When Bad Things Happen to Well-Intentioned Legislation

My Forbes article is up for this week, and discusses 10 reasons why legislation frequently fails.  A buffet of Austrian economics, Bastiat, and public choice theory that I wrote for the high school economics class I teach each year.

Here is an example:

3.  Overriding Price Signals

The importance of prices is frequently underestimated.  Prices are the primary means by which literally billions of people (most of whom will never meet or even know of each others' existence) coordinate their actions, without any top-down planning.  With rising oil prices, for example, consumers around the world are telling oil companies:  "Go find more!"

For a business person, prices (of raw materials, labor, their products, and competitive products) are his or her primary navigation system, like the compass of an explorer or the GPS of a ship.  And just as disaster could well result from corrupting the readings of the explorer's compass while he is trekking across the Amazon, so too economic damage can result from government overriding price signals in the market.   Messing with the pricing mechanisms of markets turns the economy into a hall of mirrors that is almost impossible to navigate.  For example:

  • In the best case, corrupting market prices tends to result in gluts or shortages of individual products.  For example, price floors on labor (minimum wages) have created a huge glut of young and unskilled workers unable to find work.  On the other side, in the 1970s, caps on oil prices resulted in huge shortages in the US and those famous lines at gas stations.  These shortages and gas lines were repeated several times in the 1970's, but never have returned since the price caps were phased out.
  • In the worst case, overriding market price mechanisms can create enormous problems for the entire economy.   For example, it is quite likely that the artificially low interest rates promoted by the Federal Reserve over the last decade and higher housing prices driven by a myriad of US laws, organizations, and tax subsidies helped to drive the recent housing and financial bubble and subsequent crash.  Many will counter that it was the exuberance of private bankers that drove the bubble, but many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered
  • me

    Ah, good intentions. Realistically, any system that attempts to put more distance between concrete choices made by the people directly involved and where decisions out to be made (let me just write a ten page brief on how people ought to behave in legalese, because that's going to make the world a better place!) is plodding towards failure.

  • Ashlyn

    Now I'm curious about what the radical leftist told the kiddies.

  • Arthur Felter

    Minor detail-

    Fiskars: scissors http://www3.fiskars.com/
    Fisker: car http://www.fiskerautomotive.com/en-us

  • Doug

    Gee, I hope this doesn't mean that Bernie Sanders has it all wrong. http://tinyurl.com/6jbvtvv

  • Lee

    "...many bankers were like ship captains who drove their ships onto the rocks because their GPS signal had been altered
    "

    Wonderful analogy.

  • Mark2

    Some points

    First I don't think Creationism and Evolution are that much different. Can't we all just get along.

    Second, it is funny that the party of Science, who believe that evolution is the norm, want to keep the entire world static, Temperature has to always be the same. If one owl starts taking over another owls territory, shoot the predator owl, etc. If these guys are all evolving, none of that should matter - and they should let evolution take its course. They in fact treat life as if GOD made all the animals he is ever going to make.

  • Mark2

    As for the 70's gas lines, I was but a little kid, so I didn't read the news or hear details of what was happening. The previous year allocation problem makes sense. But when I was a kid, the fact that rural areas had a lot of gas was chalked up by many of the adults I was listening to, as yet another sop to the politically well connected farmers.

    I don't know if it was true, but pandering to farmers is also not beyond the realm of politicians and their devious plans.

  • me

    Well, unfortunately distorting price signals isn't just a "there's a democrat in the white house" thing. Stop being tribal people, and seriously work at getting some real libertarians elected.

  • Mark2

    @me

    No crud, every administration like to prop up his favorite industry.

  • Ted Rado

    The marketplace should be allowed to function freely. Production capacity, price, supply and demand would be in balance. The USG just screws things up when they interfere. I defy anyone to argue that the USG has done a good deed by intervening in housing, energy, consumer protection, or anything else.

    I am still trying to find something the Congress is good at, besides pissing away huge sums of money.

  • http://aguanomics.com David Zetland
  • rox_publius

    if this doesn't get linked at the right, you might as well shut the whole sidebar down.