How governments distort and reduce trade
The free market is the aggregation of billions of choices, wants, needs and desires going on in the world at any one time, all in the form of mutually beneficial transactions. Naturally, as you’d expect, such a system is far too complex and dynamical to be mapped to a set of simple ordinances and decrees, and that is the basis on which so many regulations are frequently problematic to the agents involved in trade.
I will show how value is created in every societal transaction for both agents by the combination of consumer surplus and producer surplus. Consumer surplus is the difference between what the consumer pays and what he would have been willing to pay, and producer surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive. I also explain how the mutual value attained by both agents in those free exchanges is much closer to an optimal outcome than when politicians impose their will on the transactions.
As this paper also shows, the main regulations one ought to oppose are ones that artificially interfere with prices and the information-carrying signals they exhibit. Two examples are price floors and price ceilings. I will show how both of these interventions negatively interfere in the market process, and how frequently both parties (buyers and sellers, employers and employees, landlords and tenants) are made worse off by these price controls.
On the issue of when it is good or bad for the state to be involved in the free market, I use quite a simple and obvious formula: the state should only involve itself in our transactions when there is a net benefit to society from this involvement. That is, when the benefits of doing so outweigh the costs.
When stated like that, I would think it is hard to find a sane person who disagrees with that proposition. The odd thing, however, is that there are plenty of people who would find little trouble agreeing with the idea in its above abstract form, but who quite comfortably hold numerous beliefs that depart from the above logic. It is this anomaly that will be unpacked.
James Knight is the writer of the blog The Philosophical Muser.