Minimum Wage vs. Balance

~ Jim Berger ~ 1 Comment

I began, several weeks back, by stating that minimum wage laws are a terrible idea. I made several posts laying the ground for the idea that minimum wage laws represent only a small part of the problem of government intervention, which upsets the balance in markets established through unfettered exchange.

I now return to the minimum wage laws and show how they fit into the general patterns of government intervention: redistribution, regulation, and monetary expansion.

Redistribution

We usually associate the process of government redistribution with the confiscation of private property (taxation) and disbursements (spending) to other parties. Minimum wage laws represent a more devious form of redistribution.

Government assesses a different form of tax by forcing employers to pay workers more than a market wage. This process has the same effect as if the government taxed the employer an amount equal to the difference between the worker’s market wage and the mandated minimum, then remitted that amount to the worker. The government receives a sneaky bonus by imposing this form of taxation: the government gets additional FICA taxes from the employee and the employer.

Regulation

The most obvious intervention of minimum wage laws occurs in the form of regulation. Regulations attempt to get people to shift their preferences by defining acceptable behavior then imposing some form of penalty for non-compliance. Many (most) business licenses do nothing to improve the quality of a product or service provided. The business owners simply prefer to pay for a license and stay in business than close the business and pay a fine or go to jail.

Minimum wage laws apply the same sort of limitations on the free exchange of labor for fair compensation. These laws tell employers that they will receive a punishment for providing a job for less than an arbitrary sum. Employers will prefer not offering a job that they value less than the regulated minimum than providing the job and suffering a penalty.

Minimum wage laws don’t raise wages. They take lower-paying jobs off the market. People willing to accept less pay have opportunities taken from them.

Monetary Manipulation

(Mostly Expansion)

Manipulation of the supply of money amounts to the most insidious form of intervention affecting minimum wage laws. Its effect runs counter to what legislators claim they want for workers. By expanding the quantity of money, government reduces the real wages of all employees—including those at the bottom. As prices and revenues rise, the perceived value of low-end labor seems to increase. Nominal low-end wages increase, but their purchasing power declines. Thus, in real terms, the value of the wage minimum does not increase—and may even decrease.

What the government gives with one hand, it takes away with the other.

Conclusion

Free markets tend toward a dynamic natural balance. They achieve this balance as the result of many individual transactions. Both “buyers” and “sellers” leave each transaction receiving something they value more than what they give up. These individuals don’t worry about the market as a whole; they only wish to satisfy their own preferences. But, when these transactions all link together, they achieve an effective and efficient allocation of resources. They achieve a sort of dynamic balance.

Anything done to intervene in these voluntary transactions upsets the balance throughout the market. One of these interventions consists of minimum wage laws. By preventing the voluntary exchange of labor for wages, the government causes destructive waves throughout the market.

These laws cause some workers to suffer unnecessary unemployment. In some cases, they create an additional tax burden on employers, with the negative effects that added taxes cause. The few workers who seem to benefit from this form of intervention have their real wages diminished by expansionary monetary policy. (Monetary policy ironically intended to maintain full employment.)

Proponents base minimum wage laws on a grand lie: that intervention can improve the natural dynamic balance of a free market.

Intervention vs. Balance

~ Jim Berger ~ 1 Comment

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.

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.

Intervention

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.

Conclusion

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.

Resource Allocation

~ Jim Berger ~ 1 Comment

Balancing Production and Consumption

A Review

Before I continue discussing the allocation of resources in a free market, I would like to recap some of the points that I have made in the last few blog posts.

I started by explaining the concept of consumer sovereignty, which means that the whole purpose of production and markets consists of satisfying the needs of consumers. Second, because of the importance of consumers, producers have the motivation, and an obligation, to keep their costs as low. Next, I made the point that consumers are the major influence in determining prices because of the importance of their purchasing decisions in the market. At that point, I raised the question of the source of consumers. Because production must always precede consumption, consumers must first produce something or have a producer support them (e.g., family members supported by the primary breadwinner.) My last post introduced the concept of complexity. Before one can understand how all of this gets tied together, one must comprehend the tremendous complexity of markets.

This post will pull it all together and show how consumers, producers, and market complexity combine in free markets to make the most efficient and effective allocation of resources.

To open this discussion, I will describe an individual exchange.

Individual Exchange

It takes many, many individual exchanges to create what we refer to as a market. Thus, understanding market activity requires a clear understanding of an individual exchange. Whenever two people interact, an exchange occurs when each offers something that they prefer less than what they receive in exchange. This applies whether the two parties engage in a direct exchange, involving one good exchanged for another, or if the parties engage in an indirect exchange, involving the exchange of money for a good.

In every voluntary exchange, the parties involved both gain. Each person values what they receive more than what they gave up. Because of this fact, we can consider individual exchanges as an effective allocation of resources.

For indirect exchanges involving money, we tend to refer to the person offering the money as the buyer and the person offering the good as the seller.

Market Allocation

Voluntary individual exchanges provide the foundation for free markets and the market allocation of resources.

Billions of exchanges, all connected, create large markets. All buyers and sellers free to exercise their discretion to achieve mutual gain. Because the objective of large markets consists of satisfying the needs of consumers, the mutual benefit from this multitude of transactions leads to effective and efficient allocation of resources throughout the economy.

Central Planning

Numerous people seem to have become enchanted with the idea of central planning. They think that government can do a better job in allocating resources than the market. A centrally planned economy has never worked and, in fact, cannot work.

The complexity of markets, even small markets, makes it impossible for one mind, or a group of minds, to know the needs and desires of all consumers. Central planning cannot match the effectiveness and efficiency of voluntary exchanges in a free market.

Conclusion

Because of the complexity of markets and the subjective nature of value, only free markets can achieve a proper balance between production and consumption — i.e., effective and efficient resource allocation.

Market Complexity

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In previous posts, I introduced the importance of consumers in a well-functioning market. I also introduced the fact that consumers consisted of a byproduct of production. Consumers can neither consume nor acquire things to consume without first producing. These facts might lead one to assume that some sort of centralized control might make a more efficient market. Before I continue and describe why this cannot work, I would like to explain a concept critical to understanding the fallacy of centralized planning — or market intervention. I will in this post explain the complexity of markets.

Butterfly Effect

Systems thinkers occasionally refer to the Butterfly Effect. The Butterfly Effect provides a hypothetical example of a highly complex system. Small changes in one part of a large system can cause significant changes later in another part of that system. A butterfly could flap its wings in Indonesia, and six months later, through a chain of events, it could cause a hurricane off the coast of Florida.

Such an effect seems highly improbable. But, whether it’s even possible, it provides a good model for understanding the incredible complexity of large systems. Think about the number of connections it would require for a tiny action like the flapping of a butterfly’s wings to multiply its effects over time and distance to result in a hurricane thousands of miles away. If you stretch your imagination, the Butterfly Effect can help you consider how small actions in a large system can create sizable effects.

To make this description of complex systems a bit more realistic, I will describe two types of large-scale systems: mechanical systems and living systems.

Mechanical Systems

Mechanical systems consist of those systems that follow the laws of physics. They behave in highly predictable ways. If we know the detailed structure of the system, we can predict with a high level of certainty the behavior of the system’s processes.

The flow of water provides an excellent example of a mechanical system. We can say with almost absolute certainty that water from a small rainstorm on the East slope of the Rocky Mountains will ultimately arrive in the Gulf of Mexico. Even with the mechanical system, however, we cannot predict all the behavior precisely simply because we don’t have the capability of knowing all the details of the system structure. No one has mapped out the exact location of every rock and stone in the streams from the Rockies to the Mississippi. It will require this level of detail to predict the behavior of the system in detail.

Complex living systems present an additional set of complications.

Living Systems

Living systems have two characteristics that make them far more unpredictable than mechanical systems: they self-reference and self-adjust. These characteristics mean that living systems can watch their own behavior and adjust that behavior to produce a different outcome.

To demonstrate the adaptive behavior of a living system, let me use an example that has some similarity to the flow of water. Think of a man (or any mammal) traveling a road that generally slopes downhill. Unlike water that will always seek a lower level, the man can follow the uphill path to reach his ultimate destination. With many forks in the road, an observer cannot possibly predict in advance the exact route of the man traveling to his destination.

Billions of Decisions

The many individual transactions make up a living system that we refer to as a market. Predicting the behavior of a single individual in the market can be difficult by itself. Even if you have the individual’s shopping list, you cannot predict impulse purchases nor product substitutions. As markets get larger and larger, they include more and more unpredictable, self-adaptive humans.

Markets consist of millions of actors — both buyers and sellers — making billions of decisions involving one-by-one transactions. No individual, or small group of individuals, can comprehend the structure of large markets. Because of the adaptive nature of the humans in that system, precisely predicting the behavior in markets becomes impossible.

Conclusion

Piece by piece, I have tried to demonstrate that symbiotic interactions between producers and consumers— which in the end are the same people — create markets. Markets require a process that does the best job, somehow or another, allocating resources to produce what consumers desire and have the capacity to acquire.

In my next post, I will discuss the most effective and efficient method for resource allocation.

Creating Consumers

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I have described the importance of consumers in the operation of free markets. All production and distribution exist to serve consumers. Consumers ultimately determine all market pricing. But, from where do these all-important consumers come? How do consumers get “created?”

According to common usage, we call people who spend money in the economy “consumers.” Consumers, however, play a much more complex role in the market. For this discussion, I will divide consumers into two groups based on how they acquire their money. I called one group real consumers and the other group artificial consumers. I will explain the difference between these two types of consumers. Then I will return to Joe’s restaurant to describe the impact these different types of consumers have on prices.

Real Consumers

To explain what I mean by a real consumer, I will first refer to Say’s Law, which briefly says that production creates its own demand. This “law” describes the creation of real consumers in a free market. Real consumers use what I earlier referred to as market money — money acquired by selling something they own. In other words, workers employed in the production process get paid with market money, and using that money, they become consumers.

For real consumers to consume more stuff, the economic system must produce more stuff. Real consumers must make a sacrifice to acquire their market money. Having to make sacrifices to acquire their money influences the preferences of the real consumer.

Artificial Consumers

Artificial consumers use non-market money — acquired by government spending (redistribution) or by exchanging promissory notes for bank-created money. No one needs to sell something they own for the artificial consumers to acquire their non-market money. Making no sacrifice to acquire their money also influences the preferences of artificial consumers — but in a very different way.

Return to Joe’s Restaurant

My earlier description of price determination in Joe’s restaurant applied to real consumers using market money. Introducing artificial consumers with non-market money into the economic system sends false signals to Joe and other suppliers in the market.

When artificial consumers receive money for which they make no sacrifice, they may prefer to eat at Joe’s rather than preparing a cheaper meal at home. In response to this artificial demand, Joe does not lower prices that he would otherwise, and he may raise some prices that he otherwise might lower or maintain. Joe might even expand his restaurant based on what he reads as strong demand.

Having these artificial consumers might seem like a bonanza for Joe. Still, the increased sales do not reflect the realistic preferences of these customers — nor the availability of additional goods in the economy. Having made no sacrifice for their non-market money causes them to make changes in their scale of preferences. And the impact does not stop with Joe.

Because of the artificial shift in preferences, grocery stores sell fewer goods than usual, and they may, based on this flawed information, lower some prices. The grocery stores might even contract their operations. These contractions will probably result in job losses.

Although very simple, I hope this example shows how artificial consumers‘ non-market money distorts the information transmitted to the market by prices.

Conclusion

I have labeled elements of the market that we normally cannot identify. Money does not come with markings designating market money and non-market money. Consumers do not wear tags designating them real consumers or artificial consumers. Joe and the grocery store interpret consumers’ spending as signals of the amount of stuff produced in the past in the amount of stuff they (Joe and the grocery) need to produce in the future.

With the introduction of non-market money by artificial consumers, these signals, however, contain false information.

At this stage, we only know that the current trend in prices misleads both producers and consumers.

Price Determination—Part Two

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Now that we have a precise definition of the word “price,” we can discuss price determination (or priced discovery) of what we refer to as “market price.” We can understand the determination of an individual price by understanding the previously discussed definition of “price.” The individual price results simply from the agreement between buyer and seller. But, what determines the “market price?”

To explain the discovery of a market price we will return to Joe’s restaurant. We will discuss how he determined the market price of the items on his menu. To understand that process, we will return to when Joe first opened his restaurant.

When Joe first started his restaurant, he offered three items on his menu: item A, item B, and item C (I’ve avoided naming specific food items so you don’t get caught up in judging which one you like the best.) Since he didn’t know how much customers would willingly pay for these items, he decided to offer them for $5.00 a plate. (For the sake of this argument, we assume that the cost of preparing each plate was the same.)

After about three months of operation, Joe discovered that he generally ran out of item A before closing time. On the other hand, Joe had to throw almost half of Item B away. Finally, the quantity he prepared of item C seems to be just enough. So, Joe decided to adjust the prices on each of the items.

Joe raised the price for item A to $8.00 a plate; for item B, he lowered the price to $3.00 a plate; and item C he left at the original price of $5.00 a plate. After making these price adjustments, Joe found that the quantities he prepared were just enough.

Joe managed to achieve these results without getting involved in individual negotiations with each customer for each item. Customers express their preferences by either buying or not buying the items offered. Joe now had a good idea of the market prices for each of these food items.

You will notice from this example that Joe’s customers, not Joe, ultimately determined the market price for the items on his menu. He could not forces customers to pay more for an item than they wanted. Nor could he force them to buy less of the product they enjoyed more.

Determining the market prices for the items in Joe’s restaurant is a lot more complex than this example. Still, it does provide a microcosm of the process that determines the market prices of all goods and services in a free market.

By using this crude example, I hoped to demonstrate what I referred to earlier as consumer sovereignty. The consumer determines the prices of all goods in a free market, from the lowest order to the highest order. The consumer signals at what price he will buy by a negotiating process of buying or not buying.

If consumers have more influence on determinating market prices than producers, how do we make consumers? From where do they acquire their money?

Price Determination—Part One

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The determination of prices represents another piece in the free market puzzle. As frequently as you hear people refer to prices, I find it surprising how many misconceptions people have about prices. How do you define “price.” What factors determine price? What role do prices have in resource allocation?

In this article, I will address the definition of “price.” I will discuss other important aspects of prices in future posts.

To discuss price in a meaningful way, we must first give it a definition.

The ratio of what a market actor gives up for what he gets determines the price of the item received.

In dollar-denominated transactions, we would state that in terms of dollars per unit, e.g., dollars per pound, dollars per bushel, or dollars per item. We can only express that price after the completion of a transaction. The dollar amount on a price tag represents only an “offering price.” If a person accepts that offer, the resulting ratio from that transaction becomes the price.

When a number of transactions occur at the same ratio of dollars to units, we generally refer to that as the “market price.” A “market price,” however, does not commit the parties to any future transaction to that price. “Market prices” simply indicate a ratio at which future exchanges will likely occur.

Along with this definition, we need to define two terms closely related to the term “price:” “buyer” and “seller.” Market transactions consist of exchanges. The distinction between “buyer” and “seller” (or “buying” and “selling”) depends on perspective. With every exchange, we can refer to both parties as either“buyer” or “seller.” One party buys goods and sells dollars. The other party buys dollars and sells goods. So, who’s which?

In referring to exchanges involving dollars, normal usage for “buyer” refers to the person offering dollars, and “seller” refers to the person offering goods.

Does what I have just written simply describe a distinction without a difference?

Understanding the common nature of “buying” and “selling” as exchanges can change our perspective. For example, when a store own raises his (offering) price, he signals that he wants more dollars for his goods; when you wait for a sale, you just want more goods for your dollars. What’s the difference?

In the next article, I will discuss the process of price determination or discovery.

Lower Producer Costs

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The importance of consumer satisfaction—which I have referred to as Consumer Sovereignty—plays a critical role in the behavior of all actors involved in the structure of production. Miners, manufacturers, distributors, and retailers will all try to lower their costs so they can pass the saving on to consumers.

To understand this tendency, let’s examine the behavior of a single person acting as both producer and consumer. If we watch a man—we’ll call him Joe—cooking his own dinner, he will not spend more time, use more utensils, or include more ingredients than he needs to prepare the meal he desires. If the normal cooking time amounts to half an hour, Joe will not continue cooking for two hours. Of course, he does not want to burn his dinner, but, even if burning were not a risk, he wants to eat so he can get on to other activities.

If Joe enjoys cooking so much that he starts a restaurant, he will face a similar challenge in satisfying his customers. To have a successful restaurant and stay in business, he must keep his costs lower than his prices. Also, lower prices will generally lead to more customers. Thus, to have lower prices and more customers (and stay in business), Joe has a natural pressure to keep his costs low.

Of course, wages make up part of the operating costs of a business. The downward pressure on costs creates downward pressure on wages.

The reduction of all costs, including wages, occurs as a natural outcome of satisfying the desires of consumers.

Does all this mean that Joe should lower his prices to near zero and force his worker to work for close to nothing?

Running a business requires considering more factors. For example, Joe’s restaurant seats only 35 people, so what benefit does he achieve for lowering prices and costs to gain more customers?

I will look at price setting next.

Consumer Sovereignty

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Legislating minimum wages, at any level, is a dumb idea. It fits a pattern of dumb ideas suggested by the interventionists in governments. Many of the critics say that minimum wage laws lead to more unemployment. That statement turns out to be accurate, but I want to begin this discussion on a much more fundamental level.

I want to point out the importance of the consumer in a free market system.

The only purpose for an economic system consists of responding to the desires of consumers. All production and all trade exists for the sole purpose of satisfying consumers. This statement holds true at all levels of production and exchange.

The mining process, which produces one of the highest orders of goods, exists to produce lower-order goods that ultimately turn into consumer goods. Without the need to satisfy consumers, farming, mining, manufacturing, distribution, and retailing would not exist.

Because of the importance of satisfying consumer needs, Ludwig von Mises coined the term “Consumer Sovereignty.” Although that term might seem a little extreme—and it has for some economists – it does, however, emphasize the importance of consumers in the structure of production.

You might ask, isn’t this obvious, or what does this have to do with minimum wage legislation?

First, this article lays the groundwork for understanding the harm caused by many forms of government intervention.

Second, this article sets the stage for understanding that consumers have more influence on wage rates than do employers.

Crazy Markets

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In my post titled “Money Tree,” I explained in a general way how the addition of “non-market money[1]” distorts market prices, which in turn leads to a misallocation of resources.

In this post, I will build a hypothetical model to show how that process works in more specific conditions. I will follow two different market actors through two possible scenarios for that model. In the second of these scenarios, I will show how the addition of “non-market money” leads to several low-priced stocks’ market craziness, including Gamestop’s shares.

Ceterus Paribus

For the sake of this model, I have applied ceterus paribus limitations (to borrow a term from economists.) I have held constant several factors that might otherwise affect prices — the most notable I have held production, which plays a significant role in price determination, constant.

The Actors

This model will use two imaginary market actors (workers and buyers.)

We will call our first actor Marvin. He practices law and makes an above-average income. He spends his money on the same categories as Joe, but he can afford higher quality products, and his nights-out come far more frequently.

We call the second actor Joe. He works as an auto mechanic. Joe makes a good living under normal circumstances, but he usually cannot afford any extravagances. He mostly spends his money on food, clothing, and shelter. Occasionally he has enough to take the family out to dinner.

Scenario #1

In their infinite wisdom, government officials have placed restrictions on people’s activities; however, in this scenario, they have not succumbed to the pressure to distribute money to citizens (unlike our current reality). The market must operate on “market money” only. People must produce something to exchange for the money they have.

The coronavirus restrictions have had an adverse effect on Marvin’s income. He has not had to make significant sacrifices, but he has had to trim his spending around the edges.

The coronavirus panic has had a relatively similar effect on Joe’s income. People don’t have their cars repaired as much, and Joe now works fewer hours. He has eliminated the dinner outings, and he must skimp on the rest of his budget.

Prices- Scenario #1

Initially, the prices of the products that Joe and Marvin purchase did not change much. After the suppliers of these products saw their inventories start to grow, they lowered their offering prices to get products to move.

By offering products at lower prices, stores effectively increase the real wages of their customers — including Joe and Marvin.

Resource Allocations

Because the market continued to operate with only “market money,” both Joe and Marvin, although to differing degrees, adjusted their purchases to accommodate their reduced incomes. In response, sellers accepted lower prices, which benefited Marvin, Joe, and other shoppers. Even though production and consumption both declined, prices accurately reflected that new reality, leading to an effective allocation of resources.

By operating with only “market money,” market prices adjusted to reflect the real damage done by government intervention — closing businesses.

Scenario #2

In the second scenario, in addition to the restrictions placed on people’s activities, the government distributed “non-market money” to various people in the economy, including Joe and Marvin.

As with scenario #1, coronavirus restrictions have reduced Marvin’s income, but now he has an additional $1,000. Again Marvin has not had to reduce his spending. What should he do with the extra money?

Marvin decides to buy a pair of shoes he has eyed for some time. They cost him $100. Before he can decide what to do with the other $900, he gets a message from the Reddit investors. On their suggestion, he buys $900 worth of Gamestop stock.

I will discuss the result of the decision below.

In scenario #2, the restrictions have had the same adverse effect on Joe’s income. This time, however, Joe also gets the additional $1,000 (“non-market money”) from the government.

Joe continues to restrict his budget because he does not know how long his repair work will suffer. He feels that he can afford to spend some of the $1,000 he received from the government.

Joe spends $50 on a take out meal for the family and $150 for a new bike for his son. He plans to save the rest.

Then Joe hears about the success that the Reddit Investors have had with Gamestop, and he decides to buy $800 of stock.

Prices- Scenario #2

Although many people had lower incomes because of the COVID restrictions, many of them had the “stimulus” money, and they did not reduce their spending as much as they would have in scenario #1. Because demand seemed to remain strong, retailers did not reduce prices as much as in scenario #1. Thus, people did not get the same boost in real income.

But another phenomenon occurred.

Because Marvin and Joe and many like them spent part, or all, of their “stimulus” money on Gamestop, the stock price rose from about $10 a share to nearly $500 a share. Being able to buy low and sell high sounds like a good deal, but this price increase did not have a uniform impact.

As the price rose, not every investor made the same amount of money. Some got in early and held on to near the peak. Marvin bought at $50 and sold at $400 – he made $17,100. Others got in early and got out early, making a small profit. Still others got in late and got out only slightly later, also making a small profit. But, everyone did not make money due to this price rise. Hedge funds, because they had shorted the stock, lost billions during the price rise.

Then the price fell back to around $20 a share. As the price crashed, investors lost varying amounts of money. Joe bought at $100 and sold at $25. He lost $600, money he could not afford to lose.

Distortions in Resource Allocations

The extra “non-market money” really screwed things up. When “non-market money” enters the market, it turns the process into a zero-sum game — for every loser a winner, for every winner a loser.

Marvin managed to make a handsome profit, but that came at someone’s expense. Marvin could now buy things for which he would not sacrifice. Part of his gain could have come at Joe’s loss.

Joe, instead of spending money on his family, lost a bunch on a bet that he would not otherwise have made. Joe could not now buy things that he could have afforded, even with a reduced income. Did his loss finance the gains of others who invested money they really could afford to lose?

Hedge funds lost a lot of money. Don’t be too quick to judge. You don’t really know who had invested in these funds.

Conclusion

Because of the complexity of markets, financial and otherwise, no one has the capability to assess the impact of “non-market money” on the allocation of resources. We can say with certainty that the distribution of this money causes a misallocation of resources. People make market transactions with money for which they did not have to sacrifice and for which — in the case of “artificial money” — they did not exchange goods valued by anyone in the market.

I have used the trading of highly volatile stocks as an example because, although not typical, it shows an extreme example of the impact of the injection of “non-market money.”

Politicians have no clue of the damaging effects of their “generous” spending. The price will definitely come sometime in the future. When and how bad?

You guess.

  1. “Non-market money” & “market money” – I introduced these non-standard terms in a previous post. The terms refer to the sources of the money. “Non-market money” consists of money either taken by force (i.e. taxation) or created artificially (i.e. created out of nothing by the banking system)> ↑