King Midas is the King from Greek mythology who had the gift to turn anything he touched into gold. In the story of slightly wiser King Midas he gains the ability to control which things turn into gold and which things do not. This was used to illustrate that real goods, not money (in this case gold) are the source of wealth. As he spends more and more freshly made gold, since the amount of actual products can’t increase too much, the value of each piece of gold must become less and less. Money is simply a claim to real resources. When there are more claims for the same amount of resources, it is a necessary outcome that each claim be worth less. This is basically what inflation is (though by the same token, it can be caused by the same amount of money circulating with a reduction in real goods).
Before becoming wiser, Midas continues to turn more and more useless rocks into valuable gold, using them to support the expansion of his grand palace. As the opulence of his palace grows into something previously beyond human imagining, the King’s people grew hungry and disquieted. It now requires twice as much gold to buy the same simple breakfast as before. The people come to petition the King for help. He thinks on it and decides to proclaim that all food must now cost what it used to before his newfound power.
The people temporarily rejoice for those greedy farmers and merchants will no longer get the
better of them!
But remember, the gold lost its value in the first place because the King created much more gold to use to claim resources. By doing this, he diverted much of the production of the country towards himself. If his claim to the country’s resources grew so much, but the country’s productive ability remained about the same, how could it be possible everyone else gets as much as before? Is it possible for
any law he passes to allow the people to still have everything they were previously used to consuming in addition to all he is funneling to himself? No, that would imply that somehow the
gold really was able to make more of everything. If this were the case, we could solve all the world’s scarcity problems simply by simply running a printing press!(Once again you would need a story, not only about how making money could increase productivity but would increase it by whatever amount is printed!!! As well as a way of explaining away all the hyperinflation of the past.)
Instead, the new law would make it almost impossible to find food in the market, for it will not be worth it to the farmer to work for claims that amount to so few real goods when he goes to market. He will instead choose a different option, producing less, doing a different job, or selling his wares on the black market.
If the newly high prices are really the result of the greed of the farmers and merchants,
then why did they not increase the price earlier? Why not make the price even higher? In a
competitive market, prices are not an arbitrary construct. They are the value that naturally arises from peoples’ interactions which make it so that the amount people want to buy and sell are equal. If we try to change this, then by definition, there will now be some people who would no longer find themselves willing to trade.
Midas’s gift is nearly identical to King Midas’s ability to tax. In the case of direct taxes, he takes money from the people. When he creates gold though the people hold onto their money, it is instead the value that money represents that is taken.
Had he instead levied enough taxes from his people in order to channel the same amount of resources away from other markets and direct them to himself, the end allocation of resources would be roughly the same. In this case, however, it would be more obviously nonsensical to respond to the people complaining about being taxed so much by saying that the prices just need to be cut in half. Imagine handing out 1000 slips of paper that each says they can claim one prize when there are only 100 prizes. You can legislate 1 slip=1 prize all you want, but fundamental reality will always get in the way. Even the mightiest ruler cannot legislate away reality!
Midas learns his lesson and promises the people that he will no longer use his power to create gold to indirectly take from them. It was a hard-learned lesson, but he finally understands real goods and services are what the wealth of a country consists of, not its money. Thus he became the fairly wise King Midas.
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[…] saw King Midas at his most foolish when he tried to fix the inflation he created by instituting price controls. If there are roughly as […]