Sunday, September 19, 2010

Attempts at control merely show how little we know

Published in The Tennessean, Sunday, September 19, 2010

Attempts at control merely show how little we know

by Richard J. Grant


In their attempts to understand economic matters, people commonly make two big errors. One is to think of various types of relationships as if they were discrete and durable objects. An example is employment relationships. In this case, we not only speak of “saving” or “creating” jobs, we even think of them as being ends in themselves rather than remembering that any particular job exists to help create those things that we really want.

The other big error is to presume to have knowledge that we cannot possibly have. When there is a disruption in the supply of any good, such as gasoline, the price tends to rise. Such price rises can trigger outrage in people who see the increases as “price gouging.” The question for which these people have no defensible answer is, “What is the correct price?”

They do not know the answer now, just as they did not know it before the supply disruption. Rather than allow the price to rise in order to cover the costs of attracting gasoline supplies from other regions, they invoke “anti-gouging” laws and then wonder why the gas stations in their city have no gas. They have political power, but not the knowledge to avoid unintended consequences.

Attempts to protect preconceived notions of a “fair price” are similar to attempts to protect jobs. A “job” makes no sense when divorced from the purpose that gives it value. A job is just a relationship, an agreement to trade services in the pursuit of some goal or the production of some good. The relationship could last for an hour or for many years. It depends on what people believe they need.

The existence of a job depends on the private knowledge that is generated through many complex relationships. A “market” is not a thing; it is the name that we give to this network of changing, purpose-driven relationships.

We can attempt to count and categorize the jobs, but we cannot stand above the system with governmental powers and truthfully claim to be “saving or creating jobs.” Government officials can never have the detailed knowledge of either the individuals’ desires or the resources available to satisfy them. That is why the only thing that socialism can guarantee is failure.

Politicians always have an incentive to promise something for nothing. When gas prices rise, they try to hold them down. When home prices fall, they try to prop them up. The politicians get votes, but gas supplies don’t arrive and houses don’t sell. Then they blame “markets” and hurl accusations of “greed” at the usual suspects.

In the name of protecting jobs, and winning votes, politicians will often look outward for suspects. Treasury Secretary Timothy Geithner and a significant number of senators and congressmen have decided that China is responsible for some of our current unemployment. They seem to believe that they know what the “correct” exchange rate should be between the yuan and the dollar. They claim to know that the yuan is “undervalued” and that the Chinese government is causing this deliberately.

They disapprove of the recent Chinese policy of fixing the yuan exchange rate to the dollar. Interestingly, the fixing of exchange rates was perfectly acceptable during the quarter century following World War II. It is also acceptable for several other countries today, especially if they export oil. It was also acceptable during most of American history, when the dollar itself was defined as a specific weight of gold or silver.

Instead of being honored that China had chosen to define the yuan in terms of the dollar, Secretary Geithner called the yuan “undervalued.” But what does that say about the dollar?

If the Chinese are controlling other prices and enforcing regulations that are real trade barriers, then we have something to teach them. But if we fail to protect our own freedom at home, then that is our biggest error.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean