Wednesday, March 10, 2010

Government Creates Illegal Businesses

... which proves government interference reduces creation of wealth.

If commerce outside the law were more efficient than commerce within the law, outlaw trade would out-compete legal trade and drive the law-abiding from all markets. Yet, the only places we find outlaw commerce are where commerce within the law is either not possible or so heavily taxed or regulated that it becomes less efficient than outlaw commerce. Bootlegging of cigarettes is a problem because cigarettes are heavily taxed, so bootleg cigarettes can be offered for lower prices than legal cigarettes while the bootlegger makes a profit in spite of risks and occasional losses. Nobody bootlegs soft drinks.

The more government interferes with the legal market, the more profitable the outlaw market until government controls become so onerous the legal market disappears.

Basic Economic Truth: Low-cost solutions drive out high-cost solutions. Always, everywhere, at all times.

The explanation is simple: people try to maximize their wealth, so buyers seek low prices while sellers seek low costs and high prices. Prices are negotiated between buyer and seller; costs are controlled by the seller alone.

Costs can be difficult to characterize, however, and something what is a low-cost solution for one segment of the market may be a high-cost solution for another, so multiple solutions can exist at the same time, each serving a different market segment.

Price is similarly complex. The waiting for a low-priced item adds to the buyer’s cost: waiting reduces the time a buyer could be doing something else; time is wealth. Just as the risk of being imprisoned adds to the seller’s cost, the risk of being imprisoned adds to the price the buyer must pay.

Without government interference in the market there is no outlaw market. Illegal trade costs more than legal trade, so legal trade drives out the outlaw trade. Absent government interference.

The fact that government “management” or “guidance” or “regulation” or taxation tends to encourage the high-cost outlaw market proves that government interference adds to costs and reduces wealth. Absent government interference, the inefficient, wealth-wasting outlaw market would not exist. Government power, beyond the minimum of protecting persons and property and enforcing contracts, does not and cannot increase human wealth. The existence of thriving illegal businesses proves this.

There is an exception to that grand pronouncement: what economists call “externalities,” although government regulation of externalities can be considered part of protecting persons and property. More on that later.

No comments:

Post a Comment