Bargaining Kills Economy
We all love to bargain, right from vegetables and groceries to the million-dollar government tenders and contracts, we want to save our money by hook or by crook, but are we saving is the real question? In the first place, why do we focus on saving money? Are the circumstances so devastating that we don’t have the surety and certainty over will we be earning tomorrow at least the same if not more than whatever we are earning today,
This uncertainty makes us save money, invest the money, and spend our hard-earned money wisely.
But the fact is
if we earn less, we tend to save more, if we earn more we tend to save less, “not more”
So the psychology behind saving works like this if Sachin earns Rs.10,000 per month his goal will be to save the maximum amount of money that he has earned, let’s say he saves Rs.5000 per month, 50% of his income.
So the ratio of earnings to savings is 2:1 that means for every two rupees earned by Sachin he saves one rupee.
Now if Sachin gets a promotion, let’s say Sachin’s boss is very happy with him, so now Sachin earns one lakh rupees per month, now because he earns more he will spend more and not save more.
Try to imagine yourself in Sachin’s situation where you are earning one lakh rupees per month, how much money will you save?
Please answer with the hand on your heart, will you save more than 50% of your money that is Rs.50,000, probably, would you save more than 50% of your money probably not, but more likely you won’t save more than 40% of your income. i.e. Rs. 40,000,
so, by comparison, you have increased your savings from 5000 to 40,000 but percentage-wise your savings have decreased to what you are earning now.
If you calculate the ratio of earnings to savings now it will be like 5:2 so from 2:1 where you saved 50% of your salary now you save 5:2 that is 40% which is less than 10% from the previous savings.
So from this understanding we can now drive only two conclusions:
- Earning more doesn’t necessarily mean you are saving more. (Earning is not directly proportional to saving)
- Why do savings decrease with an increase in earnings? because now we are spending more.
From the above discussion we know earning more results in spending more also in economics, there is one factual line “spending drives economy”.
Because if Sachin spends more the other person with whom Sachin is trading or transacting will earn more, so one’s spending is another man’s earning.
Okay now, let’s get back to the original topic which is how bargaining kills the economy or how bargaining will kill the economy?
So again if one’s spending is another man’s earning, if one spends less another man earns less, now this another man when goes out and spends less, then as a result of this at a massive scale of a country this will form a vicious cycle where we will start seeing every person’s income getting decreased.
Wait a minute, Let’s understand this with an example -
Let’s bring Sachin back and frame a example around him let’s consider that,
In Sachin’s residency some kitchen sink is leaking and it’s getting so worse that a lot of fresh tap water is getting wasted so to get rid of this problem, he calls the plumber, the plumber comes and fixes the kitchen sink, Sachin is now very happy because his leaky kitchen sink got fixed.
now the plumber demands his service fees Rs.500 plus tap cost Rs.200 that he replaced with the old tap, adding these fees sums it up to Rs.700.
Now as usual to save some money Sachin gives it a try to bargain Sachin says take Rs.400 instead of Rs.700, plumber after a lot of bargaining settles down for Rs.500, so the plumber earns Rs.200 less than what he had demanded, now Plumber’s spending power has decreased by Rs.200.
When the plumber goes out in the market to buy something worth Rs.700, he will start bargaining with the shopkeeper, the shopkeeper has to clean his inventory so the shopkeeper will eventually sell goods for Rs.500 and make Rs.200 less, now shopkeeper’s spending power has decreased by Rs.200
Just imagine that there are tens and hundreds and thousands of such shopkeepers whose spending power has been decreased by some customers bargaining aggressively and buying goods from them for a cheaper price in their shops.
Because of the decrease in the spending power, the shopkeepers will have less money to buy new inventory from the manufacturing company, because demand is less from the shopkeepers, the manufacturing company will manufacture less and therefore will bring in fewer revenues.
Now continue imagining tens and hundreds and thousands of such manufacturing companies start reporting reduced revenues, their working capital is decreased their stock prices start plunging in the stock market, as a result, companies start to cut down their costs by firing people, by sourcing less raw material etc…
So if companies start firing a huge number of people, those people who got fired from the manufacturing plant will start earning less because their income has suddenly stopped from some amount to directly 0, their spending power will also decrease and we will start to see a stagnation in the economy.
I mean I may have exaggerated the situation too much but that’s how this works
Imagine the economy as a giant mechanical machine and we individuals as small gears, if one/two gears start misbehaving by not spinning adequately with other gears, from a Birdseye view machine will still start performing smoothly with some jerks here and there, but if all gears collectively start misbehaving, the machine will stop until all gears are oiled and serviced back properly in their place.
So that’s how bargaining collectively at all prices in our daily life would result in reduced earnings and reduced economic growth,
Of course, there are a lot of external dependent factors like spending in the modern world simply doesn’t get reduced immediately as we have the Power of credit/debt and leverage as institutions like banks based on our earning capability and/or salary slips sees us creditworthy and increases our spending power or purchasing power by giving us loans and credit card limits.
Also, lower repo rates are the interest rates decided by the central government banks like RBI which increases borrowing which again increases spending power, but in a nutshell, if external factors are thrown out of the picture this is how bargaining kills the Economy.
To learn more about how the economy works please refer to this awesome Youtube video
Disclaimer :
Everything I have mentioned over here is based on my limited research and knowledge, I have tried my best to provide the citations and resources that I have used which collectively from my perspective on this topic, and because this is my perspective give me my very own right to be wrong, I am just an immature guy trying to be mature with my thoughts, all your constructive criticism and feedback is always welcomed.
