Myth: Inflation and Scarcity

The change in the definition of inflation has caused a lot of confusion. A prime example of this confusion is when modern day economic students tend to confuse two different economic phenomena as being the same. These two phenomena are inflation and scarcity and according to traditional economists they are not the same.

✓Consider the case of inflation. Inflation is caused by an increased quantity of money in the system. Inflation does not have anything to do with the physical goods themselves, it is concerned with excessive money. The effect of inflation is rising prices

✓Shortage, on the other hand, is a different economic phenomenon. Shortage is caused by issues pertaining to real goods and services. Shortage has no connection with an increased money supply. However, shortage also exhibits the same effect i.e. rising prices.

Now, since both inflation as well as scarcity end up creating the same effect, people tend to get them confused as being the same thing. As we can see from the definitions, they are not caused by the same cause. However, they have the same effect.

Deflection:

To a large extent, the creation of this confusion has been willful. It helps the people who caused the inflation to deflect attention from themselves. For instance, a government that has monetized too much debt and created too much of the currency can deflect the matter of itself and say that the rise in prices is being caused by the supplier’s hoarding. This has been happening at a lot of places across the world. Let’s look at an example from India.

Scarcity, By Itself Cannot Cause Inflation:

Food inflation has been on a high path in India for decades. The government usually blames the corrupt middlemen for having caused this inflation. But this argument is completely baseless. As we have discussed in an earlier article, the middlemen do not have control over the money supply which is why they cannot cause inflation on their own.

Even if the created artificial shortages in the market and raised the prices, the consumers would run out of money to actually make the purchase. There simply would not be enough money in the system. The price of one commodity may increase. However, the prices of all commodities cannot simultaneously increase without the government issuing more money to facilitate the transaction.

Case: Cartels and Not Scarcity

Quite clearly, the work done by cartels is being passed off as inflation. India has laws which prohibit famers from dealing directly with the consumers or retailers. These laws are called Agricultural Marketing Produce Committee Act and are decided at a state level. In many states in India, till date this act necessitates that the farmers sell their produce only and only to a government authorized middleman (cartel). Selling their produce to anybody apart from the middlemen would be considered illegal and there can be arrests as a result!

Now, clearly the produce of an entire nation is controlled by the hands of a few middlemen. This cartel increases prices as and when they feel like with no consideration as to how it will affect the quality of life of the common man.

This is clearly the case of an artificial shortage and cartelization, the argument of scarcity is a fake argument constructed by the beneficiaries to deflect attention away from themselves.

Scarcity Implies Fall In Output:

Another fact that contradicts with the scarcity argument is that scarcity would imply that the stock of goods is getting smaller over the period of time. However, if we consider the case of farming in India, the productivity has gone up several times as a result of the green revolution. The per capita production of grains in India is higher today than it has probably ever been. Despite the increase in productivity all these years, there has been a steep increase in the prices as well. The facts state for themselves, this does not seem to be a case of scarcity!

The point being made here is very simple. Scarcity and inflation both have the same effect. Hence it is easy to get confused amongst them. However, it is important that we do not get confused since the nature of underlying problems in each of these cases is very different. There is very little an increase in the interest rate can do to break a cartel. Also, there is very little abolishing APMC act can do to prevent the government from monetizing more debt. These problems need to be considered separately and a befitting solution must be created for each of them. Both the problems are extremely important. However, they are different!



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Managerial Economics