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Interventions in markets by governments and central banks
are routine and we take them for granted. No one
questions them, but they can create dangerous
distortions. Their reason for intervening is to take price
determination away from markets and consumers.
The authorities and big business do not like leaving prices to free markets because prices are subjective: in other
words, prices are decided by the desires of the consumer and not the cost of
production. This is the central plank
in the Austrian School’s
explanation of economic theory in free markets, and it therefore follows that what consumers actually want and at what price
must in turn determine prices through the whole supply chain. Keynesians do not take this view,
dismissing the influence of consumers
on actual prices as a
short-term effect that does not fundamentally challenge the importance of costs. They do not like uncertainty over prices, because it invalidates their economic models.
If you accept
the Austrian School’s
argument, free markets are to be
cherished, and interventions only
result in less efficient
use of economic resources.
If you go with the Keynesians, you will believe there is room for the market to fail, arising from aberrations in consumer behaviour. They call it “animal
spirits”. They tell us that
changes in the allocation of economic resources by the free market
are not always justified,
opening the door to market intervention.
There are no prizes for guessing where big business stands in this Keynesian vs Austrian debate. Given the choice between dancing to the consumer’s tune and looking
for government subsidy it always opts
for the latter. It has a vested interest
in supporting Keynesian economics.
This is why
big business believes in government. Government is a source of subsidy and
protective regulation. Equally,
government naively believes that it must consult big business to form successful industrial and economic policies. The result of this symbiotic relationship is that government
intervenes in almost everything that has a price both directly
and indirectly through
the manipulation of interest rates.
The effect is
to downgrade the importance of consumers’
wants and needs, which are most effectively expressed in free markets. The consumer, who is also
a taxpayer, ends up paying
the government to rig prices against him. No one, surely, can argue that this is a
satisfactory way of proceeding.
But what about those
animal spirits? The answer is
simple: prices and products
get out of line with what consumers actually want, almost always as a result of government
interventions. It can be because government has subsidised or protected the wrong production, or it can be because
it has provided easy money in the past and consumers have become financially over-extended. Today, both reasons
are there in spades.
Understand this,
and it becomes obvious that the popular solution advocated by Keynesians and big business alike, of increasing the pace
of intervention, will not erase
those pesky animal
spirits. Instead, the cost,
borne by the hapless consumer in his role as taxpayer,
actually accelerates, as well as distorting markets even more.
Market intervention is
what has got us here, and more of it is definitely not the cure.
Orginally published
at Goldmoney here
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