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EghtesadOnline: The way to reduce production costs and the general level of consumer prices is to achieve single-digit inflation through price liberalization, deregulation, and financial and monetary discipline, Hossein Haqgou, an economic analyst said in an article published in the Persian daily Shargh.

A translation of the text follows:

“The objective exchange value of goods is their objective significance in exchange, or, in other words, their capacity in given circumstances to procure a specific quantity of other goods as an equivalent in exchange ... It should be observed that even an objective exchange value is not really a property of the goods themselves, bestowed on them by nature, for at the last resort, it also is derived from the process of valuing individual goods,” Ludwig von Mises, the prominent Austrian economist of the 20th century, says. 

President Ebrahim Raisi once again underlined the need for “close monitoring of prices and market control” at the Iranian Cabinet meeting on Monday [Dec. 20] so that “we do not see a rise in prices”. 

Industries, mining and trade minister [Reza Fatemi-Amin] has also announced that a plan will be launched this week, which requires the “total production costs” to be printed on products, which will help “consumers understand how much more than the cost price they are paying; the measure will help increase transparency”. [The measure has now come into effect since this writing].

Following this decision, the head of the guilds chamber enumerated the list of goods included in the plan and said, “On the order of the Industries Ministry, producers of mineral water, [fruit] juice, carbonated beverages and malt beverages from the group of consumer goods, and food processor, beverage maker, meat grinder and microwave from the group of capital goods will enter the first phase of this project for six months; other goods are likely be added to these items this week.” 

Once this plan takes effect, manufacturers will be required to print the production price, i.e., the invoice price, on the products and stores are required to display the selling price, i.e., the price that a consumer pays on the product or on the shelves. We have 80,000 items on the market, which we have calculated the production prices of. Sometimes, the gap between production and selling prices of an item is as much as 100-120%, he added.

There is a stark difference between the order of the president, which is, in truth, price stabilization and the plan of his minister and the executive body in charge with implementing this plan, which is seemingly the liberalization of prices to some extent. This difference will be dealt with in favor of “stabilization” and “price control” because there is nothing to argue about, if the purpose is to only inform consumers about the cost price of a product; in actuality, the measure will have no benefit, except for raising public awareness. 

 

 

End Price Movement

But what if after the cost prices have been printed on the items, the pricing institutions seek to determine the seller’s profit and control it? What will be different from the current situation? I believe this problem has its roots in one single misconception. 

Let’s take a look back. A decade ago, during the tenure of former president, Mahmoud Ahmadinejad, a so-called “End Price Movement” took over the country’s industries and trade sectors. Initiators of this movement claimed that by setting the cost price of goods and products and reducing it, they would be able to establish a balance in the market between supply and demand, and somehow solve the problem of pricing. 

The then commerce minister [Mehdi Ghazanfari] said, “By reducing the cost price, we will be able to help the growth and development of commerce in cooperation with the cooperatives and the private sector.” This movement gained momentum following the merger of Commerce Ministry and the Ministry of Industries and Mines, and the establishment of the Ministry of Industries, Mining and Trade. However, as soon as their term of office was over, their movement, which had failed to achieve anything, except for much ballyhoo, was fortunately shelved. 

At the peak of this so-called “movement”, famed economist Mousa Ghaninejad explained that “cost price is a term used in accounting to describe the costs incurred to produce goods or render services in an enterprise. The difference between the market price and these costs shows the enterprise’s profit margin. The cost of production is the equivalent of this term in economics, whereas ‘market price’ is an economic concept outside the sphere of the enterprise. Market price is not necessarily and always affected by production costs. If the market price was to be a function of the cost of production, we had to sell our oil at the price of $4-5 per barrel or Pablo Picasso’s paintings should not have been purchased and sold for more than a few hundred dollars. Prices in the market are determined by supply and demand.”

A decade on, we are seeing the same proposition being expressed in different wordings that are not scientific, rational, or based on experience. It is surprising to see [officials] speak of resolving the pricing issue and creating balance between supply and demand by printing the cost of production on products.

 

 

Root Causes of Price Increases

Price increases are rooted in inflation that results from an increase in money supply and overt and covert deficits in the government budget and large imbalances in various economic sectors. 

With that in mind, assume that we ignore the demand side and consider the supply side as the basis and calculate the cost price of 80,000 items and print these prices on the goods. The question is will the government opt to control and suppress prices with regard to the producer price index? 

If yes, there is nothing to discuss and if the answer is no, then the question is, what is the use of writing the end costs on the goods? Is it to control the selling price? If so, how have these prices been set? For example, if the cost price of a bottle of milk is, say, 150,000 rials [50 cents] then at what price should it be offered for the government to be satisfied and not punish the seller? 

Cost price is different in each city, county, neighborhood, district, and in proportion to the size and type of store. Will the government determine the profit margin for each of these differences and notify the sellers? Unfortunately, after decades of trial and error, officials have not learned that it is the market and the supply and demand mechanism that determine the prices, and not the government bureaucracy and its accounting perspective. 

 

 

Fighting Windmills

If we really want to reduce production costs and the general level of prices to serve producers and consumers, it is enough to revive the economy like all 165 countries that have achieved single-digit inflation via liberalization, deregulation and financial and monetary discipline. We don’t need to act like a latter-day Don Quixote, fighting some windmills.  

In his book “Economic Policy”, Mises says, “Let us consider one example of interventionism, very popular in many countries and tried again and again by many governments, especially in times of inflation. I refer to price control. Governments usually resort to price control when they have inflated the money supply and people have begun to complain about the resulting rise in prices.

“Once the government fixes a maximum price for consumer goods, it has to go farther back to producers’ goods, and limit the prices of the producers’ goods required for the production of the price-controlled consumer goods. And so the government, having started with only a few price controls, goes farther and farther back in the process of production, fixing maximum prices for all kinds of producers’ goods, including the price of labor, because without wage control, the government’s ‘cost control’ would be meaningless. 

“Moreover, the government cannot limit its interference in the market to only those things which it views as vital necessities, like milk, butter, eggs and meat. It must necessarily include luxury goods, because if it did not limit their prices, capital and labor would abandon the production of vital necessities and would turn to producing those things which the government considers unnecessary luxury goods.”

 

Quixotism