Dive Deeper: Man-Made Forces in the Economy
Unfortunately, the government often thinks it knows better than
the people and frequently constructs man-made policies that interfere with this
flow. Only government has the ability to force its will, most of the economy is
built on free voluntary cooperation between buyers and sellers but not
government. While the use of force is troublesome enough, the further damage is
that the government does not know where resources should be used or can be used
best.
Government is concerned about power, and it makes it decisions
based on how to stay in power not how to make profits. Besides spending that
keeps government in power, the government also has friends it wants to help and
can do so with other man-made forces. There are a number of tools it can use,
and the sad part is that it will often try to convince people it is good for
them and some in government may honestly believe it, but it is not so. We take
a look at a few of these and their effects now.
Subsidies
Governments often give subsidies to businesses run by people they favor. These policies are often promoted as a way to keep prices down. Of course, a low price at the store because tax money was given to the business does not save money, it hides the true cost, which is often so high that people would not buy the product otherwise. Subsidies are about hiding the flow of resources; the government takes some resources out of sight and gives them to its friends, so its friends can look nice and helpful by offering low prices.
Subsidies are almost always helpful to the powerful and wealthy
and hurt the poor because they require tax money paid by the poor and given to
the rich pro-government supporter. Ultimately, since subsidies hide the true
costs, an economy will get too much of what is subsidized, something it does
not want or there would be no need for subsidies. The resources would puddle up
in the subsidized area and go to waste. This short video about petrol
subsidies in Nigeria shows the problem.
Taxes
Taxes are supposed to raise money so the government can pay for
things all people need but would not have otherwise; police and army and courts
can be corrupted but they are necessary. However, in many cases taxes are
structured in such a way that some benefit and others are harmed as tax law is
written carefully and with certain purposes in mind to help some and harm
others.
But even fair tax law has its issues that we must consider.
Anything that gets taxed we tend to get less of it. Tax workers and fewer
workers will be hired, tax profits and fewer businesses will be started. It is
another of those man-made forces that causes resources to flow in certain
unnatural ways; people will spend resources on unproductive things to avoid
taxes and maybe even hide profits and wages to keep them away from the tax
collector. Taxes are like a dam and prevent resources from flowing where they
would naturally. They cause some to find ways around the tax, like putting up a
dam and then building a canal around it that only some can use.
Price Controls
Price controls act much like subsidies, they cause resources to flow unnaturally and create puddles of waste. When the government forces a price lower than it should be, there is over consumption on that resource. Those puddled resources are lines and people wanting the product and can’t get it because producers can’t raise the price and the government forces the price so low that it is not profitable to sell more product. We have this problem in some American cities where the city government has forced landlords to charge lower prices for apartments/flats. The two videos below explain the problem, which is common all over the world. In the videos you will see boarded up buildings and people who might bribe officials; those are puddled resources wanting to flow but can’t.
On
the other hand, when the government forces prices to be higher than they would
be, resources flow away from that activity, we can think of this as a river
running dry that should be full of water. When government passes a policy that
sets the price on some good that is high, such a minimum wage for labor, fewer
people will use that resource in this case fewer people will be hired as this
video shows.
Trade Barriers
Maybe the easiest to see and the most severe man-made issues in
the economy is outright bans on trading--whether it be outlawing imports or
certain kinds of businesses or granting monopolies to the government or its
friends to exclusively engage in certain kinds of business. This is like
hoarding resources, it only allows the favored ones to be involved and everyone
else is at their mercy.
Unfortunately, governments, which are more interested in power
then good resource use, use many of these tools to their power benefits.
Entrepreneurs need to know how this impacts them and advocate for changes when
they can, but also have to be able to work around these interferences. The
government, even if it means well, just does not have the information necessary
to make good decisions. There are too many people looking to do too many
different things with different skills and goals for a government to manage. It
is just trying to manage too many differing things that are sometimes in
conflict with each other; it can’t be done. It is like trying to manage a bunch
of skaters at a skating rink as this video shows.