In free markets, we have what I have dubbed balance. I use the term balance advisedly because I want to connote the idea that the market always adjusts to the changes in the behavior of buyers and sellers. I want to distinguish between balance, which I used to note dynamic adjustment, and the frequently used term “equilibrium,” which people use to mean coming to static rest.
Market intervention creates a constant disruption to the normal balancing process of markets. Intervention makes adjustments in the market that counteract the benefits of balance.
What I referred to as balance has three distinguishing traits:
- Producers and consumers act voluntarily. They both gain in the process.
- Buyers and sellers act based on individual preferences.
- The money supply does not fluctuate; therefore, prices reflect the actual preferences of buyers and sellers.
Combining these traits makes for a free market that allocates resources effectively and efficiently.
Market intervention disruptions the same three factors and, therefore, the balance of the market:
- Government spending (a.k.a. redistribution) amounts to involuntary consumption. You pay for the road, bridge, or government building whether you need it or not.
- Government regulation consists of dictating individual preferences. The state mandates that you wear a mask whether you want to or not. The state requires you to come to a full stop at a stop sign even when you have a clear view of an empty street.
- The banking system manipulates the money supply, which creates false price signals in the market. Buyers and sellers make rational decisions based on flawed information causing poor investment and spending activity.
The end result of market intervention consists of a market always out of balance. Producers and consumers, buyers and sellers, end up taking actions they wouldn’t otherwise take, resulting in the ineffective, inefficient allocation of resources.
Without government intervention, free markets achieve a dynamic balance that effectively and efficiently allocates the scarce resources in an economy. Free markets make everyone a winner.
On the other hand, market intervention keeps the market always out of balance, causing the continual misallocation of resources. Market intervention creates winners and losers.