Allocation of Resources

Every individual in this world is different.  We all have some of the same basic needs, but our desires and preferences vary greatly.  Two people both need to eat food to live, but they might choose different foods to eat.  This is just one thing.  If we start comparing desires, the differences are vast.  Even if the two people have similar interests, their priorities will still differ in some ways.

When you earn a dollar, whether it is through selling something or working for someone or getting a gift, you will choose what to do with that dollar.  You may use it to buy a basic need like food, shelter, or clothing.  After these initial needs are taken care of, there are other things on your priority list.  Maybe it is buying a car or taking a vacation.  Maybe it is buying more expensive food or eating out at a restaurant.  The point is, you are going to do what you want with it.

When the government takes your money, politicians are deciding on how they want it to be spent.  The best you can hope for is that they will spend it on something near the top of your priority list.  But everyone's priorities are different.  Therefore, everything the government spends is a misallocation of resources.  If the money were left in the hands of the individuals that earned it, it would be spent or saved how that person wanted.

With all of the taxes, government regulations, and money creation of the past 100 years or so, the government has created huge distortions.  The market tries to work around these things as best as possible, but there are still severe distortions.  The boom and bust cycle is a shorter term version of this whole thing.  The Fed creates money out of thin air and distorts interest rates and causes a boom, whether it is in stocks, housing, or something else.  When the money creation stops or slows down, there is a correction or a bust.  The market is trying to correct the previous misallocation of resources.

This is why there will continue to be tough times ahead.  The government did not allow a correction to fully take place in 2008 and instead dumped vast more amounts of money in bailing out failed companies and trying to prop up the economy.  The government and the Fed will not allow the sick economy to take its tough medicine.  Instead, it just uses a pain reliever to delay the inevitable and ultimately make the problem much worse.

Even if the government did everything right from here on (about as good of a chance as the sun rising in the west), we would still have a severe correction.  The reason is because of the huge misallocation of resources that has previously taken place.  It would take some time for the market to straighten everything out and get things in line with where consumers and investors want them to be.  In a true free market, there might be half as many colleges.  Half of the college professors might need to find another line of work.  Or perhaps the market will demand just as many as now but at a lower pay.  Without subsidized loans and subsidized education, perhaps we would see a dramatic reduction in prices.

It is hard to say how any of this would play out, but that is really the point.  Nobody can determine the preferences of millions of people.  Only each individual and their family can determine where best to put their resources.  Until we dramatically reduce government spending, taxes, regulations, and artificial money tampering, we can only guess what a true free market would look like.