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Equilibrium Free MarketsContinuing with our lifelong libertarian saga, today we are going to analyze one more reason why libertarianism is so difficult to get at. Mind you, when we mean "difficult" what we mean is difficult for other people, not for us. This barrier we will talk about today has to do to a degree with the previous barrier that we talked about; this is the The Time Preference Barrier. As a consequence of the latter we, human beings, want things now and not later. Therefore we are biased to think in terms of "now" and not later. We are biased to think in terms of acting locally but not thinking globally and this is a big problem. This problem will introduce us to today's topic. Let's get to it.

One of the most common ways of thinking has to do with one issue that it's in the mind of most people. This issue is jobs and anything that may potentially affect them. One of the big "potentials" is imports, particularly from China. We have all seen, purchased, used, and felt guilty about Chinese products. We know that these products are probably damaging our local economy but we can't help ourselves not to think with our wallet first. Thus, our thinking goes more or less like this:

We don't have too much money therefore we have the tendency to buy the cheapest product we can find. Unfortunately, the cheapest product comes from China. Thus, we buy it knowing full well that some local manufacturer or businessman will not get our money. No money means no profits. No profits means that our local economy begins to disintegrate. We also have the option of buying locally but if we do so then we are left with less money for other things. This "less money" may not be critical for some people but for most of us it is. In the Western world the middle class is slowly beginning to disappear. As such more and more people are becoming poorer and therefore they cannot afford to buy locally at higher prices. This constitutes a vicious circle towards oblivion. As local businesses begin to fail, so do jobs, less jobs means less spending money, which means less local businesses, and so on.

Thus, most people look towards the government for solutions. And what do these solutions look like from a politician's perspective? They look like protectionism. Simple right? Let's rise import taxes in order to prevent Chinese products (to mention one) from entering your local economy. Thus, local businessman can keep manufacturing products and services locally at higher prices but maintaining local jobs up and running. And in so doing we will live happily ever after. Or so the fairy tale goes.

In conditions like this it is very difficult to argue in favor of true free markets, which demand, completely and utterly open borders. What we're talking about here is the scenario where any product from anywhere in the world may enter your local economy. As such, it is natural for people to panic. The thinking is that cheaper products will completely decimate the local economy. And to a degree they are correct.

What? We siding with mainstream economists?

Yes, when the logic is correct, which in this case it is.

If protectionist barriers are dropped altogether, there will be a flood of products into local markets and with them will come a lot of pain. This much is true. And, as human beings, because we have time preferences (meaning, we want stuff now) we cannot see beyond this point. However, if we make the effort to look at the entire picture (and no, we know we don't mean the big picture) we will see something slightly different. The story goes more or less like this and begins with a question.

Why are the Chinese products are so cheap? The simple answer to this question is because labor is very cheap in China. But why is labor very cheap in China? Because up to recently they weren't that many jobs in China. And why is this? Because China was communist and in a communist system the government decides how many jobs are to be there. And as we know from history, communism is not a very good system to create jobs or well-being for that matter. Thus, the number of jobs in China was very low. Therefore, wages were low. Simple supply and demand. However, once the Chinese embraced, comu-capitalism, things began to change rather rapidly. With the entrance of entrepreneurship in the Chinese marketplace, many new companies were created which in turn created many jobs. The products of these companies were shipped to other countries because the prices were far lower. Thus, we can see this process as a transfer of wealth from wealthy countries to poor countries. And this transfer has a net effect which most people choose to ignore because it extends over longer periods of time.

What we are talking about is the fact that Chinese people are becoming richer and Western people are becoming poorer. This phenomenon it's a process that most people just ignore because the only thing that they can see is cheap Chinese products entering the market and decimating local ones. We think with our wallet. This is how biased we are towards short time frames.

But now let's extend this timeframe further in the future. What do you think is going to happen if Chinese workers become wealthier? Yes, manufacturing cost will start to rise. And so the next question is how high will these costs rise? Will the cost in China surpass the costs in let's say Europe? And i and if so why?

The answer is simple. No. The costs will not rise above the costs in Europe. Why is this? Because if this would be the case, manufacturers will simply move to Europe where the costs are cheaper than in China! See what's going on here?

As borders open up and free trade becomes pervasive, a transfer of wealth from rich people to poor people begins but this transfer doesn't go on forever. At some point in time it reaches an equilibrium. When this equilibrium is reached the decimation of local Western economies stops. At this point and from an entrepreneurial perspective makes no sense whatsoever to manufacture in China because there simply aren't any wage advantages. At that point in time and from a businessman perspective it makes most sense to relocate were the local advantages are superior. This is so because it doesn't matter where in the world manufacturing takes place, as all the wages anywhere become about the same.

This picture it's quite difficult to see because we are talking decades. This is yet another thing that conspires against libertarianism. People are simply not able to think that long, and for good reason. The reason is that they are becoming poorer and they simply cannot afford to keep waiting. This is understandable. However, we must point out that the reason why they are getting poorer is because places like China have been away from free markets for very long time. This is also because many Western countries have become socialists and as such incapable of generating new jobs. The root cause of this inbalance is government action, not free market action. Free market action is the solution, regulations is the disease. More regulation will only make things worse.

From a libertarian perspective it is difficult to embrace this reality because we are not in equilibrium. In the equilibrium point things begin to improve by themselves. At that point it is easy to embrace libertarianism because all the socialist leftovers have already disappeared. However, until we reach that point, socialist rules and regulations will continue to push us away from equilibrium.

It is not without sarcasm that we notice that the great communist goal of providing high standards of living for everybody can only be achieved and it is being achieved by free markets and capitalism! Through the voluntary re-distribution of wealth! This is something that many anti-globalization organizations fail to grasp. This issue, this phenomenon it's so massive that only people who have been brainwashed since birth are capable of ignoring it.

The equilibrium barrier exists and it is real. It is a side effect of our time preference as emphasized and described by Austrian economics. This is yet another point where Austrian economics and libertarianism touch and as such they are mutually supportive even though they are different disciplines.

So, what is the path that the libertarian should take? Do we buy articles from China? Do we protect our wallet? Or do we protect the local economy? The answer is simple. We abide by our time preferences and buy from China because we know that the faster the Chinese economy grows the faster their wages will rise and the faster we will reach an equilibrium point at which point in time the local economy will begin to revive. The only choice we have is a simple one, we can either delay the equilibrium and endure many decades of misery and pain or, we can push and accelerate the equilibrium thus ensuring the briefest of all possible economic pains.

We would like to emphasize again, that the reason why we have to deal with this pain has to do with what governments have been doing for over the last 80 or so years. Should free markets existed for the last 80 or so years, we would already be in equilibrium. We would already be enjoying the best that human ingenuity and entrepreneurship has to offer. Instead, take a look at where we stand today. We are at the brink of the biggest financial disaster in human history. What it is yet to come, will have no precedence and will be so devastating that will remain in the minds of generations to come. And this is only the beginning. We will suffer through these ordeals time and time again. But it did not had to be this way. Allow us to say it again. It did not had to be this way. It is only this way because an artificial dis-equilibrium was created and now we have to suffer the consequences.

And in a strange sort of way, this is good for libertarianism. This is good because it pushes us one step further towards economic pain so great that people will evolve politically. And it's about time!

Note: please see the Glossary if you are unfamiliar with certain words.

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