The Home Builder-Economy Analogy

The following analogy is taken from Meltdown (2009) by Thomas E. Woods Jr. The author says this a summary of what the Austrian theory says:

Imagine a home-builder who believes he has 20% more bricks than he actually has. He will build a different kind of house than he would if he had an accurate count of his brick supply. (Assume he can't buy any more.) The dimensions will be different. The style may even be different. And the longer he goes without realizing his error, the worse the eventual reckoning will be. If he finds out his error, only at the very end, he'll have to tear down the whole (incomplete) house, and all those resources and labor time will have been squandered. Society will be that much the poorer.

The economy is like the home builder. Forcing interest rates lower than the free market would have set them makes economic actors act as if more saved resources exist than actually do. Some portion of their new investment is malinvestment---investment in lines that would have sense if the saved resources existed to sustain and complete them, but which do not make sense in light of current resource availability.

An adept analogy. Basically information affects what your actions are. Incorrect information or beliefs will take you down the wrong path.

Here is what the author says should be done about the current economic crises:

• Let the big companies go bankrupt. It's capital equipment doesn't disappear. Someone will come along and buy them and run the business.
• Abolish Fannie and Freddie. These are zombie companies according to the author.
• Stop the bailouts and cut gov't spending.
• End gov't manipulation of money.
• Let's have a debate about whether the Federal Reserve (Fed) is helping or hurting the economy.
• The Fed should abolish its Term Auction Facilities and return to making loans at its discount window only to its traditional customers. Interest rates should be allowed to float.
• End the monopoly money.

Good ideas. I like the zombie term for Fannie and Freddie. Basically they are companies run by the gov't. In other words they are in between a free-market company and a gov't agency. Weird. I think the Fed does more harm than good, because there is a lot of power to control the economy. And power corrupts. This is the same reason I am anxious about having a National Sales Tax--it would allow the gov't too much power to control how much you save and spend.