Econ-ity » October 13, 2014

Daily Archives: October 13, 2014

In Defense of Profits

bishalbazaarIn late September, a few shops in Bishal Bazaar came under Department of Commerce’s scanner. Shops were found selling goods at prices much higher than their cost prices. It is unfortunate that the businessmen obstructed the monitoring and went in as far as shutting down the entire complex in order to protest the department’s move. This also earned them a lot of infamy in the public domain. However, much of this hue and cry over how businessmen were sucking life out of poor Nepalese people, ‘anarchy of businessmen’ and the likes that followed the incident were mostly unnecessary.

As a country that practices liberal economy, what is even more unfortunate is that the government has been excessively reluctant in letting go of the ages-old practice of the controlled-economy. It has adamantly held on to its four decade old regulation that bars businesses from making any profit exceeding 20%. This is outright mockery of the ‘economic liberalisation of 1990s.’ Why else is it that there is no black-marketeering when government imposes a 300% plus tariff in private cars and suddenly there is black marketeering when a private businesses make a profit of 21%? In no way is it a liberal economy when the government tells you how much profit you can make out of a transaction.

But of course, the government imposes such heavy taxes in order to give back to the people, right? Not quite. 65% of the Fiscal budget goes to financing administrative expenditure. Government’s annual revenue is lesser than its administrative expenditure. So, NO, not taxes and other sources of government revenue do not finance development in the same sense that we assume that revenues collected by government will come back to the people. On the other hand, the profits made in free markets do.

No businessman hoards all of his profits in a locker. He consumes other services, invests somewhere or saves his profits through banks and other financial institutions. When he consumes a good X, the producer is making money and the suppliers of the raw materials are getting jobs. This even creates new job opportunities as demands increase. Investments create economic benefits to the society. Even his savings propel economic growth as that is a capital that some other individual can acquire from banks and financial institutions to kick-start his new venture. So other than the amount that a businessman saves in his locker for some unforeseen circumstances in the future, all other profit he makes is channeled back to the economy and that multiplies the wealth of the society. This is the unseen side of the marvelous thing called ‘price’ and the profit it helps generate.

And the misguided notion of consumers being fleeced by businesses in the aftermath of free-markets is the least of my worries. In a free market where the government does not interfere with prices and the profit margins that service providers set for themselves, the transacting parties work-out a fair deal for both of them voluntarily. One can always bargain with the service provider to get a service at an affordable price. But in no way is an individual entitled to an affordable service. If I cannot afford a suit at Bishal Bazaar, that is not the place for me. I better explore alternatives such that my wants fit my budget. If I still think that I cannot have a regular tailor do my suit and I go out of my budget to fulfill my want, then that is a trade-off I have made between the satisfaction of a Bishal Bazaar-tailored suit and the added work-load that I have to take on, to cover for the expenses. There is really no connection with the cost price of tailoring a suit. It is all about the value I see in a commodity.

Liberal economy and profit control are incompatible with one another. Profit is an amount that a consumer is willing to pay to a service provider over the cost price of the same commodity/service to transfer the ownership to himself. A price is a value that a consumer puts over a commodity. Nobody can be forced to buy something that gives him no value in return. Similarly, nobody ought to be forced to limit his profit to an arbitrary figure if the other party in the transaction is willing to pay for it.

There are other things like cartel, adulteration and anti-competitive practices that the Department of Commerce should be looking to curb, if it wishes to protect the consumers’ welfare. But in no way should profits ever be on their list.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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