Startups versus the State

The free market tends to destroy opportunities for unusually high rates of profit as entrepreneurs reallocate resources from areas of normal profit rates to areas with higher rates of profit. In the short run, there is money to be made in satisfying neglected consumer demand, but in the long run competition makes it so that each opportunity eventually becomes less and less lucrative.

This process is great for both consumers and entrepreneurs. Consumers either get an inexpensive solution to an old problem, or they get an expensive solution to a problem that previously had no solution (and even this product will fall in price over time). Entrepreneurs get rewarded with unusually high profit rates for creating new and better products.

Unfortunately, this process gets interrupted when the state hampers the market with regulations, monopolies and other arbitrary laws. The taxi medallion monopolies are one well known system that causes economic havoc. These laws artificially reduce the supply of taxis in major cities which means some people have to stand around in the rain. Mass transit monopolies are not any better, resisting any and all demands for better roads, brides, tunnels and railways. Continue reading →