Healthy economies arise from the voluntary interaction of parties in a free market. I feel it appropriate to refer to this type of interaction as Economic Balance. In this post, I want to look at Economic Imbalance.
I coined the term Economic Balance to reflect the results of free market transactions. Both parties get something they value more than what they give up. Classical economists refer to “economic equilibrium,” which connotes stagnation (or a dead economy).
Economic Imbalance arises when some entity (usually government) intervenes in the free market process. Intervention comes in many different forms, but they usually fall under three main categories: regulation, spending and taxation, and monetary inflation.
Regulations forces people through the threat of violence to do things they would not otherwise do.
Spending and taxation redistributes resources according to the values of legislators and bureaucrats and not according to the values of market participants.
Monetary inflation represents the most insidious form of intervention. Monetary inflation causes distortions in the information flow that result from market pricing. The distortions of information from the pricing system cause market participants to make rational decisions and take action based on flawed information.
I will discuss these topics under the subject of intervention in future posts.
For those familiar with the work of Ludwig von Mises, I do not want to confuse my term Economic Balance with his reference to the “evenly rotating economy,” which, in oversimplified terms, means a dynamic economy in which supply and demand always match. By using the word “balance,” I want to imply an economy that always adjusts to changes in either supply or demand.
I refer to my previous post from a couple of years ago. This distinction needed further emphasis.