Saturday, April 12, 2008

Economic cause/effect

Today's lesson of economic cause and effect, which may or may not be relevant soon: the effect of inflation on unrest, price controls, and the ultimate effects thereof.

When inflation happens, people get upset. Mainly, this is because the government is in effect stealing their savings through taxation. Also, though, because the poor individuals are less able to afford basic supplies, as their income generally trails inflation (especially if the economy is stagnant at the same time).

The general historical response to this has been price/wage controls. That is, the government will impose fixed prices on commodities, or fixed wages for people, in an effort to allow them to continue to purchase goods. Generally, this leads to increased costs for producers, as they cannot sell their goods at market even as their costs are rising. If their profit margin is small, they will soon be finding other lines of work, putting more people out of business and removing their goods supply from the system.

As this continues, obviously, the supply of those goods diminishes, and generally the quality decreases as well (as the surviving businesses are those which can produce the goods the cheapest to stay profitable the longest). In most cases, this might be acceptable; unfortunately, the typical case of price controls is food, in which case it's very bad when the supply and quality is reduced.

With imposing price controls, the government is essentially causing the exact effect it is trying to avoid: namely, increasing the shortage of the goods/food. In addition, a black market will probably develop where people can buy the goods/food for market price, which ironically will be vital to the country once the official supplies are suffocated into oblivion. Nevertheless, countries continue to practice these efforts, usually with the understanding that they are doomed to failure and leaving the country worse off than before, but to appease the uneducated masses who trust the leaders to understand the effects, and just want solutions.

A good thing to think about, just in case some short-sighted or plain stupid politician suggests imposing price controls, a moratorium on foreclosures, or some other equally destructive price control measure...

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