WorldSys: Austrian Home Study, Week 29

READINGS: Selections from Henry Hazlitt’s Economics in One Lesson; Chapter 12 of Gene Callahan’s Economics for Real People

1 What is a price control?

Some kind of government-mandate change made to a market price. The State may establish a price floor below which a price may not be allowed to fall, a price ceiling above which a price may not climb, or a fixed price at which a price must remain.

2 What is a shortage?

An amount of a good less than what is demanded at a given price.

3 What is a surplus?

An amount of a good greater than what is demanded at a given price.

4 Is a shortage the same thing as scarcity?

Not quite; all economized goods are scarce more or less by definition. But there being a shortage of something means there’s an additional amount of scarcity over and above the normal amount. Automobiles are scarce because there are not an infinite number of them, but there is only a shortage if the president erects enormous tariffs on imported cars, or if a meteor hits a Detroit and America’s ability to produce cars is permanently hindered.

5 What are some of the effects of rent control?

As rent controls are just a form of price controls most of the consequences are the same. Such controls unfairly privilege those already living in apartments at the expense of those who don’t because not everyone has an equal chance to bid for space. There is no incentive to conserve space, so tenants who might be willing to suffer a roommate to split rising rents will have no reason to do so. Rent controls also strongly and increasingly dis-incentivize building new housing because construction costs are rising while potential profit (from rents) is legally frozen in place. Sometimes the State will understand this and only place rent controls on existing buildings, not ones built in the future. If this is the case, people will refuse to move because it will be so much more expensive to live anywhere else.

6 What are the effects of minimum wage laws?

Minimum wage laws price marginally-productive workers out of the market. So if the minimum wage was $10/hr and is being raised to $15/hr, anyone who was just barely worth the old wage will now incur a loss for his employer at the new one.

He will, therefore, most likely be fired. To paraphrase Hazlitt, “you cannot make a man worth a certain amount of money by making it illegal to pay him less”.

The more this happens the more economic sense it makes to begin investing in alternative like automation. There are quite a lot of jobs, like cleaning or taking orders at fast food restaurants which are increasingly falling to AI and robots because minimum wages laws make employing humans for these tasks prohibitively expensive.

So both rising unemployment and rising automation are hallmarks of a rising minimum wage.

7 What are the effects of “price supports” for agricultural products?

A typical price support scenario is artificially restricting the supply of a good like cotton or oranges to ensure that prices remain at a State-mandated level. This means that all growers of cotton and oranges produce below their capacity and prices remain above what the market “wants” them to be.

Now contrast this with an organic price decrease. If demand for agricultural goods drops, prices drop, and only the least-effective farmers go out of business: those that were working bad soil, or using old equipment, or being less efficient than they possibly could be, etc.

The resources being used by these marginal farmers are now freed up, and the most effective farmers might conceivably be able to expand their output, more effectively utilizing the newly available land and equipment.

Now, anyone who buys cotton or oranges gets their goods for less than they did before, the price having dropped and all. That extra money is then made available for saving, investing, or purchasing other goods. Those farmers that were knocked out of business by a drop in the prices of oranges and cotton might well find themselves employed in some adjacent industry, supplying the demand engendered by this surge in economic activity — in fact, it isn’t uncommon for a superior company to buy out a competitor and keep nearly the entire staff in place.

To be sure the picture isn’t always so rosy, but note that neither this scenario nor anything like it is possible with the State blindly whacking about with prices and production like a six year old at a piñata.

8 Shouldn’t the government outlaw “price gouging” after a natural disaster, at least for essential items such as canned food and bottled water?

Such laws dis-incentivize provisioning these goods. Higher prices for water, gasoline, and food reflect their scarcity. When water goes for $10/bottle people two or three states away will lead their trailers full of bottled water and drive to the disaster site. If we let our good intentions compel us to legally outlaw such behavior the far more likely result is that there will simply be no water at all.

Maybe we’d like to say “well, people should just drive to the disaster site with water anyway, out of the goodness of their hearts”, and maybe that’s true, but our sentiments do not change the reality at all.

9 What function do market prices serve?

Market prices condense and represent information about preferences, the availability of resources, production costs, supply and demand, and so forth which is otherwise spread throughout the economy in an unusable state. With the prices of final goods, the prices of the factors of production, prices for distribution, an entrepreneur is able to make sensible economic calculations. When people want more of a good or service they begin buying whatever quantity of it exists, which makes providing the good or service more profitable, which serves as a signal to entrepreneurs to enter this segment of the market. The reverse process serves as a signal to entrepreneurs to leave this segment of the market.

Thousands, or perhaps millions, of people are able to act as if they are a working together to accomplish all of this, but in fact it’s just individuals making economic decisions moment-to-moment or day-by-day.

The central mechanism making all of this possible is the price system.

10 Shouldn’t the government try to raise the prices of stock shares, in order to promote investment and growth?

No. Doing this won’t help the people who’s stock was trading below the new price, they will simply be booted out of the market. Even if this somehow weren’t the case (because people were mandated to own a certain amount of stock or whatever) the company’s boosted purchasing power would come from stock purchasers who have had their own purchasing power reduced by the same amount.

It’s unlikely that many will be buying the stocks at the new price, which means that for the most part people are just buying those stocks they would’ve bought anyway, only without the option of buying stocks that had been trading at the less-than-mandated price.

11 How do corporate “raiders” promote efficiency when they engage in leveraged buyouts?

They free up assets like labor and equipment which can be used by other firms. The “raider” essentially waits until such time as a company’s assets exceed its share price on a stock exchange, leverage their buying power to raise enough money to purchase the firm, and then auction the company off piecemeal.

This allows the mis-used resources tied up in the company to be better utilized elsewhere. Other firms might bid on the computers, office equipment, etc. of the original firm.

12 Why does Callahan write that “…there is no use crying over spilled milk?”

In the real economy failures happen. Entrepreneurs misjudge the markets, conditions change and old techniques are no longer viable, speculators and investors make bad calls, money is lost.

The free market corrects for this be liquidating the resources tied up in these unprofitable ventures, making them available for use elsewhere. This is a healthy and necessary part of a functioning economy, not a reason to cry and wring our hands and subsidize failing enterprises at the public’s expense.

There is nothing wrong with taking pity on people who have fallen on hard times, economically, but the correct approach is not bailouts, it’s to let the failures happen and new ventures to emerge.

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