Addressing the COSATU conference, President Zuma took a few minutes to provide delegates with a lesson in economics. He blamed “capitalists” for high prices, and, according to the description he gave, it appeared that he was of the view that “capitalists” could raise prices at will.
The President’s speech writers provided him with two unfortunate examples that did not support his contention. The first was the notorious bread price case that came before the Competition Commission and the other was the petrol price.
In the bread price case the competition authorities studiously avoided dealing with the price. The milling companies were found guilty of collusion, forming a cartel and fixing the bread price. They were not found guilty of price gouging, which is the term usually used to describe excessive pricing. That might be puzzling when it was a small baker who reported the millers to the Competition Commission.
Why would a small baker complain about excessively high prices? A small baker could make a killing by undercutting the price charged by the cartel. The problem reported by the small baker was that the cartel was fixing the price at a level at which he could not compete. Contrary to what most people were led to believe, the big miller was charging a very low price, what is called a “predatory” price, which is intended to keep out the competition.
The petrol price was also a poor example to have chosen because it is not the oil companies that fix the petrol price, but government. Of the total price for 93 grade petrol, the government takes 21.44% in taxes, it takes another 12.75% to fund the Road Accident Fund, and the wholesalers and retailers of petrol receive 15.65% between them. So who is ripping off the customers?
Capitalism can be defined as “voluntary exchange between individuals free of third party intervention”. In a capitalist system every transaction is voluntary, there is fierce competition between competing suppliers to provide the goods and services people want, there is a greater variety of choices, and prices are lower than what is found in any other system. Not quite what the President was describing.
Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.