Category Archives: Economics

Prices, Thermostats And Socialism

In a free market economy, price – of raw materials, labor, finished goods, services and capital itself – works a lot like a thermostat in your house.  Prices reflect what is happening in the market with respect to supply and demand and signal to individual markets what is needed in terms of more or less supply.  Your thermostat reflects what is happening to the temperature of the air in your home and signals what is needed in terms of more or less heat or air conditioning.

When the government sets or influences prices, it displaces this market pricing.  The results are rather like a false reading on your thermostat.  Both the market and you will respond to a false stimulus leading to results which are not optimal.  The market will provide more or less supply based on inaccurate pricing information just as you will adjust the heat or air conditioning in response to inaccurate temperature information.

The analogy ultimately fails, only because you have your own internal thermostat which will ultimately override the mechanical thermostat – you will rather quickly figure out that the mechanical thermostat is not working correctly and will adjust the heat and air conditioning based on your own judgment.  Unfortunately, markets have no quick functioning redundant system for making adjustments to supply.  As a result, when the government influences or sets prices, supply either increases or decreases for extended periods of time.  This, in turn, spreads misallocations of capital throughout the involved industry.  If the government influences or sets prices in multiple industries, the effect is magnified, misallocations can overlap between and among industries, and widespread economic distortions ultimately result.  If you had no redundant system to override your broken mechanical thermostat, you would waste fuel for heat or air conditioning and withstand the inconvenience and discomfort of being perpetually too hot or cold.  You would waste capital and suffer a lower standard of living.  The same negative results occur when false pricing effects spread throughout an economy.

Only capitalism i.e., free markets, enable this extraordinarily accurate and amazingly efficient price setting mechanism. In all planned economies, i.e., non-free markets, prices are distorted and do not provide accurate signals as to what commodities are being produced in quantities too high or too low for an efficient economy.  False prices lead to distorted economic decisions and the misallocation of capital.

Capitalism is so resilient and so superior to any other economic system that it has been able to sustain mixing some elements of planned economic theories within its overall superstructure and still continue providing a standard of living and efficiencies in markets which far exceed that which could be achieved in any economic system based entirely on planning.  However, it is a fallacy to think a mixed economy is superior to a completely free economy.  A thermostat that works properly part of the time and only misreads the temperature by a few degrees when it is not operating correctly may be better than no thermostat at all, but it is not the optimum.  The same is true when components of planned economic systems that don’t work are mixed with free market capitalism.  The results may be tolerable, but it’s a mistake to think they are optimal.  Moreover, if you eliminate capitalism completely, or even dilute it sufficiently by mixing in too much government imposed ‘planning’, the pricing mechanism will break down completely, immediately followed by a severe malaise in the broader economy and its ultimate failure.

A truly free market, checked only by the rule of law including the enforcement of contracts and strict sanctions against fraud, represents an economy working at full efficiency for the benefit of society, allocating resources in the most efficient way possible and continuously increasing the general standard of living over time.  Government efforts to modify free market pricing dislocate capital, reduce the efficiency of the economy and its ultimate capacity and, all too often, provide economic advantages to favored constituencies and cronies.

Those who advocate for socialism do so, not because they believe it is efficient and will provide a rising standard of living for society at large, but because they wish to achieve a more equal distribution of wealth.  They ignore or don’t understand that only capitalism grows the economic pie.  Socialism provides a disincentive to productivity while simultaneously introducing these inefficiencies and misallocations which can do nothing but damage the capacity of an economy to produce goods and services for the benefit of everyone.  Thus, Winston Churchill’s words are as true now as they were when he spoke them and will be true for all eternity.  “Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy.  It’s inherent virtue is the equal sharing of misery.”

We should embrace the “perfectly working thermostat” economic model.  Free market capitalism will again unleash the best and fastest mechanism ever understood by the mind of man for improving the lives of the most people in the shortest amount of time while creating the conditions for the advancement of society at large.

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NPR, Robot Guy, and Econ 101

I heard a story on NPR this morning about small wagon sized robots that may soon deliver takeout food in Washington D.C.  It’s already being tried out in town.  Once up and running it is said to be able to pick up and deliver food in a two mile radius.  It uses the coordinates provided by the purchaser via a smart phone to identify the location for the delivery.  Very cool if it all works out.

What wasn’t so cool was a question asked by the reporter which revealed her ignorance of economics and worse, the answer given by the interviewee (robot guy).  The reporter asked whether the robot will eliminate jobs.  The robot guy’s response was “absolutely not”.

Huh?  How can something so obvious be beyond the grasp of such really smart people?  Why doesn’t the reporter know instinctively that if the robot works as planned and does so more inexpensively than hiring human labor it will end up doing the designated work rather than humans?  And why would the robot guy be so positive that somehow, this labor saving device, designed for the very purpose of saving human labor, will not save human labor?

Because we think, humans have been discovering and inventing ways of doing less work since the beginning of humanhood.  Domesticating horses reduced by orders of magnitude the time and human labor it took to move people and materials from one place to another.  Locomotives, motor vehicles and airplanes again did the same.  The first shovels reduced by orders of magnitude the time and human labor it took to dig a hole.  Motorized digging equipment again did the same.  Wash boards reduced by orders of magnitude the time and human labor it took to wash clothes.  Electric washing machines again did the same.  Each time a labor saving technique or device is created, guess what it does?  It saves labor. 

This robot was invented for the very purpose of eliminating labor.  Right now, some human, either the purchaser or the seller or an independent delivery service has to transport food purchased at a restaurant for take out to the place where it is to be consumed.  The purpose of the delivery robot is to eliminate that human labor.  The reporter should have known the answer to her question before she asked it.  Unless the robot is only to be utilized on behalf of purchasers who, but for access to the robot, would have left their house, driven to the restaurant, picked up the food and returned home with it, jobs will necessarily be eliminated.  And if the robot is so relatively inexpensive that purchasers choose to use it rather than other human oriented delivery services, what will happen to those delivery service jobs?

If the robot works as expected and is cost effective, i.e., cheaper than the alternatives, it will thrive and the alternatives will not.  This is the nature of a free economy and the nature of creative destruction.  It’s quite simple, even elementary.  The troubling thing is that it apparently isn’t understood by two people who are sufficiently intelligent and well educated to be an NPR reporter and a robot guy.

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