The theory and reality of market economy

Economics can turn out to be a dangerous profession or principle for those who put unrestrained and strong faith in the conventional foundation of economics with which they embark upon in the world of economics. In fact, it can be a problem of the axe in wrong hands where the axe is the lesson derived from conventional principles of economics and the wrong hands are none but economists themselves. When an economics freshman starts his class in the department of economics, the first thing he learns is what economics is. Then he gets the introduction to the basic theory of demand and supply on which market mechanism is built. He learns that price acts as a catalyst to put everything in order. It is guided by spontaneous movement through the signal emanating from the condition of supply and demand. This is the fundamental law of the classical economics on which free market enterprise systems depends and works.
But how truthful this law is? What do economists themselves think about such a law?  More than hundred years ago, the great Swedish economist Knut Wicksell articulated his position on such a law as follows: "It is obvious, for example, that the so-called effective demand influences prices. The demand of persons who are not in a position to pay the price asked for any particular commodity hasn't the slightest influence on price, however great that demand may be. It may be compared to the longing glances of numerous, though impecunious, persons who gaze at the precious objects in the jewellery shop - in other words - the quantity of the goods that can be bought at the prevailing price is, on the average, neither great nor small in relation to the supply but is in fact exactly the same" (Lectures on Political Economy, Vol-1, p-19). For Wicksell, who gets, who doesn't get, and who gets what amount are totally irrelevant as long as demand and supply are equal.
Let's say there are hundred units of chocolate. According to Wicksell, it shouldn't be a matter of concern at all if one person gets hundred chocolates and the rest none or all get none but one. Market price is totally and completely independent of the distribution of market demand. For example, the market price of the chocolates would be same if everyone in a king's kingdom is deprived of eating chocolates except the king. To say more clearly, Wicksell fostered an unrestrained belief in market mechanism which is independent of the degree of exclusion it produces. The degree of exclusion - that means how large the number is who gets away with empty stomach from market - is totally an unnecessary matter to reflect on. The market itself is a sign of omnipotence and whatever comes out of it is rendered by the omnipotent above which none can stay and command. Over the years, people have digested this principle in such way that today even a barber can tell us exactly what Wicksell told us hundred years ago. Here comes the victory of economics and the victory is that it has made us an adamant parrot that mimics the principle very well but falls prey to such principle.
Today when people speak up against economic inequality, it seems to be quite puzzling. One the one hand, we believe in and are working on such principles that betray our concern for justice. On the other hand, we cry for economic justice and equality.
On the side of reality, we can see how this blind faith in the power of unrestrained market mechanism can lead to a very drastic consequence. Price difference between the urban and rural markets has been a permanent problem in our country. Day by day the difference is increasing with the sign of little mitigation. The popular argument is that the middlemen and syndicates are behind the problem. But little attempt has been made how conventional market mechanism has worsen the problem. The classical demand theory says that if prices go above the equilibrium level, they must come down since demand at those prices will be less. So, according to that theory, the price differences should have been banished even if middlemen and syndicates set prices above the equilibrium prices.
But this is not what we are observing in our country. The price difference is still persistent. Then what is the problem? The remark of Wicksell gives the answer. The answer is that if market prices are independent of the distribution of market demand, then who gets and who doesn't get are not relevant as long as the supply is equal to the demand. In other words, market can reach a price at which numerous are forced to starve and few gorge and yet it is an equilibrium price!
Along with the price difference problem, skyrocketing real asset price has turned out to be a significant problem. The price of an apartment in Dhaka city has reached to such level that today even a person with more than Tk 40,000 salary per month can hardly hope to buy an apartment saving money. By the time he accumulates the required sum to buy an apartment, the price of the apartment will have risen to such a level that the required sum will fall short of the real value of the apartment.
But our policy makers, too much complacent with the truth and power of free market enterprise system, are still showing lacklustre attitude to control asset price. Some even say that demand and supply are guiding the real estate price.
But our economy has some uncanny features that are not so widespread in other countries. One is the influence of the remittance money. There is a huge gap between the income level of people who work in the USA and those who reside in Bangladesh. The people earning and residing in the USA can afford the price for an apartment or can offer a price that people residing and working in Bangladesh can't. This is a problem of oligarchic domination in the market where the rich rusticate the poor from market by force. Another factor is the dominance of dynastic wealth. A significant portion of the wealthy class is blessed with dynastic wealth and large inheritance. The influence of dynastic wealth and remittance money combined creates a problem of oligarchic domination in the market in which the rich simply outcast the poor.
So, Wicksell's faith in market mechanism is taking its toll. The outcome is that millions will be pauperised and a few will be blessed by the conventional free market enterprise unless we come to realise that real economy and the conventional theory are quite different and put some control on asset prices.  

The author writes from the University of Denver, USA.
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