I’m a big fan of the dismal science; I even call myself an economist, most days. But there are some things about the economic theory I was thought that will always confuse me. Principle number one I think is incorrect is that there are no economic profits in the long run.
While I’d like to chalk this up to a Keynesian conspiracy, it is based on the principles of perfect competition: low or no barriers to entry, and a large number of companies making the same product perfectly (at maximum efficiency). While this phenomenon never happens in nature, and it ought to be rejected; many businesses today embrace the theory in today’s economy and adopt an attitude of, “make money now, figure something else out later.”
Emphasizing this mindset is nearly every fiscal and monetary policy action federal and state governments, and their servant/master the Federal Reserve commits. Every stimulus package, round of quantitative easing, and decision to keep the federal funds rate near or at zero for just a little longer encourages firms to get while the getting’s good.
One explanation for this phenomenon is the concept of economic discounting. Essentially that a dollar (or an oil deposit, or some other form of capital) is worth more today than it is in the future. The discount rate represents the opportunity cost of what else could be accomplished in the short run using that same capital. Each individual has a unique set of preferences, and thus a unique discount rate.
Monetary and fiscal policymakers are shaping the discount rates of investors by signaling that there is assistance to be had if you are “struggling” and that $1 today is going to be worth more than $1 tomorrow (inflation). Politicians are in no hurry to pass a measure that will legitimately stabilize the economy when the effects of it might not be seen until after the next election.
Economist Daniel Altman wrote a great article last month “Losing the Future: Why short-term thinking is the greatest threat to the global economy.” Altman argues that narcissism is pushing people to disregard the ramifications of their actions, and that by being in debt, both public and consumer, we are stealing from future generations.
The only way to combat this is by adjusting the value systems, and thus discount rates of individual decision makers. Governments use this strategy through our wallets, by subsidizing those industries and companies seen as “good” and heavily regulating and penalizing through taxes those industries and companies seen as “bad”. Easy examples are the green industry (good), and the coal industry (bad). What makes things more confusing is when the government sends mixed signals about its priorities, by subsidizing parts of industries, such as ethanol subsidies that make gasoline appear cheaper , and penalizing other parts, such as regulations on CO2 emissions.
Austrian economists, such as myself, recognize that the most stable change comes from the spontaneous order of the marketplace; billions of people and trillions of decisions, allocation scarce resources in reaction to signals promulgated through the market.
So how we make these changes in priority? Well, friends, that are what Thoughts on Liberty, and many other Liberty movement groups, are fighting to do: to combat the misinformation, the bad education, the bullying, and manipulation.When we make investments, whether it be in stocks, bonds, time, or relationships, show others that it is the long run that matters.