Sense out of nonsense (Part 7)-Unethical Veljibhai Vs Economical Veljibhai

Unethical Veljibhai Vs Economical Veljibhai

Mayank Gandhi & Shrey Shah

My mother told me in panic, “Shrey, hand sanitizer bottle is finished, please go and get a new one from Velji bhai. His shop might be open. What will we do without sanitizers?” Avoiding marauding policemen, I entered Veljibhai’s shop from the back (he was closed from the road-facing side).

“Veljibhai, please give me one dozen hand sanitizers.” I requested. He took out two bottles and said that these are all that he could give and quoted a price of Rs 400 per each. I was shocked and angry. Typically that hand sanitizer costs just Rs 150. “What Veljibhai, I had never expected you to be a typical greedy businessman, taking advantage of the Corona period to loot consumers. You are taking unfair advantage of the situation” I was enraged. This moral degradation of someone I trusted was shocking. “Why did a good, god-fearing, decent man behave like this? Was money everything? Isn’t taking advantage of my desperation inhuman and corrupt?”.

I started thinking logically. Was it so black and white? Good vs bad?

The more I thought the more I realized that there are 3 hidden forces in this aspect- Freedom, Greed and the Battle between Vice and Virtue. Leaving aside ethical issues of black-marketing and hoarding and I began to understand the logic that why during period of crisis there was a sudden soaring of prices. The answer was in simple economics.

The basic principle of any free market economic activity relies on 2 pillars. The demand and the supply. In normal day to day life, with other things remaining constant the optimum price level is reached as demand meets supply. This price level is based on free flowing interaction between the above 2 parameters. As indicated in the diagram (1.a) below, the price of any commodity is determined at the intersection of 2 lines. This point of intersection is also called the point of equilibrium.

(Diagram 1.a)

But now let us consider what happens in extra-ordinary situations like the one Veljibhai and I were in. With supply remaining the same (you cannot simply wave a magic wand and hope for increase in production) the demand has now increased. (Instead of purchasing just 1 bottle, I asked for 12) Thus, as indicated in the graph below (1.b), an increase in demand (from D1 to D2) with supply remaining the same changes the point of equilibrium. This change in equilibrium naturally leads to increase in price of the product. Thus, what Veljibhai was doing could have been not an immoral act. He could have been just following Economics which informed us that this increase in price of the commodity was a natural by-product of free-market (where demand and supply interacted without any other influence) economics.

   (Diagram 1.b)

Therefore, the question that was before me was, “When the buyers purchase a product from the free market, are the markets really free? Are the buyers not really under any external influence? Certainly at times of crisis the markets are not really free markets. The buyers are under extreme duress and their purchases are made more out of compulsion of necessity. I would not go to buy 12 sanitizers in normal situations”. Therefore, these were not regular purchases but more of forced purchases. Therefore, for Veljibhai to charge me unnecessarily high prices under the garb of free economics was also incorrect. It looked more of an extortion to me.

The more I thought the more I realized that during the times of crisis it is necessary that we leave the logics of Economics behind and adopt the ideals of humane and a moral society. Rather than allowing greedy traders to take advantage, people must look out for each other. It made more sense therefore for Veljibhai to not increase the price of sanitizers but rather take one for the team and show a compassionate side and just not be a businessman for once.

I wanted to outrage and maybe demand answers from him but I decided to think about the other side for one more time. I realized that Veljibhai had taken the risk of possible Corona virus contact, taken the risk of police action, his sales had dwindled (people were only buying essential stuff – that too, only those who knew the back entrance), distributors were taking more price from him and giving him very few bottles. As against 100 bottles of sanitizers that he used to buy earlier from distributors, his order was 1000 and he had to pay much more to the distributors in black market. The distributors also had to shell out much more to the manufacturers, Alba laboratories, whose stock was over and they had to order chemicals at astronomical price and pay labor five times their daily income to come to work. Production was low while expenses were way higher than usual and demand was sky rocketing. Was Veljibhai really to be blamed? Or should I have blamed Alba Laboratories for the high price? Wasn’t Veljibhai just the final link of a chain that were forced to increase price.

Another angle also needed to be explored. Businessman enter the field of business with the primary incentive of earning profits. The increase in cost of the product and profits made Alba Laboratories take risks and keep the operation running. Without increasing the price of sanitizers, Alba industry would have faced massive losses because of higher costs and expenses of production – resulting in them going out of work? This supply link when looked from the other side would have meant more disaster for me. Because with the normal margins and so much risk of supplying materials – would the distributors have delivered? With so much low sales but without additional margins – would Veljibhai have kept his shop working? Would not that have created bigger scarcity in the market?

What is better? Selling at higher price or not selling at all?

Fifteen days passed and I again went to Veljibhai for buying hand sanitizers. Against my order of 12 hand sanitizers, he gave me all 12 bottles at Rs 200 each. I was surprised. I asked, “Veljibhai, last time you gave me just two bottles at Rs 400 each. Why are you able to give me 10 of them and that too at 200? Has the demand decreased?” Veljibhai smiled and said, ”The increased demand and profits worked as incentives and Max Industries and Rohit Labs have started manufacturing large quantities of hand sanitizers. Alba Labs has also increased production by allocating more resources. Therefore in spite of increased demand, we are getting more supply and prices have also been reduced and we are able to deliver full quantity to our customers.”

I smiled back in relief. Maybe my impression about Veljibhai initially was misplaced. It was about supply-and-demand and not about greed of the shopkeeper.

P.s- Economics and Ethics much like medicines is not an exact Science. Every problem and point has not just one solution but several. Some may work and some may not. The point of this article is not to justify the indiscriminate rise in prices at times of crisis or to question the moral values of individual those who do it. The point of the article is to ensure a healthy debate and discussion between the timeless questions over which great philosophers (sometimes economist) have debated and discussed over and over again. These questions essentially are: -

1. .    Freedom- What exactly is the meaning of freedom? If there are buyers who are willing to purchase at a given price, should the freedom of sellers be curtailed and they be asked to sell at a cost decided by the society at large? If so are we really respecting individual freedom? From Immanuel Kant to John Rawls, almost all modern philosophers have argued that a just society is one where individuals respect each other’s freedom and give them the option to live their own concept of good life.

2. Greed- However, what is more important, is it the freedom of buyers and sellers or preventing greedy businesses from resorting to unjust price discrimination for earning profit? The anger of the society at such increase in prices is not against profit maximization but it is an anger against profit maximization at the time of crisis.

3. Virtue and Vice- Both the above point is fundamentally a conflict not only between Ethics and Economics but between Vice and Virtue. The conflict before us has and maybe will always be, what is virtue through the eyes of one individual is a vice for few others. Therefore, this conundrum between respecting freewill of buyers and sellers v.s earning profit at the expense of others during crisis is a never ending one.

We need to keep debating it and discussing it, till we find the right answers. Or is there a right answer?