Economics in Five Lessons
Written by James Ostrowski on March 16, 2006 – 10:40 pm -
Free Buffalo’s Policy Report No. 3 (our eighth policy study) was published today.
Here’s some excerpts:
Introduction. The decline of the Western New York economy over the last 45 years is best explained by economics. Only when the people of this area understand the basic economic principles and political dynamics that explain our decline, will they support the policy changes necessary to revive that economy. This essay will outline the five lessons of economics that we believe are most important for understanding our plight and how to get out of it.
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Since all resources are scarce, no economic system can fulfill all needs and wants at the same time. Thus, it is not a fair criticism of any economic system that it fails to do so. Rather, the question is, which system is the best or better than the others at meeting human needs and wants?
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So, let’s call a system based on choice the market. Let’s call a system based mainly on force, socialism. And let’s call a mixture of the two pure types of systems, a mixed economy. In the United States, we have a mixed economy because we sometimes rely on choice, the market, but other times we rely on force, or socialism.
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Whenever you hear a politician propose a new spending program, you are really hearing someone deny that all resources are scarce. They rarely talk about the cost of these new programs, the real costs to real people they know nothing about who will lose their hard-earned dollars and have to give up their personal dreams so that some politician can buy votes with their money.
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It is because of entrepreneurs that the market is self-correcting. If there are inadequacies in existing goods and services or companies, clever entrepreneurs seeking profits will conjure up other goods and services that better meet those needs or in fact correct defects in existing products. For example, if network newscasts are perceived to be slanted toward one political viewpoint, talk radio entrepreneurs will offer a different product. If talk radio hosts play fast and loose with the facts, blogging entrepreneurs will start websites that track and monitor their shows to keep them in line.
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In a system based on force, people will generally be motivated to produce force, or to be part of organizations that use force to allocate economic resources. That way, they can use that force to direct economic resources to themselves. Conversely, in a system based on force, there will be a disincentive to produce goods and services because you do not have control over their distribution and cannot receive what you perceive to be their full value in any transaction. Rather, the goods and services you produce will tend to be taken from you by force in exchange for little or no compensation. Thus, economies based on force reduce the incentive of all to produce wealth and increase the incentive to produce force. Since productive work is not fully rewarded, there is an increased incentive to remain idle, since leisure is not taxed. There will also be thriving black markets as people try to produce goods and services outside the reach of regulatory and tax regimes.
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Economic value is subjective. Only individuals can truly know their values and needs and wants. Individual preferences are ranked ordinally, not cardinally. In other words, “1st, 2nd, 3rd, etc., not 1, 2, 3. That being the case, there is no way to mathematically compare one person’s preferences with another’s. Central planners and politicians do not and cannot know them. However, through freely chosen market transactions, individuals make their values objectively known to others, alter supply and demand and affect prices. Prices in turn then reflect the sum total of all human knowledge about the scarcity and value of economic resources. High prices lead us to conserve scarce resources while low prices tell us that the good or service is plentiful and need not be so carefully conserved. Lower-priced resources are then used to create more valuable products and commodities. Without market prices, the process of converting lower-priced goods into more valuable ones would be impossible.
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Thus, when the government officials on the newly-created Erie Canal Harbor Development Corporation choose plans for how to spend government money and how utilize government land on the Buffalo waterfront, they are in effect choosing based on their personal preferences and values, not having any possible way of knowing what the public’s priorities are. (Asking the public’s opinion on a survey or at a public meeting tells us nothing about what costs those persons would be willing to pay out of their own pockets for the projects they prefer. Thus, such commonly used approaches do not remotely replicate the efficiency of market choices.)
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So, the essence of taxation is to take your money and spend it on things you oppose. Once you understand that simple but elusive and painful truth, you will no longer be mystified by the so-called waste of your tax dollars. They may be wasted from your point of view, but they are not wasted from the point of view of those who spend your tax dollars: the bureaucrats and politicians and their infinite list of clients. Just as you will spend your funds on your highest and most urgent needs and wants, they too are now spending your tax dollars on their own needs and wants. You may moan and groan about the Defense Department paying $1,000 for a toilet seat, but the manufacturer of that toilet seat was laughing all the way to the bank.
http://politicalclassdismissed.com/?p=203#sthash.HNQkXfgk.Q6SDJUk6.dpuf
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