Monday, January 20, 2014

Big Picture & Small Picture

Most Malaysians must have felt the increase in prices of goods throughout the nation in recent times. They grumble and then blame the government for it. But the truth is that prices of goods can never remain stagnant forever. I hate to break it to you, folks, but inflation happens in all countries in the world; prices are bound to rise no matter how well a country is managed. The sooner we accept this as a fact of life, the better.

I think the problem with Malaysians as a whole is that for generations the government has been adopting the culture of subsidy in its governance. Most essential commodities were subsidized, and in fact, many are still subsidized up to now. The only question is by what margin(s). 

As I said, prices of goods have been rising steadily over the years, and I'm quite sure that most Malaysians are aware of that, even if they're unwilling to admit it! My grandfather is in his mid-nineties now. He used to work as a manual labourer at the train station in Beaufort for RM14 a month about 65 to 70 years ago. That was somehow enough to support his big family comprising school-going children. Today, RM14 is probably just about enough for a simple nasi campur lunch for a pax at the Suria Mall food court. Quite mind-boggling when you come to think of it.

However, it does seem like the magnitude of price increase in recent times was substantially more than the kind of increases in the past. Is that really the case? Well, I'm not sure how to answer that question, but in Kota Kinabalu, real property had appreciated rather substantially over the recent years. And then a whole range of goods have also seen substantial increases in prices. It does make one wonder how on earth would someone in the next generation afford to buy his own house.

I'm fairly amused that many people have the tendency to do their simple mathematics to arrive at their conclusion that business owners are raising prices without justifications. Say a 20 sen increase in the price of 1kg of sugar can eventually lead to a 20 sen increase in the price of a glass of coffee. We all know that 1kg of sugar is enough for many, many glasses of coffee. Or in a similar way, a 30 sen increase in the price of 1kg of flour can somehow lead to an increase of say 10 sen in the price of a roti canai, even though only very little flour is required for the making of a roti canai. So immediately we ask the question: How come oh?

That's the problem when one looks at the situation as an isolated case from a very narrow angle. People have the tendency to see the small picture, but the big picture is very different. The truth is that everybody tries to find ways to increase their incomes in the long run, and if that is not achievable, at least maintain the present level of incomes would be a minimum. The case of the coffeeshop owner or the mamak at the roti canai stall can't be considered in isolation, because it would lead to the wrong conclusion. The market must be seen in its entirety to be understood.

The point is that because of the rising prices of many goods in the market as a whole, one would find that if his income still remains the same, he will end up buying a smaller basket of goods than before. In other words, he is not even maintaining his present income level, because although in Ringgit and Sen, he's getting the same amount, but in real terms, he can no longer buy the same amount of goods. Therefore, he will try to increase his income to reach an amount so that he can at least buy the same amount of goods as before. But beyond that he would like to earn a little bit more so that he can now buy slightly more goods than before.

With this latter scenario, let us now return to the case of the coffeeshop owner or the mamak at the roti canai stall, this time looking at the big picture instead of the small picture. If he used to make a profit of say RM10,000 per month, it is no longer good enough for him to earn that much now, because he will end up buying lesser than before (whatever it is that he's been buying). Earning the same amount would actually mean that his income is reducing in real terms, not even maintaining! In his mind, he will try to adjust his prices so that he can earn a profit of say RM11,000 per month to satisfy the requirement of buying at least the same basket of goods as before with a little bit more to spare. And then everybody else will also try to do the same! That is why a small increase in the price of, say, sugar or flour can lead to a seemingly huge increase in the prices of a glass of coffee or roti canai.

I will leave it at that for you to ponder the merits of the argument. I will try to find the time to discuss about kangkung in a separate post later, when I have the time.

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