CHAPTER 4Political Foundations: EVALUATING PROPERTY RIGHTS, PRICE MECHANISMS, AND POLITICAL DISTORTIONS
If you put the government in charge of the Sahara Desert, in five years there'd be a shortage of sand.
—Milton Friedman
When a collection of individuals agrees to form a society, they have many options in determining how to organize themselves. The political philosophy of the group will be manifested in its political-economic systems, and the range of possible solutions is wide. This chapter focuses on two key decisions that relate to a society's vulnerability to boom and bust cycles. First, we evaluate the different philosophies relating to property rights. A society's choice to allow private property to exist and to protect such property with corresponding rights is an essential prerequisite for market-determined prices to be “discovered” via supply and demand dynamics. Further, without private property rights, the idea of booms and busts may be moot, as the state owns everything.1
The chapter evaluates the mechanism through which a society chooses to determine the prices of goods, and the roles that those prices play in the allocation of scarce resources. Although significant gradations exist between the extremes, two primary price-determination methodologies are considered: (i) supply and demand–driven price “discovery” processes that take place through the interaction of buyers and sellers; and (ii) central planning–driven price dictation in which the prices of goods ...