Why A Government Run Market Can’t Work

First we have to accept that there is no perfect system possible. People are people, for good and ill. All we have to work with are incentives.

People who gravitate towards working for, with, or through government almost all have an urge to power, to control what people do. Whatever area of power a government is authorised to operate upon, the boundaries of that area will do nothing but grow ... and grow and grow.

People who do not pay for what they get almost always abuse and/or overuse it, no matter how vital or trivial. Anytime you give something to people for "free," they will never say they've got enough of it. There will always be a demand for more.

Everyone as a buyer wants to get the most they can for the lowest cost. Everyone as a seller wants to get the most money they can for what they sell.

People also tend to be caring, to be generous when they can afford to be, to think they are doing good, not only for themselves, but for the people they care about and even people in general. But people think they know more and are more competent than they really are. They tend to oversimplify the complex and make the simple complicated. Either that or abdicate the authority to choose for themselves to those they deem smarter, more powerful, and better informed than they are. However, no one can know more or can be more concerned about any individual's needs, wants, and desires and how much they value what things, in what proportion, than that person themselves.

While there are always exceptions for every rule about human nature, these are pretty near universally true.

Anything that you try to set up that doesn't take *all* of these into account is going to fail to achieve its stated ends. It will do too much or too little. It will result in the wrong things being done at the wrong times done by the wrong people with wrong information. No one will be happy with the results.

Top down, command and control, never works in the long run. Even in the military, which comes closest, the best structure delegates detailed decision making to the lowest level possible, to the ones with the most knowledge about the actual situation at that specific place and time in the context of the operational goals.

Micromanagers at the top in the military get a lot of people killed. Micromanagers in any large organization waste assets and misdirect efforts, whether it's in a government bureaucracy or a company. They simply *cannot* know enough to make the best decisions for others. No one, even with the most powerful computer and big data, can. It's hubris to think otherwise.

The best system to get the most good for the greatest number is no system at all. To let those who know their own situation best make the decisions. Who know what they value and how much and what their own personal goals are.

Then use the general benevolence of people help those who cannot help themselves. Their desire to maximize their gains, even in the emotional sense, is tempered by wanting to get the most for their time and money and so weed out the grifters. To decide for themselves which charity is doing the most good in the particular area they care about with what they are given, which means low overhead and minimal waste.

Government, by its very nature, cannot be efficient. It cannot take individual situations into account. It cannot change directions swiftly under changing conditions. It cannot operate under anything but bureaucratic structures with all the power grabbing fiefdoms and resource wasting procedures that it inevitably results in.

To try to put something important under the control of a system that ostensibly tries, but simply cannot be, all things to all people, while wasting valuable and scarce resources in people, facilities, and money is an incredibly bad choice.

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Pass More Laws, Fix The World. Easy, Right?

This post by James Pethokoukis on the enormous interconnectedness of globe-spanning supply chains, along with David Henderson’s reminder of Pietra Rivoli’s The Travels of a T-Shirt in the Global Economy, reinforce the reality that reality is vastly more complex than most people realize.  Indeed, it’s not too far a stretch to say that nearly all mistaken economic notions, dangerous ideologies, and counterproductive government policies are the simple results of people thinking the world to be far simpler than it really is.

The solution is to seize income or wealth from those who have more and give it to those who have less.  Simple. Easy-peasy.

Do you not have as much money as you like, or do you despair that some people have much more money than do other people?  Both the explanation and the solution seem simple.  The explanation for income and wealth inequality is that those who have more have more only because they’ve somehow weaseled an excessively large share of “society’s” wealth from those who have less.  The solution is to seize income or wealth from those who have more and give it to those who have less.  Simple.  Easy-peasy.

Anyone who has mastered simple addition understands that transferring $X from Smith to Jones reduces Smith’s net worth by $X while raising Jones’s net worth by the same amount.  And because wealth simply exists – it’s simply out there – the only effects of any such forcible transfer are simply to make Jones richer, Smith less-rich, and society more equal.  What you get is what you see.  See, simple!

Do you grieve for workers who lose jobs to fellow Americans who choose to buy more imports?  The explanation and the solution are simple: restrict imports.  Jobs saved!  End of story.  Simple!  And the only possible explanation for policies that allow domestic jobs to be ‘destroyed’ by foreign trade is that people in power, who are either malevolent or incompetent, simply failed to pursue the simple solution of protectionism.  It follows that solving this simple problem requires nothing more than installing in high office someone strong and resolute – someone skilled in the art of the deal – who will simply demand that foreigners reduce their sales to domestic consumers.  No more job losses!  Our country is great again!  What could be simpler?  Who needs – indeed, who even notices – complex global supply chains?  Restrict trade and everything we need we will simply produce ourselves.  No prob!

Are people in some foreign lands tyrannized by their own rulers?  The explanation and the solution are simple.  Somehow the levers of state power in those lands fell into the hands of bad guys.  The simple solution is to get rid of the bad guys and replace them with good guys.  And the simple way to replace bad guys with good guys is with physical force.  Further, because we are good guys – and because, when we are abroad, we are always noble – we should simply use the resources at our disposal to dispose of the bad guys and their bad policies.  Quite straightforward, really.

Is the economy slumping?  The explanation and the solution are simple.  Every businessperson knows that the more people spend on the offerings of existing businesses, the more profitable and thriving are these businesses.  So the simple reason for an economy-wide slump is that people aren’t spending enough economy-wide.  The solution is to get people to increase their spending in the aggregate.  Duh!  What could be simpler?

Has some teenager or single mom died of an overdose of an illegal drug?  The explanation and solution are simple.  Drug-enforcement efforts are too weak.  Rev up those efforts and watch not only illegal drug use fall, but currently dissolute and irresponsible people become less dissolute and more responsible.  Simple!

Are some workers paid less than you feel they should be paid?  Of course your assessment is correct, for nothing could be simpler than noticing that some workers’ wages are much, much, much lower than are other workers’ wages.  And wages so low are simply wrong!  The simple and obvious solution is simply to force employers to pay all of their workers wages that are at least as high as you judge appropriate.  Simple!

Do government schools perform poorly?  My gosh, the explanation is simple and plain as day: these schools are underfunded.  To solve this simple problem, simply increase government-schools’ budgets.  Simple!

Whatever your complaint, the solution is simple: give power and authority to the government.

Are some people homeless?  The reason for this misfortune is simple: there aren’t enough homes.  The solution is equally simple: build more homes that homeless people can afford!  (It’s called “affordable housing,” which differs from what too many home-builders mysteriously insist on building: unaffordable housing.)  Why didn’t anyone think of this simple solution earlier?!

Indeed, is your life not ideal?  Is the world imperfect?  The explanation for much of this sad reality is that other people are not behaving in ways that would make your life and the world better.  It’s oh-so-plain to see.  If only merchants would lower their prices.  If only employers would raise the wages they pay.  If only investors would build that new factory in my town rather than elsewhere.  If only those people from far away did not come here and offer to work at the same kind of job that I now hold.  If only the police would get tougher on criminals.  If only our elected leaders would not be out-bargained by foreign leaders.  If only our military were better funded and not restrained by misguided isolationist sentiments here at home.  If only corporations would put people ahead of profits.  If only corporations didn’t spend so much to influence the outcomes of elections.  If only….  Whatever your complaint, the solution is simple: give power and authority to government officials who promise with great earnestness to “solve” whatever problems you, as a voter, instruct them to solve.  These officials, adequately armed and provisioned, will simply roll up their sleeves and attack the problems directly – simply – and fix things.

What could be simpler?

Republished from Cafe Hayek.

Donald J. Boudreaux


Donald J. Boudreaux

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University, and a former FEE president.

This article was originally published on FEE.org. Read the original article.

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Prices And Controls

When or anyone unilaterally decides how something should be priced, you are dictating to everyone what they can and can't do, what they can and can't buy, what they do or do not want.

Labor and material cost are far from the only inputs into the price of something at any given place and time. What people are willing to pay tells manufacturers where and where not to invest and how much or how little of it to produce. Prices dictate profits and the potential for profits is the incentive for why a person or business makes something in the first place or looks for ways to make it better or cheaper.

Capitalism, in purely economic terms, is really just an acknowledgment that there is often an investment (capital) needed in order to make something or to offer a service for sake and that those who come with the investment (capital) should reap a reward for their investment.

Investment is simply savings, delaying current buying (consumption) in the expectation of having those savings work to give you more money in the future.

Free markets require the ability to invest, i.e. capitalism, but the reverse isn't necessarily true. Simply because you are allowed to invest, doesn't mean you are participating in a free market.

Free markets are what empower people to create opportunities for themselves, not some super-governmental body dictating prices and products. Countries do not trade. People trade. Businesses trade. Stop trying to interfere with their ability to do so in the way that each one of them decides is best for *them*.

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Trade And Tariffs

For most of the first 100 years of the US, the only two major financing methods the federal government used were tariffs and, to a lesser extent, taxes on liquor. Tariff rates were generally from 5 to 10%. Imports and exports stayed fairly equal since there wasn't much in the way of foreign investment in the US (which doesn't get accounted for in the way we figure trade "deficits" today). Far harder to invest and run a business on the other side of a huge ocean that still took quite a while and involved a significant level of actual danger to cross than it is today.

Tariffs were also explicitly used as a weapon against the South, to force them to buy goods from the North instead of imports. In fact, that was one of the major arguments that led to the succession of the South and the resultant Civil War. Sorry, but no, it wasn't *all* about slavery.

No single policy acts in a vacuum. We grew despite the tariffs that were in place, not because of them. We grew because of the low level of government interference in free markets. We grew because we didn't see business as some evil or dangerous mount that needed to be ridden with jack boots and spurs.

Free trade benefits the population as a whole. Yes, some individuals get hurt, but that happens all the time for many reasons other than trade as well, whether it's new technology or processes, businesses moving from one place in the country to another, or just the changing tastes of the general public.

Yet even though all of these non-international trade changes create far more total losses for the individual businesses and employees in the nation affected by whatever changes happen, we still recognize that the nation as a whole benefits and so don't demand government stop the changes from happening (although many states have become quite predatory or cronyist in offering government goodies to attract new or keep old companies in their state).

International trade is exactly the same thing. There is no economic difference to the nation as a whole what caused the change that creates the temporary business dislocation. When a less expensive way of making a good is found, more people benefit than are harmed, albeit that the losses are more localized and easy to see, while the benefits are more diffuse and harder to pinpoint.

The ideal situation is that our government not get involved at all. It doesn't matter to the workers or final consumers what another country's policies are. They are really unimportant to a truly free trade. If another country doesn't mind harming their own citizens for the benefit of their politically well connected, that's their problem, not ours. It is not our business, as a country, to decide how other countries are run.

Any artificial change in the price or supply of any good or service, such as tariffs, forced on the economy harms it as a whole. The current free market price of any given good or service is the always moving target of finding the most efficient way to produce the most supply of what is of the most value to the most consumers at the lowest possible price. That's really the bottom line of what drives everything that happens in a free market.

Prices people are willing to pay are used to inform producers of what consumers want at any given point in time. Desire for profits drives producers to find the most efficient way to meet those desires at the lowest cost. That process is what has created the incredible world we live in today, the explosion of possibilities never even dreamed of before, raising masses of people the Earth could never even have sustained before yet to an increasing standard of living, in an amount of time that's the merest fraction of the history of the human race.

This is what freedom creates and this is what is blocked when the force of government inserts itself between what free and peaceful people want to do and what they are allowed to do. It can do nothing *but* net harm to its citizens.

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Why You Can’t Have It All

Not every desire of every person can ever be fulfilled, no matter how big an economy grows. The basic fact of essential scarcity is the bedrock of all economic thought.

That means you always have to decide what you want the most with the necessarily limited means available at any given point in time. You can't have it all.

"Solution" is the word usually used when someone asks things like "But how do we solve the problem of poverty?" or "What do we do about all these people who can't find jobs?"

As long as poverty is defined as a percentage of a certain level of income, it can never be "solved." As long as jobs are defined as doing only the work you want to do and only at the pay you think it's worth, it can never be solved.

On the other hand you can ask questions like "How can we best reduce the number of people who live in poverty through on fault of their own?" or "How can we do the best job of getting the price of homes or apartments down to where more people can afford them?"

Notice that neither of those questions imply that poverty will be completely eliminated or that everyone will be able to live anywhere they want. But those are not "solutions," those are tradeoffs.

Unintended consequences are simply secondary or tertiary effects that weren't seen or thought of at the time you take an action. There are almost always unintended consequences with any action taken. Sometimes very minor and sometimes not. But at least when actions are taken by private individuals the people who can be hurt are relatively localized and few in number. When the government does it *everyone* gets hurt.

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A Brief History Of Money

Money is a commodity that has value in and of itself. It doesn't matter if it's precious metal, shells, or even grain (although that doesn't stand the test of time - it only keeps so long). The essential characteristic of money lies in that convertibility. That it is of value to everyone, everywhere that you may want to trade with.

Currency began as simply a more convenient way to exchange goods. Instead of having to cart around all kinds of sizes and weights of money, the commodity itself was stored at a trusted warehouse (or, in most cases, a vault) and the paper was a claim payable to anyone that showed up with it at that place. As the owner of that money you paid them for this service. That's how the original banks made their profit - simply a charge for services rendered.

The more widely trusted the holder, the wider the geographic region that would accept those claims in payment. If you needed to go wider afield, you had to take care of the shipment of the actual money and banks also arranged that with trusted couriers.

Internationally gold and, to a lesser amount silver, became the standard. Gold is valued everywhere in and of itself and has a high value per weight. It is scarce, it is durable and easily divisible. All countries that had a paper currency measured it's value in terms of the amount of gold a denomination was exchangeable for. Country's currency exchange was still actually gold exchange as you could go to the central bank and actually get the gold any time you wanted.

A few hundred years ago, bankers realized that it never happened (almost never - as long as the bank remained trusted) that everyone wanted the actual gold at any point in time. That meant they could loan out notes - more notes than they had actual, physical gold to back. That was where fractional reserve banking started. It started out small. Just a little more than they actually had. After all, you needed to make sure people believed that anyone and everyone could actually get their gold whenever they wanted or the whole scheme would fall apart. In this way, the banks created money out of thin air. They have 100 tons of gold in their vaults, but 200 tons worth of notes in circulation.

The danger was that if people thought their savings were at risk, they would all go to pull it out ... a "run" on the bank. Generally bigger banks would bail out smaller ones if it they thought is was financially sound, but, for example, someone started a rumor that got out of hand. Otherwise the whole scheme could go kaput. As long as it remained private, banking crises were usually localized and/or of short duration.

Then governments started sticking their fingers in the pie. Previously they only minted metal coins. When they devalued their coinage, they alloyed it. The more alloy they mixed in, the less it was actually worth. Essentially the same process as inflation but far easier for the average person to understand.

But governments quickly learned to love central banks. Why let private business get all the rewards? It lets them play with the money supply and rake some of it off the top without it being very noticeable, whether that's just a little alloy mixed in or a small increase in the number of currency notes on their reserves. Then, under the guise of "protecting" their citizens, they took complete control.

Central banks now set the amount of reserves banks were required to keep, unconstrained by any business considerations. They would act as the lender of last resort, not other banks who actually risked their own depositors' money when they bailed another bank out. They thought they could create perpetual prosperity by continually expanding the "money" supply, loaning it out left and right. That conceit, along with the trade wars of the late 20's after the war triggered the worldwide Great Depression. In the US they then made it worse by over-correcting in the other direction and drastically reducing the money supply instead of their proclaimed role of being the lender of last resort to shore troubled banks up. The other banks had been told they shouldn't do that any more, the government would take care of it and they should leave it all up to them.

Then things went from bad to worse.

In 1933, FDR stopped allowing currency to be convertible into gold inside the US as a measure to fight the depression, but it was still convertible internationally at a fixed $35/oz. That was a significant increase over the prevailing rate of about $20.67/oz on the open market, instantly making the US dollar "worth" more as far as current accounts went. The idea was that this boost would stop the deflation that was occurring because of all the currency the FED was pulling out of the market and it did do that, at least for a time. Over a few years the prices adjusted and levelled back out at the same amount of work got you the same goods as before.

Then towards the end of WWII, with most of the industrialized world in ruins, one of the first issues the nascent UN dealt with was the value of currencies. As the only major untouched industrial base, and with the US preparing to bankroll a lot of the rebuilding, a meeting was held in Bretton Woods, NH in 1944. At that meeting the allied powers decided to peg everything to the dollar instead of gold itself. Remember that gold was still 100% convertible into gold, which is where the saying "a dollar is as good as gold" came from. So at that point we still were dealing with worldwide currency that could be redeemed for gold at any time. That meant that for most of the world you no longer had to worry about transferring the physical gold, just the currency.

Then came the 60's. The Great Society and the Vietnam War. The US was deficit spending at levels never seen before in what was still, essentially, peacetime. Other countries started to wonder if we truly had enough gold to cover all the dollars that were being spent. Some of them started grabbing the gold - the actual physical gold, which, under Bretton Woods they always had the right to do.

August 15, 1971. Nixon signed a "temporary" executive order ending the ability for *anyone* to redeem dollars for the actual gold. That's when we really went off the gold standard. That's when the dollar became a fiat currency, a piece of paper backed by nothing. The subsequent wage and price freezes, the OPEC refusal to sell oil just for dollars causing the energy crisis, as well as the high inflation and interest rates of the 70's were all results of that as well as the regular, and much bigger than previously, economic roller coaster the world has been on ever since.

While most currencies are still "priced" in terms of dollars, nothing is fixed any more. Everything floats. There has been talk, and not just talk, but serious proposals to end the centrality of the dollar and replace it with a "basket" of several countries' currencies. That way the world isn't tied so closely to the US economy and what happens here doesn't affect everyone else as quickly and completely as it has since '44.

When that happens, and I expect it to within the next few years, the dollar won't be the almighty paper any more. It won't be "as good as" anything. Treasury bonds will drop in value like a rock. We won't be able to get all the foreign financing for our government debts (and remember, those debts are for *government* spending, not for trade purposes, no matter how many times protectionists try to pass it off as such). *That* is when we start learning the lesson the hard way that the dollar is actually *only* worth the goods it can be exchanged for.

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In Defense Of Globalization

Different countries have different comparative economic advantages in making or creating different goods. Everyone benefits from getting the goods and services you need or want at the lowest cost and that’s what globalization is all about.

A country doesn’t benefit from blocking trade and making everything within its borders any more than a single household would benefit from making everything they have off their own land. In both cases, trying to make for yourself what others can make cheaper results in lower standards of living, whereas if you trade some of what you do best for some of what someone else does best, then you both win.

It’s basic economics.

That doesn’t mean no one ever loses for a period in time, but that happens all the time anyway. Manufacturing of a given item in a different location has the same effect on jobs as does a new technology for making it easier, cheaper or making a less expensive substitute that fills the same need. It frees up manpower (and mindpower) to use in more productive activities.

I don’t think much of anyone wants to go back to a culture where it took 90+% of the population living on farms and hunting to feed everyone. I don’t think anyone wants to go back to when horsepower was literally that … actual horses. I don’t think anyone wants to go back to a time when thread or yarn was made by hand and then woven by hand into cloth which was then sewn by hand to make clothes.

Yet each of those changes, and millions more like them, resulted in loss of jobs and sometimes entire industries. Yet the overall net benefit is exactly the same as when jobs simply move to a new place where it’s cheaper to make them.

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A Living Wage – Why Those Evil, Greedy Corporations Just Won’t Pay It

I get so tired of hearing this complaint.

A Living Wage?

My first question is, just what defines a living wage? Considering there are hundreds of millions of people living (barely surviving, but living) on less than $1 a day, I’d say just about any wage you earn in any developed country is a living wage.

Then the question becomes then what standard of living constitutes a “living wage” here? Let’s boost it to enough food to not be malnourished, a roof over your head and clothes to wear to fit the climate. If you’re willing to do what you need to do, even a minimal part time job covers that with money left over.

What’s next? A car? A private apartment? A cell phone? Air conditioning? Cable? Video games? Name brand sneakers? Who decides? Heck, I’ve only got three of those.

Oh, those Greedy Corporations

The next part is if a particular business is even able to pay what someone considers to be a living wage. While a business can pay people significantly less than they’re worth for a short while, especially in a tight job market, but what they can’t do, ever, is to keep paying people more than they are worth. An employee has to contribute more to the bottom line of a business than the total costs of hiring them.

If an employee makes the company $10 for every hour he works and you raise the minimum wage to $15 an hour, guess what … he’s out of a job, no matter how much he needs it. A business can’t afford it to be any other way and still stay in business. That’s not being a greedy corporation, it a business necessity.
If you increase the costs of having an employee by adding in mandates of any kind, same thing. An employee HAS to be worth more than they cost, whether that cost shows up directly on a paycheck or not.

And It Keeps Getting Worse

That’s what ALL externally imposed costs on employers do. They price people out of jobs by making it more expensive to hire them. They don’t allow a person to work cut rate while learning how to do a job, so they never get to learn what they need to get a better job, if they can get one at all. It drives people out of business or they never start one to begin with. That means even fewer jobs.

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Market Insanity

Speculative bubbles have been around for a long time. Whether it's a single item or a broad generality like real estate, they have the seeming power to make your wildest dreams come true or to destroy entire economies.

The Dutch Tulip Mania was the first recorded speculative bubble back in the late 1600's. Tulips were highly prized flowers and the bulbs weren't exactly cheap. But a group of investors saw them as a way to make money - big money. They started bidding prices up and up and tempting more people into the bubble, until a single bulb could be "worth" several years of actual wages.
 
Then one day a few people finally said "This is crazy. They're only flowers. Beautiful flowers, but just flowers." Over a matter of a few weeks the prices plummeted and lost 95+% of their "value" and wiped out the entire life savings of a lot of very foolish people.

Bubbles have been blowing up on a regular basis for quite a while now. The dot coms and real estate are only the two most recent to pop.

But they're back. All those trillions of dollars the FED has been pumping into the economy since 2008 haven't been invested in actual productive pursuits, but into speculative investments. Propping up companies that should have gone under (bail outs anyone?). Starting of companies that should never have been started (think Solyndra). Projects that never got off the ground. Real estate again. Dot com again. Multi billion dollar buyouts. Lusting after the Next Big Thing.

I don't expect a pop in the next few months, but I'd be surprised if it was more than a couple of years away and this one could be a lot bigger than the last. A whole lot of paper wealth is going to disappear and there's even more dominos lined up to fall over this time. Time to be thinking about battening down your financial hatches.

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Trade Wars

Do imports really hurt the American Economy?
95% of the people used to work on farms. Now it's 2%. Yes, there were periods of wrenching dislocations and plenty of individuals who were hurt. But does anyone really think it would be best to go back to 95% of the population spending their days in strenuous back breaking labor in the fields?
 
Most of the manufacturing jobs we lost were due to mechanization and improving productivity, not lost to other countries, for all of the political pronouncements to the contrary. The unions had a heyday in the aftermath of WWII when most of the world's manufacturing had been destroyed - except ours. But that couldn't be expected to last. We even paid to help everyone else rebuild theirs while ours started to rust away.
 
It's always easy to point to the individual people hurt by a process ... they're always there. But what do the poor do when prices for essentials start skyrocketing because of punative tariff taxes. How much steel does it take to make a car, a refrigerator or a washing machine. Those prices will be going up if either Trump or Clinton has their way. Prices go up, fewer bought, lower production and lost jobs. They just aren't as obvious or concentrated as the ones we can directly point to.
 
Neither one of the candidates have been honest with us. They both pandered to fears and scare tactics and outright lies. In the end the election isn't about who most people wanted in the Oval Office, it's who they fear the most moving in.

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