Tuesday, March 24, 2009

Why I am no socialist

It has often been said that socialism fails everywhere but in the minds of academics and liberals. Oh contraire. In yesterday's lecture to my financial markets class on interest rates, I cited Sen. Durbin's bill to impose a national usury ceiling of 36 percent on consumer lending as a classic example of government interference into markets. I tell the students that if they know supply and demand and present value, then the course is easy. As an illustration of government imposed floors and ceilings, I asked how many favored minimum wage legislation. Disappointingly most raised their hands - and they are finance majors and seniors! I then drew a supply and demand curve for low wage labor with the minimum wage above equilibrium. Labor markets with wages above the minimum are not affected. However for the market affected, the impact is that at that wage, there are more laborers demanding employment than there are jobs resulting in unemployment. The empirical evidence bears this out and it is a well know fact that raising the minimum wage increases unemployment among those at that wage. Given the excess of workers, I then show the students that employers deciding among who to hire will make that decision based on the employer's tastes and preferences. Therefore, the government interference in the market causes the employer to engage in discrimination against workers. Likewise, if Durbin's 36 percent usury ceiling is enacted and is binding, supply and demand tells us that if it is binding, then there will be a greater quantity of loans demanded than lenders are willing to lend. Again, in deciding who to lend to, lenders will make that decision based on their tastes and preferences rather than letting the market allocate based on the price of the product. Once more, the lenders will engage in discrimination against borrowers. As I then said to the class, this is the result of socialism where markets are not allowed to function and allocate resources based on supply and demand. In socialism the allocation of resources is decided by the taste and preferences of the state and those who administer the programs for the state. Then looking at my students, I said that this is why I reject socialism because I would rather be discriminated against by the market than by you.

1 comment:

JP said...

I am so glad to have come across your blog, and will doubtless spend many reading hours here (which will slow me down on my way through Chronicles of Wasted Time by Muggeridge, but alas, learning never ceases). I had given up most hope for the current generations being spat out by modern academia, but I am encouraged by what your students can learn from you. Bravo!!!