Posted tagged ‘First Rule Of Ecomomics Scarcity’

Economic Ignorance Has Caused Our Political Chaos.

March 8, 2017

Microeconomics or Micro Economics as a Concept

What do Jeffery Sachs (economics professor at Columbia), Bill Gates, the Pope, Donald Trump and Republicans in Congress have in common?….. Economic ignorance!

Why are  pronouncements by people with authority rarely challenged?….. Economic ignorance!

I found some recent articles on economicpolicyjournl.com which have a similar theme: People with authority demonstrating their ignorance about basic economic principles.

Here are the articles.

Harvard Educated Economist Clueless About The Fundamentals Of Economics.

I Never Realized The Economic Ignoramus Bill Gates Is….Until Now.

The Pope’s Problem With Basic Economics.

Trump In Melbourne Spilling His Economic Plans And How Non-Free Market Are They.

House Republican Border Adjustment Tax Plan Gains Support In White House: Prepare For Higher Prices And Less Product.

Jeffery Sachs, Bill Gates and the Pope don’t have the power of Government behind anything they say. Their authority exists in the minds of the people who believe they have authority. They can’t force their economic ignorance on us

The President and Congress have the power of Government behind their policies. Politicians and bureaucrats can force their economic ignorance on us.

OUR ECONOMIC IGNORANCE

The increasing political chaos existing in the U.S is rooted in the economic ignorance of a vast majority of people. Both the masses, and people with “authority”, bear responsibility for our present political and economic situation.

People with “authority” being economically ignorant creates a problem because we the masses accept what they say as truth. This leads to the passage of Governmental policies which can’t produce the outcomes predicted by the people with authority.

We have the power to be a check on these people with authority. But we reinforce their authority on the one hand, and increase the economic ignorance of the masses on the other, when we don’t challenge the economic validity of what they say.

People with authority always want more power. Their power can’t be increased unless we allow it. Authority not backed by the force of Government isn’t real authority. We voluntarily give people their position of authority.

With politicians and bureaucrats it’s different. Their authority is backed by the force of Government. Our first non-violent voluntary recourse to their power is to vote the economically ignorant out of office, or not to vote them into office in the first place. Our second is putting political pressure on politicians. But this only works if a overwhelming majority of people put political pressure on them.

The ability of politicians and bureaucrats to grow their power, rests on the economic ignorance of the electorate. If the economic consequences of the policies passed by these politicians were known by the voters, they wouldn’t have been passed. Understanding basic economic principles allows us to look over the horizon and see the consequences of these policies.

EXAMPLES OF FAILED POLICIES

The Affordable Care Act aka Obamacare sounds great. But the laws of economics will not allow the ACA to lower the cost of healthcare. The costs can be shifted, but not lowered by government decree. The result of passing the ACA is chaos in the healthcare market, or what is left of a healthcare market.

Increasing the minimum wage for low skilled workers sounds great. But the laws of economics won’t allow increasing the minimum wage, above what that labor produces. The result of passing this law is fewer low skilled workers will be employed.

FORSEEABLE CONSEQUENCES

If, we the people, understood some basic principles of economics we wouldn’t allow these interventionist ideas to be planted, let alone take root.

Some of these basic principles are: 1) Scarcity, 2) Subjective Value, 3) Supply and Demand 4) Production Precedes Consumption.

Lets look at the Affordable Care Act and mandated minimum wage increases through the binoculars of scarcity, and supply and demand.

Scarcity is the first rule of economics. Scarcity simply means, “what everybody wants adds up to more than there is”. Put differently. Their are limited means available to satisfy the unlimited ends we seek. These limited means have to be allocated toward producing the ends we seek. There are two ways to allocate these means. One way is voluntary cooperation, through prices in a free market. The other way is force, through the edicts of politicians and bureaucrats using government power.

Supply and Demand is easy to understand. Put simply; More is demanded and less is supplied at a low price, and more is supplied and less is demanded at a high price. Prices reflect and drive supply and demand. If their is a sudden drop in the supply of a product, the price rises. This increase in price rations the existing supply, and sends a signal that more needs to be produced. On the flip side of the coin, if their is a sudden increase in the supply of a product, the price will go down. This decrease in price sells off the existing glut, and sends a signal less needs to be produced.

AFFORDABLE CARE ACT AND MINIMUM WAGE LAWS

The Affordable Care Act forced “30 million” uninsured people to enter the healthcare market. This meant the demand for healthcare was going to increased. Even though the supply of healthcare couldn’t be increased as quickly. (Example) It takes years for people to become doctors and nurses. Increasing the supply takes more time than the almost instant increase in demand brought about by the stroke of pen. If we apply the economic principles of scarcity, and supply and demand to the Affordable Care Act, what was going to happen to the price of healthcare? And this is not even calculating the cost of the regulations and new bureaucracy created by the 2500 page bill.

Raising the minimum wage increases the price of labor. According to the law of supply and demand, less is demanded at the high price. Voting for laws which increase the wages of people who we think are not being paid enough doesn’t help these people. Fewer people will be employed at the higher price. Many times these low skilled workers jobs will disappear all together because they can be replaced by automation. The price of labor was artificially increased to the point where it was economical to automate (read here). If we apply the law of supply and demand to the rhetoric of increasing the minimum wage, people wouldn’t have been fooled into thinking they were helping the people the law was actually hurting..

OUR CHOICES

Economic principles are always in play. Government edicts can’t negate economic reality. The political chaos we have today is the result of ignoring the reality of basic economics. We can’t wish these realities away because we don’t like the fact they limit what we demand.

I’m going to quote a person with authority at this point. So don’t take this quote as authoritative. Figure it out yourself.

F. A. Hayek a Nobel Prize winning economist, (how is that for status), said: “Planning, or central direction of economic activity, presupposes the existence of common ideals and common values; and the degree to which planning can be carried is limited to the extent to which agreement on such a common scale of values can be obtained or enforced.

Let’s get educated in basic economics. Life is easier to understand when you understand how the world works. Here is another quote.

F. A. Hayek: “The curious task of economics is to demonstrate to men how little the really know, about what he imagines he can design.”

We have two choices. Scarce resources can be rationed through prices voluntarily in the free market. Or Scarce resources can be rationed forcibly by politicians and bureaucrats through the power of Government. Which direction are we moving?

CONCLUSION

Political insiders of both parties have shaped the battle field into a choice between the R’s and the D’s. In reality the real battle is between the insiders in both parties who want to grow the power of Government, and people who stand for free markets and want to cut the power of government. Neither group is a majority. The majority of people are the economically ignorant. These people have been fooled into fighting the battle through the R and D paradigm.

Our job is to educate the economically ignorant. When this majority understands basic economic principles, they will they stop fighting on the fake R and D battlefield and start fighting on the real battlefield: central planning vs. voluntary cooperation.

 

Related ArticleMinimum Wage Laws Create Unemployment, at austrianaddict.com

Related ArticleIncome Inequality Part II: Increase The Minimum Wage, at austrianaddict.com.

Related ArticleThe Reality Of Obamacare, at austrianaddict.com.

Related ArticleThe Economics of Healthcare vs. The Right To Healthcare, at austrianaddict.com.

 

Central Planners Hate Economics

August 26, 2015

F A Hayek

F.A. HAYEK The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

 

Politicians get voted into office because they promise to use the power of government to ‘do something’ to fix fake ‘crises’. They try to blame the unfettered free market for every inequality or unmet need found in society. Politicians blame economics because it is an easy target since most people don’t understand basic principles of economics.

Economic reality puts a limit on the unlimited designs of planners. The first law of economics, scarcity, especially the scarcity of knowledge, sees to it that everything has limits. Economic laws don’t limit the planners plans. Economic laws reveal the reasons the plans won’t work but they don’t create the underlying economic reality.

Ludwig von Mises

LUDWIG VON MISES  – “Economic history is a long record of Government policies that failed because they were designed with a bold disregard for the laws of economics.”

Planners have charged their central banks to do away with scarcity by using electronically printed counterfeit money. It sounds plausible on the surface if you look at ‘that which is seen’. But we all know from reading Bastiat that ‘that which is not seen’ is more important. The unintended consequences of Central Bankers policies, of money printing and zero percent interest rates, are playing out right now for all to see. Wasted resources and capital consumption are two of these results.

F. A. Hayek – “It has already been suggested that it is not necessary for the working of this system (free market capitalism) that anybody should understand it. But people are not likely to let it work if they do not understand it.

Central planners condemn free market capitalism because it doesn’t produce perfect results, (which means it doesn’t produce their desired result). Free market capitalism is the best system for allowing individuals the freedom to pursue their desires. This individual freedom has lifted the masses of people to a higher standard of living. Is it perfect? Nothing that man does is perfect. It is the responsibility of each voter to understand basic economic principles in order to protect the free market from the planners who want to destroy it. Start now because your individual freedom to pursue your interests in a free market is under siege.

 

LUDWIG VON MISES  – “Many think that governments are free to achieve all they aim at without being restrained by an inexorable regularity in the sequence of economic phenomena….they maintain that the state is God.”

These quotes by Hayek and Mises came to mind as I was reading an article titled, Economics Is Dead, And It Is Being Killed Again, by Per Bylund, at mises.org. here are some excerpts from the article.

“You have to applaud the anti-economics left for this rhetorical masterpiece. They have struggled for decades to sink the ship of economics, the generally acclaimed science that has firmly stood in the way of their anti-market and egalitarian policies, hindered the growth of big government, and raised obstacles to enact everything else that is beautiful to the anti-economics left. The financial crisis is exactly the excuse the Left has been waiting for. It is a slam dunk: government grows, Keynesianism is revived, and economics is made the culprit for all our troubles.”

“If this weren’t so serious, it would be amusing that the failure of Keynesian macro-economics (whether it is formally Keynes’s theory or post-Keynesian, new Keynesian, neo-Keynesian, monetarist, etc.) is taken as an excuse to do away with sound micro-economic theory to be replaced with Keynesian and other anti-market ideas. But it is not amusing. If most of the discussions heard are to be believed, the failures of central planning is a reason for central planning, just like socialism is a reason for socialism. The success of the market, on the other hand, is not a reason for the market.”

“…. the Left hates all that is economics. Because it points out that creating a better world through central planning, money-printing, and political manipulation is indeed impossible. The market is neither perfect nor efficient, but it is better than any available alternative. In fact, the unhampered market is the only positive-sum means available for human society. The market is indeed the only way of progress; all else is a step backward.

Related ArticleCapital Consumption aka. Eating Our Seed Corn, at austrianaddict.com.

Related ArticleWe’re All Born In The Middle Of The Story, at austrianaddict.com.

Related ArticlePolitician’s “Affordable” Ideas Must Obey Economic Forces, at austrianaddict.com.

 

Incentives Matter

May 29, 2014

File:VA hospital waco 2009.jpg

The recent revelations about VA hospitals shouldn’t surprise anyone. This problem isn’t peculiar to the VA, it’s systemic in all bureaucracies. The track record of central planning is less than stellar, whether It’s government intervention in a  free market economy like the U.S., or central planning in a communist economy like the former Soviet Union. Both systems create bureaucracies that have their own incentives under which the individuals inside these bureaucracies make decisions. We can’t look at bureaucracies from the stand point of how a business operates in the free market, because the incentive structure is totally different. We might think that these bureaucrats are not acting the way we would act, if we were in their position Don’t be too quick to judge, these bureaucrats are acting exactly how they should act if you consider the incentives they operate under. In a free market, prices ration scarce goods and services, and also pass knowledge to individuals and businesses. The incentives and constraints transmitted through the market, are totally different from the incentives and constraints transmitted to bureaucracies by politicians and administrators. In the market the incentive is to provide what the consumer wants which means you first must give before you receive. A bureaucracy is a monopoly on a particular service, which means the person using the service is an annoyance rather than someone who has to be pleased. In a free market the consumer can go somewhere else if he is not satisfied. At the DMV the consumer has no other place to go to get the service. In the case of the U.S. Postal Service, consumers are choosing better options for communicating and shipping packages, and the U.S. Post Office doesn’t care because it’s getting propped up by yours and my tax dollars.

PROBLEM SOLVING

Firing Eric Shinseki and replacing him with a better “angel” won’t solve the problem, {if the problem is making sure the veterans are being taken care of}, because the incentive structure will remain the same. If the problem is trying to find political cover, than firing him will help in solve the “political” problem, at the expense of veterans lives. Watch and see if the administration fires Shinseki and then claims the problem is being take care of. Remember Guantanamo Bay detention center in Cuba is still open today even though the President said during and after the campaign in 08, that he was going to close it, so we know political talk and actions are responses to political incentives.

CREATING INCENTIVES

Here are a few examples of Governments creating incentives that individuals respond to.

I will quote from Thomas Sowell’s book Basic Ecomomics. “During the Stalin era in the Soviet Union, there was a severe shortage of mining equipment, but the manager of an enterprise producing such machines kept them in storage after they were produced, rather than sending them out to the mines. The reason was that the official orders called for these machines to be painted with red, oil-resistant paint and the producer had on hand only green, oil-resistant paint and red varnish that was not oil-resistant. Disobeying official orders in any respect was a serious offense and “I don’t want to get eight years,” the manager said. When the manager appealed to a higher official to use the green, oil-resistant paint, this official’s reaction was “Well, I don’t want to get eight years either.” ….None of these people were behaving irrationally. They were responding quite rationally to the incentives and constraints of the system in which they worked. “

Remember the Deepwater Horizen oil drilling rig that exploded and spilled oil into the Gulf of Mexico in 2010. Well here is what you need to know about the incentives that government created to push oil drilling farther out in the gulf. I will quote from this article Bashing BP at mises.org. “In 1995, President Bill Clinton signed into law the Deepwater Royalty Relief Act (DWRRA), which was “intended to encourage natural-gas and oil development in the Gulf of Mexico in waters at least 200 meters (656 feet) deep by offering royalty relief on qualifying natural gas and oil lease sales.” This act has since expired, but there remain continued incentives for drilling in deep water.”

“In other words, the government specifically passed laws that gave the oil companies incentives to drill far offshore — that is, in deeper water where risk is presumably higher. In addition to the higher risk of accidents, the cost of solving any problems are necessarily greater in five thousand feet of water than in, say, 250 feet of water…..Who could blame a company for trying to achieve a minimum relief volume, which would guarantee billions of dollars in royalty-free sales of petroleum and natural gas?”

“Additionally, a liability cap of $75 million for the oil companies was put in place by law. This is an incredible use of the control of the political means to make favorable dealings for oneself in the economy.[1] In fact, it is the very definition of corporatism: First, individuals within a company work to get laws passed to reward companies for taking risks previously deemed unworthy of the time, energy, and capital expenditures. Then, those same individuals within the company work to get other laws passed to limit liability when things go wrong.”

CONCLUSION

The VA is a totally Government run healthcare system. Considering it treats veterans, it is relatively small compared to the amount of people Obamacare will affect. Since Government can’t manage the VA’s small sample size; how is it going to handle the amount of people in Obamacare? The short answer is, it can’t, and here are the two main reasons why.

The first is you can’t legislate abundance into existence. The first rule of economics is scarcity. We live in a world governed by scarcity and health care is not immune from this rule, no matter how much politicians want to legislate it out of existence. Scarcity means that healthcare has to be rationed in one of three ways, by prices in a free market, by fighting each other for the scarce good in a lawless society, or by an administrator or a board in a government-run system. If healthcare existed in abundance, it would not be an economic good and therefore would not have to be economised.

This reality of scarcity leads to very different incentives and constraints being created in a free market, a hampered market, or in a centrally planned socialist economy. People are self-interested individuals and will respond to the incentives and constraints created by each economic system. The consumer is sovereign in a free market system, and bureaucrats and their rules are sovereign in a centrally planned system. Think of the 2500 pages of rules in the Obamacare bill, and the 300 plus million individual citizens it is supposed to cover and ask yourself; will it work? If the end sought is to provide quality healthcare the answer is no. If the end sought is to prop up and grow government. The answer is yes. Always look for the incentives and ask; how will a self interested person respond?

Related ArticleCentral Planners Don’t See The Consequences Of Their Actions. Or Do They? at austrianaddict.com

Related ArticleHuman Action Reveals The Reality About Political Decisions, by austrianaddict.com.