laws of science are so easily observable to all of us that we
understand the concept of the law and what will happen to us if we
try to defy the law.
example, consider the law of gravity. In 1687, Sir Isaac Newton
provided the first mathematical explanation of gravity. He did not
invent gravity, but he provided a mathematical construct of how much
gravitational attraction two objects will have.
did not take Newton for people to know that there is some force at
work that kept things stuck to the ground. For several millennia,
people had observed that if you tripped on a root, jumped in the air,
or fell from a cliff you always, always came back to earth.
human species has always known about gravity. Newton’s
contribution then was not a discovery as much as an extension of what
we knew and helped us understand what it would take for us to advance
in areas such as air travel and space exploration, with gravity as a
is a much more difficult discipline to see the laws and to understand
the consequences of trying to defy the laws.
the law of supply and demand. If there is a huge demand for
something in an open and free economy, then there is a rush to fill
that demand. And any attempts by the government to try and restrict
the attempts to fill the demand will fail. Some obvious examples are
alcohol prohibition in the 20s and early 30s and the ongoing attempts
to stop the flow of illegal drugs.
both of these instances, there was a large demand for a product and
all attempts to restrict the supply have been of marginal success.
The government cannot defy the law of supply and demand.
is another attempt to defy the law of supply and demand that is
currently more relevant.
the 1990s and early in the 2000s, the economy in the United States
was growing at a good healthy pace. In fact, it was growing so well
that our unemployment rate was basically at 0. There is always going
to be some churn in the economy, with companies going out of business
and others starting up or expanding, but if you wanted to work there
were jobs available. In fact, almost every store or restaurant you
went to had a help wanted sign up in a window. There was a huge
demand for labor, but there is actually a finite number of Americans
available to work. The law of supply and demand certainly extends to
more than beer.
was a rush to fill the demand.
rush came from our friends in Mexico and Central America. They came
by the tens of millions, and still the unemployment rate did not
increase. These immigrants were viewed with a very cautious eye by
Americans as had most immigrants to America has received for the past
150 years. There was a constant cry to seal the border and stop all
of these people from invading our country.
reality is that as long as there was a demand for their services, the
immigrants were somehow, someway, going to get here. You cannot defy
the law of supply and demand.
law of economics that is constantly trying to be defied is that there
is a market price that will clear the market. Distorting the pricing
mechanism will distort the market in very unhealthy ways.
most common example is rent control. The government is always trying
to help those that are less fortunate. One way they have tried in
the past is to put controls on how much a landlord can increase the
rent for the renter.
practice always leads to a lack of apartments available for rent.
The government dictating a price lower than what the market needs to
clear will always lead to shortages. With the lower price there is a
greater demand for the product. But with the lower price there is
less of the product produced.
the government never seems to learn this lesson.
government is going to be dictating the price for medical services
for many if not most Americans. This price will be below the market
price that will clear the market. This will, in the long run, lead
to shortages in medical care.
cannot defy economic laws without causing unpleasant distortions in
area where economic laws are continually being misunderstood is
international trade. The reality is that trading with other
countries actually increases the economic pie that for both
countries. However, it is easy to see the jobs lost when trade
causes reduction in a specific industry because the reduction can be
over such a narrow piece of the economy. But it is difficult to see
the expansion of economic activity that is spread over the rest of
the entire economy.
United States has been a leader in advancing free trade for decades.
If that trend ever reverses and the US becomes more protectionist,
then we will see some jobs saved but economic law will ensure that
overall we will be less well off than we were before. Prices will
increase, and that always hurts the poor more than the wealthy.
great book (very short) that explains the benefits of trade is “The
Choice” by Russell Roberts. So much of the economic impact of
trade is counterintuitive. This book does a good job of explaining
the cause and effect of trade.
are a few of the common errors that are made by our politicians.
They do not make these errors not knowing the economic laws. They
always have some explanation for why the economic laws do not apply
in a specific instance or what they are going to due to mitigate the
economy law so the market distortions do not happen.
is similar to flapping your arms as you jump off a cliff. For awhile
it may appear you are defying the laws of gravity, but it turns out a
mess in the long run.
Adam Smith is obviously not the actual name of the author of this column. The real author has
worked for two Fortune 500 companies, one privately held company, and a public accounting
firm. His undergraduate degree was in accounting, and he earned an MBA for his graduate
degree. He also has completed coursework for a PhD. in finance. He continues to be employed
by one of the Fortune 500 companies.
The author grew up in the Washington D.C. area but also lived for several years in Arizona. He
currently resides with his family on the East Coast.
The author has held various callings in The Church of Jesus Christ of Latter-day Saints.