23 July 2012

Day 52: Government Intervention

In this section we will have a look at the outflows and consequences which manifest when the government intervenes in the economy. The economic model is designed to ‘stand on its own’, where the forces of supply and demand ought to rule and regulate the market without anyone exerting any form of control or manipulation. It is designed to balance itself out.

However, due to the free market principle – some people are excluded from being able to access (basic) resources because of insufficient financial means. The government might find it necessary to intervene in the economy to allow for more people to be able to access these goods and services.

Price Ceiling
A ‘price ceiling’ is a legal upper limit on the price of a good or service. Once this price ceiling is imposed by the government; it becomes illegal for suppliers to sell the particular good or service at a higher rate than the set ceiling price. This is done to protect consumers from conditions that could possibly make basic commodities inaccessible.

Let us now have a look at the ‘ripple effect’ that comes about when a price ceiling is imposed.
We know that consumers like low prices and that suppliers enjoy high prices. Within the free market an equilibrium price is reached [See Day 49: Resource Distribution: Supply & Demand for a refresher on 'equilibrium price] where both demand and supply meet each other. For a price ceiling to be effective [a maximum price], the government has to set the ceiling below the equilibrium price. If for instance, the equilibrium price of bread is set at $3 a loaf – the government would set a price ceiling at let’s say $1,50 a loaf – to make the bread accessible for a wider range of people. This will initially make the consumer temporarily pleased as he or she can now buy bread or buy more bread with his or her available funds. Though, as we have seen before, the interest of the supplier lies at the opposite side of the equation. The supplier is now not making as much money as he could have been making at the equilibrium price, and considers being at loss with the new price rate. Producing the same amount of bread loaves at the new price is not (as) profitable anymore and the supplier starts producing less. The bread will still be available at $1,50 a loaf – but less bread will be offered. In the end, we have the exact same problem as before the price ceiling was imposed: some will be able to buy bread, and others won’t. The price ceiling has as a side-effect created a shortage in supply and no actual solution has been put in place.

Price Floor

A ‘price floor’ on the other hand, is an imposed minimum price that may be charged for a particular good or service. It becomes illegal to sell the particular good or service at a lower rate than the set floor price. Price floors are imposed by the government to prevent prices from being too low. The most common known price floor is the minimum wage for labour. Price floors are also often used in the agricultural sector in an attempt to protect farmers.

As you can guess, a price floor is not without consequence.

What happens when the price of a product or service increases? Potential buyers are more likely to refrain from buying the product or service as it is considered to be less lucrative to buy the product or service at the floor price. The quantity demanded of the particular good or service decreases.

On the other hand, there will be in an increase of supply, as more people are willing to supply this particular good or service since they can get more money for than at the equilibrium price – for the exact same amount.

If we now have to translate this into a real life practical example such as the minimum-wage, we get the following scenario:

Because of the increased in price for labour, companies are less likely to hire as many people as they would have done at the equilibrium price – because it became more expensive to do so.
Thus some people will be able to get jobs and have a minimum wage that they can live off. But at the same time there will now be people who will not be able to get a job at all, due to the decrease in available job positions. There is a surplus in supply.  In the end the people who were supposed to benefit from the government intervention, are the ones who are worse off in the long run.

Another example of the inefficiency of price floors within our current economic system plays out within the agricultural sector. To provide farmers with a decent income (and thus to keep them motivated to produce food for consumption), the government can introduce a price floor on certain types of food. The farmer will start producing and supplying more of that particular food, as he or she knows that a greater profit is being made. At the same time, a lesser quantity is being demanded as the particular food just became more expensive in the eye of the consumer. A surplus of food is thus created. This can cause massive amount of food to go to waste or lead governments to dump the surplus of food in other countries, which disrupts the local market there – where the farmers there end up not being able to sell their produce as they have been bombarded with cheap surplus food / food-aid from overseas.

Often politicians themselves are not even aware of the side-effects / consequences of making such decisions -- as they are playing a popularity game and are only concerned with doing that which 'looks good' and have no background in economics, or where they will know what the actual effect of their decisions is, but still do it anyway, as the voters are fooled within believing that the politician is being 'altruistic', while nothing really changes.

This again highlights that there is no solution possible within the system – since self-interest is at the base point of everything – and so no matter how you try and ‘manipulate’ the game – self-interest will always bite you in the ass and get what it wants. If you try and change some of the rules, self-interest will simply adapt and do what self-interest does = only care about self, and others will still be hurt in the process. And so no matter what you do, you’ll still end up with a broken system, because the very foundation, the very starting point is unsound. Whatever move you make to “try and make things better” will simply be matched by a counter movement which keeps the entire game / construct in place. 

This dynamic is important to keep in mind, as some people will for instance advocate ‘minimum wage’ without seeing/realizing what the consequences/side-effects are. This doesn’t mean that people shouldn’t have a basic income – it just means that it won’t work in our current system.

That’s why we cannot just ‘edit’ or ‘adjust’ the system – we have to completely and irrevocably replace it with a whole new value system – a value system as the Equal Money System which values Life over all, and works for the whole of Earth and its inhabitants.


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