Economics is About Managing Scarcity

Economics is About Managing ScarcityI recently read the tragic story of Laura Hiller. Laura died from Leukemia even though she had bone marrow transplant donors ready and willing to go. The reason? There were not enough hospital beds for transplant patients in Ontario where she lived. This is apparently an on-going problem in Canada.

One of the mantras of those seeking to establish a Canadian-like nationalized healthcare system in the United States is that no one should be denied a life-saving medical procedure because they are unable to pay for it. Setting aside how often that actually happens, is that worse than being denied such a procedure because you’re in the wrong place on a waiting list?

Those who think government can just supply things “free” to everyone who wants them don’t understand the concept of scarcity in economics. Scarcity says there are always more people who want a good or service than can be provided with it. Always. That remains true no matter what economic system is in play – whether capitalism or socialism. The only difference is the mechanism used to allocate resources.

In a capitalist system, the mechanism is the free market. Prices determine who gets what, when. Of course that means some people will not get some things, even important things, because they don’t have enough money to buy them. The fallacy is that when government makes things free, that problem goes away.

In a socialist system, the mechanism for allocating resources, while purported to be the government, is in reality things like time and proximity. It’s not those who have the most money who can obtain things but those who have the most time to wait in line or who live closest to the store so they can be at the front of the line when the doors open.

Think of it this way, if next week Apple raised the price of a MacBook Pro to $25,000, they would be out of reach of many people. But, here’s the rub – the same would be true if next week Apple lowered the price of a MacBook Pro to $25. Assuming their inventory is not unlimited, they would run out of computers in a matter of minutes. Again, the only difference is the people who get one in the second case are those at the front of the line rather than those who have $25,000 to spend.

Here’s the question: Is one of those situations more moral than the other? Is it better for people to be denied a good or service because they don’t have enough money or because they don’t have enough time or proximity? Either way, some people don’t get what they want.

So back to healthcare. Is it better for someone to die because they cannot afford to pay for a procedure or because they cannot get access to the procedure? Is one less dead than the other?

A better question is which of the two allocation methods allows for the most people to have access to the things they want or need and history has shown us over and over that it is capitalism and the free market that does that.


Photo credit: LendingMemo via / CC BY

The Ten Commandments of the American Left

  1. I have no other gods before Me.The Ten Commandments of the American Left
  2. Thou shalt not make for thyself a god other than Me and My feelings.
  3. Thou shalt not take My name in vain or disagree with Me in any way.
  4. Remember January 22, 1973 and keep it holy.
  5. Honor Me that you may live long in the land and not get fired or have your livelihood threatened.
  6. Thou shalt not kill – animals. Babies, that’s fine.
  7. Thou shalt not commit self-control and personal responsibility with regard to sexual practice.
  8. Thou shalt steal from the rich (as defined by Me) and redistribute it to the poor (as defined by Me).
  9. Thou shalt bear false witness any time the facts are not on thy side.
  10. Thou shalt covet all that thy neighbor has and try to take it from him because he only has it due to privilege.

Should Payday Loans be Controlled by the Government?

According to a recent article in the Baptist Press, the Southern Baptist Ethics & Religious Liberty Commission (ERLC) is partnering with several other organizations to “target” payday loans. They see these loans as an abuse of the poor and want the federal government to “put an end to the predatory practices of payday lending.”

So what exactly does that mean? Do they want all businesses who provide short-term loans to be forcibly closed by the government? Do they want the federal government to fix prices for this type of loan? For all loans? Do they want the government to force these lenders to give preferential rates to people with certain incomes, regardless of credit history? Do they want government to force banks and other traditional lenders to provide loans to those who otherwise would not qualify (can you say sub-prime mortgage crisis)?

One of the problems with social justice crusades is that social justice is hard to define. What exactly is a “just” interest rate or a “just” price for a car or a loaf of bread? The Bible verses referenced in the BP article quote 0% when they reference interest, is that what they’re suggesting?

There’s also a fundamental misunderstanding of the free market and of economic principles behind this push. Interest is not a random number. Interest is a price. It is the price of money. Price is where the interests of the consumer and of the business intersect. General Motors cannot charge anything they want for a new Chevrolet. They can only charge what people are willing to pay. If they cannot make a Chevrolet for less than what the public is willing to pay for it, they will stop making Chevrolets. If these payday lenders are simply greedy predators out to make as much money as they can on the backs of the poor, why don’t they charge twice or three-times the rates they currently do? After all, they’d make more money that way.

Many a social justice crusader has tried to use government price fixing to help the poor. Unfortunately, when the price a business can charge is set below the market rate, the poor (and everyone else) soon find the store shelves empty. Try to buy a television or a roll of toilet paper in Caracas these days.

The truth is these lenders provide a service that is needed – otherwise they wouldn’t exist. One of the unintended consequences of forcing lenders in high risk markets to artificially lower their rates is that such lenders will soon disappear. Then the people who use their services to help make ends meet, instead of having a short term loan at a high interest rate, will have their car repossessed or their electricity cut off or be evicted from their homes. Thomas Sowell goes into this in more detail in an excellent article called “Predatory Journalism on Payday Loans and Price Controls.” Sowell says in part:

…demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.

It’s easy to demand that the government force businesses to assume additional risk in order to satisfy your sense of social justice. But, if you really believe payday loans are too expensive, start or invest in a company that provides such loans at 6% per annum. If that’s a workable business model, the meanies charging too much will soon be out of business through the invisible hand of the market rather than the iron fist of government.

Equality versus Justice?

Equality vs Justice

You may have seen this picture floating around Facebook or Twitter. Every time I’ve seen it posted it receives a bevy of positive comments and “likes.” But is it an accurate representation of justice? Most attempts to boil down complex issues to a bumper sticker or a meme fall short and this is no exception. There’s too much we don’t know about the scenario. I think by answering a couple of questions, we can show this is not a good example of injustice being rectified:

Where did the boys get the boxes?

How did the box redistribution happen?

First of all, where did the boys get the boxes? This matters. Resources don’t just appear out of thin air. Did they earn them (or buy them with their earnings)? Did someone give them to them? Were they already there? If the boys worked to earn the boxes, how is it unjust for them each to have what they worked for? Say they earn the equivalent of a box an hour at some job and each boy worked an hour – then each boy has received justice, what he was owed. If someone gave them the boxes how is it unjust for each of them to have what their benefactor provided at no charge? If the box fairy wanted one or more of them to have an extra box he could have provided that but he was under no obligation to do so since the boys did nothing to earn them in the first place. Finally, if the boxes were already there, again, the boys did nothing to earn them. None of them had a claim on any of the boxes, much less more than one of them. The boxes belong to someone else so they, in fact, have no rights to them at all.

Secondly, how did the box redistribution happen? Did the boys decide among themselves to share the boxes? Did someone force them to redistribute them? If the boys decided among themselves to share the boxes that’s great, but that’s not justice, that’s charity. Justice is giving what is owed, generosity is not. Forced generosity is an oxymoron. I pay taxes every year not because I have compassion for the federal government or am generous towards a bloated bureaucracy but because if I don’t they’ll put me in jail. Which brings us to the other possibility. If the boys were forced by someone bigger or stronger than themselves to redistribute the boxes that’s not only not justice, it is injustice. And depending on how the boys got the boxes, it might also be theft or extortion.

Bottom line, all the boys wanted to see the game but they did not all have the resources to do so. That’s not injustice. That’s just life. Not having enough boxes to see the game is no different than not having enough money to buy a ticket to see it. Is it unjust if one of the boys has enough money for more than one ticket but chooses not to give the extra money to his friend who is short of funds? Of course not. He may be ungenerous or stingy for not buying his friend a ticket (or he may just need that money for something else) but he’s not being unjust.

It’s great when we do things for our fellow man, sharing with them out of the abundance of the blessings God gives us. We should do that. However, let’s not confuse that with justice. Justice is getting what is owed me. If I work 40 hours for an employer who promised to pay me for those 40 hours, justice is getting what I earned at the end of the week. If I rob a liquor store at gunpoint, justice is the judge meting out the sentence I’m owed for that crime. However, in the normal course of life, I’m never entitled to the fruit of someone else’s labor. Again, I’m not saying it’s not right and good to share our resources with one another. But if we insist that equality of outcome be the measurement of a just society (which is what this meme is suggesting), we need to realize the only way that can be achieved is through forced redistribution, usually at the hands of government. And history has shown us that never works as promised unless the promise is that most people will be equally poor.

One final thought:

How is it just for three kids to see the game for free when everyone on the other side of the fence had to buy a ticket? These boys have cheated the players (if they’re being paid), cheated the owners of the ballpark and cheated their fellow citizens who spent hard-earned money to buy a ticket.

Socialism’s Dirty Little Secret

It is not self-sustaining.

As Margaret Thatcher said “the problem with socialism is that you eventually run out of other people’s money.” Like cancer, socialism needs a host.

In a revealing article called “Cuba Could be Venezuela’s Biggest Loser” from NBC news, Silvana Ordonez says:

Without Venezuela and its oil and subsidies, “industrial production, trade, transport, agriculture, and the whole economy would be affected dramatically. Medieval nights of the ’90s would return, with blackouts of up to 14 hours in some areas…

In other words, as Venezuela becomes more like Cuba, it becomes unable to be the socialist island’s host, propping them up with subsidies previously produced by a more capitalist economy.

In the United States, the host is the US taxpayer. However, as Thatcher’s quote reminds us, there’s a point at which the host is used up. As with cancer, when enough of the healthy cells have been consumed, the body dies. Given that  70% of all US government spending is now wealth transfer payments, I fear we are getting close to that point.

The laws of economics continue to hold sway, ideology notwithstanding. Universal socialism is an impossibility. For once everyone is socialist, there’ll be no one left to pay the tab.