Killing The Golden Goose

Monty Pelerin / Economic Noise

First quarter GDP results, announced yesterday, declined 2.9%. Is that a sign that we are killing the golden goose? Whether it signals death or not, it certainly indicates something is very wrong. This number comes on top of the pretense of an economic recovery, one which allegedly has taken five years as opposed to a more typical  five months to develop.

Killing The Golden Goose

A recent post,  How A Country Dies, explored changes in the economy, society and government that identify and accompany a dying country. The US has all of these signs, many of which have advanced to dangerous levels. Are we witnessing the death of markets?  In a strict sense, markets don’t die. In a practical sense, they do!

In the case of  black markets, “avoidance costs” and risks reduce the quantity that otherwise would trade. Needs and wants do not go away because some legal authority disapproves. Markets continue, although may be driven underground. If demand is high enough to pay for the cost of the product plus the higher costs associated with the trade, transactions will occur. The so-called War on Drugs is just one example of such a market. Demand and supply are met, despite the higher transaction costs.

The Strict Sense

Markets are not physical places.  The free  exchange of something for something else constitutes a market. A willing buyer and  seller are all that is necessary. Markets in this sense never die. The death of markets requires the cessation of wants or needs.

Even in situations where  transactions are forbidden by law, markets don’t die. The term “black market” describes the trade that occurs sub rosa in such situations. (Many economists equate “black markets” as “free markets” which don’t die just because of legal restrictions.) The force of law does not change people’s wants or needs. At best (or worst) laws can make trade more onerous. Penalties for engaging in trade represent an additional cost or risk of doing so. Markets become less efficient in the sense that extraneous costs must be covered in addition to those associated with a normal transaction.

In the case of  black markets, “avoidance costs” and risks reduce the quantity that otherwise would trade. Needs and wants do not go away because some legal authority disapproves. Markets continue, although may be driven underground. If demand is high enough to pay for the cost of the product plus the higher costs associated with the trade, transactions will occur. The so-called War on Drugs is just one example of such a market. Demand and supply are met, despite the higher transaction costs.

The Practical Sense

Markets do not have to be forbidden or made “illegal” to be adversely affected. All government intervention beyond the basic framework of law defining property rights and fraud adversely affects markets. Such intervention is an attempt to change the product or terms of trade that willing buyers and sellers would otherwise prefer. That reduces freedom and satisfaction.

Each such intervention raises the cost of trading, meaning there will be fewer trades. Fewer trades mean lowered standards of living. On a limited scale, the effects of such intervention are hardly noticeable. Intervention beyond the minimum is hardly ever the case. Bureaucrats seem to have endless schemes to “improve” things, limited only by their imagination and desire to make a better world. Every such “improvement” deviates further from the trade that was acceptable to buyers and sellers.

Free markets produce incentives for improvements. Sellers have every incentive to produce improvements that buyers are willing to pay for. These include considerations like safer products. The consumer is sovereign in these matters. Producers who respond to their wants and needs better will thrive. Others will stagnate, eventually going out of business.

Bureaucrats have neither incentives nor consequences when they impose their “brilliance” on others.  In virtual every case, intervention raises costs and reduces options for both buyer and seller. There is no cost to the bureaucrat, no matter how hare-brained the idea. And because he is measured in terms of his “nuisance factor,” the bureaucrat has unlimited incentives to interfere. Damage that results is never considered in his evaluation.

Intervention always reduces freedom and choice. Hence, it reduces utility (or if you prefer, happiness). Sustained intervention can devastate individual markets by requiring  producers to produce what consumers do not want, or at least do not want as much of at the higher price. Production is always diminished as a result of intervention, as is consumer satisfaction and the level of employment.

Implications For An Economy

read more at Economic Noise:

http://www.economicnoise.com/2014/06/26/death-markets/