AUSTRIAN ECONOMICS ADDICT

In my previous post I wrote about the importance of understanding economic principles so as not to get fooled by rhetoric. This video demonstrates this point as Peter Schiff, who predicted the 07-08 economic meltdown, spoofs these delegates. These people agree with him that profits should be banned or confiscated,  without stopping to think about the consequences.                                                                                                                                                                                                        What are profits and what is their purpose in a free market economy? First a profit is a residual claim on what is left over after a business pays all of its costs of production. In other words the owner of a small business, or the stock holders of big businesses keep as profit any money leftover after paying for wages, capital, taxes, unemployment insurance, business insurance, workman’s comp., social security, medicare, medicade, interest on financing, accounting services, lawyer fees,  and on and on and on. If a profit is made, this profit sends a signal to the business that they are satisfying consumers desires. They are allocating scarce resources to their most productive uses, according to consumers demand, and should continue producing their good or service. Losses also play a role. If there is no residual claim after business expenses, the message sent is STOP! Don’t continue down this road! You must produce more efficiently or go out of business! What about excess profits, should they be banned? Who decides what is an excess profit? If the profit margin is “excessive” compared to other businesses, this sends signals to entrepreneurs. The signal sent is, consumers have a higher demand for this particular good or services, then present production can satisfy. Entrepreneurs will jump in, attracted by these higher profits, and produce more. By producing more, the profit margins will start to fall in line with other businesses. This is the law of supply and demand. When more is demanded the price tends to rise. When more is supplied the price tends to fall. In our case demand is higher than supply creating higher profits, as supply starts to catch up with demand profits decrease. This spontaneous organization of the market, where information is sent up and down the production chain, through prices, profit margins, and interest rates, brings supply and demand into alignment. The free market coordinates production and consumption more efficiently then any other system because the information needed to plan an economy can’t be known by any one person or any commission of experts, as is the case with socialism, communism, or any perceived middle way between the free market and central planning. This information is, the constantly changing subjective desires of each individual, and is scattered across the vast expanse of the population.                                                                        It was hard for me to get my head around the reality that the order we see does not create the free market, it’s the voluntary cooperation of individuals in the free market that creates this complex order that we see. Learning about economic principles allows you to see the world in much more depth, unlike the shallow view of the people in the video.

This entry was posted on September 10, 2012 at 4:20 pm and is filed under Econ. 101. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Democrat Convention, Economic Ignorance, Peter Schiff, Profit margin, Profits and Lossed, Supply Demand