Free Demand vs. Forced Demand
In order to understand the events of the past week we must look at the forces that effect the market. In this case we will look at demand. Then split demand into two components “free demand” and “forced demand.” Free demand is the demand that exists for a good or service without the need to threaten violence and forced demand is the demand that is the result of the threat of violence.
There are different levels of influence that the threat of violence has on demand. It can be said that the harsher and more direct the violence the greater influence it has on demand. In addition to this, the more at odds with free demand the greater the violence needed.
It is often best to show the meaning of an abstract concept through an exaggerated and over simplified example.
A very common and example would be the school bully. Imagine you are walking through school and the bully comes up to you and says “Give me your lunch money.” Your “free demand” for having someone take your lunch money is basically none existent, so you answer “that’s okay, I am really craving a sloppy joe, I think I will pass on your service and keep my money.” The bully then realizing that there does not exist enough free demand for his service (stealing lunch money) he threatens, “give me your money or I will hang you by your tighty whities in front of everyone in the school.” This immediately increases your “forced demand” to have someone take your lunch money. Thus the overall demand has increased significantly enough and the bully kindly provides you with the service he was offering, and takes your lunch money.
In the United States over the past century we have seen a continuous increase in the use of “forced demand” in certain areas of the market. Some of the areas we have seen it are the market for houses, stocks, military security and foreign aid. The overall demand for these services has been greatly influenced by “forced demand” via the Federal Government.
Most people will say, “I was not forced to by the stocks or house that I own.” Is that really true? The government gives significant tax credits for people to pay interest on a mortgage and put money into government “encouraged” investment accounts. These accounts are then restricted on the types of assets that they can hold.
Now let’s look at this in terms of the lunch money analogy. The IRS comes to you and says “give me your money.” You say, “No thanks I would like to keep what I have earned.” The IRS threatens, “give me your money or I will seize all of your assets and possibly lock you up.” While you are thinking the IRS then says, “or you could keep your money, but you have to buy a house on credit with it.” Well all of a sudden your demand for a mortgage has increased significantly, you say, “tell you what I don’t really want to have a large debt, but in this case I will buy a new house instead of give you my money.” Your overall demand was increased by the “force” of the government.
The problem with forced demand is that you have to continue to supply the force to keep the same level of demand. The natural and free state of things would exist where the “free demand” is.
We are in a time where the market is trying to move back to its natural state where it should be with only “free demand.” However, this hurts the people that supply based on “forced demand.” They are going to do all that they can to further increase the force needed to keep the forced demand high.
Remember in the United States we live in “The Land Of The Free.” Let’s make sure we don’t let the school bully take that away from us.