Fiscal deficit is a common trend of current socialist mixed economy governmental regimes all round the world.
Fiscal deficit is an economic phenomenon of collective state where the government’s expenditure exceeds the total revenues collected. Fiscal deficit gives the idea to the government about how much it need to borrow from the available sources to attain the budget requirements.
In India, the Reserve Bank of India performs the deficit financing. Government may also borrow money from other banks of the money market.
Reserve Bank of India does not produce wealth, but yes, it does produce currency by printing out notes out of thin air to meet the fiscal deficit requirements. When the RBI print out currency to fulfil the requirements of government, the currency reaches the market and that causes inflation and acute price rise.
The current acute price rise in India (especially in food sector) is evidently the result of the government stimulus it provided on behalf of borrowing from RBI that in turn simply print and dolled out currency in the market to increase the liquidity. Now those “stimulus” for the market is causing problems for the common man. That is, although government borrows money from RBI, which in turn, prints out money at the demand of politicians and government, the actual borrower who suffers the burden of debt is only the common man of India who has to face the yawning mouth of inflation every second day.
India’s fiscal deficit for the April to December 2009 was $66.9 billion.¹
So we can say that Indian government works on the principle of “Aamdani Aththanni Kharchaa Rupaiya” (expenditure exceeds income), and to maintain the expenditures, government burdens the common man with the always exceeding debt.
Anjalika Bardalai the senior economist and editor of Economist Intelligence Unit said in March 2009 that the fiscal deficit is probably the biggest downside risk that we see to the Indian economy.²
Reserve Bank Governor D. Subbarao also expresses his converns regarding the failure of regulated economy.

“I worry that in resolving this financial crisis perhaps we are sowing the seeds of the next crisis…next crisis could be a currency or a fiscal crisis,” Subbarao said.³

India is no new to the threat of extreme debt and bankruptcy. India faced the similar situation in 1990 when Indian government was forced to accept liberalization. Obviously, nobody would like to have a repeat of 1990 fiscal crisis. Yet, it is a possibility. To reduce that risk, Indian government strictly needs to control its expenditure and reduce the burden of welfare state, that is, government need to disinvest further.

The Fiscal Crisis of Euro Zone

The evidential repercussions of governmental expenditures and debt burden on the Euro zone countries are a matter of thought for financial world. The crisis began in Greece and is expanding to Spain and Portugal. It would be foolhardy to believe that the crisis will constrain itself to the weaker economies of Europe alone.
In 2008, when Pakistan faced bankruptcy due to its fiscal debt, economist warned that Ukraine, Kazakhstan, and Argentina could also slide into a downward spiral towards bankruptcy, and to that list, now we have added Greece, Spain and Portugal. Ex-IMF chief economist Simon Johnson openly stated that the UK should also be considered in the category of nations at the verge of bankruptcy because of huge governmental fiscal deficits.⁴ There is no reason to doubt the ex-Chief economist of IMF because of the fact that the euro-zone governments are predominantly welfare states with extreme high fiscal deficits year by year. The budget situation in all European countries is extremely weak with no hope for a manageable budget any soon. The government obviously provides huge welfare benefits for the citizens in shapes of free-education, Universal Health Care systems and other socialistic patterns that obviously increase huge collective wastage of resources produced by citizens.
Simon Jones said, “They seem to show no awareness at all that much of Europe is facing a serious crisis and it’s not limited to Spain, Greece and Portugal, it’s also going to include Ireland. I think Italy is also very much in the line of fire. There’s a very serious crisis inside the Euro zone.”
The only way for these economies to avoid the situation of bankruptcy is to reduce their fiscal deficit to minimal and that is possible only by reducing the governmental expenditures, i.e. by restricting government to very limited or no power to interfere with market.
During the Global Meltdown, when the government of major countries were announcing “economic stimulus” for the market, socialists were claiming how the Market is unable to be free and needs governmental help. I mentioned how the Economical Stimulus are not a Cure it is Venom⁵ . The current situation throughout the world is evidential proof for that opinion.
The world is still to learn a simple fact that there is no such thing as a Keynesian free lunch, that government does not produce anything, and whenever it robs individuals of their wealth for the purpose of welfare of society or nation, such crisis evolves to brutalize every individual.

US, the most powerful Borrower

Larry Summer once asked in US Congress “How long can the world’s biggest borrower remain the world’s biggest power?”⁶
The question signified its strength when Moody’s Investors Service cautioned that the triple A credit rating of the US could not be taken for granted.
For its grandeur position as a citizen friendly government providing them free gifts, entitlements, subsidies, stimulus, educational helps, Medicare, Medicaid and other social service programs, US government keeps borrowing money from Fed by issuing T-bonds. President Obama has also dreams of Universal Health-care and Free Education for US citizens. Further government need funds to keep its worthless and terrorizing schemes of War on Terror. The unaware citizens feel good and strong at such governmental gestures and politicians keep on playing with the future of citizens, burdening them with further huge debts, announcing further social programs like Universal Health care and free education. The current national debt on US is around 13 trillion. President Barrack Obama signed ceiling of $14.3 trillion public debt on February 12, 2010. The yearly Public debt chart shows that US debt never decreased and it will always keep on increasing.⁷
Renowned economist, editor of Financial Times and author of “The Ascent of Money: A Financial History of World” Professor Ferguson stressed that

The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.⁸

Such huge national debt increases the fears of default and currency depreciation, and an immediate hyperinflation that push up real interest rates. The higher interest rates drag down the growth further while the private sector also suffers the burden of debt. In addition, to pay back and avoid bankruptcy, government tries to increase revenues by confiscating private property, increasing taxes that in turn dilapidate the private sector completely causing extreme unemployment, poverty, food crisis, riots and complete chaos.
According to International Monetary Fund, the developed countries need to manage their fiscal deficit within a decade in order to avoid defaults. Worst condition of nations under debt is of Japan and UK, than Ireland, Spain, Greece and at sixth place, is US.
Conclusion: The economic stimulus proved out to be venom; the western countries are now in a deep fiscal crisis while India and China are facing the huge inflation problems. The collective welfare statist ideology is wrong at its base and the world need to understand that the only cure for the Market is Freedom from any sort of Governmental interference.
With such huge debt burdens, the governments now need to heed the libertarian urge for free market. Governments need to restrict their welfare programs. There should be no government interference in market. Governments now need to work for reduction of expenditures and reduction of debts.

1. India Apr-Dec fiscal deficit at $66.9 bln – govt, Reuter India [↩]
2. ‘High fiscal deficit, biggest risk to India’ Anjalika Bardalai, senior editor/economist, Economist Intelligence Unit. [↩]
3. Next crisis could be related to currency or fiscal: RBI, D Subbarao, Governor of RBI [↩]
4. The UK should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said, Ex-Chief Economist of IFA [↩]
5. Economic Stimulus is not Cure, it is Venom, RFL [↩]
6. Larry Summers’ killing Question on US Fiscal Deficit, NYTimes [↩]
7. United States public debt, Wikipedia [↩]
8. Professor Ferguson,
   A Greek crisis is coming to America, Financial Times [↩]

A free society by definition is the society in which, each individual, i.e. the basic unit of the structure of society remains free to pursue his personal prosperity and happiness, where he is free to achieve his most using his talent and hard-work and saved resources. Obviously, such a society depends on rational pursuit of self-interest and provides full freedom for the individuals from the shackles of social responsibility or altruistic motives.
Often socialists claim that such a free laissez-faire capitalist society will turn out to be a system of dog race where no one will look for the poor, the impoverished an the depraved. Furthermore, socialists claim that for a poverty-free society, compulsory altruism is most necessary, where the producers and creators who can produce wealth, must be forced to pay for the living of the poor and depraved. All governments throughout the world follow such Robin Hood’s philosophy and rob the producers, creators, entrepreneurs and investors for the name-sake of welfare state by means of compulsory taxation, price control, Universal Equality Programs and other similar dictatorial techniques. Yet, the world suffer the problem of poverty as always and despite all the huge socialistic efforts by the governments whole round the world, situations never improves.

So what can help to eradicate the poverty?

As per World Bank’s estimates, 60% of Indian population was living in poverty in 1981, during the socialistic regime of Indian government.
Since 1991, India enjoyed the streams of economic liberalization and stepped towards the making of a free society. As a result, the current estimates of World Bank suggests that 42% of the total Indian population now live under the global poverty line of $1.25 per day (PPP). That is quite a big sweep.
Similarly, in China, since the far changing economic reforms and liberalization were made in the late 1970s, the growth fuelled a noteworthy decline in the poverty rate from 64% at the beginning of reform to 10% in 2004.
Obviously, the data suggests that economic reforms and liberalization is the key to the eradication of poverty. Before 1991, the government controlled almost all industries and production sectors of India but after that, step by step liberalization of industries from public sector to private sector took place and the OECD states the result in following words

Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently, a rate of growth that will double average income in a decade. [...] In service sectors where government regulation has been eased significantly or is less burdensome – such as communications, insurance, asset management and information technology – output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. – OECD¹

Similarly, China confronted economic reforms and liberalization in 1978 and now, as of 2005, 70% of China’s GDP is in the private sector. The relatively small public sector is dominated by about 200 large state enterprises concentrating mostly in utilities, heavy industries, and energy resources.²

Free Market Entrepreneurship is the Key to riddle of Poverty

The examples of China and India clearly show that a free market based on Individual freedom is obviously a solution for the poverty in the society itself.
What impels an entrepreneur, investor, producer or creator in a private sector to remove poverty is not his “altruism”, rather it is his selfishness, his motive to produce and earn more, bigger profits. Yet for making profits, he needs to increase the productivity of the workers. As productivity of workers increases, the poverty reduces.
Social governmental constraints, regionalism, nationalism, license raj, price controls, taxes and subsidies etc only reduces the productivity of individuals and hence causes further poverty.
Examples of Entrepreneur trends eradicating poverty
While the politicians and government of Maharashtra is playing cards of protectionism, regionalism and linguistic discrimination by framing such ridiculous rule like permitting a taxi license only for those who can speak and write Marathi,³ the youth from North East is enjoying various job ventures in private sector freely in Indian metros. For their productive efficiencies, girls and boys from North East are in great demand for jobs in private sector as service providers, sales persons, mall, showrooms or boutique managers etc.⁴
This contrasting difference between the private entrepreneurs and government authorities is because of the fact that private entrepreneurs are motivated by the single aim of satisfying their customers in best possible and productive way for doing which, they need to come above any such linguistic, regional or religious discriminations. On the other hand, government and politicians have nothing to do with customer’s satisfaction or individual rights; what they look for is potential vote bank.
The Astaire Research suggests the hurdles in Indian economic reforms and progress in following words–

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests. – India Report, Astaire Research⁵

Another example of entrepreneurs helping the cause of eradicating poverty is the success of entrepreneurs like Vikram Akula⁶ or Irfan Alam.
Irfan Alam an MBA from prestigious IIM-Alhmedabad is the founder and chairman of the SAMMAAN Foundation. His enterprise innovated for the help of the millions of Rickshaw pullers across the country. Most of them are illiterate and poor. Over 90% of them are farm workers who migrate to cities for want of employment at home. They hire rickshaws for which they pay owners Rs 30 to Rs 40 per day and end up with a pittance for themselves.
He managed and persuaded banks to finance rickshaw-pullers. His enterprise SAMMAAN designed rickshaws that can put on hold newspapers, mineral water bottles and other such small items for sale if the passenger needs them. These rickshaws also carry advertisements and the pullers get 50% of the ad revenue, the remainder going to SAMMAAN.
Thus apart from the fare, the rickshaw-puller also earns from the ads and the sales. Gradually they become the owners of the rickshaw after re-paying the bank loan in instalments.
Irfan started off with 100 such rickshaws in 2007. Today, over three lakh rickshaw-pullers from across the country are registered with SAMMAAN. While 10,000 and odd are pedalling the special rickshaws, the process is underway to benefit others.⁷
Conclusion: It is the selfish motive of the entrepreneurs to make profits that entails the solution of poverty. As the governments will start to leave the market and society free of their dictatorial regime, the society itself will reduce the poverty to minimum.

1. “Economic survey of India 2007: Policy Brief”, OECD, pdf [↩]
2. China is a Private-Sector Economy, Economist Fan Gang points to a 70% share of GDP now in private hands, but he acknowledges that much improvement is still needed [↩]
3. Want a taxi permit in Mumbai? Read, write Marathi, Mumbai: The Maharashtra government framed new rules for taxi drivers to get permits in Mumbai. [↩]
4. North East Youth ride high on Reatial Boom, The Economic Times [↩]
5. “The India Report”, Astaire Research. [↩]
6. Vikram Akula, CEO and Founder of SKS Microfinance [↩]
7. Obama invites Bihari Entrepreneur to entrepreneur summit, The Economic Times [↩]

A panel of “experts” appointed by the Government has recommended raising fuel prices.  The panel, headed by Kirit Parikh,  recommended a hike in domestic LPG by Rs 100 a cylinder and PDS Kerosene by Rs 6 a litre. It is not certain that what the panel called for will be implemented. Rangarajan Committee and the Chaturvedi Committee reports in the past went unimplemented.  Many newspapers reported that the panel is for deregulating fuel prices. It is not at all evident that a Government orchestrated hike in prices would be a genuine deregulation. If these goods are underpriced, certainly, the hike would be a welcome move. A hike in prices will certainly reduce fuel subsidy burden.

The findings of the panel, it is said, will be unpalatable to the government battling inflation. An increase in fuel prices, however, can’t cause a general rise in prices. Only an increase in money supply would lead to “price inflation”. If fuel prices rise, people will cut down consumption of fuel or other goods. There will not be an increase in aggregate demand. There will be no “cascading effect on food prices”. When subsidies to maintain low fuel prices are removed, the prices of other goods might come down. It will also reduce the fiscal deficit. (A subsidy of over Rs 71,000 crores was given in 2008-2009, at the expense of the innocent, long-suffering tax payer.) Price controls, needless to mention, are not a solution to price rise. Government enforced price controls to deal with price rise, as several economists have noted, is like “trying to hold down expanding pressure in a boiler by manipulating the needle in the boiler’s pressure gauge”.

Unfortunately, in India, the prices of fuels and fertilizers are administered by the Government. It should be obvious that no bureaucrat has the necessary information to set the prices of these goods. Lacking profit-loss signals, the prices set by the government would only be arbitrary. It is true that sometimes the market sets the price higher or lower than necessary to clear the market, but no one has the wisdom to correct these discrepancies. The market, left to itself will set this right. If fuel prices are higher than justified, it will send out the signal that it is profitable to produce fuel. More people will enter the market. The supply of fuel will rise. This will bring down the prices. If fuel is priced lower, producers will get the signal that it is not profitable to produce it. Some producers will leave the market. Soon prices will move towards a level which will clear the market. The market is self regulating.

It is important to recognize how the profit mechanism coordinates the market if we are to understand the harmful effects of price controls. Usually, price controls are thought of as a way to curb excess profits. But, in the market there is a tendency towards equalization of profits in all sectors. No sector can be more profitable than any other in the long run. If a sector is more profitable, there will be excess investment in two forms. One, more people will invest I the sector. At the same time, people already involved in the sector will plough back the “excessive” profits.

Government price fixing has harmful, unintended consequences. If the government sets the prices below the market level, there will be chronic shortage. Such a policy fails to take in account why prices are higher. Prices can be high only when there is an increase in money supply or a decrease in supply of goods. Price controls do nothing to cure inflation, which is purely a monetary phenomenon. When prices are set low, less people will produce the goods and the shortage becomes more problematic. The product disappears from the market, and there will be immense pressure on the Government to raise prices, if it is to cure the shortage. If the Government sets the price above the market level, it would lead to unsaleable surplus.

It is true that if the Government gets out of the price fixing business, there would be a sudden rise in prices. It might be painful to most people. But such short term pain is much better than the chaos price controls create. Shortages and unsaleable surpluses are just two such consequence of price fixing. There are several other consequences. Price controls create black markets. Customers become a menace to sellers. The quality of service comes down tremendously. People will have to resort to means of production which are expensive. There will be hoarding and delays in production. People will waste time standing in queues and searching for products. Price controls lead to further controls, and may ultimately lead to socialism, which will entirely wreck the economy. In short, Government price fixing creates chaos.

Read more on it “Reason of Price Rise and Consequences of Price Control“

The basic premise of various economic theories is derived as ‘scarcity’. In fact the study of economics is limited towards ‘economic goods’, that is, goods that carry use value to people but are scarce compared to peoples’ infinite desires. Prices for these scarce ‘economic goods’ arise out of an implicit process of bidding.
In short, the market allocates resources among the several bidders who can outbid their counterparts.

While conventional mainstream economists do not falter till now, they’ve seldom recognized the scarcity of another important factor in human action–time. It should be obvious to anybody that time is not an abundant source available to human beings. Human beings contemplate the fact that time is scarce, and conform all their actions to harmonize with the limited time available. Thus arises the concept of ‘time preference’.

The ‘price’ of time

The thought of tagging a ‘price’ for time can sound weird first, but an example can make things clear. Lets take the case of a prosperous farmer wanting to acquire new land to increase production. How much would the farmer be willing to pay for the new land? According to mainstream productivity theory, the farmer will be happy to pay the amount of value that he expects the new land to add to his returns in the future. Suppose the farmer anticipates the land to boost his returns by $1000 per year, he would be ready to pay any price below $1000 for the first year(Let us, for a moment, assume that there is no well-developed financial system established which could offer interest returns on deposits).

So, if $1000 is the return from the new piece of land for a single year, and further since land is productive for centuries together, should the land be priced at infinity? It would have to be, if the world works merely as what the productivity theory claims. Unlike mainstream economists, the Austrian school recognizes the importance of time as an economic factor. The most important idea to keep in mind, with respect to our farmer example, is the fact that the farmer doesn’t live forever; or that he wouldn’t value returns from his land when he is bound to his bed in his twilight days(assuming the farmer has no heir). This solves the problem of the valuation of land. Land, like all other economic goods, has a finite price.

The valuation of land being one important lesson this example teaches us, that’s not all about it. The example also shows us how the infinite value of land is ‘discounted’ to a finite value(price) based on the amount of time elapsed. So how does the price of time express itself in the market place? The most basic expression of time discounting being expressed in the valuation of durable economic goods land, the other important market for time is, the loanable funds market.

The loanable funds market

The loanable funds market or the financial market is the most explicit expression of the time market in the economic world. This market witnesses suppliers and borrowers of present capital carrying out the same bidding procedure that is characteristic of any free market. Like the market for other commodities, the borrowers of capital in the loan market bid for present goods, and suppliers of present capital supply their capital to those borrowers who promise the highest amount of future goods. The interest rate thus expresses the premium or discount that is placed on present and future goods respectively.

Ill-effects of the lack of time accounting

While almost all mainstream economists consider land, labor and capital as the factors of production, Austrian economists have for long contended the possibility of the other factor of production–time. Over here looms a wide scope of disastrous implications that could be framed against various mainstream theories, that is, based on their failure to account for time as a factor of human action.

The major effect could be seen in policy recommendations of mainstream economists vying for the government to possess a monetary policy–that is, a set of guidelines to tamper with the time(loanable funds) market. The advent of fiat currency has helped governments to ‘fine-tune’ the economy with monetary tinkering of the time market.

Any sound theorist of the Austrian should feel aghast at the kind of ignorance that conventional economists lie under when they recommend tampering with key signals(i.e. interest rates) of the time market as one of the ways to ‘stabilize’ the economy. Inflation, currency debasement, business cycles, the doomsday event that follows any policy based on debasing the currency–hyperinflation, and many other side effects of intervention in the time market, are taken to be normal policy prescriptions in today’s economics mainstream–all because of the failure to recognize the role time plays in human action.

The skyrocketing prices of common commodities is becoming the main political issue around which, the BJP is trying to make their case against Congress lead government. It is true that government is responsible to the price rise, but can government control the prices or the price rise?
It is a common myth that producers, hoarders, speculators and dealers control the prices and tries to bring the prices as high as possible to make maximum profits at the expense of poor consumers who have no choice but to be exploited by such corrupt speculators, hoarders and dealers. It is certainly an irrational myth because to make maximum profits in a competitive market, the speculators, hoarders and dealers need to adjust selling their commodities at the minimum possible prices.

Who Decides the Prices?

The price of a commodity depends on its demand and its supply. Demand and supply being the amount of commodity the buyers are prepared to buy and sellers are prepared to sell, at all prices.

If supply is constant, The higher the price of a commodity, the lesser is its demand, the lower the price of a commodity, the higher is its demand.

As the speculators and sellers reduce the price of their commodity, the demand of that commodity increases. People obviously are willing to buy more shirts at Rs20/- per shirt and they will buy lesser shirts at price of Rs40/- per shirt. Since the lower price increases consumers, speculators and sellers tend to decrease the price to the minimal possible value so that they can outcompete the other speculators and sellers. Most of the consumers will opt to buy from that seller who is asking the least prices and hence, that seller will make maximum profits. Obviously, a speculator cannot decide price for his stored commodity any less than the actual cost of that commodity plus cost of its storing and his share of profit.
Thus, it should be clear that speculators could not decide the price variation of a commodity as price is directly proportional to the demand of consumers. A speculator or a seller may merely speculate the increasing or decreasing trends of the demand of a commodity and adjust the supply of commodity by either storing it or flooding the stored quantity of the commodity in market in accordance with their share of profit.

Can Government decide and control the prices?

Speculators cannot decide and control prices because they cannot force anybody, they cannot use violence against anybody. So, if a speculator decides to sell stored commodity at higher prices, he will loose his consumers, as they will have choice to go for that speculator and seller that provides the commodity at lower prices.
Yet, government can decide and control the prices because government do not need to look for the supply of a commodity, on the other hand, government works under the pressure of vote banks. In order to obtain maximum of the vote bank, government can actually decide the prices of various commodities lower than the cost of production and storage of those commodities. That is why, just in order to gain maximum vote bank, government can promise to sell wheat or rice at a price of Rs2/- per kg, or even at free of price. This is absolute corruption and fraud because the cost of production of any commodity or service is always higher than the price dictated by the government and hence government always works at loss that ultimately burdens the poor consumers, voters. Government can control the prices too because it has monopoly on violence, government can force all speculators and sellers to sell the product at the dictated prices; it can illegalize speculating and selling and may control selling services completely by collectivizing the market. Government can jail speculators, sellers and dealers if they do anything against the monopoly of government, government can kill them too by means of police force.
Obviously, government has no responsibility or need to look for the quantity, quality and supply of the commodities of which it dictates the prices because the basic means of government income is confiscatory, compulsory taxation. Yet, when supply of a product reaches too much lower and the demand increases too much higher, government succumbs under the pressure of demand and supply and resorts to increase the prices, that again creates havoc for the consumers.

Reason of Price Rise and Consequences of Price Control

In order to hide its irresponsibility and fraud, government often suggests that the reason of price rise is population explosion and scarcity of products. Yet, it is again a myth. It is true that Indian population increased almost 4 times since 1947, yet the thing to be noted is, Indian production increased 100 times (or more). So comparably, production is too much more in relation with present population than what it was in 1947 in relation with the population of 1947.
Price rise is direct consequence of Inflation¹ . As government has monopoly on printing fiat currency out of thin air, it keeps increasing the fiat currency. As a result, the purchasing power of citizens increases. Since the purchasing power of consumers’ increases, their demand also increases and it exceeds the quantity of available supply.
Whenever the quantity of demand of consumers’ increases than the quantity of supply the producers and sellers can provide, the situation of shortage occurs where the consumers are willing to buy, but the sellers and suppliers cannot provide, they have nothing to sell.
Such situations creates tensions within the society and may erupt in violence as every consumers suddenly comes to realize that although they have fiat currency, they have no wealth, they have been robbed and they are poorer than what they were years before. To avoid such situation, government feels forced to increase prices of commodities because price rise actually solves out the problem of shortage. At higher prices, demand of consumers decreases and tends to come closer to the quantity of supply available in market. Yet again, government may loose vote bank because of price rise, hence it resorts to price control again.
Price control is again a fraud and creates chaos in market. Due to lower dictated prices, demand of consumers remains high irrespective of the supply and that increases wastage of scarce products causing shortage. As production and supply never meets the demand of consumers in such scenario, the consumers suffers.

Solution of Price rise and Shortage

As price rise is result of Inflation and government’s monopoly on printing currency² , the solution of price rise obviously is a denial of fiat currency and acceptance of 100% gold standardized currency and end of government monopoly at issuing currency³ . The increase in supply of such money would always be ineffective and small and would be limited by the high costs of mining additional quantities of gold.
Price rise became a chronic social problem because government replaced the Gold standard of currency by unworthy paper currency whose quantity can be raised without limit and without cost. There is no other solution for this chronic problem.
In addition, the problem of shortage and all the frustrations, corruption and violence attached with it is because of the government control over prices. In order to avoid any shortage of any commodity in market, it is necessary for government to leave the market and pricing system free of any interventions and let the producers, sellers, speculators, hoarders and dealers take care of the pricing system.
Speculators and hoarders saves the consumers from shortages by speculating any change in the trend of demand and supply and adjusting the prices to that level at which, the demand of consumers decreases or increases to the equalizing levels of the available supply.
When demand is higher and supply is less, speculators increase the prices and hence decreases the demand to equalize it with the supply and hence saves the consumers from the frustrations of not being able to buy, and thus avoids any wastage and shortage.

1. Story of Money, What Causes Inflation? [↩]
2. Story of Money, What Causes Inflation? [↩]
3. Fiat Money Versus Gold Standard, Privatization of Currency [↩]

We have seen how the state planning for alleviating famine and food shortage fails miserably in a planned economy. Often in a mixed economy, government seeks proper control over the agriculture and food sector and that becomes the reason of corruption and further suffering at the times of need, scarcity and famine.¹
On the other hand, in a free market, the profit motive acts efficiently to assuage worst kind of shortage and famines and hence actually save the populace from extreme starvation.
In a free market, there is a tendency of price of wheat, rice or crude oil (or any other commodity that can be stored), to be equal to its expected prices say after 6 months or a year, that is, free market naturally depresses the unexpected price rise.
Whenever government intervenes with the market, the market moves away from this natural tendency and the consumers suffer unexpected shortage and famine.
The force behind the tendency of uniformity of present and expected future prices of a commodity in a market is the profit motive of free enterprisers. Any disturbance in prices provides a chance for higher profit rates and as the enterprises exploit it, the discrepancy in the prices reduces to minimal.

Solving the Shortage of Grains

To understand this, let us take the case of an unexpected flood or drought in an Indian region (say Bihar, or Andhra Pradesh). Because of drought, the production of wheat will be reduced (let us say it reduces by 1/12th of the average wheat production in an year). Obviously, because of the shortage in production, the price of wheat is expected to rise after say, 6 months. The enterprisers looking for making higher profits will speculate this expected price rise and will start storing the wheat at the current lower prices to save it to make higher profits in future by selling the stored wheat at higher prices.
Their speculative storing of wheat will result in a raise of current price of wheat, as there will be lesser wheat available to be sold to consumers, and the enlarged quantity of wheat for future will reduce the future prices of the wheat.
Because of current higher prices, the consumers will also start accommodating themselves to the shortage of wheat by reducing the consumption of wheat and checking the wastage. This thriftiness on behalf of consumers will allow them to sustain the time of absolute scarcity of wheat and that will further reduce the expected future price of wheat. Thus, at one hand, speculators will increase the current prices of wheat by storing it for future sales at higher prices, on the other hand, the increased available quantity of wheat for future and the thriftiness of consumers at present will reduce the expected prices of wheat in future. As a result, the maximum possible increase in price of wheat at the period of most scarcity will also be not very much more than the current price of wheat plus the storing and preserving charges of the wheat by speculators.
In absence of speculators, as most of governments illegalizes speculation for price control, the consumers will never realize the actual shortage of wheat because there will be no sign of scarcity by means of price rise and will continue consuming wheat as normal. On the other hand, although the stored wheat will satisfy the demand of consumers for first 11 months, there will be no wheat left for the next 12th month of year as the total wheat produced is already less by 1/12th of the average required for an year. Such a situation will not only make people suffer starvation but will also fail to reduce wastage when it could have been. In addition, it will provide further chances of bureaucratic governmental corruption.
The profit motive will also alleviate the situation of famine and scarcity by means of another natural force of free market that tends to equalize the price of a commodity at all places. At a time when Andhra Pradesh or Bihar is suffering famine and food shortage, the dealers at other parts (say Uttar Pradesh, Punjab or Tamil Nadu) will seek higher profit rates by selling their stored wheat to the consumers in Bihar or Andhra Pradesh. This will result in a slight increase in price of wheat at the local markets while the increase quantity of wheat available for Bihar or Andhra Pradesh consumers will reduce the unexpected rise in price of wheat at markets there. Thus, the shortage of wheat at a region will be spread to whole India and hence will reduce its effect to minimal, all will share the increase in price of wheat, and that will reduce any extra burden on the consumers of famine suffering area to negligible.
The speculators cannot store the wheat for more than a period of 12 months as by that time, the new crop of wheat will arrive in the market and that will reduce the price of wheat to normal.

Issue of Oil Shortage because of Corrupt Oil Barons

The same principles of free market will also tackle any unwanted situation in the market of crude oil and petroleum or any storable commodity.
In the previous post, while discussing the Market Anarchy² , one of my friends raised the issue of Oil Barons, asking what will happen to free market if the Arab Oil Barons tries to control the market because of their influence on oil production.
Let us assume that all Oil Barons of Arab makes a union and tries to control the free market by imposing an artificial scarcity of crude oil (although this is impossible because reducing supply of oil will reduce all income of those oil barons as they have no other means of profitable production).
The speculators of free market will certainly foresee the future shortage of oil and will maintain their oil storage to make higher profits. That will obviously increase the current prices of available oil and hence will introduce the thriftiness in consumers, making them more able to sustain the period of oil shortage. Consequently, it will reduce the chances of unexpected increase in price of oil at extreme periods too.
On the other hand, Indian free market will also tend to increase its oil production to make higher profits. In addition, profit motive will tend the oil producers of other nations (like USA or Russia etc) to sell their oil to the Indian market. That will obviously tend to spread the scarcity of oil through out the world and hence will assuage the problems of Indian market. Hence, although the economy of India and actually whole world, will suffer a comparable loss but that would not be of any considerable degrees. On the other hand, Oil Barons depend only on oil production, their loss at not selling the oil will be huge and directly pointed towards them, and that will break their union.
Conclusion: A free market inadvertently safeguards itself against any sort of scarcity of any commodity by means of the profit motivated market forces. As speculators guard the market and hence the well-being of consumers as true and honest soldiers (as their vested profits and interests are strictly attached with the consumers), the free market necessarily remains free of any discrepancy in the prices of any commodity.
Even the administrators of mixed economy have realizes the power of forces of free market that is why Indian government issued allowance of speculations over wheat few months ago³. Certainly, it is a positive step towards the Free Market.

1. Cultivating Famine, Reason for Liberty [↩]
2. Issue of Oil Barons, The Market Anarchy [↩]
3. Ban of wheat futures lifted, Speculation allowed, Economic Times [↩]

In absence of central planning and governmental interventions, the production remains in the hands of independent, self-interested, profit-seeking individuals.
In absence of forced laws and regulations, the independent self-interested producers follow the natural laws of market that brings the uniformity and systematically accelerated progress in the free society where the wastage of resources reaches to minimum and overall production tends to reach to maximum and hence the common ills of collectivism such as extreme poverty, unemployment, class differences etc gets the proper remedies in the individualistic, free-society systems.
Whenever government intervenes in such a society by means of central planning and interventionism, the chain of progress breaks and the retardation takes place that brings the common ills of collectivism back to the frame.

Uniformity of Profit

Naturally, every body works to gain profits, everybody lives to sustain and comfort his life, profit is the only motive for a free individual to put up his endeavours in production and prosperity. Yet, the laws of natural anarchy also ride profits and that is the Uniformity of Profit principle. The principle suggests the natural tendency of a free-society towards establishing a uniform rate of profit on capital invested in all the different branches of production, be it steel production, grains production, oil industry, the shoe business or whatever. Profit, obviously is the difference between the sales revenues and cost of production.

The reason for such tendency of natural uniformity is the profit seeking nature of the free-individual. Investors prefer to earn higher rates of profits on their investment rather than the lower rates. That is natural, rational behaviour of man to seek maximum possible profits. Thus, other things being equal, wherever the rates of profits are higher, investors tends to invest their additional wealth, and wherever the profits are lower, they tend to withdraw their previously invested capital from those production sectors. The additional investment that thus reaches to any high profits providing production sector tends to reduce the rate of profits in that sector.
This happens because the additional investment increases the production and hence supply and availability of the products and that brings down the selling prices of the product. As selling prices reaches closer to cost of production, profit rates comes down. On the other hand, the production sector that initially was providing lower profit rates suffers lack of investment and hence lack of production and supply, which throws the prices of the products of that sector higher. As the selling prices increases, the profit rates of that sector also increases and hence, that production sector again becomes the higher profit providing sector. This rolling up and down of investments in various production sectors tends to bring equilibrium where the rates of profit in various production sectors tends to be uniform.

Benefits of Natural Anarchy

In a free-society, as the profit rates tend to be uniform, every sector gains enough investors. As every investor is driven by his profit seeking nature, he remains alert about consumers demand and that reduces the chances of malinvestment and hence over-production or under-production. The natural anarchy thus provides a balance between the production of all the essential products for our life and progress. Anarchy not only prevents but also remedies the mistakes of over-production or under-production if committed. If at the threshold of a high profit-rates providing sector, investors commits mistake of over-investment, it tends to over-production that decreases the rates of profit and hence further investment reduces resulting in lesser production and hence providing the necessary cure to the mistake.
Because of individual freedom and uniformity of rates of profit, each sector not only gains enough investors, it also gains enough human resources in form of workers, specialists, managers, entrepreneurs and inventors and that leads to over-all increase in rate of production leading to reduce poverty and scarcity at all fronts.
As natural anarchy tends to bring the uniform rates of profit for investors, it tends to bring uniform rates of earnings, wages and increments to the producers, workers and innovators involved in various sectors of production and services and hence establish a developed division of labour. Since, the free-society tends to bring uniformity of profits and earnings, the ills of economic inequality tends to reduce to minimal¹
because of which, class clashes, casteism, racism, and other sorts of irrational discriminations are reduced and that brings the environment of natural freedom for each individual being free to use his talents and endeavour to pursue happiness by earning it honestly and freely. Thus in a free-society, natural anarchy tends to bring happiness and progressive increase in production of each individual.

Ills of Interventionism and Central Planning

The government by means of central planning or interventionism often dislocates the harmony of free-market and hence breaks the chain of progress bringing chaos to the society. In presence of government interventions in forms of subsidies, taxation, prohibitions, licensing etc, the profit motive looses its essence, and instead of learning and leading the way of natural profit seeking tendency, investors are forced to invest based on government’s dictatorial interventions. This dependence reduces the investors’ incentive to invest and hence causes lack of investment. In absence of profit motive, neither the government, nor the investors by themselves get any chance to check the threshold of investment and production and that causes loss by means of malinvestment resulting in over-production in some sectors and under-production in different. Also, by means of subsidies, stimulus packages and forced production, government creates bubbles of boom that tends to burst ultimately causing malinvestment that results in loss of production, lack of investment, depression, scarcity, wastage of resources, corruption and unemployment. As the government interventions destroy the division of labour, society suffers lack of freedom, extreme differences between classes, casteism, discriminations and overall underproduction that bring in problems of poverty.
Conclusion: In a free-society, market follows the laws of natural anarchy and that provides freedom, progress, prosperity and increase in the productivity and profits of the free-individuals tending to solve out the social ills if present along with preventing and curing the economical mistakes by means of profit motive that works as a thermostat or the invisible hand to guide the society towards cumulative production and provide the individuals means to pursue their happiness honestly and freely. Government interventions prove to be fatal, destroying the profit motive that is the only possible means of checking the malinvestment, over-production and under-production. This results in economic chaos, making the birth bed for various social-ills by destroying the division of labour.²

1. Economic inequality based on freedom of individuals to exploit their own intelligence and talent is significantly less visible than the economic inequality that results because of forced planning or government coercion. The fact is greater freedom results in greater prosperity of whole society and less extreme width of economic inequalities, Freedom Versus Egalitarianism [↩]
2. Division of labour is the essential aspect of a free, prosperous and ever improving progressive society, Division of Labour [↩]