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Would It Be Bad for the Economy If Oil Fell to $3 a Barrel?

Written by Gary North on December 17, 2014

If the price oil fell to $3 a barrel, and it stayed there for 10 years, that would be a good thing.

What if this led to massive unemployment in the oil industry? That would be a good thing.

But isn’t the primary task of a free market economy to balance supply and demand? Yes, it is. Then isn’t it important that employment stay high, so that output can remain high? That is Keynesianism’s view. It is also mercantilism’s view. But it is the wrong question. A firm does not employ lots of people in order that output can remain high. It employs lots of people so that output meets demand at a price that is profitable for the company. If a firm continues to produce large quantities of goods that cannot be sold at a profit, it is making a horrendous mistake. It is wasting resources. The important thing at this point is for the firm to shut down operations entirely. Close up shop. Go fishing. Stop the waste.

The free market economy, according to Adam Smith, and also according to Ludwig von Mises, is supposed to produce goods in order to meet demand of customers. The free market economy’s task is not to see to it that lots of people are employed. It is not to see to it that investors receive a normal rate of return. The free market economy’s task is to see to it that, when customers go to the store, they can find whatever it is they are looking for at a price they are willing and able to pay. That is called a market-clearing price. It is the central task of entrepreneurs to create output that will be sold profitably at a market-clearing price.

What is a market-clearing price? It is the price at which nobody is waiting to sell the item, and nobody is waiting to buy the item, unless the price changes. If an entrepreneur can forecast in advance what this price will be, and then organize productive capacity in order to meet this demand at a price that produces a profit, then he is well worth his money, and he will make a lot of it.

The entrepreneur’s task is not to figure out how many people ought to be employed, except for one purpose: producing something that the market will buy. It is not the entrepreneur’s task to serve the workers. It is the entrepreneur’s task to serve the buyers. Any other view of the market is going to lead to some variation of mercantilism. Adam Smith refuted that position in 1776, but the world is filled with mercantilists who have not read Smith, or who do not understand Smith, or who find that it is not in their personal self-interest to admit that they believe Smith and they recommend what he says, because they want to clean up personally. That, as a matter of fact, is exactly what Adam Smith did. One year after he wrote The Wealth of Nations (1776), he went on the government’s payroll as the head of the customs office of the Scottish branch of the British Empire. He made his money by collecting tariff payments that he believed were bad for the economy.

(For the rest of my article, click the link.)

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