How we should attempt to understand the Economy
Lost amongst the political and economic analysis of the day are some fundamental truths that, whilst being ignored, are never going away and without proper acknowledgement will cause governments everywhere to continue to cause a distorted, hampered and inefficient economy. First, we need to define what the economy is, what the market is since we can’t very well acknowledge distortions in the market economy if we haven’t even defined what that is. The market economy is a system that allows for and is made up of all exchanges that are considered, by those who take part in said exchanges, legitimate. On a simple level, this exchange involves two individuals trading one thing that they value less for something they value more, if I put that into a realistic example, exchange is trading £1.50 for a loaf of Hovis bread. If this is done without coercion, that meaning without the threat of violence and voluntarily, then it is objectively true that both individuals are better off (value has been created) since if either individual thought they would be made worse off from the exchange then they would not have made the exchange. This all comes from the fundamental truth that value is subjective, 100 different people can value the same item differently allowing for this exchange that makes people better off. It follows from this that any intervention into this simple yet highly influential exchange distorts this value creation and leads to worse outcomes for everyone involved. Since this is only an article and we need not understand the deeper mechanics of the market economy to fully address my point, I will not delve deeper into the mechanics of the market economy but I encourage people to read “The Seen, The Unseen and The Unrealized” by Per Bylund to strengthen your own foundation of knowledge and truly understand how much government affects you.
As I already commented, any government policy that causes a disruption in exchange necessarily causes value loss. The important point I want to make here though is that we should not just analyse the consequences we can see, it’s important to do so but we should never leave out the unseen consequences as our politicians always seem to do. To illustrate this, I want to use Bastiat’s Broken Window Fallacy. It goes something like this, a baker comes to work one day and finds that one of the windows on their bakery has been smashed. A large crowd gathers and noticing that the baker is sad because he will now have to pay for a new window, members of the crowd point out that this is actually a good thing since the local window repair guy will get some business. The implication being that the smashing of the window is actually a boost for the economy since the repair guy gets some business and value is created. The fatal mistake of this logic is that value is not created. If the window had not been smashed then the baker could have spent that money on other things that he values for his bakery which would have in turn (if he makes the right decision) created more value for his business as it would boost his exchange. Instead, he now cannot spend that money and must spend it on the broken window, he could even have to close his shop for a day or two whilst its fixed which loses him business. He is, in effect, just restoring the value that was lost by the breaking of the window thus, in actuality, no extra value has been created. However, if we just look at what is seen then all we see is the window repair guy getting business which gives the illusion of a boost to the economy that I have just finished explaining.
Those reading may agree with me and think that this logic is so absurd that no politician or professional economist would fall into this illusion but we see it regularly. A fantastic example are Natural disasters. After Hurricane Katrina, the US Labor Secretary said "[W]hat will happen—and I have seen this in previous catastrophes and hurricanes—there is a bright spot in that new jobs do get created." The Economist paper said "While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins." In 2021, after the California wildfires, Alan Gin, an economist at the University of San Diego, said "In the odd nature of economic accounting, this will probably be a stimulus. There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments." There are many more examples of this from across the political spectrum yet as I have demonstrated, it’s all based on horrific logic, easily debunkable logic. You have to ask yourself, how can these so called “experts” keep getting this so wrong?
I want to quickly hone in on why a very common government policy has vast unseen consequences that are very rarely talked about, the Minimum Wage. The Minimum wage, for those who do not know, mandates that individuals of a certain age must be paid no less than a certain, arbitrary wage e.g., the national living wage in the UK for workers over the age of 21 will be £11.44 after April 2024. The seen outcomes are that individuals on the current living wage will get a pay rise to help with the cost-of-living crisis. However, what is not seen is the potential jobs that could have been created had the minimum wage not been in place e.g., a small business like a startup may choose not to create a job it otherwise could have if the minimum wage wasn’t in place, some potential business owners may choose to not create a business at all knowing that they wouldn’t be able to afford the staff to get the business going. These are just quite simple examples of how just the minimum wage falls into the broken window illusion. The reality is quite different because it is much more dire since the regulations on work are multitude, you can make whole books on just labour regulation.
We must shift our perspective on the economy. It is presumptuous to believe that the extensive regulations imposed on the market only target the intended areas of influence. We require a new calibre of politicians who acknowledge the hubris inherent in advocating for substantial economic interventions and grasp that the economy is a complex system, not easily adjusted without repercussions. We need them to see the unseen.