Economics gets a bad rap for being an imprecise and contradictory science. the famous president harry s truman asked for a one-armed economist, so he didn’t have to hear “on the one hand” followed by “on the other hand.” For better or for worse, the economy and the policies it inspires affect every corner of the world. In this article, we’ll look at four of the most dangerous misconceptions that have haunted free market economists since the days of Adam Smith. (see also: basic concepts of economics ) .
Inflation is inevitable
Inflation seems to be a natural phenomenon; your father paid a quarter for a movie and your grandfather paid $ 3 for a suit, but now you pay $ 5 for a cup of coffee. The ugly truth is that there is nothing natural about inflation. Inflation is a product of the printing presses and, worse, it works as an additional tax on people’s earnings. Inflation can help select groups in the short run: for example, a farmer might get a higher price and make more profits, until the price of other supplies recovers. however, it only helps the government, in the long run, giving it more funds to allocate and at the same time lowering the real value of its debts.
It is no coincidence that the main beneficiary of inflation, and sole owner of the printing presses, has great difficulty “controlling inflation.” There are many different solutions to inflation, but the motivation to stop it is what critics cite as lacking. (see also: inflation tutorial ).
Governments can save us
Government solutions to problems are suspect at best. Most of the solutions have “pig barrel”, which means they have all kinds of passengers with special interests embedded that add to the cost and damage of government intervention. Many government interventions end up carrying a political agenda as the top priority. The new deal reforms of the 1930s were costly in their own time, but one of the surviving political creations, social security, has been a growing tax burden ever since.In many cases, government solutions to economic problems can turn into borrowing schemes to redistribute wealth (that is, your tax dollars) in areas that will buy political support.
From a true free market perspective, it often seems that the real motivation behind political decisions is to keep decision makers in politics. Tax liability is quickly removed if votes are at stake. This reality, often ignored, does not shut people off from government intervention; all the thousands spent on pentagon toilet seats or million dollar bridges to nowhere can get the job done one day. (see also: economic crises: let them burn or end them? )
Free market means no regulation
The free market is an unfortunate name, because people tend to equate “free” with “unregulated.” Unfortunately, the “self-regulating market” does not get off the hook, so we are stuck with this misconception. The fact is, there are many indications of what an unregulated market would look like. Every time you check out a consumer review of a product, for example a car, you are seeing non-governmental regulation at work. Automakers watch what people say about their cars and change next year’s models to eliminate the things that bothered the reviewers.
Consumer interest groups and self-imposed industry standards are two powers that free market economists argue could replace most government regulations, saving taxpayer money and bureaucracy in the meantime. In a sense, these two groups control regulation, while lobbying by consumer groups and industry influencing legislation could be argued to be a more costly and less efficient way of getting the job done.
Taxes do not affect production
Taxes are sometimes represented as a zero-sum game. the government takes a certain amount from private hands and then spends it on other things, so the sum total of economic activity does not change. we pay taxes, we have roads and schools. however, free market thinkers argue that taxes have a negative economic effect, by reducing the incentives to produce more and, therefore, reducing domestic production.
Whether it’s earnings or personal income, the fact is that the more you earn, the less you keep as a percentage of your total income. removing the parenthesis reduction decreases this for people, when increases in income are purely an inflationary phenomenon, but the government simply takes a larger and larger portion, as it works harder to earn more and more. (see also: should we switch to a flat tax? )
Although not everyone reacts in the same way to this stimulus, the overall effect may be a decrease in production. even the government understands that taxes drag the economy. It supports both when you use temporary tax cuts (one to five years) or redemptions to stimulate the economy. However, the government is addicted to tax revenue. Every time the government revenue has expanded, the government itself has expanded to use it all and write more for more.
Instead of using temporary tax relief measures to increase the economy’s output, an effective free market alternative would be to reduce public spending and lower the tax burden. After all, virtually all of the most productive and prosperous peacetime periods have followed major fiscal setbacks. (see also: do tax cuts stimulate the economy? )
The bottom line
Academic opinion, despite vehement protests, seems to follow the rules of supply and demand. The economics of Adam Smith, Fredrik Hayek, and Milton Friedman are simple and straightforward, suggesting an ideal world of low taxes, self-regulation, and hard money. The wishes of the governments of the world that run the printing presses are contrary to this brand of economy. therefore, we have a demand for competitive theories that, contrary to experience, call for deficits, government stimulus, inflation targeting, and massive public spending.
While it is good to expose fallacies, it is difficult to get excited about the possibility of change. It doesn’t matter if we have one-handed economists or not, because governments are often victims of a different disability: hearing only what they want. (see also: free markets: what is the cost? )
