Some time ago we published the article The Time Preference Barrier. In it we explained how our desire to satisfy our needs as soon as possible determines, for the most part, when The Three Laws of Political System Change are triggered. We are now going to apply this analysis to explain how this phenomenon impacts our way towards Libertarianism and Austrian Economics. But first, we need to understand how governments operate in the economy and how this differs from the Free Market.
PLANNED SOLUTIONS
Motivations
Governments (that would be politicians once elected) typically operate with total disregard for the people they claim to "represent" (see for example Who Watches The Watchers or The Wonders Of Unlimited Democracies or In Government We Distrust). However, politicians also know that once in a while (typically when close to elections) they "have to do something about"… something. They fully understand the value of propaganda and as such, they have to find a "problem" and "solve it".
Now the tiny flaw with this approach of finding a problem and solving it, is that it cannot be done in the real world (for the most part). Yet… this is such a good ploy that there must be a way to use it, right?
Planned Government Solutions
There are only three possible scenarios:
- The problem has already been "solved" (in which case it is of no value to politicians) e.g. stabilizing the economy through Central Bank "management".
- The problem is horrible and ongoing (in which case it is of no value to politicians because these problems are typically too dividing and only mange to subtract votes) e.g. whether or not to impose small sentences for "honour killings".
- The problem is in the future which means that they can spin it in a manner in which their so-called "solution" will maximize votes. Perfect!
Because of those, limited scenarios, politicians always choose the third one but there are also several advantages of so doing. Let's count:
- The first one is that given that the problem does not actually yet exist (statistically speaking) and only isolated cases can be determined (maybe), they are thus perfect for manipulation. This allows politicians to spin the "problem" in any direction they may want with precise timing and utterly in-precise "solutions" and/or "actions".
- The second is that as this problem is not prevalent, it can be extrapolated and blown out of all proportions in any way they choose to do so.
- The third one is that since, again, this problem is not prevalent; they can present themselves as the first ones to "expose" this "societal issue" that needs "urgent resolution" thus becoming heroes.
The best part is that they can do so without the fear of repercussions simply because as the problem is not yet prevalent (again, statistically speaking) no scientific data yet exists and thus political spin will support any point of view. Perfect!
The Presentation
Any salesperson worth their commission will tell you that presentation is 90% of the sale. And politicians are superb sales people shoveling horse dung in your direction. This is how politicians typically present the "Issue":
Having scared the gibblets out of the population, they now present their plan to "Solve" the "Issue". For that, of course, they will need to spend, spend and spend and for that they will have to use the unholy trinity (tax, borrow and print) for your own and societal's good, of course. Thus, they proudly present "The Solution" which typically contains two estimates; the first is what will it cost if we "do nothing" (i.e. adopt band aid solutions over time) trying to cope with the Issue as we go along and the second is what will cost if we adopt the Early Action Solution now:
Invariably, the Early Action Solution Cost is vastly cheaper than the Ongoing Solution Cost (i.e. pay-as-you-go) alternative. Furthermore, the Early Action Solution is so cheap that it will only add a few extra cents here and there to your already "fair" taxation burden. Most people won't even notice it! Of course, over time as the Issue becomes larger, there will be some minor tax "adjustments" (i.e. increases), but not to worry because we will keep those increases manageable. Sounds familiar?
This is the process reflected in the graph above.
Caveat
Are we saying then that all government actions fall within those three possibilities? No. However, when "big solutions" to "big issues" are required, they do. Dear reader, please keep in mind that, for the most part, governments issue useless laws all the time. These laws have very little to no impact in our everyday life, with the exception of eroding our -already dead freedom (incidentally, wouldn't this be considered necrophilia? … nevermind… we digress..) - and sucking our wallet dry. We are not interested -in this article- about those laws. What we are interested in is in laws that have massive impacts in our lives which are generated by a single legislative act.
JUST-IN-TIME SOLUTIONS
Motivation
In contraposition, Free Markets work exclusively through self-interest. At the entrepreneurial level this is expressed as profits. However, in order to have profits there must be sufficient demand to begin with. However, demand does not materialize based on far future issues.
Why?
Again, because of our Time Preference.
We, people, human beings, prefer to have good stuff now, not tomorrow. Thus, if we don't see a problem now, it is not an issue and the "good stuff" that will fix that problem is not necessary; we don't want it. Come back to us when this so-called future problem is causing an actual problem, and then we'll talk and we will want the "good stuff" to fix this problem now; but not before.
Thus, Free Markets have no motivations (i.e. they see no profits) in problems that either do not exist or that are so far in the future that people don't care about them.
Just-In-Time Free Market Solutions
From a Free Market perspective, there are only two possible scenarios:
- Either a problem is "actual enough" to merit the development of a solution which people will be willing to pay for or,
- Not
The second one simply means that no solution will be developed until there is actually a market for it. Thus, no long term planning is required.
The first one, on the other hand, will prompt for an Economic Calculation (see Austrian Economics For Dummies - Economic Calculation) which will estimate whether or not people will be willing to pay for this solution and how much.
If the estimate indicates that yes, that people will buy this solution, then entrepreneurs will plan for a specific price point (i.e. the Estimated Customer Acceptable Price - see the graph below). As you may have noticed from it, this price is actually a band; this is, a range of potential prices as a price cannot be known in advance. This is so because in a Free Market a price is discovered though transactions and never imposed. However, this price point will only extend moderately into the future because… entrepreneurs know that Economic Calculations become more unreliable the farther into the future they look. This makes a great deal of sense, since going into the future there are many unknowns such as whether or not the problem will be solved, whether or not there will be competition and whether or not there will even be a market! Thus, Free Markets plan as indicated in the graph below:
Note: please see the Glossary if you are unfamiliar with certain words.
