Flawed Principles in Malaysia's Economic Thinking.

Here are a few observations from Milton Friedman. (1) Government can never duplicate the variety and diversity of individual action. (2) while government participation is required in a number of situations, further intrusion by the government  will lead to unwanted consequences.  In the process, government would replace progress by stagnation, substitute uniform mediocrity for the variety essential for progress. (3) For progress to take place, the bulk of economic activities must be organized through private enterprise operating in a free market. (4) Free market system is a necessary condition for political freedom.

On a more practical level,  where a government meddles and intrudes in areas which it does not control or has no business to meddle in the first place, problems emerge. The BN government has got their priorities wrong in wanting to copy PR’s strategy to reduce car price. They intrude into areas which they have no business to be in such as tweaking productivity and profit margins. These two agendas lie exclusively or mostly on the part of private enterprise. In the case of a car manufacturer, on the car maker.

In trying to reduce car prices, its belter for the government to manage the variables it has complete control such as excise and sales tax. It’s the government who imposes these and not the private sector. Its better for the government to mind its own business.

 On the 8^th of July 2013, Mustapha Mohamed as minister for trade presented his closing arguments. This is the part where the minister concern will try to answer and explain all the issues raised against his ministry.

He offered to give his explanations on two important topics; (1) reduction of car prices and (2) Trans Pacific Trade Agreement. He proved to be adept at delivering a subject which is his forte- economics and matters pertaining to trade. He demonstrated an above average understanding compared to the rest of the BN ministers and back benchers. While he was countering arguments from the PR side, none of the BN backbenchers came to his defence other than offering the usual bellows from behind their seats.

He made one tactical mistake though. Instead of addressing the subject of reducing the price of cars, he chose to rebut what Rafizi Ramli has been saying about the subject. He has thus placed himself on the terms Rafizi has set. Perhaps accustomed to the usual muted response from UMNO and BN audience, Mustapha must have assumed the audience on our side is the same.

This kind of thinking proved to be the chink in his armour. He approached the subject by chronicling what Rafizi said on the subject. Now, unless his advisers have been on top of all what Rafizi said on the subject, he has cornered himself into a bind. Obviously from how Mustapha conducted himself, his advisers have failed him.

His first mistake was to conclude that Rafizi declared that PR will abolish excise duty on cars. Big mistake. Rafizi did say about the removal of excise duty but doing that over a period of 5 years. In other words, doing so gradually. Mustapha Mohamad insisted that Rafizi wanted to abolish excise duty in one go.

Mustapha Mohamed proceeded to extricate himself from the knot he tied himself with. But it was too late. He tried to redeem himself by giving a short lecture on how the price of a car is obtained.

Most of the members of parliament understood how, I think. The 4 elements that go into the pricing of a car are the cost ex-factory, profit margin, excise duty and sales tax. Mustapha went on lecturing on how improving the productivity the manufacturer reduces unit cost and hence can offer a reduction in car pricing.

I have never had the chance to observe the thinking of the government at close quarters. Now that I have, I realised where the fundamental flaw is. It’s a common flaw that runs through the entire gamut of BN government economic thinking. The same principle or thinking as it were underlined much of the overrated government’s ETP. The thinking is this: this government thinks it can generate economic progress by way of centralised planning. To do it must exercise complete direction over the affairs of economic agents.

Herein lies the fundamental flaw. Having wedded itself to the idea of centralised planning, it seeks to control variables outside its own area of competence.

Consider the attempt to reduce the car price. The 4 elements that Mustapha mentioned were (1) ex-factory price (2) profit margin (3) excise tax and (4) sales tax. All these cost elements are variables if and only if one party gets to control all. The government can’t control ex-factory price and profit margins, short of giving decrees. These cost elements are set by the manufacturer and the government is not the manufacturer. Being outside its control, the cost elements are no longer variables but parameters. You can change variables easily but cannot do the same on parameters.

The only elements the government can control are excise and sales tax. Rafizi’s and PR’s stand on reducing car price is correct. From the point of view of the government, the only elements the government can control are excise and sales tax. The biggest cost element is excise duty which is entirely under government control. Since it’s the biggest cost element and since it’s absolutely under government control, the price of cars can be reduced only by managing the excise duty.

The government has no business to meddle into the organisation of an economic activity such as car manufacturing. The car manufacturer, driven by competitive pressures will do whatever it can to improve productivity thereby reducing unit cost. It then prices the product by incorporating the desired profit margin.

The flawed thinking of the government is that it thinks it can organize an economic activity by central command. It thinks it can legislate its dictates in other people’s scope of control. The same line of thinking underlines the ETP and other economic initiatives. But that will be the subject of further articles.