I happen to feel very strongly about personal responsibility. I do not want the government being my nanny. Yet, I realize that many people feel exactly the opposite. They don’t want to take care of themselves and are always crying out for the government to “do something” about whatever it is that is causing discomfort in their lives.
Unfortunately for all of us, those cries for the government to “do something” do not fall on deaf ears. Politicians are always eager to buy more votes for themselves by “doing something” in the name of helping people.
When government action is applied to the field of economics and prices, just about every action the government takes is going to cause more pain and discomfort than it solves.
The free market, with honest weights and measures, is the most efficient means available to humanity for providing the highest standard of living for the entire population of the globe. Inevitably, if some outside force, such as government, interferes with the free market, it will cause everyone to experience a lower standard of living (with the possible exception of those who directly benefit by the government action, but even then, that is not always true).
I’ve said it before, and I will say it again, prices are merely the free market’s method of finding a balance between supply and demand.
I’ll use an example of extreme prices on a new Lexus in order to explain my point. Suppose that the cost of a new Lexus, in today’s dollars, was only $10.00. Yes, ten dollars each. How many would you buy? I’d probably buy 50. That would cost about $1,000.00. I would only be limited by the space it required to store them. Everyone would surely want to buy more than one, and many people would want dozens of them for that price.
So it is easy to see that a low price will encourage great demand. The reverse of that is also true. If a new Lexus cost $50,000,000 each in today’s dollars, the company would sell very, very, very few of them. The exceedingly high price would greatly discourage demand.
If the price is too low, there is too much demand and the manufacturer can’t keep up. If the price is too high, there is too little demand and the factory goes idle for long periods of time.
So prices too low will encourage too much demand, while prices too high will greatly curtail demand. This also applies to profit. If one company is making a high profit by manufacturing an item, other companies will see this and decide to manufacture a very simmilar product. This results in more competition and greater supply. The effect of an increase in supply will be a lowering of prices.
Price is like a thermostat that regulates supply and demand. If anyone forcibly plays with that thermostat, it is going to upset the balance of supply and demand.
What typically happens with government is that the central banks print too much currency. All the well connected insiders get the fantastic benefits of the new money by the billions. But as this new money gets spread out into the economy, the value of the money gets diluted. It is like taking one gallon of milk, pouring it into two containers, and adding a half a gallon of water to each. Magic, presto! Now you have two gallons of milk.
Except that you don’t. You have one gallon that has been watered down by 50%.
So the central bank creates new money by the billions. Then the effects of that inflation are felt by the population several months later in the form of rising prices. As this process continues, at some point the public will cry out for the government to “do something”.
And those wonderful policticians will indeed take some very visisble actions by limiting price rises. This is price controls. The problem with this approach is that instead of making the population more comfortable with steady prices, it will heap more misery and a lower standard of living on the population.
The population cries out for relief from misery, and the government delivers more misery as a result.
How so?
Well, supply, demand, and profit. Let’s go back to our example of the Lexus. Let’s say that a new Lexus sells today for $50,000 dollars. Let’s also assume that it cost the company $40,000 to manufacturer it. As the central bank dilutes the value of the currency, the price to purchase that Lexus goes up to $60,000 and cost to make it goes up to $50,000. More central bank printing of the currency further dilutes the purchasing power and the price to purchase that Lexus goes up to $70,000 and cost to make it goes up to $60,000.
This cycle continues until the price to purchase that Lexus goes up to $200,000 and cost to make it goes up to $190,000. At that point the cries from the public are overwhelming and the government steps in to “do something” about the problem. Instead of doing what it should do and create an honest currency that cannot be diluted (which would supremely benefit the people and put an end to the well connected insiders stealing from the system for their own benefit by diluting the currency), the government institutes price controls to stop the rising prices.
If the cycle of diluting the currency continues while price controls are in effect, it will bring about dire results. Getting back to the example of the Lexus. What if the currency is further diluted so that the price to purchase that Lexus should be $220,000 and cost to make it is $205,000, but the government instituted price freezes and Lexus is only able to charge $200,000 due to the price control laws? How long will Lexus continue to lose $5,000.00 per car they make? What if the central bank continues to dilute the currency, and the cost for Lexus to make a car goes up to $225,000?
You may be asking how the cost for the Lexus company could rise with price controls in effect? Well, Lexus doesn’t buy all their materials in the country where the price controls have been enacted. Therefore, their costs can and do go up. The result is that at some point they will stop making their cars, or at a very minimum, stop selling their cars in the country where the price controls exist. No company can exist if it costs it more to make their product than the product can legally be sold for. Therefore the company will simply stop making and selling their product in the country with the price control laws.
With price control laws enacted and a continuing of currecny dilution by the central bak, eventually most companies will not be able to function properly and will have to cease making and selling their product in the country with the price control laws. Taken to the extreme, the store shelves will become empty as no company will be making the itmes to restock the shelves.
This is not just some philosophical mental exercise. It is reality. Just lok back at the Soviet Union a little over a decade ago. Yes, the official price of sausage may be $1.00 per pound, but if there is no sausage available, what good did the official price do? The grocery store shelves in the Soviet Union were always empty. People would wait in line for hours and even days for the chance to buy what little might become available. 5,000 people lined up to buy 6 chickens. Is that the type of situation that the government wants to create by “doing something”?
Price controls bring about shortages. We will all suffer when price control laws are passed and put into practice.
Rather than cry for the government to “do something”, Americans should demand the elimination of the current dishonest system that only benefits the insiders. Americans should demand that government enforce the Constitution, and re-institute and protect honest weights and measures for the benefit of the people, rather than prevent honest weights and measures for the benefit of the few well-connected insiders.
America should wake up before it is too late.