Our weekly explainer on economics using lessons from popular culture. In Installment 49, Bhavesh Joshi fights Hoarding.
A few years ago, BBC reported that out of 818 million gallons of water a day that the Delhi government pumps out, water meters installed by the Delhi Jal Board only record and bill 37 percent of it. The inability to record and bill almost two-thirds of Delhi’s portable treated water amounts to annual losses of about $330 million.
It is no surprise then that the latest Indian Superhero, unremarkably named Bhavesh Joshi, ditches the western superhero trend of fighting some fantasy monster in space and chooses to tackle a real-world problem: water shortages in the city of Mumbai.
In the movie Bhavesh Joshi, there exists a state nexus between the police, a legislator and the local municipal corporation to divert the public supply of water away from city homes towards private tankers, thus creating an artificial scarcity of water in the Mumbai. They capitalise on this artificial scarcity by selling water to the public at a high price. In economics, this phenomenon is known as Hoarding.
Hoarding is defined by Investopedia as “the purchase of large quantities of a commodity by a speculator with the intent of pushing up the price. A speculator hoping to increase the price of a commodity can do so by leveraging demand for it by buying physical inventory as well as purchasing futures contracts for that commodity.”
Hoarding of public utilities usually occurs due to inefficient distribution of resources. The government, owing to what FA Hayek calls the ‘Pretence of Knowledge’ mis-prices these commodities by creating a black market for them. For instance, it is not hard to find touts hoarding train tickets and selling them at higher than established government prices to customers who are willing to pay more for the journey due to their higher consumer surplus.
It is the creation of the artificial scarcity that is the crime here. Hoarding, per se, is not always a bad thing, and might even fulfil a purpose in an economy where free markets operate. American Economist Kenneth Arrow once argued: “When situations of scarcity arise, hoarding is always blamed. But the evidence for the degree and effects of hoarding is usually difficult to come by. If the famine is prolonged, then hoarding at the beginning means greater stores will be available later on.”
Allowing storage of crops by farmers in India could immensely benefit Indian agriculture. The Essential Commodities Act, 1955 bans the storage and transportation of large quantities of any of 90 commodities, including onions and wheat. Lifting the ban on hoarding, or creating a buffer stock case would aid the farmer, smoothen prices and reduce the effect of price shocks, both for consumers and producers. It would also incentivise investors and food processing companies to put money into agriculture supply chains and to set up cold storages and warehouses.
Keith Sharfman in a paper titled ‘The Law and Economics of Hoarding’, offers a compelling case for hoarding, “People hoard commodities when they believe that price will rise in the future. As a practical matter, this means that less of the commodity will be available in the initial period when hoarding takes place, but also that more of the commodity will be available in ensuing periods as people consume or sell their stockpiles. If one has confidence in markets as a general matter, it is difficult to object to hoarding.”
Another area where hoarding is prevalent and beneficial is: labour markets. Companies often do not lay off employees during an economic downturn or recession. Even though labour hoarding reduces a company’s bottom line during harsh times, it ensures that employee talent is available to that company and not to its competitors when economic growth resumes. According to former IMF chief economist Olivier Blanchard, increase in labour hoarding can have a large effect on year-to-year changes in labour productivity but these changes are unlikely to make much difference when average productivity growth is observed over a decade.
In the end Bhavesh Joshi fails in his attempt to bring social justice or Insaaf (also the name of his website) to the city of Mumbai. Maybe he could have taken classes in public-choice economics.