A World Economy Without Free Markets Will Collapse

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Posted: Dec 12, 2019 11:25 AM
A World Economy Without Free Markets Will Collapse

Source: AP Photo/Ariana Cubillos

Leftists are replacing market prices with values that they determine – such as those obtained through legislation requiring equal pay for equal work, fair trade, minimum wages, and maximum salaries. Simply put – leftists are tearing down the free market system. It makes about as much sense as preventing pilots and air traffic controllers from communicating.

Most people have no idea of the vital communication roles served by market prices. Without reliable market prices, economies fail. A modern economy can survive only if decision-making is based on observing prices from its own markets or from observing prices from the markets of other nations.

To understand the power of markets, read I Pencil by Leonard Read (a very brief, free reading available at www.fee.org). Or consider the plight of a bureaucrat in a controlled economy under the assumption that the bureaucrat is unable to observe any market prices. Let’s think about how impossible it would be for the bureaucrat to make efficient decisions.

Suppose that the bureaucrat is charged with the seemingly simple task of determining the amount of resources that should be allocated to the country’s facilities for manufacturing potato chips. The goal in a centrally-managed economy should be to balance the benefits of providing potato chips to the population with the burden of creating and distributing the product (at the margin). For the sake of argument, let’s generously assume that the bureaucrat truly seeks what is best for others rather than seeking bribes and being lazy – both of which are huge problems in controlled economies.

The bureaucrat notes that the potato chips seem to directly require potatoes, cooking oil, salt, bags and fuel (assuming that the facilities and equipment already are in place). These are relatively easy resources to value – or so it would seem. Let’s start with the easiest one: salt. What resources are needed to acquire the salt? The salt comes from salt mines – but how much labor, mining equipment, transportation and fuel is required to obtain the salt? But that, in turn, requires analysis of those inputs. Consider just the equipment used in salt mining. What resources are needed to produce the equipment such as the metal, rubber, glass, energy and other inputs? Consider just the glass. What resources are used to make the glass? And on and on the chain of resources goes – exponentially expanding the number of studies that would need to be performed. Of course in a market economy all the decision-makers need to know is the price of salt (and other direct inputs).

The bureaucrat quickly realizes that in a centrally managed economy there is no way to value the resources expended (the costs of supply) or to forecast the benefits generated by the potato chips (the demand). Perhaps the populace is feeding the potato chips to cattle and pigs – which people familiar with market prices know would be a foolish waste of a society’s resources.

The bureaucrat’s only hope is to think back on how the economy functioned before the socialists took over (or observe what is done in countries with free markets). This approach would seem to work OK for potato chips in the short run. But what about the long run and the need to respond to changes in technology? And what if the item being valued is not a potato chip – it’s a computer chip? Computer chip technology has changed so rapidly that even if a reasonable analysis of their values could not be formed without market prices, any centrally-managed attempt to value the computer chips would be outdated within a few years.

Of course centrally managed economies can survive as long as they can observe (and ape) the prices and technologies of free economies. But what will happen if the left reaches its goal of globalization and government-controlled pricing? The answer is that there will be no free markets left to signal value and no one with incentives to do anything about it.

Ayn Rand brilliantly portrays the end result of global socialism in her first book – a brief book entitled Anthem – which is widely available for free on the web (its copyright expired). Rand describes a civilization that has declined into a state of poverty – and worse yet – has lost the belief in the importance of the individual. That is the future if globalist-socialists take control. Human progress will not slow – it will reverse quickly. And each individual will bow to the collective or be destroyed.