Capitalism: Couple of points

Imagine a situation where there is a wealthy businessman, and he has an excellent B-Plan to make more money. He opens a mall in few villages, and offers low prices for an extended period of time enough to drive the mom-and-pop stores out of business. He makes loss over the period but, as he is wealthy, he is fine. As he monopolizes the villages. He then raises the prices to values higher then before. Is this legal? Yes. Ethical? Thats a different debate. Should the govt protect the small time investors and prevent this situation? Obviously. But How?  Please comment on that after reading the rest of the post.

Just note few of the things which make the situation tricky. The wealthy businessman are few in number. So the competition is that much less. Even if there are a little too many for comfort, it makes economic sense for all of them not to compete against one another. There are better off looking at different villages as market or selling different products. As the govt is obligated to protect the interest of all its citizens, what laws should be implemented to prevent rich business from growing richer at expense of village folks?

All the controversy and walmart bashing that you see is because of their tactics. In US, which is run on the ultimate form of capitalism, huge chains like sears, circuit city, walmart, target, sports academy are present everywhere. But single-shop owners are not present in that large a number.

During our fortnightly lab meetings, another issue came up. It was possible that any of there stores, sometime in future, record the stuff a person purchases, and charge each of them accordingly, i.e., different price for different costumers for the same product. More frequently you buy a product, more you are willing to pay for the it, and hence by a capitalist principle, more they are gonna charge you for it. As scary as it sounds, it not something to be scared about (From my limited knowledge of economics, correct me if i am wrong). Price rises for everyone. And hence the inflation. And so you currency will lose its value. Consequently, your employer will raise your salary. No harm done!

If you are wondering how is the previous case different from this one, remember that the in the previous case, only a part of the population is affected. So raise in inflation is not significant. And so only the village folks get poorer. We need a solution in capitalist domain. If we venture into socialist/communist form of governance we do have some solution. But, get you creativity going in solving this problem in capitalist domain.

I had put this for discussion with a group of friends. Here are some of the points that came up.

A study has shown that  “kiranas” can  coexist with big time retailers. But I am not sure if it talks about India alone or all over the world

Few solutions:

One of the  plausible solutions is moving towards socialist form of governance specifically for food grains, cereals, oil and basic amenities is a govt controlled efficient Public Distribution System. India had a decent network of Fair-Price Shops (nyaya bele anagadi in Kannada) or Ration Depots all over the country. But of course, govt interferenace has its drawbacks of corruption among others. As the Govt gave up it’s exclusive procurement rights, the system died out. Govt no longer has access to sufficient food grains. The private companies are quick to approach the farmers and get the produce at a lesser cost and once they have it, they can import/export or process it depending on the market needs. This can lead to hoarding.

Another solution that was tried (targeted at walmart) was to restrict the area of shopping area to a certain value. In India, too, such a law was tried. They were aimed at stopping tata-birlas from running more business. But it was circumvented by opening business under proxy names.

Charge large taxes on goods sold at higher rates elsewhere. This again is some kind of regulation which might not work too well owing to transportation cost etc.

Capitalism on Waitresses and Waiters:

Tipping culture exists in US because some people are paid less than minimum wage. They are paid less than minimum wage because it is a tipped job! When waitress or waiters earn less then minimum wage even after tips they dont report it because it becomes an excuse for the employer to call them incompetent and fire them. More on that here (via desipundit).

I am a capitalist too and love the idea of free market, but it is quite cruel at its fullest level. Do comment on possible solutions to the problem I described above.

Happy new years to all my readers!

7 Replies to “Capitalism: Couple of points”

  1. Hi,
    First of all, happy new year to u.
    Nextly, in a free market system, survival of fittest is a given. Someone has to make way for others. In India, we saw the closure of several big but inefficient companies when licence raj was abolished.
    Coming to retail, studies done in many countries of the world have shown that mom-and-pop stores can survive along with big retailers. In China, after 10 years of 100% FDI in retail, organized retailers control only 10% of the retail market. In India, a study is being done to find out the impact of big retail on mom-and-pop stores. Small retailers do have their unique advantages, which would be honed to perfection when faced with competition. Some job loss would occur, but not so much as to create a social upheaval.
    Of course, too much of everything is bad, even capitalism (subprime crisis). But, capitalism is definitely the lesser evil compared to socialism or communism. The proof is the failure of socialism / communism everywhere in the world. Soviet Union disintegrated, East Germans crossed over to West Germany, Cubans still flee to US at the cost of their lives and so on…

  2. no need to worry abt any kind of retailers atleast for a decade since we have a healthy number of consumers… maybe after a decade we may see an uprising from small retailers who are at loss bcoz of shift in loyalty from small retailers to big ones in future…

  3. @pota: thanks!
    @deepak: unfortunately, that not the case in US …. only the big player rule the market …. but yeah …. capitalism is less of the two evils ….. i hate communism and socialism.
    @mahek: well … i am not being specific about india ….. it is a problem in general for which i am curious to find a solution

  4. Hmm…I don’t like the idea of government imposing itself on anything, to be honest, in any way. It is all very well to say that extreme capitalism is bad, but where does one draw the line for intervention. Also, all government intervention assumes two things: a)Good thinking b)Competent execution.
    Unfortunately, in a system made of human beings, neither of these can be guaranteed. After all, let us not forget that the sub-prime crisis earlier talked about was precipitated by intervention following a previous crisis (dot-com bust). This is why I completely support the market economy.

    As far as retail is concerned, I think I have made my points on the discussion you referred to and will desist from doing so again here.

  5. interesting…
    hmmm…
    I dont see a need for any major intervention by the govt other than some revenue taxes, because i think this situation will go a full circle and come to a stablilized position.
    something like – these big marts will take over and dominate the villages. More such competitors will show up… the pricing wars will keep a check.
    Or lets say there’s only one biggun in the village. That will ruin the local economy as you claimed and the purchasing power of the people will go down. His profits will drop and he’ll be forced to reduce prices.
    Or as someone pointed out, an uprising by the small traders can take care of the problem a la French Revolution. 🙂

  6. @aswin
    yup …. govt shouldn;t interfere much
    @naresh
    nice point … but if it is basic amenities, people are forced to buy it …. but then when i read “because i think this situation will go a full circle and come to a stablilized position”, i figured… if prices rise, the industry (agricultural or otherwise) in villages will rise prices and things will still stabilize … nice 🙂

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