Much modern economic theory, for example, has been used to justify government intervention in the free-market process. We might pause to reflect that this process, which operates as a price system or, seen from another angle, as a profit-and-loss system, is simultaneously a way of revealing the truth. Thus, for example, a price established on the free market communicates true information to all potential market participants about the exchange value of a good or service relative to other goods and services. If the government places an excise tax on a good, thereby diminishing the quantity demanded and raising the market price, potential buyers now react to a false signal of the good’s true exchange value. If the government pays a subsidy to a good’s producers, thereby increasing the quantity supplied and lowering the market price, potential suppliers now react to a false signal of the good’s true exchange value. In both cases, changes in the amounts produced give rise to corresponding changes in the amounts of various inputs demanded; and those changes give rise to other market changes; and so on, as the effects of a single government intervention in the market price system ripple outward from their source.
(Those who have studied a little economics in a university may object that according to the theory of “market failure,” various deviations from hypothetical “perfectly competitive” conditions may cause market-determined prices to be distorted and outputs to be “inefficient,” and in this event the government can intervene with taxes, subsides, and regulations to bring the market into an efficient configuration. What these students probably were not taught, however, is that this theory assumes a great deal that cannot be known to anyone except as it is determined in actual markets. Further, because the actual parameters of demand, cost, and supply functions are unknown [and constantly subject to change] in the real world, the government does not, indeed, cannot know how much to intervene—what amount of tax to set, or how much to pay as a subsidy, for example. Further still, this theory implicitly assumes that the interventionist actions the government takes are themselves without costs. One wonders: how are the tax-and-subsidy agencies and the regulatory bureaucracies supported? Even further still, because in reality such interventions are the creations not of genuine economic experts [themselves helpless enough], but of politicians and their lackeys, the interventions are intended to, and do, serve not the purpose of establishing an efficient allocation of resources, but the purpose of promoting the politicians’ personal, ideological, and political ends. The entire apparatus of the theory of market failure is a sheer blackboard fantasy, an economic theorist’s plaything that has been accepted far too often as a helpful guide to, or justification of, government intervention in the market economy by putatively public-spirited legislators and regulators.)
In reality, the market system fosters an efficient allocation of resources—it constantly creates incentives for resource owners to direct their resources away from areas in which those resources have lesser value and toward areas in which they have greater value. Taxes, subsidies, and other government intrusions in the market process in effect falsify the price “signals” that guide market participants in their decisions about how much to buy, how much to sell, how to produce, where to produce, and exactly when to take various actions.
