If an automobile company lends a man $1,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has “sold” the car. Excessive stocks are held off the market. The world’s consumers are able to enjoy less of that product than they would have enjoyed without restriction. The most capable farmers on the best land do not have to restrict their production. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs. But somebody would be hurt.
In a competitive market economy, it is the high-cost producers, the inefficient producers, that are driven out by a fall in price. They must pay part of the taxes that are used to support the X industry. They are always trying to improve it or correct it, usually in the interests of some wailing pressure group. They could turn out almost anything you cared to mention in huge and practically unlimited amounts.
It creates economic distortions. . This is that, when we study the effects of various proposals, not merely on special groups in the short run, but on all groups in the long run, the conclusions we arrive at usually correspond with those of unsophisticated common sense. It is more rampant now than at any time in the past. The bestselling IB Diploma course book for Economics has been revised and updated in line It would inevitably lead to scandals. But the argument, in its concern with increasing the demand for capital, overlooks the effect of these policies on the supply of capital. Let us say that it comes into existence because the government makes larger expenditures than it can or wishes to meet out of the proceeds of taxes (or from the sale of bonds paid for by the people out of real savings). It increases the demand for capital and reduces the supply of real capital. Inflation is the auto-suggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things.
You do harm all around, with no comparable compensation.The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. Thus every departure from the desired speed itself sets in motion the forces that tend to correct that departure.It is precisely in this way that the relative supply of thousands of different commodities is regulated under the system of competitive private enterprise. Their wage rates, determined without any element of coercion, are not necessarily equal; but whatever they are, let us assign to each of them an original index number of 100 as a base. It must, it is true, be “worked out.” The result, it is true, may sometimes come to the man who works out the equation as a stunning surprise. He is seldom seen at the jewelers, the furriers or the night clubs, and he does not call the head waiters by their first names. But these complications may be put aside for the moment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. They do this, for example, whenever they seek to fix the wages of their members above their real market worth.
One of the greatest dangers to production today comes from government price-fixing policies. It has been the result of shortsighted policies. When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business. But we cannot afford to wait for so-called natural market forces, or for the “blind” law of supply and demand, to correct the situation. But the special interests keep on insisting on the scheme. But if a policy of monetary inflation is pursued, to enable prices to rise so that the increased hourly wages can be paid, this will merely be a disguised way of reducing real wage rates, so that these will return, in terms of the amount of goods they can purchase, to the same real rate as before. If money and credit are so inelastic that they do not increase when wages are forced up (and if we assume that the higher wages are not justified by existing labor productivity in dollar terms), then the chief effect of forcing up wage rates will be to force unemployment.And it is probable, in that case, that total payrolls, both in dollar amount and in real purchasing power, will be lower than before. To make this possible, a proportional restriction of output is usually placed on each producer subject to the control. But it should be pointed out that there is nothing inherently mysterious about it (in spite of the mystery in which it is so often wrapped), and that it does not differ essentially from what happens in domestic trade. Not only is there no truth in this idea; the truth is that, if a particular union by coercion is able to enforce for its own members a wage substantially above the real market worth of their services, it will hurt all other workers as it hurts other members of the community.In order to see more clearly how this occurs, let us imagine a community in which the facts are enormously simplified arithmetically. (As, in our chapter on price-fixing, we deferred for the sake of simplicity some complications introduced by an inflation, so, in now considering inflation, we may pass over the complications introduced by an attempt at government price-fixing.
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