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Economic growth

2010-04-02T10:19:15Z

87.244.233.12: /* Measuring growth */ Typo.

'''Growth''' is a rise in living standards<ref name="Rothbard_growth">[[Murray N. Rothbard]]. [http://mises.org/rothbard/mes/chap12e.asp "Chapter 12—The Economics of Violent Intervention in the Market"], 10. Growth, Affluence, and Government, online version of [[Man, Economy and State]], referenced 2010-02-14.</ref>

==How to achieve growth==
Economic growth can be achieved only in a few specific ways. Either more and better resources can be found, or more and better people can be born, or technology is improved, or the capital [[good]]s structure is lengthened and [[capital]] multiplied. In practice, since resources need capital to find and develop them, since technological improvement can be applied to production only via capital investment, since entrepreneurial skills act only through investments, and since an increased labor supply is relatively independent of short-run economic considerations, the only viable way to growth is through increased [[saving]] and [[investment]].<ref name="Rothbard_growth" />

==Planning growth==
On the free market, individuals decide how much they want to save, to increase their future living standards, against how much they want to consume in the present. The net result of all these voluntary individual decisions is the nation’s or world’s rate of capital investment.

Some economists concentrate heavily on growth, and how high it should be. From a purely economical view, it is illegitimate to endorse growth by itself. It may "sound" good to most people, but that is hardly an adequate ethical analysis. Many things are considered as good, but man must choose between different quantities of goods and the price for those forgone. Similarly, growth must be balanced and weighed against competing values. If it were an absolute value, why stop at 5 percent or 8 percent growth per year? Why not 50 percent?

What happens if the government decides, either by subsidies or by direct government ownership, to try to spur the social rate of growth? Then, no longer does each person choose to "grow" as he thinks best. Now, with compulsory saving and investing, investment can come only at the expense of the forced saving of some individuals. In short, if A, B, and C "grow" because their standard of living rises from compulsory investment, they do so at the expense of D, E, and F, the ones who were forced to save. It can be no longer said that the social standard of living rises, or that the "society" grows. Under compulsory growth, some people clearly and demonstrably lose.<ref name="Rothbard_growth" />

==Measuring growth==
Economic growth is often measured by the [[Gross domestic product]] (GDP). It does not represent production, but overall spending, and is dependent on the techniques that are applied to the calculation of the respective price indices. To calculate a "real GDP", the statistical offices create a basket of goods and compare the prices of the goods in this basket to the respective reference periods. But there is no objective representative basket of GDP other than as a statistical construct based on many disputable assumptions, and there is no common standard which would allow the comparison of one period’s production to the other when in fact current output in terms of new, obsolete and modified goods and services is quite different from that of the past. Money [[price]]s do not measure anything. Prices only have a meaning as relative prices as they reflect the exchange ratios on the market.

In a private market economy the aims of economic activity are highly diverse and represent individual and subjective valuations. For an economy that is to serve multiple private needs, the calculation of economic growth makes little sense, if any at all. One may add up nationwide the various monetary prices of the goods and services that were sold, but besides the aggregation of the monetary [[value]]s of diverse items – what is the true and reliable informational value of this exercise?

Each [[good]] and service has a different value for each user, and there is no common standard of value available. This is even more so the case, when new products and new kinds of services come to the market. Valuations are not only heterogeneous among persons, but also differ for the same person according to the specific circumstances. Human beings have different needs and wants in different situations, and they experience changes of taste over time. Quality itself is not an attribute inherent to the things, but it is a valuation by economic actors.<ref name="Muller_growth">Antony P. Mueller. [http://mises.org/daily/1877 "What's Wrong With Economic Growth?"], Mises Daily, August 10 2005, referenced 2010-02-14.</ref>

{{See also|Gross domestic product}}

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Economic growth|Economic growth]] on Wikipedia
* [http://www.econlib.org/library/Enc/EconomicGrowth.html Economic growth] on EconLib
* [http://mises.org/freemarket_detail.aspx?control=402 Sustainable Growth: or, How to Kill an Economy], June 2002, by Llewellyn H. Rockwell, Jr.
* [http://mises.org/daily/1345 Currency Devaluation and Economic Growth], October 2003, by Frank Shostak
* [http://mises.org/story/3669 Does Loose Monetary Policy Cause Economic Growth?], September 2009, by Frank Shostak
[[Category:Economical Concepts]]

Trade

2010-01-02T14:47:55Z

87.244.233.12: Added resource.

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'''Trade''' is the voluntary interpersonal exchange of [[good]]s.



==Trade and Production==
The fundamental law of production is that joint production yields a greater return than isolated production. Two individuals working in isolation from one another produce less physical goods and services than if they coordinated their efforts. This is probably the most momentous fact of social life. David Ricardo first formulated this law as a law of comparative cost within the context of the theory of foreign trade. Later economists such as Pareto, Edgeworth, Seligman, and Mises argued that it was in fact a general law of exchange. Mises coined the expression “law of association.” Even if there were no other reasons for human beings to cooperate, the greater productivity of joint efforts, compared to isolated production, tends to draw them together.<ref name="Hulsmann_production">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"], 1. The Division of Labor without Money, p.21, referenced 2009-05-08</ref>
{{See also|Production}}

===Opportunity cost and trading===
For example, Amy can produce either one hundred oranges or ten tires in a day while Chen can produce ten oranges or two tires in a day. It doesn't look like they have anything to gain by trading: Amy is much more productive than Chen.

But compare their '''opportunity costs''' - what you have to give up to get something else. To produce one hundred oranges, Amy gives up the opportunity to produce ten tires. Her opportunity cost of an orange is one tenth of a tire, and her opportunity cost of a tire is ten oranges. Chen's opportunity cost of an orange is one fifth of a tire, and her opportunity cost of a tire is five oranges.

In terms of tires, it is cheaper for Amy to produce oranges because she only gives up one tenth of a tire to produce an orange while Chen has to give up one fifth of a tire. In terms of oranges, it is cheaper for Chen to produce tires because he only gives up five oranges to produce a tire while Amy gives up ten oranges to produce a tire.

They can both have more oranges and more tires if they specialize and trade. Chen can offer Amy one tire in exchange for seven oranges. Chen would be better off because he would get seven oranges in exchange for one tire, while he would only get five oranges for one tire if he produced them himself. But this is attractive for Amy too, because she can get a tire for only seven oranges, which is fewer than the ten oranges she would have to give up if she produced tires herself. At any "orange price" of tires between five and ten, Amy and Chen are both better off.

The same logic is valid for countries - countries are also better off if they can specialize and trade.<ref name="Caden_Opportunity">Art Caden. [http://mises.org/story/3744 "Tire Trade Tirade"], Mises Daily, posted on Monday, October 12, 2009. Referenced 2009-10-13.</ref>

==Direct Exchange==
Direct exchange is also called '''barter'''.

Jones can trade his apple against two eggs from Brown. In such a world, the volume of exchanges—in other words, the extent of social cooperation—is limited through technological constraints and through the problem of the double coincidence of wants. Barter exchanges take place only if each trading partner has a direct personal need for the good he receives in the exchange. But even in those cases in which the double coincidence of wants is given, the goods are often too bulky and cannot be subdivided to accommodate them to the needs. Imagine a carpenter trying to buy ten pounds of flour with a chair. The chair is far more valuable than the flour, so how can an exchange be arranged? Cutting the chair into, say, twenty pieces would not provide him with objects that are worth just one twentieth of the value of a chair; rather such a "division" of the chair would destroy its entire value. The exchange would therefore not take place.<ref name="Hulsmann_barter">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"], 1. The Division of Labor without Money, p.22, referenced 2009-05-08</ref>

==Indirect Exchange==
If a person desires a [[good]] with the intention to trade it away to someone else, then he is engaged in '''indirect exchange''.

With the possibility of indirect exchange, goods are [[value]]d not only by their direct use-value but also their exchange-value. An actor will always value a unit of a good at the higher of these two. (For example, even a non-smoker can prefer a box of cigars over a hot dog, if he thinks he can trade the former to a smoker.)<ref name="Rothbard_value" />

{{See also|Money}}
{{See also|Price}}

==The Benefits of Trade==
In a voluntary exchange is the [[Value|valuation]] of goods different and reverse: each party values what is given up less than what is received in the exchange. Because individuals value [[good]]s differently, there are mutual "gains from trade". Both parties benefit from a voluntary exchange (or at least expect to).<ref name="Rothbard_value">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap2a.asp "2. Types of Interpersonal Action: Voluntary Exchange and the Contractual Society"], Chapter 2-Direct Exchange, ''[[Man, Economy and State]]'', online version, referenced 2009-05-26.</ref>

Trade also fosters specialization and the ''division of labor''. By specializing in activities in which they are relatively most productive (or have the comparative advantage), actors greatly increase the productivity of their labor and enjoy more consumption goods than would be possible without trade.<ref name="Rothbard_division">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap2a.asp#3._Exchange_andthe_Division "3. Exchange and the Division of Labor"], Chapter 2-Direct Exchange, ''[[Man, Economy and State]]'', online version, referenced 2009-05-26.</ref>

==Free trade==
A voluntary action—free exchange leads to the mutual benefit of both parties to the exchange. Indirectly, the network of these free exchanges in society — known as the "'''free market'''" — creates a delicate mechanism of harmony, adjustment, and precision in allocating productive resources, deciding upon prices, and gently but swiftly guiding the economic system toward the greatest possible satisfaction of the desires of all the consumers. In short, not only does the free market directly benefit all parties and leave them free and uncoerced; it also creates a mighty and efficient instrument of social order.

On the other hand, '''coercion''' has diametrically opposite features. Not only does coerced exchange mean that some live at the expense of others, but, indirectly, coercion leads only to further problems: it is inefficient and chaotic, it cripples production, and it leads to cumulative and unforeseen difficulties. Seemingly orderly, coercion is not only exploitative; it is also profoundly disorderly.<ref name=Rothbard_free">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap12g.asp#12._Conclusion "12. Conclusion: The Free Market and Coercion"], Chapter 12-The Economics of the violent intervention in the market, ''[[Man, Economy and State]]'', online version, referenced 2009-06-15.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Trade|Trade]] on Wikipedia
* Jeffrey Tucker, [http://mises.org/story/3834 Halloween and its Candy Economy], article on exchange and formation of money
* [http://blog.mises.org/archives/011356.asp The Story of Trade and Money] by Walter Block (video mashup of a lecture)
[[Category:Economical Concepts]]

Marginal utility

2009-12-29T20:12:37Z

87.244.233.12: Added resource.

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People use their means for the most important ends. If they have to give up a unit of their stock, they will continue to satisfy the more important ends. The satisfaction provided by the marginal unit is called '''marginal utility'''.<ref name="Rothbard_marginal">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap1b.asp#B._THE_LAW "B. The Law of Marginal Utility"], [[Man, Economy and State]], online version, referenced 2009-07-07.</ref>

==Law of Marginal utility==
People make decisions on the '''margin'''. No one chooses between "guns" or "butter", but between a definite amount of guns and a definite amount of butter.

As an actor acquires more and more units of a good, he devotes them to successively less and less urgent ends (i.e. ends that are lower on his scale of values). Therefore the marginal utility of a good declines as its supply increases. This is the '''law of diminishing marginal utility'''.<ref name="Murphy_marginal">Robert P. Murphy. [http://mises.org/rothbard/mes/guidechap1.asp "A Study Guide to Murray Rothbard's Man, Economy, and State, with Power and Market"], Chapter 1, referenced 2009-07-07.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Marginal utility|Marginal utility]] on Wikipedia
* [http://mises.org/story/3100 Diminishing Marginal Utility: It's a Law] by Art Carden
* [http://mises.org/story/2610 Marginal Utility Is Not Rocket Science] by Frank Shostak
* [http://mises.org/story/2628 Marginal Utility and Interest Formation] by Frank Shostak
* [http://mises.org/daily/3918 What's Wrong with the Utility Function?] by Predrag Rajsic

Inflation

2009-12-26T13:00:53Z

87.244.233.12: Link added.

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'''Inflation''' is a general increase in the [[money]] supply.<ref name="Hazlitt_inflation">Henry Hazlitt. [http://mises.org/story/2914 "What You Should Know About Inflation"], ''[[Mises Institute]]'', referenced 2009-06-07.</ref><ref name="Shostak_inflation">Frank Shostak. [http://mises.org/story/908 "Defining Inflation"], ''[[Mises Institute]]'', posted on 2002-06-03, referenced 2009-05-26.</ref>

One of the effects, that may accompany inflation (and is sometimes confused for it) is a rise in [[price]]s. A similar, but opposite effect in kind is [[deflation]].

==Definitions==
There are several ways to define inflation, with varying usefulness and ability to explain the phenomenon.

===Increase in money supply===
[[Price]]s do not stay constant, they are always rising and declining. An increase in the money supply - inflation, properly defined - has a tendency to raise them in general.<ref name="Rothbard_inflation">Murray N. Rothbard. [http://mises.org/rothbard/mes/chap12f.asp "11. Binary Intervention: Inflation and Business Cycles"], Chapter 12—The Economics of Violent Intervention in the Market, ''[[Man, Economy and State]]'', online version, referenced 2009-05-26.</ref>

<blockquote>When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase — or does not increase as much as the supply of money — then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A "price" is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.<ref name="Hazlitt_inflation" /></blockquote>

An increased stock of [[commodity]] money will raise the standard of living by further satisfying nonmonetary demands for the commodity. New paper money does not demonstrably benefit some without injuring others.<ref name="Rothbard_inflation" />

===Overly large increase in money supply===
This has been a popular definition in the past. A large increase in the money supply would have the accompanying effects - like price increases. However, it is not clear how large exactly an increase has to be, making in a judgment call.<ref name="Goods">Ludwig von Mises. [http://mises.org/humanaction/chap17sec6.asp "Inflation and Deflation; Inflationism and Deflationism"], ''Chapter XVII. Indirect exchange'', [[Wikipedia:Human Action|Human Action]] online edition, referenced 2009-04-27.</ref>

===Unbacked money===
According to [[Murray N. Rothbard|Rothbard]], '''inflation''' is the process of issuing [[money]] beyond any increase in the stock of specie. In other words, new money substitutes are issued without backing of their specie. The great gain comes from the issuer’s putting new money into circulation. The profit is practically costless, because, while all other people must either sell goods and services and buy or mine gold, the government or the commercial banks are literally creating money out of thin air. They do not have to buy it. Any profit from the use of this magical money is clear gain to the issuers.<ref name="Rothbard_inflation" />

===Rising prices===
In a popular definition, '''inflation''' is an ongoing rise in the general level of prices.<ref name="White_inflation">Lawrence H. White. [http://www.econlib.org/library/Enc/Inflation.html "Inflation"], ''[[Wikipedia:Concise Encyclopedia of Economics|The Concise Encyclopedia of Economics]]'', referenced 2009-05-26.</ref>

However, this fails to explain why is inflation dangerous or exactly how does it cause its effects. "Why should a general rise in prices weaken real economic growth? Or how does inflation lead to the misallocation of resources? Moreover, if inflation is just a rise in prices, surely it is possible to offset its effects by adjusting everybody's incomes in the economy in accordance with this general price increase."<ref name="Shostak_inflation">Frank Shostak. [http://mises.org/story/908 "Defining Inflation"], ''[[Mises Institute]]'', posted on 2002-06-03, referenced 2009-05-26.</ref>

It is sometimes claimed, that a specific price increase - e.g. of oil - can increase all prices on average. But if people must spend more on oil, will not prices drop for the goods that they can no longer afford to purchase?<ref name="Casey_rising_prices">Christopher P. Casey. [http://mises.org/story/3482 "Only Criminals Use Honest Money"], ''[[Mises Institute]]'', posted on 2009-06-03, referenced 2009-06-3.</ref> (It is also impossible to establish an average of prices of different goods and services.<ref name="Shostak_inflation" />)

It is contended that the increase in commodity prices often occurs ''before'' the increase in the money supply. Immediately after the outbreak of war in Korea, strategic raw materials began to go up in price on the fear that they were going to be scarce. Speculators and manufacturers began to buy them to hold for profit or protective inventories. But to do this they had to borrow more money from the banks. The rise in prices was accompanied by an equally marked rise in bank loans and deposits. If these increased loans had not been made, and new money had not been issued against the loans, the rise in prices could not have been sustained. The price rise was made possible, in short, only by an increased supply of money.<ref name="Hazlitt_inflation" />

==The process of inflation==
Historically, governments have often inflated by debasing [[coin]]s, but they found it is cheaper and faster by creating paper [[money]] on a printing press.

In the present is the method usually more indirect. As an example from the US, the government will sell its bonds or other 'IOUs' to the [[bank]]s. In payment, the banks create "deposits" on their books against which the government can draw. A bank in turn may sell its government IOUs to the [[Federal Reserve Bank]], which pays for them either by creating a deposit credit or having more Federal Reserve notes printed and paying them out. This is how money is manufactured.<ref name="Hazlitt_inflation" />

The value of money varies for basically the same reasons as the value of any commodity. Just as the value of a bushel of wheat depends not only on the total present supply of wheat but on the expected future supply and on the quality of the wheat, so the value of a dollar depends on a similar variety of considerations. The value of money, like the value of goods, is not determined by merely mechanical or physical relationships, but primarily by psychological factors which may often be complicated.

The value of a unit of money does not depend only on the present supply of money outstanding. It depends also on the expected future supply of dollars. If most people fear, for example, that the supply of dollars is going to be even greater a year from now than at present, then the present value of the dollar (as measured by its purchasing power) will be lower than the present quantity of dollars would otherwise warrant.<ref name="Hazlitt_inflation" />

==Effects of inflation==
{{See also|For and against paper money}}

===Profit of money creators===
Increases in the money supply initiate an exchange of something for nothing. They divert real funding away from those, that generate wealth towards the holders of the newly created money. The general increases in prices, which follow, are a symptom of the erosion of money's purchasing power.<ref name="Shostak_inflation" />

===Rising prices===
The increase in the money supply will create a new level of [[price]]s, but it will not be the old level of prices, multiplied in all relations and quantities.

New money will change the spending habits of people. Also, some of them will make gains and losses and will alter their spending habits accordingly. Therefore, all prices will not increase uniformly. Some prices will rise more than others, therefore, some people will be permanent gainers, and some permanent losers, from the inflation.<ref name="Rothbard_inflation" />

==Further misconceptions==

===Velocity of money===
It is frequently said that the value of money depends not merely on its quantity but on the "velocity of circulation." Increased "velocity of circulation," however, is not a cause of a further fall in the value of the dollar; it is itself one of the consequences of the fear that the value of the dollar is going to fall (or, to put it the other way round, of the belief that the price of goods is going to rise). It is this belief that makes people more eager to exchange dollars for goods. The emphasis by some writers on "velocity of circulation" is just another example of the error of substituting dubious mechanical for real psychological reasons.<ref name="Hazlitt_inflation" />

''See also [http://www.mises.org/story/918 Is Velocity Like Magic?] by Frank Shostak.''

===Shortage of goods===
A rise in prices can be caused either by an increase in the quantity of money (inflation) or by a shortage of goods — or partly by both. Wheat, for example, may rise in price either because there is an increase in the supply of money or a failure of the wheat crop. But we seldom find, even in conditions of total war, a general rise of prices caused by a general shortage of goods. Even in the [[Wikipedia:Inflation in the Weimar Republic|Germany of 1923]], after prices had soared hundreds of billions of times, high officials and millions of Germans were blaming the whole thing on a general "shortage of goods" — at the very moment when foreigners were coming in and buying German goods with gold or their own currencies at prices lower than those of equivalent goods at home. Similarly, the rise of prices in the United States since 1939 was attributed to a "shortage of goods", while official statistics have shown a rising industrial production.

Nor is a better explanation to say that the rise in prices in wartime is caused by a shortage in civilian goods. Even to the extent that civilian goods were really short in time of war, the shortage would not cause any substantial rise in prices if taxes took away as large a percentage of civilian income as rearmament took away of civilian goods.<ref name="Hazlitt_inflation" />

===Budget deficits===
A budget deficit is inflationary only to the extent that it causes an increase in the money supply. If it is fully financed by the sale of government bonds paid for out of real savings, it does not need to cause any inflation.

Inflation can occur even with a budget surplus if there is an increase in the money supply notwithstanding.<ref name="Hazlitt_inflation" />

===Wage price spiral===
Sometimes it is spoken of so-called "inflationary pressures" — particularly the so-called "wage price spiral."

If it were not preceded, accompanied, or quickly followed by an increase in the supply of money, an increase in wages above the "equilibrium level" would not cause inflation; it would merely cause unemployment. And an increase in prices without an increase of cash in people's pockets would merely cause a falling off in sales. Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply.<ref name="Hazlitt_inflation" />

==References==
{{Reflist}}

==External links==
* Wikipedia page on [[Wikipedia:Inflation|Inflation]]
* [http://www.econlib.org/library/Enc/Inflation.html Inflation] from The Concise Encyclopedia of Economics
* [http://mises.org/books/inflation.pdf What You Should Know About Inflation] (pdf), [[Henry Hazlitt]]
* [http://www.mises.org/story/2340 The Revolutionary War and the Destruction of the Continental] by Thomas E. Woods, Jr.
* [http://mises.org/books/inflationinfrance.pdf Fiat Money Inflation in France] (pdf) by Andrew Dickson White
* [http://libertarianpapers.org/articles/2009/lp-1-43.pdf The Definition of Inflation According to Mises: Implications for the Debate on Free Banking] (pdf) by Nicolás Cachanosky
* [http://mises.org/daily/3909 The Non-Mystery of Inflation] by Mark Spangler
[[Category:Economical Concepts]]

Frédéric Bastiat

2009-12-26T12:16:40Z

87.244.233.12: Added resources.

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'''Claude Frédéric Bastiat''' (1801-1850) was a French economist, legislator, and writer who championed private property, free markets, and limited government. Perhaps the main underlying theme of Bastiat's writings was that the [[free market]] was inherently a source of "economic harmony" among individuals, as long as [[government]] was restricted to the function of protecting the lives, liberties, and property of citizens from theft or aggression. To Bastiat, governmental coercion was only legitimate if it served "to guarantee security of person, liberty, and [[property rights]], to cause justice to reign over all."

Bastiat emphasized the plan-coordination function of the free market, a major theme of the Austrian School, because his thinking was influenced by some of [[Adam Smith]]'s writings and by the great French free-market economists [[Jean-Baptiste Say]], [[Francois Quesnay]], [[Destutt de Tracy]], [[Charles Comte]], [[Richard Cantillon]] (who was born in Ireland and emigrated to France), and [[Anne Robert Jacques Turgot]]. These French economists were among the precursors to the modern Austrian School, having first developed such concepts as the market as a dynamic, rivalrous process, the free-market evolution of [[money]], [[subjective value theory]], the laws of diminishing [[marginal utility]] and marginal returns, the marginal productivity theory of resource pricing, and the futility of [[price]] controls in particular and of the government's economic interventionism in general.

==Works==
Bastiat was the author of many works on economics and political economy, generally characterized by their clear organization, forceful argumentation, and acerbic wit. Among his better known works is ''Economic Sophisms'',<ref>Frédéric Bastiat. [http://www.econlib.org/library/Bastiat/basSoph.html "Economic Sophisms"], referenced 2009-06-13.</ref> which contains many strongly-worded attacks on [[statism|statist]] policies. Bastiat wrote it while living in England to advise the shapers of the French Republic on pitfalls to avoid.

Contained within ''Economic Sophisms'' is the famous satirical parable known as the "[[Wikipedia:Candlemakers' petition|Candlemakers' petition]]"<ref>Frédéric Bastiat. [http://silentpc.org/university/Candlemaker.pdf "Candlemakers' petition"], referenced 2009-06-13.</ref> which presents itself as a demand from the candlemakers' guild to the French government, asking the government to block out the Sun to prevent its unfair competition with their products. He also facetiously "advocated" the cutting off of everyone's right hand, based on the assumptions that more work means more wealth and more difficulty means more work.<ref>Frédéric Bastiat. [http://www.econlib.org/library/Bastiat/basSoph8.html#S.2,%20Ch.16,%20The%20Right%20Hand%20and%20the%20Left "Economic Sophisms"], Series 2, Chapter 14-17, referenced 2009-06-13.</ref> Much like [[Wikipedia:Jonathan Swift|Jonathan Swift]]'s ''[[Wikipedia:A Modest Proposal|A Modest Proposal]]'' or [[Wikipedia:Benjamin Franklin|Benjamin Franklin]]'s anti-[[Wikipedia:Slavery|slavery]] works, Bastiat's argument cleverly highlights basic flaws in [[protectionism]] by demonstrating its absurdity through logical extremes.

He also famously engaged in a debate with [[Wikipedia:Pierre-Joseph Proudhon|Pierre-Joseph Proudhon]] about the legitimacy of interest between 1849 and 1850.<ref>Frédéric Bastiat. [http://praxeology.net/FB-PJP-DOI.htm "Bastiat-Proudhon Debate on Interest"], referenced 2009-06-13.</ref>

Bastiat's most famous work, however, is undoubtedly ''[[Wikipedia:The Law (1850 book)|The Law]]'', originally published as a pamphlet in 1850. It defines, through development, a just system of laws and then demonstrates how such law facilitates a free society.

==The broken window fallacy==
The '''parable of the broken window''' was created by [[Frédéric Bastiat]] in his 1850 essay ''Ce qu'on voit et ce qu'on ne voit pas'' (''[http://en.wikisource.org/wiki/That_Which_Is_Seen,_and_That_Which_Is_Not_Seen That Which Is Seen and That Which Is Unseen]'') to illuminate the notion of hidden costs associated with destroying property of others.

Bastiat uses this story to introduce a concept he calls the '''broken window fallacy''', which is related to the [[Unintended consequences|law of unintended consequences]], in that both involve an incomplete accounting for the consequences of an action. Economists of the Austrian School frequently cite this fallacy, and [[Henry Hazlitt]] devoted to it his book ''[[Economics in One Lesson]]''.<ref name="Hazlitt_broken_window">[[Henry Hazlitt]]. [http://jim.com/econ/preface.html "Preface"], ''[[Economics in One Lesson]]'', online version, referenced 2009-05-15.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Claude Frédéric Bastiat|Claude-Frederic Bastiat]] on Wikipedia
* [http://mises.org/about/3227 "Frederic Bastiat (1801-1850): Between the French and Marginalist Revolutions"], by Thomas J. DiLorenzo
* [http://www.econlib.org/library/classicsauB.html#bastiat Books] from Bastiat in the Library of Economics and Liberty
* [http://mises.org/literature.aspx?action=author&Id=123 Works] of Bastiat in the Mises Institute
* [http://www.gutenberg.org/author/Bastiat Works by Frédéric Bastiat] at the Project Gutenberg
* [http://www.bastiat.org/ Bastiat.org] publishes and indexes information about Bastiat.
* [http://www.bastiat.net/ Cercle Frederic Bastiat] publishes and indexes information about Bastiat
* [http://herve.dequengo.free.fr/Bastiat/Bastiat_bio.htm Biography] by [[Gustave de Molinari]] (in French)
* [http://mises.org/books/man_alone_roche.pdf Frederic Bastiat A Man Alone] (pdf), by George Charles Roche III.
* [http://mises.org/content/Bastiat200.asp Frédéric Bastiat: Two Hundred Years On] by Joseph R. Stromberg
* [http://mises.org/daily/3926 The Long Shadow of Frédéric Bastiat] by George F. Smith
* [http://mises.org/daily/3860 Bastiat Does Not Go Far Enough] by Louis E. Carabini
[[Category:Historical]]

Price controls

2009-12-19T19:46:01Z

87.244.233.12: Some typos and minor rewording, WP link.

'''Price controls''' are government attempts to fix [[price]]s for commodities and services at a height different from what the unhampered market would have determined.<ref name="Mises_price_controls">Ludwig von Mises. [http://mises.org/humanaction/chap1sec1.asp "1. The Government and the Autonomy of the Market"], Chapter XXX, Interference with the structure of prices, ''[[Human Action]]'' online edition, referenced 2009-09-11.</ref>

Maximum prices are usually set to prevent [[inflation]].

==History==
Over the course of history, governments tried many times to regulate prices in some manner, either to set them directly, or by setting minimum and maximum prices. The policies have a long record of failure.

A particular example was the Ancient Egypt, where the price controls led to the ownership of all land by the state and finally its collapse.<ref name="Schuettinger_Ancient">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 1 - Ancient World, p. 9-18, referenced 2009-09-11.</ref>

In the sixteenth century price controls decided the fate of [[Wikipedia:Antwerp|Antwerp]], the most important city of today's Belgium. From [[Wikipedia:Fall of Antwerp (1584–1585)|1584]], it was besieged by Spanish forces led by the [[Wikipedia:Alexander Farnese, Duke of Parma|Duke of Parma]]. The City Fathers of Antwerp fixed maximum prices for food, with severe penalties. As a consequence, no merchant would risk ships to serve this and the city has blockaded itself better than the Duke of Parna could have done. The enforced low prices didn't force anybody to economize, and the city lived in high spirits until all provisions gave out at once. In 1585 the city of Antwerp surrendered.

In the Indian province of [[Wikipedia:Bengal|Bengal]] failed the rice crop in 1770 and a third of the population died, the disaster attributed to the rigid policy of the government, determined to keep the price of grains down. But for at least once in human history, government did learn by experience. In 1866, the province of Bengal was again on the verge of famine. This time the procedure was completely different, as [[Wikipedia:William Wilson Hunter|William Hunter]] relates:
"Far from trying to check speculation, as in 1770, the Government did all in its power to stimulate it . . . . In the earlier famine one could hardly engage in the grain trade without becoming amenable to the law. In 1866 respectable men in vast numbers went into the trade; for the Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest and where to sell it dearest and food was accordingly bought from the districts which could best spare it and carried to those which most urgently needed it."<ref name="Schuettinger_Medieval">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 3 - From Medieval to Early Modern Times, p. 33-35, referenced 2009-09-11.</ref>

Price controls did not work even for [[Wikipedia:Nazi Germany|Nazi Germany]], rigidly enforced and highly elaborated. According to [[Wikipedia:Hermann Göring|Hermann Göring]], controlling people's wages and prices - people's work - is not enough, people's lives must be controlled as well. They tried both and failed. The [[Wikipedia:Soviet Union|Soviet Union]] was an example of a mature and long-lived total wage and price control policy in operation. And yet, prices for goods, services and wages covertly increased, and a huge [[black market]] swelled up.<ref name="Schuettinger_Germany_Soviet">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapters 9 and 10 - National Socialist Germany; The Soviet Union, p. 65-80, referenced 2009-09-11.</ref>

{{See also|Forty Centuries of Wage and Price Controls}}
{{See also|History of Money and Banking}}

==Effects==
Price controls rarely succeed even for a short time, and have a long record of failing in the long term, with many adverse consequences. A list of effects (many coming from a former price controller):<ref name="Schuettinger_Price_controls">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 19 - The Economic Effects Of Wage and Price Controls, p. 139-145, referenced 2009-08-09.</ref>

* Controls lead to distortions in the market system. Prices inform buyers and sellers of the relative scarcities of all products and encourage them to restore supply and demand. But manipulated prices distort these "signals" and create shortages. Black markets emerge to meet the demand of customers. Firms, that would be profitable otherwise will be pushed out of production or not enter it at all; other firms, that would be unprofitable, survive; impairing rational investment. This encourages calls for more government intervention.
* Controls penalize non-inflationary wage or price increases. For example, wage controls also block increasing wages due to better performance.
* Controls negate the profit principle. It is the profits, that draw investment resources to worthwhile industries and by calling this motive into question, controls undermine the philosophy of the free market and cause dislocations in capital formation and investment.
* Controls are demanded by lobbyists to achieve noneconomic ends. Even with noblest of goals, more controls can be called for using similar reasoning. Why stop at regulating one product or a few?
* Controls create comfortable attitudes. In the market, decisions have to be made, profits rise or fall, firms succeed or go bankrupt, and men are given jobs or laid off. Controls sometimes create the illusion, that these decision do not have to be faced.
* The regulatory body becomes more important than the market. Employers and union leaders, observing that wages and prices can be fixed or increased only by the agreement of some regulatory body, pay more attention to influencing the decisions of that body in their own favor than they do to improving their market performance and the productivity of their labor (see also "[[Wikipedia:Regulatory capture|regulatory capture]]").
* Controls draw attention away from the real causes of inflation, and the need for actual reforms.
* Controls shift the traditional economic powers from consumers to government, labor organizations and businesses.
* Some businesses expecting price controls post "list prices", with a high 'official' price and a large discount. This gives them a chance to raise prices if needed.
* Prices may rise through other means - like reductions of quality and product changes.
* During periods of inflation, prices are rising and workers are claiming higher wages - at the same time, seller are raising their prices to keep up with the costs. There is no right moment, when the prices can be frozen, without causing problems to many businesses as workers.
* Finally, when the controls fail and are removed, any prices, that did not catch up with the real inflation will rapidly rise, creating further economical problems.

'''Price controls influence also employment:'''
* they may increase employment, if the price raises are expected to be dampened
* controls require a number of agencies, commissions, councils and boards to administer, with research and economic experts, executives, planners, members, and supervisors
* reduced profit margins make it less profitable to employ as many people as before (this also impacts any publicly owned companies)
* if businesses are hindered to make the necessary adjustments, then the number of their bankruptcies will rise

'''Other effects:'''
* Price controls inhibit recovery after disasters and hurt precisely the people they are intended to help.<ref name="Caden_disasters">Art Caden. [http://mises.org/story/3025 "Price Controls Create Man-Made Disasters"], posted on Mises Daily on 2008-06-25, referenced 2009-09-11.</ref>
* The costs of queuing, evasion, and black markets often lead governments to impose some form of rationing. Rationing must be watched closely and constantly adjusted to reflect fluctuating supplies and demands and the needs of individual consumers. While solving some of the issues, there is a high risk of corruption.<ref name="Rockoff_controls">Hugh Rockoff. [http://www.econlib.org/library/Enc/PriceControls.html "Price Controls"], The Concise Encyclopedia of Economics, referenced 2009-09-12.</ref>
* Price controls sometimes, paradoxically, raise prices more than no controls.
* A country can't maintain price controls without limiting exports, damaging foreign markets and trade agreements - otherwise, the underpriced goods will be exported.<ref name="Schuettinger_morals">Robert L. Schuettinger and Eamonn F. Butler. "[[Forty Centuries of Wage and Price Controls]]", Chapter 15 - The U.S., Britain and Canada: 1970-78, p. 111-112, referenced 2009-08-09.</ref>

==References==
{{Reflist}}

==External links==
* Wikipedia pages on [[Wikipedia:Price ceiling|price ceiling]] and [[Wikipedia:Price floor|floor]]
* [[Murray N. Rothbard]], [http://mises.org/econsense/ch34.asp "Making Economic Sense"], Chapter 34: "Price Controls are Back!"
* [[Ludwig von Mises]], [http://mises.org/etexts/mises/critique/section5.asp "A Critique of Interventionism"], Theory of price controls
* D.W. MacKenzie, [http://mises.org/story/3790 Maximum Confusion over Minimum Wages], Mises Daily from October 28, 2009
[[Category:Economical Concepts]]