Opinion: Is It Time Magazine that doesn’t understand Capitalism or China?

Time recently published an article titled “How a Starbucks Latte Shows China Doesn’t Understand Capitalism” on the attention the Chinese government appears to be bringing to the practice of foreign companies overcharging Chinese consumers. According to Time, the government in doing this shows it doesn’t understand capitalism, ought to back off, and let the market reach a proper price.

The article asserts:

The bottom line is this: Companies will price their products based on what the consumer is willing to pay. That’s nothing illicit. It’s simple supply and demand. If Starbucks lattes were truly overpriced in China, the Chinese wouldn’t be buying as many of them, and the American firm would not have been able to build a successful network of over 1,000 shops in the country.

If foreign companies are engaged in illegal practices, then they should be stopped. But meddling in the pricing decisions of independent private companies is another thing altogether. China’s leaders persistently promise to make the Chinese economy more market-oriented, liberalized and fair. Premier Li Keqiang recently committed the government to “steadfastly pursuing reform and opening-up with priority given to the stimulation of the market.” Interfering with the prices private firms charge Chinese consumers suggests that China’s officials believe that they should make economic decisions, not free markets.

Problem with Time is that it is only gets the story half right – which, by missing the other half of the story, actually makes it myopic and … , I suppose, wrong.

While Time is right in asserting that proper competition will generally bring down price, but it turns the blind eye on whether there is proper competition.  The question of whether foreign brands preying on the ignorance (i.e. blind, unsupported trust) of the Chinese consumer on the quality of foreign goods and services is a good and timely topic for discussion.

Recently, we have seen a strew of stories revealing the extent and breadth of Western companies’ predatory practices in China.  Walmart recently apologized for cheating and defrauding the Chinese public.  Apple has also apologized.  So have McDonald’s and Carrefour have also apologized. Most recently, GSK has also apologized for committing systematic bribes that ultimately allowed the company to force its drugs on Chinese consumers while charging exorbitant prices, all at the expense of the Chinese public.

All these don’t seem to matter to Time.  As long as the companies can get away with a price (in Time’s word: as long as the market supports the price), it should be allowed to.  But Time forgets that antitrust is an indispensable part of capitalism. A primary duty of any government that oversees capitalism is to pay attention to the prices consumers are paying.  Outside of antitrust, if government should never touch prices, why do so many jurisdictions in the West actively and directly set prices ranging from utility, drug, gas, wage, rent, interest rates of various sorts, etc.  And even where prices are not set directly, Western governments often affect and adjust them through tax policies, patent policies, subsidies, and other rules and regulations.

I always find it bizarre whenever anyone would make broadside arguments against regulation of price.   I mean, if we really trust markets and competition to work, then as many of my colleagues in academia have noted, we wouldn’t really need government per se.  Every service you think you may need from the government can be provided by the private sector, sua sponte, via the invisible hands of the market.

That bridge that the town needs? It will be built by contractors who will be fighting over each other to provide one – and, at the “most efficient” price.  That drug the nation needs?  No problem.  Drug companies will – through market forces – sua sponte – provide safe and effective drugs, all properly labelled – without any “government interference” (FDA testing, regulations, etc.).  So long as consumers demand it, market and competition will ensure they are delivered – efficiently and equally.

Same goes with fire department, police services, building of libraries,  … and hmm, information services such as media.  Oh I forgot, we do depend on market and competition to deliver news to us … where has that gotten us – even if we can try put a good spin?

The truth is that regulation is a political and complicated thing that depends on the details of the circumstances. Now I do agree that often price controls don’t always work because price is but a reflection of other forces at work in society.  To fix a problem, sometimes you need to fix the underlying forces, not just adjust prices.  Consider rent control.  Often, rent control can lead counter-productively to dilapidated buildings in whole sections of a city, where consumer may be getting a worse deal than if rent had been allowed to rise and landlords compete to update building and attract good tenants.

But this doesn’t mean that paying attention to price per se is not effective or somehow wrong. Never in the history of human history has capitalism worked sua sponte – i.e. without government oversight or regulations – or in an environment where consumers lack information. I think the Chinese government is doing the right thing here by bringing to the forefront of the Chinese public’s attention whether foreign brands really deserve the “premium” that they are charging consumers?  Are these appropriate practices?  Or are Chinese consumers being swindled?  Disclosure – done to inform – rarely hurts.

By focusing on price, and missing this bigger picture, Time has only shown that it is the one which doesn’t understand capitalism – that it is the one “who knows the price of everything and the value of nothing.”