A quick Econ lesson from Don Boudreaux, short enough for an elevator ride
Consider the following example: you fly to New York City. You get a cab at LaGuardia Airport and ask the driver to take you to Times Square in Manhattan – which is west of LaGuardia. Soon, though, you notice your cab headed east.
“Where are you going?” you inquire.
“To Times Square, but via Montauk,” the driver responds.
“Montauk! That’s a hundred miles east of here, and Times Square is west of here! What the heck are doing?!”
Your driver informs you that the taxicab business isn’t just for riders; its for drivers, too. Drivers need incomes, and his income of late has been too low to enable him to pay his bills. “So,” your driver announces, “by first going out to Montauk before heading to Times Square, I’ll make a lot more money off of you than I would if I drove you directly to Times Square. You’ll get there, but just not as quickly or as inexpensively as you would if I drove you their directly. Relax and enjoy the view.”
The above little tale sounds nuts. No taxi driver would do such a thing and justify his actions in that way.
But what the fictional driver in my little story does differs in no fundamental way from what producers everywhere do when they succeed in getting government to protect them from competition – for all such protection involves government preventing consumers from striking the best deals they can find.
Remember the Louisiana Florist license? Same idea. Central planners simply can not know enough to make better choices than all individuals.
Keynes vs Hayek, set to a rap.
The curious task of Economics is to demonstrate to men how little they really know about what they imagine they can design.
F.A. Hayek. Word.
Comes from an outstanding post by Thomas Woods at Takimag. Mr Woods very nicely takes issue with the ignorant Left blaming the free market when government fails; he also picks on their inability to understand significant differences of opinion of many ‘free market’ economists.
Notice: it’s the fault of the free market when the government modifies the government-established rules of a government-established institution, while its deposits continue to be guaranteed by the government. Got it?
Take the time to read the article.
Doug French posts the introduction to his new book at mises.org. I suggest you read the entire article, and even the book, but here’s the money (get it?!) quote:
Austrian economists Ludwig von Mises and Friedrich A. Hayek’s Austrian business-cycle theory provides the framework to explain speculative bubbles. The Austrian theory points out that it is government’s increasing the supply of money that serves to lower interest rates below the natural rate or the rate that would be set by the collective time preferences of savers in the market. Entrepreneurs react to these lower interest rates by investing in “higher order” goods in the production chain, as opposed to consumer goods.
Despite these actions by government, consumer time preferences remain the same. There is no real increase in the demand for higher order goods and instead of capital flowing into what the unfettered market would dictate — it flows into malinvestment. The greater the monetary expansion, in terms of both time and enormity, the longer the boom will be sustained.
But eventually there must be a recession or depression to liquidate not only inefficient and unprofitable businesses, but malinvestments in speculation — whether it is stocks, bonds, real estate, art, or tulip bulbs.
According to the article (I didn’t confirm this, but I trust it), M2 supply has increased 11 fold since 1971. Probably has something to do with what’s happening now, huh?
So the next time you or someone you know wants to blame the evil ‘big’ coporations, or the fat cats, or the rich, or the greedy investors, think for a minute.
Maybe it’s big government at work?