Tuesday, February 11, 2014

Government Price Controls and Bad Reasons to Start a Business

The Role of Government Setting Prices

I have a question for you and that question is: “Which of these three choices do you think is better? 1) An economy that is a 'Free Market' system with little interference from government, 2) An economy with a mandated price-floor, or 3) An economy with a mandated price-ceiling? 

The first choice allows prices to reach their own level by the interaction of individuals [sellers and buyers] negotiating for products. The role of government is minimized and, for the most part, only intercedes to enforce contracts and, in the case of disputes between seller and buyer, act as an umpire.

The next two, price-ceilings and price-floors, are systems where the government steps into the 'market' and, for the 'common good', 'sets' the maximum or minimum price for products or services. Examples of both of these are to be found in the U.S. at every level of government, local, State, and Federal.

Price-ceilings are put in place to 'protect' the consumer from sellers who would overcharge for a product that is in short supply. One example of a price-ceiling that I like to use is rent control. Consider the results of this 'good' intentioned 'government' interference in the market. Sellers are restricted in their 'profit' and when 'profit' is lowered fewer sellers enter the market and may even leave the market [a basic economic law]. That simply means that fewer 'housing units' will be built because there is little incentive [profit] for the seller to build them. In the 'free market' sellers would have the incentive to build more housing units. Consider also that at a lower 'profit' margin the seller has little incentive to maintain or improve his product. The seller will get the same amount no matter what he does and the buyer is a captive audience because there are no other 'housing units' available.

Now most people think that price-floors are a bit different than price-ceilings but they are not and, again, the basic economic law still applies. A seller is required to put a certain price on his or her product and the buyer is required to pay that price [if the buyer wants it]. If the price on a product goes up I have found very few people that will buy 'more' of that product. I like to use the example of minimum wage when talking about price-floors. Government, for the 'common good', legislates price-controls for labor [an individual is required to 'sell' his or her labor for a mandated price]. This sounds good to the general public and in fact, many professional economists espouse the idea that the 'poor' can be helped by this form of government intervention. I now ask a pop quiz question. “Why should a buyer [a business person] buy more of something [the labor of an individual] from a seller if that something [labor] has a higher price?”

That is the problem with economics, everything is a product that the individual will either buy or sell to survive.

And suffer not the barren-handed to take part in your transactions, who would sell their words for your labor.

To such men you should say, "Come with us to the field, or go with our brothers to the sea and cast your net; For the land and the sea shall be bountiful to you even as to us." - Kahlil Gibran, The Prophet



Here are a few bad reasons to start a new business:

1)   You are struggling to get a regular job and can’t figure out anything better to do.

2)       You want to work out of your home, and it would be easy to convert that extra bedroom into an office and such a short commute. Unfortunately being an entrepreneur is not especially “convenient”.

3)      You want a part-time venture where you can control your hours. Starting a business is not a way to shorten your work week. The exception is if you are simply going to sell your expertise in a field in which you are already established. For example if you are a well-known patent attorney (on the front-end side of preparing and filing patents as opposed to the back-end side of litigating them) then you will probably continue to prosper after moving to your mountain cabin (with fast internet service). But if your venture is something untested, then you will usually be at a big disadvantage working remotely.

4)      Your “regular” job is too much work and too stressful.

5)      You want to be your own boss.

6)   You are running out of money.

Starting a new business is almost always far more work than a full-time job at an existing company. A startup might mean that you are away from your home more than you were before. It is generally harder to succeed at a new business than working for an existing well-run company.

There are plenty of great reasons to start a new venture - just make sure that you are the right person at the right time in the right location. Otherwise, adjust, learn, move, network, save and get ready to make the plunge.

There are plenty of great reasons to start a new venture - just make sure that you are the right person at the right time in the right location. Otherwise, adjust, learn, move, network, save and get ready to make the plunge.


Michael responded: "I'd refer you to my favorite millionaire, Dave Rogers. He started his guitar shop for two main reasons: first to keep his employers business going for the customers, and second: because he loved the business. He went through a period of living out of his car, then the back of the shop, and over the next 25 years became the most successful independent guitar dealer (and owner of one the largest collections of vintage guitars) in the US. To this day, he's passionate about the business and very appreciative of his customers, some of whom he's never met because of internet sales. When you are pretty much a nobody like me, certainly not a wealthy person or musical star like he deals with every day, but he remembers your name, your kids, spouse and band, and a hundred other details about you...this is a man who was born to business. And success. 


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