Wednesday, November 21, 2007
Equalization, The Road To Poverty
Most view equalization as a solution to poverty, but it is in fact a source of poverty. Consider the above trade schemes. They show the affect of comparative advantage on trade between two parties blue and red as they trade products A and B. The upward bulging red and blue curves represent their respective production possibilities curves. The downward bulging black curves represent their indifference utility curves. They represent the welfare of consuming products A and B. Production and consumption occur where the production possibilities curve intersect.
Focusing on the left graph, notice that the individual parties red and blue producing alone only intersect the first utility curve. Yet, notice as they agree to specialize in producing either A or B in a free trade agreement, together making up the purple production curve they produce more than their individual contributions alone. Notice by acting as the purple curve they intersect the third utility curve. This is a classic principle in economics in the advantage of trade.
What if some policy reduced red's ability to produce A and blue's ability to produce B so they are both equal. The right graph shows the consequence of equalizing A and B. If red and blue decide to then specialize, they never reach a sum greater than their individual contributions.
Viewing this in the above graph's context (see A Map of The Austrian Economics Framework), we see how comparative advantage is an essential component of the economic cycle. Tariffs, quotas, subsidies, social justice, equity and any government intervention that attempts to put players on equal footing merely inhibits comparative advantage.
The result of equalization, while attempting to eliminate poverty, actually creates poverty.