Austrian economics is simply a philosophy towards money, policy, and it can even apply to business. The core tenants can have a powerful effect on business in fact, and that's why it interested me so much. I think if you understand some of the basics, you won't be able to ignore their application to your business. Here are some of the major points:
The effect on all groups
Bad economics, bad policy, bad management has this in common: It expenses one group to the benefit of another. And, the group that gets the benefit is the one that is most visible. Let's consider the Christmas Tree Tax proposed in 2011 to perfectly illustrate this point. What we have here is a group of people (Christmas tree growers) that have spent four years trying to force money from another group of people (the Christmas tree buyers).
Here's the breakdown of the two groups:
Christmas Tree Growers
- Small group
- Easily and quickly impacted by a small tax on others
- In a declining market
Christmas Tree Buyers
- HUGE group
- Small impact if charged an extra $0.15 tax on a tree purchase
President Obama is shortly seeking a re-election in 2012, so a new tax against his name isn't going to help him, and they were pretty quick to clog up this bill. But politics aside, let's look at the reality of this tax. Of course, some don't want to call it a tax, but that's just semantics. If the government is forcing you by law to pay anything on top of a purchase, we will call that "tax".
So there's a little background. You might be inline with the current administration, and think to yourself, "Gee, it's worth $0.15 to save a market. I would happily pay that to rescue my brothers and sisters in this business". That's exactly what the administration was thinking also. Heck, I used to think that way.
Now, there's a huge list of downsides that start to surface by denying the market it's freedom. First of all, if you improve the real Christmas tree market, will that be at the expense of the fake tree market? They have families also. Can we next assuming that another $0.15 tax will rescue their industry? Second, the people have already voted for the appropriate market to succeed with their most powerful vote: What they decide to purchase. If they don't want a real Christams tree, it doesn't mean they hate tree farmers, it means they wanted a fake one, and that's their decision. It's the very definition of progress.
Some markets have to go away
Personally, I purchased a fake tree because it's really cheap in the long run to do that. I spent $60 5 years ago. Compare that to a $40 tree, every year, it's a $140 savings. Guess what I did with that $140 dollars, and guess what everyone else did with it? They spent it in other markets. They voted with their cash. If the Real Christmas tree market stays alive, it should be because the entire group of buyers voted that way. Otherwise, you risk meddling with a system that works really well to produce things we want, when we want them.
This idea is best summerized by a concept Hayek layed out:
To give everyone the same opportunity, you must treat people unequally.
The scary thing about that is SOMEONE must be the judge. They must practice judgment on who needs what, and who it should be taken from. The problem is, the crowd will every agree on something like that. Plus, you might argue it's not fair.
The long run over the short run
The second thing about this tree policy that's hurtful is what's not seen. Let's take that $140 I saved over 5 years. The various places I spent that are undetectable really. I spent it at various shops or services, each time voting with my cash. Let's put my new sushi knife on the list. $35, and it's killer. It's a Victorinox knife. Because of their reputation, and great reviews, I couldn't pass it up. Let's say for example, that I was pursauded, 5 years ago, by an government sponsored commercial to purchase a real tree. Let's then say I didn't have the budget now to purchase my knife. The Tree Board would have succeeded in forcing business away, at an unfair advanted, from Vitorinox. Do you see the problem?
The point is that the purchases people will NOT make are spread over years, and thousands of industries. Just because no one can track it, doesn't mean it's not happening. So, the long run shows us that various OTHER industry will be hurt, at the expense of one industry that forced it's way, through taxation, to a higher place. What started as a good intention, created a huge mess that will never get blamed on the tax that caused it.
The mess
It gets worse. If you are a Christmas tree grower, you now have to spend extra time paying this new tax to the government. The tax specialists have to spend more time training on the subject. The IRS has to spend more time processing it, and the bueurcrats have to spend more time spending it. Let's say that tax goes to commercials: Some add agency has to spend time making the commercial (recieving the tax money), while they could be making a commercial for a market that is truly growing, and not propped up. If that ad agency suddenly loses this extra contract, they might go out of business. Should we then create a small tax to keep them in business? "Talented Ad Agency Support Fund". And the cycle happens again.
For this one good intention, a small mess has be made, and spread throughout the entire economy.
As a manager, you have to understand what this will do to your bottom line. The issue will be different, but the concepts will be the very same. You can choose to regulate a new expense, add a new rule to the books, train the folks how to handle it, and so on. Or, you will have the option to let it be. It will take me a while, over various articles to show how these concepts can be applied to helping your business but I can summarize it for you this way: Good management takes into consideration all parties that will be effected by the choice, and over the long run, no matter how small.
If this tax was to be forgotten, think of what will happen. The Christmas tree industry will shrink. The fake tree market will probably grow. The fellows that used to busy themselves with farming Christmas tress can now find another living that creates value that everyone wants to pay for. Does that seem harsh to you? If so, I would like to announce the Horse Carriage Fund For Workers Displaced By Automobiles. I accept Paypal and all forms of credit cards.
Personally, I am interested in seeing what these farmers will do next to make a living. I vote for selling fried turkey's in the empty Christmas Tree lots for Christmas and Thanksgiving. That would be a $40 well spent!
