Inflationomics

There Are Two Prices: Which One's for You?

Most people probably think I mean bid and ask, but that's not what I'm talking about. I mean a market price and a government-induced price.

A market price is created by consumers voicing their desires by purchasing goods and services they want. Consequently, markets generally produce consumer goods and goods that manufacture consumer goods. Entrepreneurs are the people who try to gauge consumer sentiment and supply them with the goods/services they want. If they fail to gauge the markets' demands successfully, they go out of business and the misallocation of resources comes to an end. Creditors pull the plug before things get too far out of hand. Then, someone else steps in, buys up the misallocated resources for pennies on the dollar and finds a different (and hopefully more profitable) use for the assets that had previously been put to an unprofitable use.

A government-induced price, on the other hand, can be brought about in a number of different ways:

  1. The most direct method is through price controls; i.e., where the government prohibits manufacturers from selling their goods at a market price and instead requires them to sell goods/services at a government-established price. Consider rent control in general and price controls in Zimbabwe. When prices are set below a market price, shortages occur--who would want to bring their goods to market when they can't get a market price for them? When prices are set above a market price, surpluses occur--who wants to buy goods for more than a market price? Black markets spring to life, sometimes at the risk of one's life.
  2. Through government-granted monopolies. Consider the United States Postal Service (USPS), which dictates the price of first-class postage; Medicare, which dictates the prices doctors can charge to treat elderly patients; or the military and police forces, which can spend billions of dollars on unpopular wars (Iraq, Afghanistan, drugs).
  3. By requiring manufacturers to meet certain standards which raise the cost of manufacturing goods. Consider the auto manufacturing industry with pollution standards, and labor-union mandated labor rates, working conditions, and pension requirements.
  4. Government contracts, subsidies, aid, grants, and cheap loans. Consider weapons contracts for the purchase of state-of-the-art weapons, state education, housing through GNMA, FNMA, milk price supports, etc.
  5. Below market interest rates (cheap money) and newly printed money. By printing enough money to cover government expenses, all prices are affected. It results in price inflation. See recent inflation rates based on the Consumer Price Index (whether you believe these numbers or not, price inflation is government created).

Unfortunately, government-induced prices can last much longer than market prices. They are not decided by consumers but rather by government bureaucratic edict and backed up by government force.

As governments grow, the world will experience more government pricing and less market pricing. Fewer consumer goods will be available, more government-desired goods/services will be made, until, one day, consumers will become fed up with all the misallocation of resources, see through all the misinformation about the importance of government-desired goals, and demand more consumer goods and less government force--in short, the freedom to choose among different consumer goods, rather than going from one government-induced crisis to the next.

Robert Jackson Smith

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