Power & Market

Economic Interventionism and Detachment from Reality

Reality check

Human action is necessarily teleological and value-maximizing. When we act, we seek to do so in a way that is coherent with our subjective valuations. The success of an action, however, is not solely dependent on the will of a person but also requires satisfactory judgment of the conditions of reality. All forms of economic interventionism, regardless of their intentions, distort either the proper assessment of reality or prevent successful actions from occurring.

We live in a world of finite means that we may use to pursue our goals. Once someone has a goal in mind, he can employ means as he sees fit to create a circumstance in which his goal is realized. Humans are not perfect, though, and it is possible for error to occur. If I wanted a place to live and chose to make a house out of cardboard, I would not have a house for very long. It would be an improper choice of means to achieve the goal. Thankfully, humans can also learn from their mistakes and avoid previous errors.

In a free market, prices for goods and services reflect information about conditions of reality. If a good is priced higher than usual, it likely is in short supply or there is additional demand for it. Conversely, a lower price indicates that it has a higher supply and/or lower demand. Prices are an easy way to utilize complex information about the world and using prices is important to choosing which means to employ in an action. For example, steel and concrete are used in construction instead of titanium despite the technical superiority of the latter. This is because titanium is extremely expensive and prices allocate scarce means to where they are most required.

A bureaucrat may observe this and decry, “It is unjust that people must be confined to inferior materials for their home. Everyone should be able to own a titanium house!” However, while the government has the ability to distort the market, it cannot change reality itself. A price cap on titanium would likely halt all production, while any remaining supply would be misallocated egregiously. Since a high price of a commodity indicates it is only used where most required, all more valued uses of titanium would be unachievable as it would be wasted where it is less urgent.

The distinguishing factor between normal error and economic intervention is that the latter causes systemic issues regarding the actions of people and cannot correct itself. In the first example of a cardboard home, the prospective homeowner needs only to realize the folly of using non-durable materials in the construction of his home to move beyond the issue. He will likely employ any economical material, such as wood or steel. People in the second scenario cannot account for the issue caused by the price cap. Prices reflect information about reality, and any builder would choose the superior material over an inferior one for the same price. This causes a structural issue as resources would no longer go where they are most required. In the absence of price distortions, almost nobody would employ titanium in the construction of their home, but would eagerly do so if they could procure it cheaply on a distorted market.

These distortions can be seen in every economic intervention. It would be erroneous to think that the opposite of price caps in the form of price floors would be distortion-free. Minimum wages prevent certain workers from gaining employment, while minimum price guarantees for goods alter consumer behavior patterns in a non-optimal manner. Interventions in economic policy are a form of positive law in that they seek to legislate beyond what can be considered morally justifiable. Due to their nature, they must produce winners and losers (or only losers in certain cases) by fiat decree. When the effects are fully analyzed, intervention always causes more harm than good.

The reason economic interventions do not work is that they claim to do something they cannot. Reality is the world as it is, and human action is required to transform the world into a more satisfactory state. Doing so requires time, effort, and proper planning. Reality cannot be transformed by mere decrees that take issue with the conditions of the world. In the hopes of distorting reality, governments distort action and cause the consequences we observe over and over again. Removing these distortionary hurdles is necessary for economic prosperity.

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