Hello everyone, I'm Callie and this is Cash with Callie. Seeing that my video about Austrian economics was well received, I decided to make this video about a topic that's at the heart of Austrian economics, the principle of laissez-faire. But what the heck is that?
Laissez-faire, a French term that translates to let do, is a principle that advocates for an economic environment where transactions between private parties are free from government intervention. Let's take a simple example. Imagine you're at a farmer's market. You see a stand selling apples for $1 each and another selling oranges for $2 each. You prefer apples over oranges, so you decide to buy an apple.
In a laissez-faire system, you're free to make this decision based on your personal preference and budget. The government doesn't interfere by setting prices or dictating what you should buy. Austrian economists argue that government intervention often leads to unintended consequences. Let's take the example of minimum wage laws. On the surface, it might seem like a noble idea, ensuring that workers earn a decent wage.
However, Austrian economists would argue that this could lead to higher unemployment. Let's consider the scenario of a small business owner running a bakery. They operate on a tight budget and need to hire workers.
If the government imposes a minimum wage, the owner might find themselves in a difficult position. They might not be able to afford to hire as many workers as they initially planned. This could lead to them having to let go of some employees, or not hire new ones, contributing to higher unemployment rates.
But the ripple effects of this government intervention don't stop there. To compensate for the increased labour costs, the bakery owner might have to raise the prices of their goods. Now, imagine the freshly unemployed individuals who were let go because of the new minimum wage law. Not only are they without a job, but the cost of living. including the price of their favourite bread or pastries from the local bakery, has also increased.
This scenario illustrates a double-edged sword of government intervention. On one side, the intention is to ensure fair wages, but on the flip side, it can lead to unemployment and increased cost of living. This is a classic example of the unintended consequences that Austrian economists warn about when it comes to government intervention in the economy. Let's consider another example.
Government subsidies. Suppose the government decides to subsidise the corn industry to support local farmers. While this might seem like a good idea initially, Austrian economists would argue that it could lead to overproduction and waste.
Imagine you're a farmer growing apples. With the new subsidies, many farmers switch to growing corn instead, because it's more profitable. The market is soon flooded with corn. There's so much corn that people can't consume it all. The excess corn goes to waste.
and resources that could have been used to grow other crops are wasted. Moreover, these subsidies can distort market signals. In a free market, prices reflect the supply and demand of goods. If a good is in high demand, its price increases, signalling producers to produce more of it.
If a good is in high supply, its price decreases, signalling producers to produce less. But when the government subsidises a certain industry, it artificially lowers the price of that good. disrupting these market signals. Producers might produce more of the good than what is actually demanded by the market, leading to overproduction. These examples illustrate how government intervention, while well-intentioned, can lead to unintended consequences.
Austrian economists advocate for minimal government intervention, allowing the free market to regulate supply, demand and prices. This perspective is a cornerstone of Austrian economics and a key part of understanding this school of thought. As we wrap up our exploration of Austrian economics and the principle of laissez-faire, let's consider how these ideas apply to the world around us. The next time you hear news about rising interest rates, the debt ceiling being raised, or other economic policies, remember the principles we've discussed today. Consider how these situations might unfold under a system guided by Austrian economics.
Imagine a world where the forces of supply and demand, not government intervention, regulate our economy. Picture a marketplace where individuals and businesses are free to make their own economic decisions, leading to a more efficient and prosperous economy. So, keep these principles in mind as you make your own financial decisions and as you interpret the economic headlines. And as always, continue to learn, explore and question.
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