ENVS 1800 Lecture Notes - Lecture 10: Process State, Uniprocessor System

One of the major problems with the economy is too many economists! Or perhaps too many politicians who think they understand economics. When politicians seek to improve the conditions in the economy they come up with what at first blush appears to be a great idea. Look at all the people who will be helped! It is not seen that is the problem it is unseen. Adam Smith's invisible hand. It is called The Law of Unintended Consequences. A politician sets out, for the best of reasons, to help a group---the homeless as an example---but in the process, far more people are harmed than helped. The results really don't matter you see because they tried but it simply didn't work. It was the politician's fault! After all, they tried to do something and that's what counts, not the results. The results do not matter.

One example was the Urban Renewal Program in the 1970s. In the processes of cleaning up and renewing city centers, SROs (Single room occupancies) were destroyed. These were cheap rooms that could be rented at a minimal price. It allowed very low-income people to have a room and shelter from the elements. But where were these people to go after urban renewal? This was one of the main causes of what has become a homeless problem.

Another example of this is my experience while living in Arkansas and teaching at Arkansas State. Interest rates were rising rapidly making it difficult for low-income families to obtain mortgages and other consumer loans. This was a time when if you had a mortgage at 14% you had a good one. Then Gov. Clinton, again for the best of reasons, asked the legislature to cap the interest rates at 10 percent. This is called Usury Law. The term Usury goes back at least as far as Thomas Aquinas and his book, The Summa Theologica which dates back to about 1244 AD. It was believed that charging interest on a loan was unchristian and downright evil. It was on this theory that Gov. Clinton based his thinking.

Once again the unseen took hold. All money flowed out of Arkansas into the neighboring states where it could earn a higher return. This is a natural consequence of a price ceiling, which this is. This is the maximum price that can be charged for a good or service. In economics and finance, there is a concept known as the Purchasing Power Parity Theory. Money (resources) flow to the market where it gets the greatest return. In finance, it is also known as arbitrage which is also the basis for most of the world trade. Investment flows to the areas with the highest return. In any event, the Usury Law was a disaster! No one could get a loan in the state as the money flowed to the neighboring states where it could earn a higher return. The Gov. called a special session of the legislature and the law was repealed.

This is also one of the differences between Keynesian and Austrian economists---of which I count myself. If we take a Keynesian and an Austrian economist to the shore of a small lake and give each of them a large rock to throw in the water, The Keynesian will throw the rock, watch them splash, and maybe see the wake the rock created. The Austrian will throw the rock, see the splash, watch the wake spread out from the point of impact. He will also see the boat moored on the opposite shore with a hole in the hull at the waterline. He will see the water lap in and the boat sink. The Keynesian never even knew the boat was there. When something is proposed, Austrian economists carry the effects out to their logical conclusion. Keynesian's, to the primary and perhaps secondary results but rarely to the tertiary. Again what happens as a result of their actions is no concern of theirs because it was the attempt that mattered.

One embedded question.

What is the benefit of carrying an idea to its logical conclusion? Or is there any benefit?