was time supposed to nuetralise claim to our land? Many Zimbabweans dont subscribe to your thinking.
I do not see what you mean when you allege that I lack a "thorough grounding[in] Smith's writings". What is it specifically about Smith's ideas in my article that is wrong? Did Smith not talk about the moral price and natural price? Are my definitions of the two concepts wrong? I am not sure what you are accusing me of.
I think you need to be generally wary of people that you discuss with and not just underestimate them without any sound basis.
I will keep you informed of my progress in Globalisation Studies. I wish to live to se a day when globalisation from below would topple the violent, neoliberal based globalisation from above!

Kuthula

3:43 pm  
Blogger Kuthula said...

I wanted to why,if you were puzzled about my claims, did you not seek to ask me since I had provided a means of feedback rather than speculating bordering on contempt for the "young Kuthula"?

9:51 pm  
Blogger Nurhisham said...

Kuthula,

Although this probably is not the proper forum for a discussion of these issues, since I've already involved myself in this I feel the need to offer some sort of rebuttal to your comments.

First, the real cause of hyperinflation is not based on some esoteric, classical model with limiting assumptions - in that sense, your quoting Robert Constanza is neither here nor there (though as an aside, I largely agree with his critique of neo-classical economics, especially as it is taught at the undergraduate level. I personally find post-graduate work far more in tune with reality).

Every episode of hyperinflation in history has been preceded by a debasing of coinage, or in the modern era an over-rapid expansion of the monetary base (i.e. printing money), beyond that dictated by real economic activity. Prof Kennedy's point on this is based on historical evidence, not theory. Sadly, the end-game for hyperinflationary episodes also tend to be similar - economic collapse, unrest and violence, and the downfall of the government or leader that initiated it. Your rationalization of government policy as the correct course in view of the loss of sources of finance is not valid in my view - hyperinflation directly penalizes the ones the government is most required to serve, the poor and disadvantaged.

By addressing the cause as the 'greed' of certain businessmen, you are addressing the symptom, not the disease. I have no argument with your characterization of the dynamics of inflationary expectations - it is very well explained, 'future inflation forecasts' and all. And this is not a situation peculiar to Zimbabwe - I have read accounts of Brazil's episode with hyperinflation where the same story is told, and I see politicians in my own country loudly decrying the alleged 'greed' of shopsellers. Telling everyone to have lower expectations of inflation will only work however if the original impetus is removed - the government must stop printing money beyond what its resources can provide, and in fact must restrict spending below that level until the vicious cycle of expectations is broken.

Otherwise, lower inflationary expectations will have no credibility at all. You can tell people to have lower expectations, but no one will believe it, and you won't be able to break the cycle of higher prices->higher wages->higher prices. Mandating prices across the board a'la a command economy might help, but only on the surface - true market prices will still prevail under the counter, which as you can imagine, hurts only those who are not immediate beneficiaries of the government's largesse i.e. the common people of Zimbabwe. The one real effective remedy that has been shown to work is one that's probably the most unpalatable - strict government fiscal and monetary discipline, and in extraordinary cases like this one, temporary abdication of sovereignty over monetary policy by pegging the currency to another currency whose central bank does have inflation-fighting credibility. Believe me, I intensely dislike the "IMF solution" for the costs it imposes on a country, but it is the correct policy prescription in this case.

To address another point in your article, your characterization of businesspeople behaviour in withholding goods and services as a 'boycott' is without merit. You point out the desirability of businesses charging 'just', 'equilibrium' prices - under highly inflationary conditions, with price controls on the retail side, businesses will no longer be able to afford to buy the goods that they sell to consumers - it appears you are thinking of businesses and consumers as essentially working in a two-good, two input world. Most 'real-world' retailers don't operate in an abstract vacuum like that, they're usually at the end of a long supply chain. Inflationary expectations will apply throughout - if you put price controls at only one end, production will cease as each part of the chain goes out of business. I find your thinking in classical model terms rather ironic considering your emphasis on reality and pragmatism.

One further point I'd like to address:

"...what other option do they have considering the neoliberal driven violence that is being unleashed on Zimbabwe because the country want to have its own home grown economic model that will not favour the UK and US companies at the expense of its citizens?"

There is nothing wrong with favouring your own citizens - it is the right of every peoples to have control over their own economic resources and destiny. Appropriation of assets however, is not the answer - ownership does not automatically confer productivity or ability. In every case I've seen of nationalisation of assets, economic stagnation has been the result - autarky has few remaining believers. The dilemma facing Zimbabwe is not unique in that virtually every post-colonial nation has had to face the fact that almost all productive assets were owned or controlled by foreigners, and that indigenous peoples have typically been with malice aforethought excluded from any meaningful role in their own economies. I note however that very few countries have undergone the kind of turmoil that Zimbabwe has undergone in trying to address this issue. There is a role for government in reducing foreign ownership - minimum local shareholding requirements for instance, industrial policies, subsidies for local businesses, technology transfers, affirmative action in employment. None of these are particularly palatable to foreigners and may be slower to enact change - but they can work and they are accepted internationally, however grudgingly. In my own country, one way we did it was very direct but legal - a fund was set up to mobilise savings in the country, then we raided the London Stock Exchange. It was a fair exchange, we got working productive assets (including all the valuable, experienced managers to run the companies) held as a trust for the people, and the shareholders received fair value for their equity. Foreign ownership in our economy fell from nearly 2/3rds at Independence to less than 20% currently. Appropriation, however justified in historical terms, is neither pragmatic not realistic in terms of increasing social welfare right now - and that should be the goal of government, not who owns what.

8:50 am  
Blogger Gavin Kennedy said...

Hi Kuthula

Let’s clear up my reference to the ‘young Kuthula’. It had nothing to do with an attack on you because you are young. I spent 35 years teaching in British universities (and guest lecturing in Commonwealth countries, such as in Australia, Canada and South Africa) and that involves mainly tutoring and encouraging young people to invest in their human capital, the one true way in which they can do better for themselves, their families and, in time, for their communities.

This Blog is read by many others too, including senior academics, and my reference is also to them, who might have expected a fairly robust reply from me if your views had been expressed by them. Academic debates are often unnecessarily rough, but discussions with younger students should always refrain from such behaviour.

Yesterday, I was visiting various economists’ Blog sites and came across this piece on the well-respected site by a well-respected economist, Lawrence White:

“Division of Labour http://www.divisionoflabour.com/
July 31, 2007
Where “to battle inflation” means “to generate inflation”
[by] Lawrence H. White

"Forbes’ headline on a story today: “Zimbabwe introduces new bank note as it battles hyperinflation”.

First sentence of the story: “Zimbabwe's central bank introduced yet another higher denomination banknote as it grappled with runaway inflation which is rendering lower-value banknotes useless.”

Jane Fields of The Scotsman offers a less naive perspective:
With spectacular disregard for the rules of economics, [Zimbabwe’s ruler] Mr Mugabe has vowed to print even more money for underfunded municipal projects.

"Where money for projects has not been found, we will print it," the former guerrilla leader told town councillors on Friday, apparently ignoring the generally accepted view that printing money is a recipe for inflation.

Local currency prices in Zimbabwe are more than doubling every month. At that rate the new Z200,000 note – today worth about two pounds of rice – will need to be succeeded by a million-dollar note in two months.”

This illustrates the crux of Zimbabwe’s current problem. It is not about blame for past events, the legacy of colonialism, and domestic political struggles. Governments are defined in law (and the United Nations) as the regime that effectively controls the territory. To call any institutional arrangement a ‘government’ is not to endorse its politics or behaviour; it purely refers to its legitimacy as a government. Whether it was elected by a system of voting, fair or tarnished, or seized power and held it in a military coup or revolution, is not decisive.

Mr Mugabe is the head of the legitimate Zimbabwe government. How other countries react to Mr Mugabe is their business, as much as it is Mr Mugabe’s business how he conducts his government’s affairs.

I live in Scotland, part of the United Kingdom, and our governments are elected in free and fair elections, under the rule of law, independent of the government of the day, and with a long history of human rights to free speech, free press, free media and, in the universities, of academic freedom. This is not to say that this makes us ‘better’ than Zimbabwe’s system of government; just different.

I have already stated I am not commenting on Zimbabwe’s political situation because I do not vote in Zimbabwe; I vote in Scotland and I confine my politics to the UK.

But as an economist, I often comment on economic issues, especially where somebody calls upon the authority of Adam Smith in support of this or that policy, and I feel free to do so as a scholar and member of the Republic of Letters.

Our debate began in response to your views in a Zimbabwe newspaper about the causes of the hyper-inflation affecting your country and your references to Adam Smith on ‘natural’ price, which were plain wrong (and indicated to me a muddled understanding of his views, e.g., confusing his views with theories of the ‘just price’, a medieval religious concept, and the ‘moral’ price, a notion that had nothing to do with Adam Smith, the moral philosopher).

My contention is that hyper-inflation (even any inflation) is the responsibility of a government that intervenes, orders, and sanctions, the printing of money for any reason not justified by the level of annual production and consumption of the available goods and services. If the government, any government, adds to the money supply beyond a ‘safe’ working level, it will cause a rise in prices. If you double the money supply you will in time double prices, and so on infinitum.

This happened in the 16th and 17th centuries when Spain and Portugal brought their stolen gold from South America, and unable to use it within their small economies, passed it and the resultant inflation on into Europe. It happened also during the Weimar Republic in Germany in the 1920s, when the government printed more, much more, money notes than were needed to purchase the available goods and services, causing a massive rise in prices similar to what is happening in Zimbabwe today. I also drew attention to the hyper-inflation in parts of the Roman Empire in the 4th century (301 AD), which Diocletian, the Emperor, caused by debasing the currency and he tried to stop by threatening anybody with death who raised their prices. It didn’t work.

It is happening today in Zimbabwe. The press cutting above suggests the actual cause: Mr Mugabe’s government is ordering the printing of money to ‘pay’ for ‘under funded’ projects, which means the money allocated to a project cannot pay for the increased money prices of goods, labour and such like since the project was approved. By printing money this will add to the next round of price increases.

Of course, people living in an economy with rampant price rises due to the increasing money supply, who have a job, will seek higher wages to pay for what they need to buy, even cutting their consumption down to the bare minimum. Likewise, people selling good and services who become aware that prices are rising rapidly from recent past experience, will increase their asking prices for those goods they have in stock, and will stockpile goods they have bought earlier and release them for sale slowly, knowing that in a month, a week, a day or a few hours, that prices will increase.

In Zimbabwe’s case, as the economy closes down – people have less and less to sell, and can afford less and less to buy – those few, and getting fewer, who have jobs will search for someone to blame for the hyper-inflation.

We know, from observation, that the state apparatus will have jobs. These include the parliamentary administration, MPs, and supporters of the government and Zanu PF, and ‘friendly’ voices in the media, plus the senior staff in the security forces (army, air-force, police, justice department, prisons, customs, immigration and intelligence services), and, somewhat lagging behind, the ranks employed by the government. The problem for a government in these conditions is that any failure to print sufficient money to pay these wages will lead eventually to an internal crisis for the government.

The government can try to replace low-denomination currency with higher denominations, but unless the people trust the government to be serious about reform of the money system, it only delays the inevitable. Meanwhile, many people not employed, not receiving incomes and unable to buy basic supplies will tend to either seek to emigrate to neighbours or become radicalised into a more and more violent popular forms of protest. Cracks will appear in the government’s cohesion as a political force. Governments in hyper-inflation spirals cannot fulfil promises of social programmes, no matter how desperate the situation requires action. This is all brought about by the government printing money and pumping it into the economy.

Lastly, I said I was trained as a neoclassical economist, I did not say I was one, though I respect its rigour. I am not hanging on to old ideas because I can’t think of anything else to teach or believe! The economics of the money supply pre-dates neoclassical economics by a century.

Should Mugabe and Zanu PF arrest every business person in Zimbabwe, it will not make a difference to inflation as long as the government keeps printing more money. Adam Smith’s theory of natural and market prices had nothing to do with the problem and ought not to be used to justify a policy of blaming business people for what is going on. Nor will blaming foreign governments or businesses.

The source of the problem is in Zimbabwe and the perpetrators are to be found in the environs of the government’s buildings, nowhere else.

I am sorry to be so brutal in pressing these points, and I do not doubt your sincerity and genuine affection you have for your country. Study well and study hard. In due course your country may need you to rebuild what is being destroyed just now.

Gavin

5:07 pm  
Blogger Kuthula said...

Dear Gavin,

You response was received well and not viewed as brutal. I think you laid out plainly your arguments. Unfortunately you dwell too much on the issues that we do not disagree on. I think you will realise that in making my arguments, I have departed from the neoclassical economics position. I think I am mentioning this for the second time.
I must quickly say that I am aware that this is a decent blog read by accomplished scholars. I engage with this knowledge in mind.
While these newspaper columns you cite are writing something which is correct according to neoclassical economics laws (and the fact that it happened as they describe it), what they do not tell us is what the Zimbabwean government can do to provide for the nation since its under economic sanctions. In other words, these stories are devoid of the context. The way they frame the story distorts the full picture. You will realise that even President Mugabe acknowledges that he is breaking the neoclassical economics laws. But what choice does he have? But that is not to absolve the businessman who have also engaged in speculative deals, raise prices based on speculated future inflation, and many other mind boggling speculative behaviour. Looking at these reports critically, there are several subtexts that one could highlight. I would be glad to do so, should you think I am not digressing.
Indeed even though hyperinflation is the responsibility of government, we cannot absolve the businesspeople. Contrary to your belief tht the sources of Zimbabwe's problems are confined within the environs of the government, they stretch much further than the govt. offices. Even the Southern African Development Community accept this.
Is it possible that you cut and paste which of my assertions in my original article about Adam Smith is offensive to you. I still do not understand. I think if you dwell more on that I would gain quite a lot. I enjoy reading and following neoclassical economics althouth I do not subscribe to its views. I read The Economist religiously, which is my favourite magazine.

Kuthula

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