Economics lessons for Non-MBAs
Posted October 1, 2009 – 9:24 pm in: My writingsI came across a book “Economics in One lesson” a long time ago, much before I even started knowing about business and finance. That book was really instrumental in making me look at things differently. Below is a compilation of some selective hypothetical examples of certain policies that governments adopt and why they might be right or wrong.
Impact of Import duties:
A sweater is produced in America at $30 each. But English manufacturers could produce and sell their sweaters of the same quality for $25. A duty of $5 is imposed by US government to keep the Americans in business.
Is there anything wrong ?
Consumers could have bought the same quality of sweater for less money. And they have $5 left over. With the $5 left over they could help employment in any number of other industries in the United States.
By buying English sweaters they furnish the English with dollars to buy American goods here. Tariff helps the protected producers at the expense of all other American producers, and particularly of those who have a comparatively large potential export market.
Impact of Industry Subsidies:
An important argument for saving the X industry—that if it is allowed to shrink in size or perish through the forces of free competition it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.
Is there anything wrong ?
By these restrictive policies wages and capital returns might indeed be kept higher than otherwise within the X industry itself; but wages and capital returns in other industries would be forced down lower than otherwise. The X industry would benefit only at the expense of the A, B and C industries.
Moreover if subsidies are provided, the result is also that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.
Impact of housing rent subsidies:
It is contended, the government, by forbidding increases in rents, protects tenants from extortion and exploitation without doing any real harm to landlords and without discouraging new construction.
Is there anything wrong ?
Rent control, encourages wasteful use of space. New housing is not built because there is no incentive to build it. If, as often happens, the government finally recognizes this and exempts new housing from rent control, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. Landlords will not trouble to remodel apartments.
A common next step is to take rent controls off “luxury” apartments while keeping them on low or middle-grade apartments. Effect? The builders and owners of luxury apartments are encouraged and rewarded; the builders and owners of the more needed low-rent housing are discouraged and penalized. There is no incentive to build new low-income housing, or even to keep existing low-income housing in good repair.It may reach a point where many landlords not only cease to make any profit but are faced with mounting and compulsory losses. They may find that they cannot even give their property away. They may actually abandon their property and disappear. The tenants are compelled to abandon their apartments.
So the government launches on a gigantic housing program — at the taxpayers’ expense.
The politicians—remembering that tenants have more votes than landlords—cynically continue their rent control long after they have been forced to give up general price controls.
<To be continued>
Tags: economics, economics in one lesson
One Comment
I read through all your entries till this one - very lucid writing. It’s said that education is whatever remains after forgetting what’s taught in school; you’re proving it wrong - keep it up!