What is the harm in mandating high supply?

[CaptUSA]

We have some economic wunderkinds here. I'm hoping you can help me with something.

I'd say I'm pretty sound economically, but I'm trying to understand what happens when the State mandates a high supply?

Following the supply demand curve, when supply increases, the price decreases and the quantity used increases. But this has to have drawbacks in other aspects of the economy when the State mandates that supply levels are maintained at a high rate in order to keep prices low.

I don't want to debate the moral harm of forcing a business to create so much supply that it forces the price down, I'm curious in the economic effect.

[fisharmor]

Classic broken window fallacy, covered in Economics in One Lesson.

A broken window stimulates people to fix windows. Sure.
What it also does is take labor out of the labor pool to fix that window. When people are stuck fixing broken windows, they're spending that effort on broken windows, instead of on installing new windows. Or designing a better, more cost effective or efficient window. Or inventing unbreakable windows.

Or any one of an infinite number of other things that person could be doing, other than fixing a window that was working just fine before it got broken.

Suppose government mandates a high supply of windows. Let's look at the way other government mandates work - and let's look in a similar vein... at building codes.

Anyone who has even paid a contractor to do construction work knows pretty well - instinctively, if not overtly - that there are well-traveled paths for construction. There are established ways of doing things, and you don't go outside of the established way of doing things. If you do, then the 65 IQ tinpot dictator who is going to do your mandatory inspection is going to flunk it without even bothering to try to process what it is he's looking at. It's not in the book, so $#@! you.

No, you have to be prepared for that tinpot dictator by getting preapproval from a county-approved engineer for your off-script construction, and God help you there. You could get someone asleep at his desk who stamps anything, or you could get another tinpot dictator who doesn't think anything off script should exist in the county.

Local governments across the US very much do mandate supply of construction. Not in the way you mean - they mandate the form of the supply, not the supply itself. But assuming that government would simply say "there must be a stockpile of 100,000 windows in this county at all times" and then NOT mandate the exact form of the windows, goes against everything we already know about them.

We already know that local building codes hamstring innovation. So we can be reasonably sure that mandating supply will also hamstring innovation. It will not be enough simply to say the supply must exist: they will undoubtedly dictate also the form of the supply, and then we will be even more stuck in time than we are now.

[thoughtomator]

What happens is that you get malinvestment. Price signals are vital to making economically sound business decisions.

[CaptUSA]

Thanks.

The reason I bring this up is because that is what is being done in the electric industry. Governments mandate that supply stay high enough to meet the peak level of demand at all times. This means that there can never be a shortage and the price signals are all skewed. Prices are artificially kept low. Even with the government mandating a profit for these companies, the price is not determined by the market since the supply is mandated to be high.

But this has ancillary benefits in the economy in that people who use electricity for purposes of industrial output pay lower energy prices.

I know this has a harmful effect on the economy in some area, but I can't find it.

It's not broken window. Broken window has nothing to do with mandating a high supply. In fact, in order to use that analogy, you would have to mandate that the window-maker keep his supply so high that the price of a new window would be low. Broken window deals with shifting demand.

If anything, it has more to do with Dr. Hendricks from Atlas Shrugged. He was mandated to offer his services regardless of the payout. Imagine if in order to lower the price of health care, they mandated more nurses and doctors - thereby increasing the supply so much that the price dropped. Now, you are seeing the benefit of mandated supply. But where is the cost? Obviously, there is a huge moral cost, but I know there is an economic cost, too. Anyone?

Oh, and it definitely DOES hamstring innovation!! That's why we've had the same distribution system for over 120 years. There's little incentive to create something better since the price is artificially kept low.

[Occam's Banana]

We have some economic wunderkinds here. I'm hoping you can help me with something.

I'd say I'm pretty sound economically, but I'm trying to understand what happens when the State mandates a high supply?

Following the supply demand curve, when supply increases, the price decreases and the quantity used increases. But this has to have drawbacks in other aspects of the economy when the State mandates that supply levels are maintained at a high rate in order to keep prices low.

I don't want to debate the moral harm of forcing a business to create so much supply that it forces the price down, I'm curious in the economic effect.

Mandating high(er) supply in some area would necessarily divert or withhold resources away from purposes to which those resources would otherwise have been applied (if this were not the case, then no mandate would have been "needed" in the first place). This, in effect, is tantamount to mandating low(er) supply in those areas from which resources must be diverted or withheld (thereby decreasing quantities and driving up prices in those areas). TANSTAAFL.

Such mandates would also necessarily entail that someone (or some group of someones) is making decisions on behalf of all about how resources should be allocated in the economy. That is, some person or group will have to designate that this purpose (the one for which high(er) supply is to be mandated) is more desirable/important/valuable/etc. than those purposes (the ones from which resources must be diverted or withheld in order to meet the mandate) - and by how much. And this, in turn, would entail all the usual problems and dysfunctions inherent in economic central planning ...

[jj-]

I know this has a harmful effect on the economy in some area, but I can't find it.

It takes resources to keep supply higher than the market naturally would. The resources could've been used elsewhere more productively.

If you want to solve problems with peak demand, deregulate the economy.

[helmuth_hubener]

I'm curious in the economic effect.

You get a lower supply of other things.

[CaptUSA]

Mandating high(er) supply in some area would necessarily divert or withhold resources away from purposes to which those resources would otherwise have been applied (if this were not the case, then no mandate would have been "needed" in the first place). This, in effect, is tantamount to mandating low(er) supply in those areas from which resources must be diverted or withheld (thereby decreasing quantities and driving up prices in those areas). TANSTAAFL.

This is a great point. But what happens when it is a commodity like energy that's needed by other industries? Instead of diverting resources, it could be argued that it is allowing use of resources. Like I said, I'm sure it's having a negative effect in some sense, but I can't find it.

[Occam's Banana]

If anything, it has more to do with Dr. Hendricks from Atlas Shrugged. He was mandated to offer his services regardless of the payout. Imagine if in order to lower the price of health care, they mandated more nurses and doctors - thereby increasing the supply so much that the price dropped. Now, you are seeing the benefit of mandated supply. But where is the cost? Obviously, there is a huge moral cost, but I know there is an economic cost, too. Anyone?

Just off the top of my head, one deleterious effect of this particular scenario would be the "production" of more incompetent or barely competent doctors and nurses (to the expense of other areas in which those people might have been more comptetent, able or productive).

I've heard Tom Woods use the following illustration of this: Suppose you we're picking players for a sports team. You are limited to a roster of, say, 25 players. You pick your players from the available pool of prospects and dismiss the unpicked remainder. But as they are leaving, word comes that the rules have been changed and you must have a roster of, say, 35 players. Where are those extra 10 players going to come from? They'll come from those prospects that (for whatever reason) you had previously decided were not sufficiently desireable (because they weren't as competent or able, for example).

[jj-]

Instead of diverting resources, it could be argued that it is allowing use of resources.

How do you prove that those additional uses are greater than those that didn't occur because their inputs were taken away to keep energy supply high?

It's often the case that what would've happened had the money not been stolen isn't clear. If I take your money and buy food for me, it's clear I benefit. Were would the money have gone otherwise? Heck, how would I know how you would've spent it had I not stolen it from you? Maybe you would've invested in cultivation methods that reduced the price of food that maybe even I would've benefited in the future had I not stolen your money.

[helmuth_hubener]

Obviously, there is a huge moral cost, but I know there is an economic cost, too. Anyone?

Cost: less of everything else.

In principle, 100% of GDP could be spent on electricity production. That would be really good for people who needed electricity, true. As long as they didn't need anything else.

Oh, and it definitely DOES hamstring innovation!! That's why we've had the same distribution system for over 120 years.

It's not like gov't is just hamstringing the otherwise freewheeling, open, competitive marketplace for electricity with this one little rule. The whole thing is a communist system, not a free-market one. That's why it's stuck in a quagmire.

[Sam I am]

If the thing they have a high supply of is perishable, then you get a lot of wasted investment

[presence]

as supply begins to outpace demand carrying costs of inventory will increase; prices will therefore have to cover those additional costs of housing and maintaining unsold goods.

[CaptUSA]

If the thing they have a high supply of is perishable, then you get a lot of wasted investment

+rep

[CaptUSA]

as supply begins to outpace demand carrying costs of inventory will increase; prices will therefore have to cover those additional costs of housing and maintaining unsold goods.

Right now, they just dispose of them. Very little cost to do so. The post above yours actually found, I think, the biggest cost.


Seriously, everyone. Thanks for the help here. I've been struggling with this for awhile trying to explain how mandating the low cost of energy is actually harming the market.

[Occam's Banana]

This is a great point. But what happens when it is a commodity like energy that's needed by other industries? Instead of diverting resources, it could be argued that it is allowing use of resources. Like I said, I'm sure it's having a negative effect in some sense, but I can't find it.

The reason you can't find it is because the effects of such mandates are rarely directly "visible" in the negatively impacted areas - certainly not in the obvious way that they are "visible" in the mandated areas. In fact, outside of cases in which such mandates involve explicitly enforced transfers of resources directly from some specific area(s) to other specific area(s), it may well be impossible to identify what areas are negatively impacted (let alone the degree to which they are so impacted). If, for example, an area is subsidized out of general revenues in order to promote greater production in some area, there is no way of telling how that money might otherwise have been expended. Often in such cases, you can only say that it would have been expended otherwise than it was (else the mandate would not have been "necessary" in the first place).

You can easily "see" the "stimulative" effects of the mandate in the mandated area - but you can't "see" what isn't there in the negatively impacted areas - and so you can't see the effects of depriving the sectors that would have had those resources if they had not been diverted to the mandate. You can't see the things that were not built, or the things that were not done, or the people that were not hired, or the greater returns investors would have received (or the greater investment that those greater returns would have encouraged), or etc. This is why so many people fall into the error of thinking that such mandates are "good" things - they can easily see the obvious "benefits," but the myriad countervailing drawbacks are effectively invisible, except conceptually.

BTW: This all falls under the umbrella of what Bastiat called "that which is seen and that which is not seen." In his essay by that name, Bastiat provided several examples of the phenomenon (of which his famous "broken window" scenario was but one).

[r3volution 3.0]

It's impossible to simultaneously increase production of everything (i.e.in the short term, of course, economies can grow over time); so increasing production of widgets requires decreasing production of gadgets. Are you familiar with the concept of the Production Possibilities Frontier (PPF)? At any one time, the factors of production that exist can be arranged in a finite number of possible combinations to produce a finite number of possible "baskets" of consumer goods (10 widgets and 5 gadgets, or 5 widgets and 10 gadgets, etc). In a market economy, the basket which is actually produced is the one which reflects consumer preferences. If the state arbitrarily stimulates production of widgets (and thus causes a decrease in the production of gadgets), we've shifted along the PFF to a different basket: one which does not match consumer preferences. The state has increased production of stuff people want less, at the cost of cutting production of stuff people want more. Since consumer preferences are the ultimate measure of value, satisfying them the whole purpose of the market economy, this is bad per se.

That description above applies to all state economic interventions whatsoever, not just mandating increased production of widgets.

But there's another problem particular to the latter. If the state just does this by fiat (you must increase production or be executed), without (say) subsidizing the producers, this is actually impossible - never-mind whether the goal is desireable, it cannot be reached anyway. In a free market, prices should already be about as low as they can profitably be. If producers could have increased profits by increasing volume, on lower prices, they would have already done so. If the government has to force them to do this, it means it isn't profitable. At a certain point, lower profits turn into actual losses, and the firm can only suffer so many losses until it fails.

[Henry Rogue]

I like Rodger Garrison's take on it, especially in conjuction with the Hayekian triangle.

It's impossible to simultaneously increase production of everything (i.e.in the short term, of course, economies can grow over time); so increasing production of widgets requires decreasing production of gadgets. Are you familiar with the concept of the Production Possibilities Frontier (PPF)? At any one time, the factors of production that exist can be arranged in a finite number of possible combinations to produce a finite number of possible "baskets" of consumer goods (10 widgets and 5 gadgets, or 5 widgets and 10 gadgets, etc). In a market economy, the basket which is actually produced is the one which reflects consumer preferences. If the state arbitrarily stimulates production of widgets (and thus causes a decrease in the production of gadgets), we've shifted along the PFF to a different basket: one which does not match consumer preferences. The state has increased production of stuff people want less, at the cost of cutting production of stuff people want more. Since consumer preferences are the ultimate measure of value, satisfying them the whole purpose of the market economy, this is bad per se.

That description above applies to all state economic interventions whatsoever, not just mandating increased production of widgets.

But there's another problem particular to the latter. If the state just does this by fiat (you must increase production or be executed), without (say) subsidizing the producers, this is actually impossible - never-mind whether the goal is desireable, it cannot be reached anyway. In a free market, prices should already be about as low as they can profitably be. If producers could have increased profits by increasing volume, on lower prices, they would have already done so. If the government has to force them to do this, it means it isn't profitable. At a certain point, lower profits turn into actual losses, and the firm can only suffer so many losses until it fails.

[r3volution 3.0]

^^^Yep, it's a very useful concept.



And here's a little something I wrote about it, trying to use Garrison's concept to iron out some of the problems I see in the usual presentation of ABCT.

[helmuth_hubener]

The post above yours actually found, I think, the biggest cost [that is: if it's perishable, it goes to waste]. I've been struggling with this for awhile trying to explain how mandating the low cost of energy is actually harming the market.

But electricity is not exactly perishable. So how does that help?

It seriously should not be that hard to explain. How would you explain the harm of building a huge hydro-electric dam, say the Hoover Dam? I mean, it's the Hoover Dam! It helps everyone, because it produces tons of electricity for us that otherwise would not exist. And so electricity is cheaper! So we can do Industry and be Productive! Wonderful! All pluses, where's the minus?

Duh: all the other stuff that wasn't built/done/improved because the resources were used up on that.

[Ender]

Thanks.

The reason I bring this up is because that is what is being done in the electric industry. Governments mandate that supply stay high enough to meet the peak level of demand at all times. This means that there can never be a shortage and the price signals are all skewed. Prices are artificially kept low. Even with the government mandating a profit for these companies, the price is not determined by the market since the supply is mandated to be high.

But this has ancillary benefits in the economy in that people who use electricity for purposes of industrial output pay lower energy prices.

I know this has a harmful effect on the economy in some area, but I can't find it.

It's not broken window. Broken window has nothing to do with mandating a high supply. In fact, in order to use that analogy, you would have to mandate that the window-maker keep his supply so high that the price of a new window would be low. Broken window deals with shifting demand.

If anything, it has more to do with Dr. Hendricks from Atlas Shrugged. He was mandated to offer his services regardless of the payout. Imagine if in order to lower the price of health care, they mandated more nurses and doctors - thereby increasing the supply so much that the price dropped. Now, you are seeing the benefit of mandated supply. But where is the cost? Obviously, there is a huge moral cost, but I know there is an economic cost, too. Anyone?

Oh, and it definitely DOES hamstring innovation!! That's why we've had the same distribution system for over 120 years. There's little incentive to create something better since the price is artificially kept low.

Tesla invented power that was free for everyone. When he died the gov invade his home and took all his ideas/inventions etc. (Think the end of Raiders of the Lost Ark.) Can't have free power now, can we? That would not be good for TPTB.

[DevilsAdvocate]

If I mandated a high supply of apples, the price of apples drops, and more apples are consumed (because if we assume the demand curve doesn't change, and the price drops, that means more MUST be consumed by definition). Now that we have all these extra apples around, we have less growing space for oranges. Supply of apples increases, supply of oranges decreases.

This is the concept of "opportunity cost", also called the "broken window fallacy". We have finite resources on this earth. More resources for one thing means less resources for another

[Ronin Truth]

Wasted resources, that could be put to better uses elsewhere.

[osan]

We have some economic wunderkinds here. I'm hoping you can help me with something.

Firstly, because it entails unwarranted and immoral use of force. That alone should shut any further discussion in the closet.

I'd say I'm pretty sound economically, but I'm trying to understand what happens when the State mandates a high supply?

It most often forces manufacturers to produce products that either people do not want or do not want to pay for at the realistic market prices. Therefore, you are either flooding the market with stuff nobody wants, or you are forcing manufacturers to produce at an economic loss at the very least, and often a financial loss as well.

Following the supply demand curve, when supply increases, the price decreases and the quantity used increases. But this has to have drawbacks in other aspects of the economy when the State mandates that supply levels are maintained at a high rate in order to keep prices low.

The demand/supply relationship ONLY works properly when the market is free. Under forced circumstances such as those you here suggest, either the demand remains low, regardless of price (product nobody wants) or it moves precisely as you describe, but the manufacturers take a wicked beating in the process. The underlying assumption in all of this theorizing is that the demand must exist at the viable price point of the manufacturer or there is no "practical" demand. For example, $#@! tons of people would love to drive a Ferrari, Lamborghini, Lotus, or some such. Few are going to swing out the wallet and plonk down $275K for a McLaren 650S, even if they have the cash to burn. Therefore, if the demand is too low, McLaren goes out of business. If demand is just enough, they make cars. If government forces them to make more so more people can have one, they likely go under, especially if government issues pricing mandates that do not cover the cost to manufacture.