24 September, 2020

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Covid-19: Economic Structure – Failure Of Market Mechanism 

By Hema Senanayake

Hema Senanayake

A few days ago, I watched the TV news in which it showed that the military assisted by District Secretary of Anuradhapura were purchasing farm produce. That news made me both happy and sad. I felt happy seeing the smiles on farmers’ faces having been able to sell their produce for a better price. I felt sad by observing the dysfunction of domestic supply chain having practiced almost “free market” principles since 1977. This intimates the need of establishing more disaster resilient market mechanism in post-pandemic era instead of replacing it by certain kind of administrative version. 

I have argued and continue to argue that there are at least two main systemic weaknesses in the present economic model. These two systemic weaknesses have created three distinction grave problems for any country, developed or developing. Those problems are severe systemic indebtedness, “over consumption” and ever increasing “regrettable component of GDP.” I have argued the need of removing those weaknesses to establish a better and resilient economy for the wellbeing of all citizens. Yet, there are strong elements in this present economic model which are needed to be protected and be further enhanced for a foreseeable future. These features will be necessary an integral part of the new post-pandemic economic order we are thinking of. During this pandemic good intention of the government and the military might weaken such vital mechanisms in the economic system, if the government does not philosophyically understand the limits and better methods of intervention. Good things are good, bad things are bad. 

One such good mechanism is the market mechanism and the other is the price mechanism. Any destruction of these mechanisms either in purchasing perishable farm produce or grains including rice will make more and lasting damage to the economy. Therefore, the government needs to rethink in establishing more disaster resilient market mechanism and the support extended by military and government’s administrative machinery could be supplementary when a disaster hit the country again. Why we need to have a free market which could be made functional even during a disaster as the foundation of the economy? Possibly, we can make subsequent macroeconomic adjustments as and when necessary in view of the country’s national economic objectives. But preserving the foundation is important. In fact, what the free market mechanism does? In order to answer this question, let us think, as to how a pencil is produced. This is simple but powerful illustration of market mechanism. 

“The thousands of persons involved in producing the pencil performed his task not because he wanted a pencil. Some among them never saw a pencil and would not know what it is for. Each saw his work as a way to get the goods and services he wanted—which goods and services produced by those who want to get the pencil they wanted. Every time we go to the store and buy a pencil, we are exchanging a little bit of our services for the infinitesimal amount of services that each of the thousands contributed toward producing the pencil. It is even more astounding to see how the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another—yet none of these differences prevented them from cooperating to produce a pencil. How did it happen?” Market and price mechanism made it happen. (Above quote is from Milton Friedman’s. I made a few changes to make it more readable for non-economic readers.) 

Authorities which set the benchmark prices and the officials in regulatory bodies such as Consumer Affairs Authority must understand these principles more than anybody. And those who promote home gardens must think of a better way to ensure national food security and it can. Otherwise their good intensions might weaken the capital formation in those sectors of the economy. Prices should reflect the amount of social resources used in producing something, instead prices should not reflect the whims and fancies of any administration. Let us build a more resilient market mechanism in post-pandemic era. 

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Latest comments

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    I am very dissatisfied with economists. They have never been practical. What is your market model, free market. Are you talking about the failure of Capitalism, Neo liberal model. Are you for exploitation of he farmer by the middle man buyers who pay very low prices and charge ten higher when it comes to the buyer. What are the pre-requisites of your economic model. USA had one model, Europe had another, Japan had one more, it looks China is very successful, even though the other countries hate it they also practice it at least with immigrant workers.
    Why you are not happy when the middle man buyer is not exploiting the producer ?
    I know here, they talk about living wages and local production, etc.,
    What is the use of the govt and for whom, if it can not look after it’s citizen. I heard, in NEW York may be, they found 17 dead bodies of COVID-19 in a back alley.
    If you are Buddhist, you would understand other things too.

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    Current Market Economy is nothing,that it was origin of Imperialism of Capitalism Development of highest stage said by V.I Lenin.
    He was great genius of 20 the century man who created of USSR in 1917 October Socialist Revolution in Russia .Lenin was leader of Communist Party of Soviet Union. Later the death of Lenin was replace leadership by J.V Stalin….1924 to 1953 of almost 30 years….Soviet Union .
    Under the market economy which gives producers freedom to Trade their products is an obstacle to efforts to build a socialist system in USSR.
    While Lenin devoted spending his time which denouncing Market Economy under socialism it will give RISE to Capitalism in USSR . The Lenin logic was that laissez-faire of Market Economy will undermined Socialism in USSR ,it gives reviving of Capitalism in Soviet soil.
    While last party Conference in of CPSU of USSR 1952 which that Stalin realized this negative facts are of developing in Soviet soil . He has shown and reveled this danger trend of Soviet Union by book of >Economic Problem of Soviet Union> in 1952.
    But I have to say there is possibilities of market Economy can be development in underdevelopment countries like of Third World nation. The Coronavirus has penetrated become that crisis of World, which impact on result of that entire system Global is NOT moving World, which is Stagnation and Standstill.
    Indeed political – Economy-Social hegemony of dominited by US has superseded & suppressed Path of development of Neoliberalism like us…. by UNP leadership since 2015 Jan 8th.!
    We are in period of democratic revolution; we have take-up unfinished TASK left by UNP which betray by Comprador bourgeoisie classes of leader to People oriented leadership?

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    A smart lock down would have done the job compared to a curfew.
    Hope we learn from our mistakes. The damage to the economy is massive and hope it will not lead to permanent damage.

    We are an island nation and should learn from Taiwan, NZ, Australia and Iceland. No curfew but smart lock downs and better testing is what is required.

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    I have no knowledge on economics however I am able to fathom the situation from what the author has articulated in a distinct and definite form for anyone to understand.
    I never miss reading the author’s articles in the CT for his direct and to the point with a vision for a harmonious and peaceful nation.
    I can re-call what Mr.Hema Senanayake pointed out as a misquote of President Mahinda Rajapaksa at the opening speech delivered by him at the CHOGM summit during his tenure.
    President’s english translation of the Pali verse of Buddha as;
    ” Let not one take notice of faults of other’s or what they have done or not done. Let one be concerned only about what one has done and left undone “
    Mr.Senanayake’s corrected version as follows:-

    ” Do not pay attention to anybody’s blame or what others have done or not done. Yet be concerned about what you have done and what you have not done” .
    This is a noble lesson for everyone of us to emulate.

    Thank you.

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    It is true central planning lifted the Soviet Union from a third world country to a first-world country. Investment in heavy industries made USSR a super-power. But the system collapsed when USSR diverted all its resources to the military. The economic system collapsed under its own weight never to raise its head thereafter.
    It is true the capitalist system in the West and Europe has managed to put the food on the table. But at the same time, the system has created inequality and social injustice. One per cent of the population owned 99 % of the country’s wealth. in Western countries.

    China has registered phenomenal economic progress following a capitalist market policy, while politically it is a one-party authoritarian state. Whether China’s economic-political model could be installed in third-world countries is a million-dollar question.

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