A free economics lesson for London Councillor Tanya Park

Lee Friday – March 3, 2017

London Councillor Tanya Park wants to tell developers when and how to invest their money. Not her money, their money. Not sure how Park would feel about others trying to tell her what to do with her own money.

A London Free Press article quotes Park: “Any owner with vacant lots downtown are not doing themselves or the city any service. The earning potential is huge . . . It behooves one to get them (developed). . .”

If Park is convinced the “earning potential is huge”, why does she not use her own money – and borrow more if needed – to buy and develop various properties?

Ah, but according to the article, ­various developers have said they approached developer Shmuel Farhi to buy land, but Farhi will not sell. Well, that simply means their offers have been too low. What’s wrong with them? They should increase their offers! In fact, why has there not been a bidding war? Are they unaware the “earning potential is huge”?

Tanya, you seem to know something no one else knows. You should seize the opportunity. Make Farhi an offer (your own money, not the taxpayers’) he can’t refuse. You will become rich, and create lots of jobs in the process. Geez, if it were me, and I knew about a golden opportunity that no one else was aware of, I would be all over it like white on rice.

The reality is that future earnings and profits – or losses – are an outcome of future events, which cannot be predicted with precision. Thus, entrepreneurs  are speculators in the purest sense of the word. They always face a significant element of risk, as they attempt to forecast, or create, future consumer demand for their products and services. ‘Profits’ are the market’s signal to entrepreneurs that consumers value their output, which means that resources have been used efficiently.

In contrast, ‘losses’ tell entrepreneurs that consumers do not value their output, which means that resources are being wasted – thus entrepreneurs must improve efficiency or go out of business, thereby conserving resources for someone else who can use them more efficiently, and profitably.

These are the basic economic principles to which councillor Park appears oblivious. She seems intent on directing the economic activities of other people, as long as she does not have to put her money where her mouth is. Business owners cannot impose their will on the market, but Park wants to do just that. According to the article, “Park said she likes an initiative by Montreal to tax land at its highest potential use, to encourage building on the lot.” That is a ridiculous idea – such political action is completely presumptuous.

Let’s define “highest potential use” as a “use which entrepreneurs believe will produce products or services which are valued more highly by consumers as compared to any alternate use of the land.” No entrepreneur on the face of the planet can possibly know the answer to this question. Therefore, such political edicts would be completely arbitrary. The only way to know the answer to this question is to allow market events to naturally unfold. If and when an entrepreneur decides to develop a property, success is defined as a ‘profitable enterprise’, because profits are the crucial indicator of consumer satisfaction.

Farhi understands the importance of good planning. He also understands the need to proceed cautiously, because forecasting market demand is fraught with uncertainty, even in the best of times. If they wish to be profitable, commercial enterprises must cater to the preferences of consumers. Consumers express their preferences by voting with their dollars, thus determining which entrepreneurs will succeed and which will fail. The article quotes Farhi: “I have no interest in trying to impose my will on the marketplace and ending up with empty facilities.”

Sadly, councillor Park has lots of company. Most politicians are eager to apply political pressure in order to shape the economy according to their vision of the world. However, as Farhi points out, “if the development is unsuccessful they can just walk away, but the bankers and lenders will not.” Farhi is correct. When the grandiose schemes of politicians fail, as they invariably do, they do not bear personal responsibility. This is what sets entrepreneurs apart from politicians. Decisions must remain in the hands of the people affected by the decisions.

In a world of scarcity, we have an abundance of politicians with tremendous (misplaced) faith in their own ability to mastermind the economy. Most of the world’s economic problems would disappear if arrogant politicians would stop their meddling.

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