dannno
09-08-2009, 05:25 PM
Ok, I think we need a better name than "Free Markets for Dummies".. but I wrote this explanation up and I thought maybe some people might be interested in making a website similar to The Great Tomato Bubble about why free markets create the greatest supply, lowest prices and reduce shortages.
The Original 'Great Tomato Bubble':
http://www.ronpaulforums.com/showthread.php?t=200652
This is a really really really rough cut of what I have so far..
Ok, let's say there are two islands with relatively equal space to grow bananas and relatively equal population sizes.
The first island has a free market and prosecutes fraud and theft of bananas. There are 6 major banana distributors and 20 small time banana distributors. Bananas cost only $.10 each and the island consumes 2 million bananas each year. This is enough bananas for everybody, and nearly everybody can afford bananas. The few who cannot afford them are given some by other individuals, in part because they are so affordable. Since they cost $.05 to grow, harvest and distribute, banana distributors collect a total profit of $100,000 each year (above and beyond salaries). This profit, although modest, is split relatively evenly among the 26 distributors, but some have more than others and the most successful distributors use said profit to grow their business to provide a higher quality product in greater quantities. Maybe next year people will eat more bananas, or decide to come to them instead for their low-cost, high value product. Since all banana producers proudly label their products, any quality issues with the bananas can be traced back to the source and consumers can avoid companies that produce low quality product.
The second island has a corrupt government and has placed banana regulations on the market, which makes it prohibitively expensive for smaller banana distributors to operate. Annual plant inspections cost $1,800, and smaller distributors cannot afford to sell their bananas for the same price as large distributors, so they quickly go out of business. Island #2 has a fiat monetary system and a central bank, so leveraged credit is used to fund the largest banana distributors. Because of this, there are only 3 major distributors, but the people on the island believe that they have a free market with competition because the ads they see on TV for the 3 distributors are rather compelling. These distributors seem to be fighting really hard for their share of the market. Bananas cost $.20 each and only 1.2 million bananas are consumed each year on island #2, compared to 2 million bananas consumed at a price of $.10 each on island #1. The quality of the bananas is just above that of the bar that the government set, so the banana quality is much lower on island #2 than island #1 despite government regulations. Doing the math, the total profits for these three distributors are $180,000 which is divided relatively evenly among the three distributors. This is a big difference from the $100,000 profit among the 26 distributors on island #1. Now we have a huge $180,000 profit among only three distributors. What do you think happened? The government has, through regulation and fiat currency, created a monopolistic cartel. Even though there are fewer bananas available for a higher price, the private companies have even bigger profits.
Recall that on island #2, 1.2 million bananas are consumed each year. There is a shortage of bananas, the poorest people on the island cannot afford them. Ironically many of the poor people on the island were once banana farmers who have been laid off since the government imposed stringent regulations on the banana industry. One day the government decides to redistribute some of the bananas to the poor people who cannot afford them. Within a year, something interesting happens. The cost of bananas is now $.25 and only 1 million bananas are consumed each year. Now there is an even bigger shortage of bananas, poor people cannot afford them so the government decides to completely redistribute all bananas so that everything is fair. The next year something even more curious happens. Of the 1 million bananas grown, suddenly 200,000 are diverted to the black market where they sell for $.40 each to people who really love bananas, and the rest of the crop, 800,000, which are of poor quality in general, are distributed evenly by the government at a cost of $.30 each to tax payers. Now the cartel is profiting $240,000 per year, plus another $80,000 from the black market that has been created. That's a $320,000 profit to the private banana cartel and a loss of 1 million bananas produced due to government intervention. Those who own the banana cartel are rich and everybody else is much worse off.
This example has NOT been exaggerated, this is what is happening with healthcare, housing and nearly anything else that the government gets itself involved in.
The lesson here is that there is NOTHING that the government can do to INCREASE the amount of bananas produced on the island. There is NOTHING that the government can do to DECREASE the price of the bananas. The poorest people might get government help, but the people who are just above them, the poor working class, they cannot afford the high prices that the government manipulated market provides so the government has to continually promise more services to more people in order to remain principled in their stance on equality. As shortages grow, prices sore and the availability of product continues to decrease. Fewer people have fewer bananas and are paying more, thanks to government intervention.
The End.
The Original 'Great Tomato Bubble':
http://www.ronpaulforums.com/showthread.php?t=200652
This is a really really really rough cut of what I have so far..
Ok, let's say there are two islands with relatively equal space to grow bananas and relatively equal population sizes.
The first island has a free market and prosecutes fraud and theft of bananas. There are 6 major banana distributors and 20 small time banana distributors. Bananas cost only $.10 each and the island consumes 2 million bananas each year. This is enough bananas for everybody, and nearly everybody can afford bananas. The few who cannot afford them are given some by other individuals, in part because they are so affordable. Since they cost $.05 to grow, harvest and distribute, banana distributors collect a total profit of $100,000 each year (above and beyond salaries). This profit, although modest, is split relatively evenly among the 26 distributors, but some have more than others and the most successful distributors use said profit to grow their business to provide a higher quality product in greater quantities. Maybe next year people will eat more bananas, or decide to come to them instead for their low-cost, high value product. Since all banana producers proudly label their products, any quality issues with the bananas can be traced back to the source and consumers can avoid companies that produce low quality product.
The second island has a corrupt government and has placed banana regulations on the market, which makes it prohibitively expensive for smaller banana distributors to operate. Annual plant inspections cost $1,800, and smaller distributors cannot afford to sell their bananas for the same price as large distributors, so they quickly go out of business. Island #2 has a fiat monetary system and a central bank, so leveraged credit is used to fund the largest banana distributors. Because of this, there are only 3 major distributors, but the people on the island believe that they have a free market with competition because the ads they see on TV for the 3 distributors are rather compelling. These distributors seem to be fighting really hard for their share of the market. Bananas cost $.20 each and only 1.2 million bananas are consumed each year on island #2, compared to 2 million bananas consumed at a price of $.10 each on island #1. The quality of the bananas is just above that of the bar that the government set, so the banana quality is much lower on island #2 than island #1 despite government regulations. Doing the math, the total profits for these three distributors are $180,000 which is divided relatively evenly among the three distributors. This is a big difference from the $100,000 profit among the 26 distributors on island #1. Now we have a huge $180,000 profit among only three distributors. What do you think happened? The government has, through regulation and fiat currency, created a monopolistic cartel. Even though there are fewer bananas available for a higher price, the private companies have even bigger profits.
Recall that on island #2, 1.2 million bananas are consumed each year. There is a shortage of bananas, the poorest people on the island cannot afford them. Ironically many of the poor people on the island were once banana farmers who have been laid off since the government imposed stringent regulations on the banana industry. One day the government decides to redistribute some of the bananas to the poor people who cannot afford them. Within a year, something interesting happens. The cost of bananas is now $.25 and only 1 million bananas are consumed each year. Now there is an even bigger shortage of bananas, poor people cannot afford them so the government decides to completely redistribute all bananas so that everything is fair. The next year something even more curious happens. Of the 1 million bananas grown, suddenly 200,000 are diverted to the black market where they sell for $.40 each to people who really love bananas, and the rest of the crop, 800,000, which are of poor quality in general, are distributed evenly by the government at a cost of $.30 each to tax payers. Now the cartel is profiting $240,000 per year, plus another $80,000 from the black market that has been created. That's a $320,000 profit to the private banana cartel and a loss of 1 million bananas produced due to government intervention. Those who own the banana cartel are rich and everybody else is much worse off.
This example has NOT been exaggerated, this is what is happening with healthcare, housing and nearly anything else that the government gets itself involved in.
The lesson here is that there is NOTHING that the government can do to INCREASE the amount of bananas produced on the island. There is NOTHING that the government can do to DECREASE the price of the bananas. The poorest people might get government help, but the people who are just above them, the poor working class, they cannot afford the high prices that the government manipulated market provides so the government has to continually promise more services to more people in order to remain principled in their stance on equality. As shortages grow, prices sore and the availability of product continues to decrease. Fewer people have fewer bananas and are paying more, thanks to government intervention.
The End.