Quote of the Day: Demand and Supply are Two sides of the Same Coin

It’s not that “supply creates its own demand,” but rather that supply is demand. One produces a good either to consume it oneself or, more commonly, to trade it for another good. Demand and supply are two sides of the same, well, coin—which reminds me to add that Say’s Law holds not just in a barter economy but a monetary one also—a freed one, that is, unlike the corporate state we all occupy.

True, someone might sell a good and not spend the money received. But this would lead to idleness only if the economy did not consist in a time structure of production coordinated by interest rates. In other words, money not spent is saved and available for investment (that is, payments for producer goods and labor, which will be spent on consumer goods) at stages remote from the consumer-goods level; that is, long-term investment in production for future consumption…

Given our insatiable demand for goods, in a freed market a general glut couldn’t happen; if prices were free to fluctuate in response to changed conditions or entrepreneurial error, the price of goods plentiful relative to demand would fall, while the price of goods deficient relative to demand would rise. Entrepreneurs would then adjust their plans, but since change is the rule, the market would never reach a state of rest. Say’s Law is about a (free) process through time, not general equilibrium.

This is from American political writer and libertarian Sheldon Richman at the Reason.com refuting progressives who deliberately misstate the great proto Austrian Frédéric Bastiat’s “Broken Window fallacy” or the fallacious economic doctrine which sees, from the perspective of spending, net benefits from destruction (e.g. natural calamities or wars).

Quote of the Day: Better Regulation Means Regulation by Markets Forces

No stock market commentary for this week

We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

 This is from Sheldon Richman at the Freeman on how political regulation leads to the “money power” (cronyism)

Quote of the Day: The Market Does NOT Ration

The market was never set up by people to achieve a purpose. It is not a device or an invention aimed at satisfying an intention. “Market mechanism” is a metaphor. The market — as a set of continuing relations among people — emerged, unplanned and unintended, from exchanges, initially barter, in which the parties intended only to improve their respective situations. Lecturing at FEE . . . , Israel Kirzner recalled that one of the first things Mises said to him as a graduate student was, “The market is a process,” by which he meant “a series of activities.” This is similar to what the French liberal economist Destutt de Tracy (1754–1836) wrote in A Treatise on Political Economy, “Society is purely and solely a continual series of exchanges.”

Mises, Hayek, and Tracy help us to sort out the rationing question. I submit it makes no sense to say that an undesigned series of exchanges rations goods. If we were to observe a free market (wouldn’t that be nice?), what would we see? Rationing? Allocation? Of course not. We would see people exchanging things—factors of production, services, and consumer goods—for money. Where would they have gotten those things? From previous exchanges or original appropriation from nature.

Consumer Choice

When a person buys five apples in a grocery store rather than ten because he wishes to use the rest of his money for other purposes, it seems entirely wrong to say the market (or even the grocer) has rationed the apples. The customer makes his choice on the basis of his preferences and the money available (which is the result of previous transactions).

It is true that as a result of market exchanges, goods and resources change hands and (except for land) locations. But in no sense is this rationing or allocation. The resulting arrangement of resources is simply a product of many transactions. Of course, people’s choices of what and what not to buy and sell at which prices create an arrangement of goods and resources that tends to be intelligible in terms of consumers’ subjective priorities. But that does not warrant calling the process rationing or allocation.

Those words—especially ration, which shares its root with rational–suggest conscious decision-making—as part of a plan—by an agent. In a free market there is no consciousness overseeing this “distribution”—another inappropriate word when it comes to describing the market process.

That’s from Sheldon Richman at the Freemanonline defending the free market from statist healthcare reformers.

Let me add, dictionary.com defines rationing as “a fixed allowance of provisions or food” or “an allotted amount”. Differently put, a one size fits all distribution of resources that are NOT based consumer choices (preferences or valuations) are barely about free markets.