Last night I watched 911-Lonestar, about a fire/rescue crew operating in Austin, Tx., led by a transplanted Fire Dept. of New York captain, suffering from lung cancer as a result of his heroics during the collapse of the Twin Towers. Every week, 911 calls are conveyed to this FD Austin house, and one of them provided a superb lesson in basic economics. A breeder of prize bulls had sold his most prized bull to a distributor, whose business was extracting, storing and selling the “issue” (sperm) of the bulls. The breeder wanted to raise another prize bull, so he went to the distributor with $10,000, expecting to buy a single “tube” (apparently enough to inseminate a brood cow), based on previous prices. However, the distributor had raised the price to $15,000 due to the demand for this particular issue. In their argument over price, the distributor asked, “if all my other buyers are willing to pay $15,000, why would I sell the same amount of the same substance for $10,000? There’s only so much of the stuff for all the buyers that want it. I run a business, not a charity.” This is the simplest example of the dynamics of supply and demand, since the substance in question has a known and limited supply (one canister only), and only one potential use, and more buyers than supply.
The breeder/buyer begged, then threatened, but still he was rebuffed, so he decided to steal the entire canister by setting a fire and sneaking in while the distributor and his employees were busy with the fire. Of course, the fire rapidly got out of control and the breeder/thief had to be rescued. I recently read an article on fee.org which explained how the free market mechanisms of price, supply and demand help allocate resources efficiently. My example above was perhaps too simple, mainly because of how limited the uses and supply were. Here is what the article says about it: “The key question when analyzing the efficacy of economic systems is how they deal with the issue of scarcity. All economic goods are, by definition, scarce. By this, economists mean that resources such as raw materials, capital goods, and labor have many alternative possible uses but can only fulfill a very finite number of ends. For instance, a single steel beam can be used in a skyscraper or a bridge, but not both. How scarce resources are arranged and for what purpose will largely determine the living standards of society. If producers utilize the resources in a manner that satisfies the most urgent needs of society, human flourishing will follow. If resources are instead squandered on less urgent needs, poverty and squalor will result. The values of inputs used to create finished products are derived from the demand for the finished product for which they are used. And because scarce economic goods have alternative uses, manufacturers of various finished products are in competition with each other for these inputs.
Take the example of wood—a nonspecific good that can be used for many different purposes—and just two potential finished products: housing and books. How are manufacturers to determine which combination of these two options will best satisfy society’s demand for shelter and reading? Only prices that emerge from the voluntary exchange of privately-owned resources can tell us where nonspecific, scarce goods are most urgently needed. Many different bidders for wood will cause price movements that convey vital information about the relative scarcity of wood and the relative value of the alternative final goods for which the wood could potentially be used. Without prices, scarce resources like wood could be employed in such a way as to leave more urgent needs unsatisfied. For instance, the market would be flooded with books, while many would-be home buyers remain without shelter.
Speaking of homes, when I bought my home in Spokane, Washington in December, 2015, I had to bid more than the asking price, because there were two other buyers who wanted it. I didn’t want to risk losing it, so I offered $3,000 over asking price; the other buyers made lower offers, so I got the house. During the three years I lived in the home, Seattle home prices shot way up, resulting in a significant migration of Seattle residents to Spokane. What do you guess happened to home prices in Spokane? I decided to sell in March of 2019, three years and three months after buying it. I wanted to list above the appraisal, but my realtor suggested that we list with a price slightly less than we thought we could get. My house was a 4 bedroom two bath house, with detached two car garage. The neighbor across the street listed at the same time, asking more than we were asking for one bedroom and one bath less, and no garage. We got 11 offers the same day we listed, and chose the second best rather than the first. Why? The second best was putting 50% down, the best 5% down. We ended up getting $51,000 over what we paid, a selling price of $227,000. Yes, Spokane is still a bargain housing market. Once again, this is a great lesson in how economics works. The definition of market price is: What a buyer is willing to pay a seller for a commodity in the absence of coercion.
Central planning by a government involves coercion at every level. The government has no profit/loss calculation. Its bidding power comes from its coercive advantage to collect taxes by force. Because government does not rely on selling products to willing consumers, there is no check on how high it will be willing to bid. Consequently, government’s arrangement of resources cannot reflect the most urgent needs of society. In a system run by the government, inputs do not derive their value from consumer demand on the finished product in which the input will be utilized, but rather, value is derived by political calculations. In such cases, the economy proceeds down a path chosen by the political class instead of one chosen by the voluntary choices of the individuals in society. The process of entrepreneurs taking risks to fulfill a future need that perhaps only they can envision becomes overwhelmed by the narrow, backward-looking resource allocation of a central planning board. With so much power focused in the hands of the small ruling elite that results from central planning, more will look to curry favor with government officials for economic advantage rather than create value for consumers.
Pay-to-play politics—and outright bribery—will become the norm. And even if the halls of Congress become filled with angels exempt from the temptation of corruption, the fact still remains central planners would be powerless to orchestrate a well-functioning economy. The problem is not that people will be insufficiently motivated to do the right things but, more fundamentally, that they will not know what the right things to do are, even if they passionately wanted to do them.