‘That’s the way it works’

Press, 13 July 1985, Page 19

‘That’s the way it works’

Mr Anderton says the Government is running an economic system that seems to imply that there is perfect competition in the marketplace. In his view, the classic theory of supply and demand, on which the free market policy is based, is completely fallacious. He says most economists do not seem to understand how prices are actuallyset in business. “These market economy models are produced on the basis that if

you increase the interest rate, for example, that will tighten the money supply, and that will press down demand, and that will lower prices, because that's the way the marketplace works.” In fact it works in the reverse way, he says, because prices are fixed by groups and monopolies. Prices are set on a cost-plus basis, called “administrative pricing,” by adding a pre-determined level of profit to all the inputs. If sales go down, they do not drop the price as the market competition theory

would suggest; they actually put it up in an effort to recover the same amount of revenue from the sale of fewer products. “If you want the most recent example of that,” he says, “try the Dairy Board. They have a mountain of butter, and on the neoclassical theories of economics they would reduce the price to get rid of the mountain. Have they done that? Like hell they have, they’ve put the price up. It’s a classic example of how the price system works.”