Chapter 4
ECONOMICS FROM AN OBJECTIVIST VIEWPOINT
* Objective vs. Subjective Economic Value
* History
* The Corporate Enterprise
* Political Power vs. Economic Power
* Property
* What is property?
* The right to property
* Why must we recognize property rights?
* Philosophical underpinnings
* Ownership
* John Locke on Property
* Some questions about the Lockean thesis
* Intellectual Property - Information as Property
* Bibliography
* Capitalism
* Wealth
* The Need For Money
* The Evolution of Money and the Nature of inflation
* The Effects of Inflation
Several miscellaneous issues
* Foundations
* Bootstrap Economics
* Economic Calculations
* Agriculture in China: An example of central control vs. individual control
* The Tragedy of the Commons
* The Public Goods Problem
* Fascism-Communism
* Marx
* The Luddite Phenomenon
* Liability
* Productivity
* Fair Trade
* Objective vs. Subjective Economic Value
Keep in mind that the term "subjective value" has a specialized meaning
in the field of economics. Here, "subjective value" means merely "that which
is of value to a subject," that is, to an acting human. The economic
function of the term "subjective value" is to emphasize the fact that things
don't have value in and of themselves apart from the value placed on those
things by human beings.
The economic ideology of the feudal system was contained in the phrases
"fair price" and "just wage." Prices and wages were seen as ethical
judgments of worth while supply and demand were viewed as economically
irrelevant. The modern idea of prices and wages as pragmatic devices for
allocating resources, implying no ethical judgment, came into existence only
during the Renaissance. Under the feudal system the economic influence of
supply and demand on prices arose only in the worst possible times: during
famine or war. And the steep rises in prices during those times were
considered an outrage perpetrated by the sellers who set them. People had
not yet learned the TANSTAAFL precept: that you can't get something for
nothing. Most still have not learned this today.
For many years men sought in vain for some objective standard of value, a
"fair" price, a "just" wage, an unvarying measure of the intrinsic worth of
an object or service. But no such measure exists, simply because "value" has
no meaning other than in relation to living beings; the value of a thing is
always relative to a particular person, not to the thing itself.
The most commonly proposed answer to their quest was that the exchange
value of a product is the amount of time put into the making of it. For
instance, if a baker worked an hour to bake a loaf of bread, anyone else
should be willing to give up an hour's work for that bread. But this scheme
leaves the baker with no way to decide how much of his time to devote to
baking bread rather than cakes or tarts. Thus this "objective value" idea
always led to economic nonsense--and it continues to do so today. The
Marxian definition of value is absurd: all the work you care to add will not
turn a mud pie into an apple tart; it remains a mud pie. Likewise,
unskillful work can easily subtract value: an incompetent cook can turn
wholesome dough and fresh apples, valuable already, into an inedible mess
with a value of zero.
Eventually it was deduced (by Carl Menger) that the exchange value of a
product is simply whatever anyone else will give for it in a voluntary
trade. In such a trade, each participant evaluates, in terms of his own
personal scale of values, what he gives up, and compares this with what he
receives. The ratio at which these items compare can then become the basis
for a price--the only possible realistic price. In this way the personal
choices of each individual participant, all balancing against each other,
comprise a dynamic flow of commerce which would be a free market. Menger
showed that the free market is just free people making free choices about
their own values. From this was derived the concept of the market as an
information system, and the realization that the evaluations underlying
economic choices are of a subjective nature which makes impossible any
objective measurement of the motivations underlying them.
The related phenomenon of "cost" is also inherently linked to choice. It
is that which the choice-maker gives up when he selects one alternative
rather than another. Cost consists of his own evaluation of the benefit that
he anticipates having to forego as a result of his choice.
* History
The failure of Charlemagne's successors to establish a consolidated
regime in Western Europe and the eventual disintegration of real political
power into the hands of a multitude of local barons resulted in a vacuum of
centralized authority. With the decline of the feudal system at the end of
the Middle Ages, the absence of centralized political power left an emerging
merchant class with the opportunity to establish the commercial institutions
which were the foundation of the industrial world we live in today. The
prerequisite for the birth of these economic endeavors was the existence of
a wide scope within which trade could be conducted with freedom from
coercion by political authorities. (In a word, Anarchy.) This freedom also
opened the door to the extensive development of towns and cities, some of
which were virtually independent political entities outside the feudal
system.
During the 16th through the 18th centuries, maritime trade with overseas
markets was at once a major field of economic growth and an area intractably
resistant to medieval principles of political control. The efforts of the
emerging nation-states to control maritime commerce lacked the universal
recognition necessary to confer legitimacy and were, on the contrary,
competing, contradictory, and mutually self-defeating.
The political/economic situation in China was quite a bit different. The
Imperial Examination determined entry into the bureaucracy and thus assured
the continuation of a centralized elite, drawing into itself the best brains
of each generation. The basic ideology of the mandarinate was opposed to the
value-systems of the merchants. Capital accumulation in Chinese society
could indeed occur, but the application of it to permanently productive
industrial enterprises was strongly restricted by the scholar-bureaucrats,
as indeed was any other social action which might threaten their supremacy.
It may not be a coincidence that modern Japan, which led China in the
adoption of Western institutions to its economy, grew out of a politically
decentralized feudal society.
For the European governments, the timing was wrong; they came to power
too late to prevent the rise of capitalism, and their only recourse for
expressing statist values was a gradual, Fabian assertion of authority over
the aspects of capitalism not too mercurial to elude their grasp. Western
governments are still engaged in this struggle today.
* The Corporate Enterprise
The conduct of economic affairs over time periods of substantial length
required the emergence of an independent economic organism, above and beyond
the individuals engaged in economic activity. The huge enterprises
(railroads, steel mills, factories) that evolved during the Industrial
Revolution required the tying up of capital in amounts, and over periods of
time, unprecedented in medieval commerce. The life of the assets and the
time needed to recover the investment often exceeded the life expectancy of
the mere mortals charged with their management.
The two great authorities of the Middle Ages were the feudal aristocracy
and the Church. Neither engaged in the relationships of trust and confidence
needed for long-term economic association. To the medieval merchant,
accustomed to keeping his wealth protected against the hazards of political
extortion or war, a tie-up of capital for a period far beyond the range of
his personal foresight would have seemed insane. But gradually, appreciable
numbers of these merchants (those who invested in corporations) came to
believe that other businessmen (those who managed the corporations) were
honest, diligent, and could be trusted. As this trust developed, many
business transactions that had formerly occurred in separate ways in various
distinct ventures came to be included in one conceptual unit, the corporate
enterprise: the publicly-held corporation with marketable stock.
Such trust presupposes a widely shared sense of business ethics, and that
sense of business ethics could hardly have been inherited from the teachings
of the Catholic Church or from the feudal aristocracy. The contempt which
the clergy and the aristocracy felt for the merchant class could only have
encouraged the merchants to develop a code of honor based on punctilious
business relationships--a behavior strikingly absent from the aristocratic
code and emphasizing the profound difference between the two.
* Political Power vs. Economic Power
All political systems rest upon a foundation of theft. The ultimate
source of political power, the wealth of the state, is the act of theft
called taxation. The distinction between politics and economics is the
distinction between the power to expropriate and the power to produce.
Politics is also characterized by other types of coercion than the theft of
wealth, but it is this act of theft that constitutes the economic foundation
of political systems, whereas other forms of economic activity (excluding
non-governmental theft) rest on the production of wealth rather than its
expropriation.
On the one hand lies economic power, exercised by means of a positive: by
offering men a reward, an incentive, a payment, a value. On the other hand
is political power, exercised by means of a negative: by the threat of
punishment, injury, imprisonment, destruction. The businessman's tool is
values; the government's tool is fear.
The power of a politician is the power to impose punishment on people who
fail to obey his commands. Even to the extent that he CAN grant rewards,
those rewards themselves consist of expropriated wealth.
The power of a businessman is the power to grant rewards (in the form of
produced wealth) to people who cooperate with him. His only power to punish
is the power to withhold the rewards. The businessman must produce something
consumers are willing to buy at a price that consumers are willing to pay,
and he must compete in a marketplace for the favor of the consumers. He must
persuade consumers to buy his product, but the politician can coerce them
into buying something whether they want it or not.
Under government there are winners and there are losers. Unlike the free
market, for every beneficiary of government action there is a victim. In a
political process, the values of the winners are imposed upon the losers,
and the losers are powerless to reject them. But in a free market,
majorities and minorities can both win, because a free market is not a zero-
sum institution. In a market it is possible for numerous large and powerful
economic interests to coexist and prosper in the same economic territory.
There is so little clarity in either economic or political analysis
because in the minds of most people the two are all muddled up together and
when people speak of "power" they make no distinction between the power to
coerce and the power to produce.
For man to achieve a human state of life and civilization, three
conditions are necessary: freedom, capitalism, and a rational code of
ethical principles to guide his social behavior. To men who use reason and
are free to interact cooperatively, nature gives more and more. To those who
turn away from reason, are not free, or who interact destructively, it gives
less and less.
With the Enlightenment and the Industrial Revolution, the first two of
these conditions were achieved, to a considerable extent. The result was the
transformation of the world. It was the people of the USA, with a government
too small and weak to significantly inhibit economic activity, who
implemented the principle of laissez-faire capitalism--of free trade in a
free market--to the greatest extent. In America, prior to the 20th century,
men's productive activities were predominantly left free of governmental
restrictions. The result was the creation, in the brief period of a century
and a half, of a standard of living unequaled by the sum total of mankind's
development up to that time. Capitalism--and civilization--are declining
because men failed to achieve the third condition necessary for a human
state of existence: a rational code of ethics appropriate to man's nature.
It is the principled foundation for such a code that Ayn Rand has provided.
Most people today have not learned to distinguish between government
wealth transfers and wealth earned in a free market. This ignorance, coupled
with Christianity's inherent aversion to commerce, induces people to feel
envy when others become rich through market activity. The consequence of
this envy is a clamor for increasing government intervention in the
marketplace. But that intervention is always counterproductive, causing more
problems than it was intended to solve. The line which divides the realm of
wealth from the realm of poverty is roughly that which divides freely
produced and marketed goods and services from government-controlled
activities. The solution to economic problems caused by government does not
lie in devoting still more wealth to an institution inherently incapable of
being a producer.
Thus it is that, just as people can use a TV without understanding
anything about how it works, America has become wealthy but Americans don't
understand why. And in their ignorance they are destroying the economic
foundations that made their wealth possible.
Much of the rest of the world suffers from a related form of
shortsightedness. The belief that the wealth of the West springs from its
factory system gives rise to an impulse in the countries of the Third World
to equip themselves with the trappings of modern technology--an impulse
exemplified by the Soviet Union's five-year plans a half-century ago. The
severely limited success of these ventures results from their lack of
appropriate economic foundations. In the West, the development of commercial
relationships preceded the rise of modern industrial institutions by many
years. Western economies had been growing with striking success for more
than a century before the large industrial corporations emerged. This
growth, and its concomitant capital accumulation, were the foundation for
the subsequent development of the Western standard of living.
* Property
* What is property?
* The right to property
* Why must we recognize property rights?
* Philosophical underpinnings
* Ownership
* John Locke on Property
* Some questions about the Lockean thesis
* Intellectual Property - Information as Property
* Bibliography
* What is property?
Property is wealth produced or acquired without coercing others. Any
object which requires the application of human knowledge and action in order
to become useful to human existence, becomes property by virtue of (and by
right of) those who apply the knowledge and effort.
* The right to property
The right to property is the social condition in which one is able to
take the actions necessary to create or to justly acquire property and to
make exclusive use of it and to dispose of it; it does not mean that other
people have any obligation to provide the objects or the actions.
* Why must we recognize property rights?
This is not quite a valid question. The proper question is: "Why must we
establish a social institution which ensures property rights?"
All action takes place on some piece of real estate and employs some
physical object. In the absence of criteria for non-conflicting ownership,
men could not know who owns what objects, or which actions are consistent
with this ownership and with the rights of other people.
The question "Why should people respect the rights of others?" amounts to
the questions: "Why should people respect the facts of reality?" or "Why
should people be rational?" But these are circular questions which presume
their own answer. The concept "why" is applicable only to that which is
already rational. To those who have chosen to be rational, the questions do
not apply; the logical consequences of their choice are the determinators of
their behavior. Since the thief has chosen to be irrational, the questions
do not apply to him; he is not amenable to reason. And HE's why we need a
social institution which ensures property rights!
It is sometimes claimed that "The reason we need property rights is that
we do not live in the Garden of Eden, where everything is in infinite
abundance. Rather, some things are by their nature scarce, which means that
there will be conflicts between individuals over who gets to control and
consume these scarce goods. Therefore, we must have a system of property
rights that solves such conflicts by allocating specific scarce goods to
specific individuals."
Much modern ethics implicitly makes such an assumption: that a fusion of
Christian Original Sin and Marxist zero-sum economics leads inevitably to
inherent conflicts of interest and the need for sacrifice. A frequent result
is the thesis presented above--that scarcity is the basis of property
rights. This fallacious view regards rights as a function of material
conditions rather than as being inherent in human nature. There is no
"reason" for "needing" property rights. Rights exist, they are not created.
The proper subject for discussion is not a reason for needing them, it is
the correct identification of them and the reasons why we must recognize
them.
* Philosophical underpinnings
Leonard Peikoff:
It is not an axiom that "man has property rights." Property rights are a
consequence of a man's right to life: which latter we can establish only if
we know the nature and value of man's life; which presupposes, among other
things, that objective value-judgments are possible; which presupposes that
objective knowledge is possible; which depends on a certain relation between
man's mind and reality, i.e., between consciousness and existence. If you do
not know and conform to this kind of structure, you can neither defend
property rights nor define the concept nor apply it properly.
David Kelley:
Property rights exist because man needs to support his life by the use of
his reason. His primary task is to create values that satisfy human needs,
rather than merely relying on what he finds in nature, as animals do.
Therefore the essential basis of property rights lies in the necessity of
creating values.
Life, Liberty, and Property. These three are so bound together as to be
essentially one right. To allow a man his life, but to deny him his liberty,
is to take from him all that makes life worth being lived. To allow him his
liberty, but to take from him his property, is to deny him all that makes
life able to be lived. Depriving a man of property is depriving him of the
means by which he maintains his life. This is why the right to property is
as important as the right to life.
See Chapter 5 for a discussion of the nature of rights.
See reference
* Ownership
Ownership is the rightfully acquired ability to use and dispose of
property. A person justly owns anything he has acquired without violating
the principles of justice.
There are two forms of control over property: possession with ownership
and possession without ownership.
The act of asserting ownership is a contextual process, depending on the
nature of the society in which ownership is asserted. For example--if I put
a fence around something, and put labels on the fence, then I will have
noticeably separated that which I own from that which I do not own. But such
a separation would be meaningless in a society of illiterate barbarians who
did not recognize the significance of the fence.
Security of ownership is contingent on the recognition by my community
that I am the rightful owner, a recognition that will be based on whatever
are this community's institutionalized procedures for securing control over
property. If the social institutions of my community are not founded on the
principles expounded above by Mr. Kelley and Mr. Peikoff, then there will
be, in effect, no ownership.
If I held the property by force only, that would be mere possession, not
ownership. It is ownership only when I am able to remain in peaceful
possession. Thus ownership is more than mere possession. It's possession
which is protected by social institutions that implement property rights.
Contrary to Von Mises' definition that implicitly assumes ownership must
involve controlling ALL the functions of a thing, the multiple uses of
property may be controlled separately by different people. Many
manifestations of ownership consist of shared or delegated control.
Ownership can be vested in groups as well as in individuals. Nonetheless,
that which is controlled IS owned property.
It is sometimes claimed that the idea of self-ownership is vulnerable to
the charge of circularity, because the concept of ownership presupposes a
relationship between an owner and that which is owned. But if I do not own
myself, who does/can own me? I possess my self. This possession can be
negated only by destroying me.
* John Locke on Property
"Though the earth and all inferior creatures be common to all men, yet
every man has a property in his own person. This nobody has any right to but
himself. The labour of his body and the work of his hands, we may say, are
properly his. Whatsoever, then, he removes out of the state that nature hath
provided and left it in, he hath mixed his labour with, and joined to it
something of his own, and thereby makes it his property. He that is
nourished by the acorns he picked up under an oak, or the apples he gathered
from the trees in the wood, has certainly appropriated them to himself.
Nobody can deny but the nourishment is his. I ask, then, when did they begin
to be his? When he digested? or when he ate? or when he boiled? or when he
brought them home? or when he picked them up? And 'tis plain, if the first
gathering made them not his, nothing else could.... And will any one say he
had no right to those acorns or apples he thus appropriated, because he had
not the consent of all mankind to make them his? Was it a robbery thus to
assume to himself what belonged to all in common? If such a consent as that
was necessary, man had starved, notwithstanding the plenty God had given
him....'tis the taking any part of what is common, and removing it out of
the state nature leaves it in, which begins the property, without which the
common is of no use."
* Some questions about the Lockean thesis
"Locke argues that mixing labor with the unowned will convert it to the
owned--without specifying what kind or quality of labor per material is
necessary."
What is necessary is to mix in enough labor to "remove it out of the
state nature leaves it in." When I have done this, I will have made my
property observably distinct from the unowned.
"If you take a boat out to sea and catch fish, the fish are properly
yours, since you used your labor to get them, but mixing your labor with
that part of the ocean does not make the ocean itself yours."
But it is not the ocean I have mixed my labor with--it is the fish. If I
were to gather in some of the ocean water and run it thru a desalinizer (or
in any other manner distinctly separate it from the unowned), then that
water would indeed be mine.
"If you go to a forest, the fruit you pick is properly yours, but this
does not give you title to the trees."
True enough, but it's not the trees I claim--only the fruit that I have
picked. The trees are indeed mine if it was I who planted and nourished
them. And again, they are mine if I cut them down and process them into
boards.
"The land under a building is not properly yours even though the building
is."
If the land under my house is not mine, then whose is it? And by what
right can he claim ownership if I cannot? It's OK with me if I don't own the
land that my house sits on--as long as no one else owns it either. Thus no
one would have the right to deprive me of its use.
"What claim do you have to water that flows across your land? Or to the
wind which blows over it?"
Although while they are on/above my land I may have a rightful claim to
them, and what I take out belongs to me, just like taking salt out of the
sea or fish out of a river, I surely have no right to sully the water or
wind which flow OFF my land and onto someone else's land. What flows beyond
my land becomes the property of someone else, and I would be dumping my junk
onto my neighbor's property. I have no right to stink up my neighbor's home
by burning trash in my backyard.
"The stuff you take out of the land is yours, but not the space the stuff
was located in."
If I dig a gravel pit, the gravel I manufacture is my property. And if
the space be not mine, then whose is it?
"If you farm a plot of land, how much, if any, of that land is your
property?"
Surely the crop I harvest is mine. But since I have mixed my labor with
the top several inches of the land, is not that top layer my property?
"How far down shall this owned layer descend? As far as the reach of the
plow? As far as the dampness of the irrigation? As far as the penetration of
the roots? And what of the space above the farm? Do you own any of it, and
if so, how far up?"
The notion that laboring on the land gives one ownership of the land
itself does seem flawed. Would it perhaps be more acceptable to assert that
laboring in a certain location gives one ownership of the SPACE associated
with that location? If a man transforms raw land into a farm should he not
then be entitled to the space occupied by the farm? I am not sure that this
idea of "space" (by which I mean "liebensraum") is a valid distinction from
the land itself. My concern is not with the land itself but rather with the
notion of liebensraum--a place to go, a space to be, a location to live in,
play in, work in.
* Intellectual Property - Information as Property
You will frequently hear the claim that one person may learn of and use
another's idea without diminishing the originator's possession and use of
the idea. As Thomas Jefferson wrote, "He who receives an idea from me,
receives instruction himself without lessening mine; as he who lights his
taper at mine, receives light without darkening me."
But if the idea can be used without the owner's consent, that does in
fact diminish his control over the idea. A consequence of this loss of
control is that if the idea has potential economic benefit (such as Tom's
serpentine walls) then the loss of control over the idea will deprive Tom of
some of his potential income.
As Tom observed, knowledge is the only product that is not subject to
diminishing returns. You can give digital information away over and over
again, and you still have it. This loaves-and-fishes quality of information
has no place among the parables of traditional capitalism. Our culture's
economic system gets its axioms from the idea of the scarcity of property,
but information has no inherent scarcity, consequently traditional economic
ideas do not adequately encompass the phenomenon of "information as
property."
Printed books created the historical idea of intellectual property
because they were fixed in form and difficult to replicate. One could
therefore own and sell them, and the livelihoods of printer and author could
be sustained. This copyright structure is collapsing with the introduction
of the changeable digital signal. We will have to invent another ethical
scaffolding to fit the new literacy. When books, in electronic form, cost a
fraction of a dollar to reproduce but are priced as high as small
appliances, be assured that a change is not too far in the future.
Publishers, film companies and broadcasters will have to find new ways to
cope with a distinctly different environment from the one that existed in
the past. How are those publishers who recognize that their commodity is
information, not sheets of paper, going to make money? Traditional
publishers have been involved in printing for so long that they have
forgotten that they are a branch of the information and entertainment
industries, and not the wood pulp and paper industry.
One suggested alternative:
The seller puts her titles on a disk in encrypted form, locking each
title with a separate encryption key. She duplicates these disks in small
batches, changing the keys after each batch, then sells the disks at retail.
The customer decides, from the promos on each disk, which titles he wants.
Over the phone, the customer can provide the job lot number, the titles
desired, and his credit card number. The seller then provides him with the
appropriate decryption keys.
In considering such schemes, keep in mind that most people pirate
information for one of two reasons: a large cost difference or a large
convenience difference. Therefore it's not enough for the legitimate copy to
be reasonably priced, it must also be convenient.
We must remember that property rights protect the security of one's
control over his property, not its value, since value is dependent on what
others are willing to pay for it. For example, your house may be more
valuable on the market if your neighbor has a nice flower garden, but you do
not have a right to this additional value, and your neighbor has every right
to demolish his garden even if it reduces the value of your property.
Jerry Pournelle: "We're all agreed that information piracy is a growing
problem, and there appears to be no ready solution for it. I admit to being
a bit scared, since I make my living from intellectual property, and that's
becoming hard to impossible to protect. In a very real sense, we're all
going to have to depend on ethics--and the last I heard, that isn't even
being taught in the schools any longer."
Pournelle identifies a critically important fact: the problem of
information as property cannot be solved "out of context," that is, outside
the general context of the social institutions that shape our culture.
Before such problems can be fully solved, society must be restructured away
from institutions of government and toward ethically rational social
institutions.
Thomas Jefferson's response to a charge of plagiarism: "My goal is not to
be original, but to be comprehensive and accurate."
Ben Franklin, commenting on a preacher who had been accused of stealing
sermons: "I stuck by him, however, as I rather approv'd his giving us good
sermons compos'd by others, than bad ones of his own manufacture, tho' the
latter was the practice of our common teachers."
If someone provides me with a better way of saying something (better than
I could think of myself) then his statement helps me think about the subject
more clearly, and express it more clearly. To deny me this is to restrict my
thinking and restrict my ability to understand the subject.
I have stolen ideas from every book I ever read.
* Bibliography
THE OBJECTIVIST NEWSLETTER
April 1964 - The property status of the radio spectrum
May 1964 - Patents and Copyrights
THE MARKET FOR LIBERTY by Morris and Linda Tannehill
pg11 How property rights and human rights are an integrated phenomenon.
pg55 the Lockean description of property.
CAPITALISM THE UNKNOWN IDEAL by Rand et al.
Rights
Economic "rights"
The nature and validation of property
FOR A NEW LIBERTY by Murray Rothbard
The right to self ownership
Property rights
Property rights and freedom of the press
Property rights in land
LIBERTARIANISM by John Hospers
Collective ownership
Public ownership
Property rights
LIBERTARIANISM IN ONE LESSON by David Bergland
pg12 Property
pg19 Property rights
* Capitalism
One of the distinctive differences between man and the other animals is
his much greater ability to conduct his behavior with reference to time
periods of substantial length. From this fact there arises a useful, if not
precisely specifiable, distinction to be made between two general categories
of wealth-creation--a distinction which ensues from man's ability to act
through time: is the wealth to be consumed immediately, or is it to be used
later to produce more wealth? If it is to be used later, as a tool for the
creation of more wealth, then it can be called "capital" and the process can
be called "capitalism." Thus I will use the term to mean: "The process of
using wealth not for immediate consumption but for the creation of more
wealth." Conducting wealth-producing activities deliberately through time is
the essence of capitalism. If you save your wealth and use it to create more
wealth, you are doing capitalism. If you merely consume the wealth, you are
not doing capitalism.
Observe that capitalism is not a Boolean phenomenon. All human societies
practice at least a tiny bit of capitalism, even if it's only the
manufacture of stone knives and arrowheads. The economic development of a
society depends on the extent to which this practice is implemented. A
society can have more or less of it. The more it has (i.e., the more that
wealth is accumulated through time) the more the society will prosper.
Capitalism can be as small as flaking one flint knifeblade. Or it can be as
huge as General Motors and IBM.
Observe also that this definition is politically neutral. It doesn't
matter WHO does capitalism, nor WHY they do it. It only matters that the act
is performed. Capitalism is an economic tool, like a hammer. Anyone can use
a hammer: a Libertarian, a Fascist, a Communist. From a strictly economic
point of view, in considering only the production of wealth, the political
philosophy of the person who uses the hammer doesn't matter. All that
matters economically is how efficiently he uses the hammer. If he uses it
well, wealth will be created; if he uses it inefficiently, less (or no)
wealth will be produced. Thus the term "State Capitalism" actually makes
sense: a government CAN implement the procedures of capitalism. This will
help explain why such dismal systems as the Soviet Union do not collapse
outright, and why a mixed economy like the USA can muddle along for quite a
while.
You can see now why I must disagree with Rand. She always equated
capitalism with the political system of her preference, but to do so
deprives us of a valuable concept that can be applied to economic behavior
regardless of the political context in which that behavior occurs. It also
deprives us of a valuable cognitive distinction: that between economics and
politics.
The phenomenon Rand spoke of should properly be called "laissez-faire
capitalism." That is, capitalism practiced in the context of a more-or-less
free market. Although this is certainly the most efficient social context
for the practice of capitalism, it is not the ONLY political context in
which capitalism can be implemented.
* Wealth
Wealth is the result of transforming naturally existing entities into
material that enables the achievement of human values.
That wealth consists merely of possessing money is a popular
misconception which arises from the primary function of money: as the
measure of value. But real wealth consists in what is produced and consumed:
the food we eat, the clothes we wear, the houses we live in, not in pretty-
colored bits of paper. Yet so powerful is the verbal ambiguity that confuses
money with wealth, that even those who at times recognize the confusion will
slide back into it in the course of their reasoning and erroneously equate
being rich with being wealthy.
One consequence of this error is that each man sees that if he personally
had more money he could buy more things, and thus if he had twice as much
money he could buy twice as many things; he would be twice as wealthy. And
to many the conclusion seems obvious that if the government merely issued
more money and distributed it to everybody, we should all be that much more
wealthy. What they do not see is that such a course of action would merely
destroy the basis of commerce by diluting the primary function of money.
* The Need For Money
A stable currency that has real long-term value is an absolute
prerequisite to the establishment and maintenance of an economically
successful society. This is especially true with regard to a technologically
sophisticated society. Whereas it is possible to maintain a simple agrarian
society on a barter basis, barter will NOT suffice in an economy that
produces king-size beds or is comprised of large industrial institutions.
One of the most significant factors in the failure of a national economy
to progress, and also a major contributor to the decline of an economy, is
the lack of a medium for the measured exchange of wealth. Even if people are
permitted to freely produce wealth, there can be very little rise in the
general standard of living if they cannot exchange that wealth in any
transactions more sophisticated than simple barter. To do so, they must have
available a secure means of measuring the relative value (relative to each
other individual's personal goals) of their products. This is the function
of money.
There are fundamental reasons why gold and silver were the first money
media, and why every time a government seizes control of money, the media
are changed and eventually the money's value is destroyed. In almost all
nations today, money is based on the empty promise of a government rather
than on the firm foundation of a known and durable commodity such as gold or
silver. And throughout the world today, inflation is everywhere destroying
the possibility of long-term investments in wealth-generating commerce.
For a magnificent description of the function of money, see "The Root Of
All Evil" speech in ATLAS SHRUGGED, Part 2, Chapter 2.
* The Evolution of Money and the Nature of inflation
Excerpted from the book HOW YOU CAN PROFIT FROM THE COMING DEVALUATION by
Harry Browne:
If you were to find yourself alone on an isolated island, you would have
no need for a medium of exchange. There would be no one with whom to
exchange.
You would go to work, as necessary, to produce the things you needed for
your survival. You would produce some things that you would want to consume
immediately, and you would probably produce other things to be stored for
later consumption.
You might also produce some other things that would be called "capital
goods"--things that make further production easier. But you would only
produce when you believed it would lead ultimately to something you wanted.
Let's suppose now that there was one other person on the island with you.
Each of you has his own area of the island and each of you is producing for
himself.
Sooner or later, you would probably begin exchanging things with each
other. Perhaps you have produced more than you need of something he hasn't
produced, and vice versa. You exchange your surplus with each other--and
both of you profit thereby.
Obviously, you won't trade your production for something you have no use
for. Why bother working if your efforts don't eventually bring you something
you can use? You'll trade only for those things you want to use now or can
store for use at a later date.
And here we have a very important rule at work: You only produce and
exchange when you believe it will lead ultimately to something you want.
But now let's suppose there are 100 people on the island--each with his
own area. You will still have to produce to survive; there's no way to avoid
that. But exchanges will probably take place on a much wider basis. In fact,
it will be only a matter of time until a "specialization of labor" develops.
That's where an individual no longer produces everything for himself.
Instead, he concentrates on the production of only one or two items--and
then trades his production with others for the products and services he
wants.
These trades with others are called direct exchange--the trading of some
of your property for another commodity you intend to use yourself. This is
also called barter--trading without money.
But, eventually, you find yourself in a position where you're willing to
accept in exchange an item you don't intend to use.
Suppose you have butter and you're looking for wheat. I have wheat, but
I'm not looking for butter. Instead, I need corn. So you go find a third
person who has corn and is looking for butter. You trade your butter for his
corn. Then you come back to me and trade the corn for my wheat.
You have what you want; but it took two exchanges to get it.
This is the beginning of indirect exchange--the trading of one thing for
something you don't intend to use yourself.
For example, one day Jones the nail-maker walks into the store of Smith
the furniture-maker. Jones opens the conversation with, "Smith, I need a new
workbench. I'll give you 2000 nails to make one for me."
"Sorry," says Smith, "I have all the nails I'll need for a while. Come
back in about six months."
Jones goes on, "But I need the workbench now! Look, you're bound to use
those nails eventually. But, even in the meantime, you can probably trade
them to someone else for something you need. I'm always getting offers of
trades from people wanting nails. They're a lot easier to exchange than
furniture."
"You have a point there, I do seem to have a lot of trouble exchanging
kingsize beds for clothes. This way, I'd use only as many nails as I need
for each purchase...well, okay--I'll try anything once."
So he accepts the nails and makes the workbench for Jones. And then he
goes out to find products for which he can exchange the nails.
And, lo and behold, it works! He finds that trades are much easier to
make. As a result, he enjoys life a lot more with a few nails in his pocket.
He can stop at a store and trade for anything he wants to--without having to
arrange an elaborate, long-term furniture purchase with the storekeeper.
In fact, he merely points out to the merchant the advantages of nails as
a trading medium in the same way that Jones pointed them out to him. And the
final argument is that you can always use the nails sometime in the future;
they won't lose their value. And if you don't use them, someone will.
The merchant realizes this; and so he accepts the nails, confident that
he can use them or trade them for what he wants.
So nails have become money. And what is money?
Money is a commodity that is accepted in exchange by an individual who
intends to trade it for something else.
Money is a commodity, just like anything else that's traded in the
marketplace. What distinguishes a money commodity from other commodities is
the intention of the person to keep it only until he trades it to someone
else. It's only a means to a further exchange for that person.
Not everyone intends to trade it, however. Some people receive the money
commodity, intending to use it for its own natural purpose (in this case,
nails for construction purposes).
And this brings us to the key word in the definition of money: accepted.
The commodity can become money only when an individual accepts it--when
someone's willing to take it, confident that he can trade it ultimately for
what he wants.
But why gold and silver?
There are five main attributes of gold and silver that give individuals
good reason to accept these commodities confidently:
1. They are durable. They can be stored for long periods of time, if
necessary, without perishing.
2. They are easily divisible. As we saw, it was easier to exchange nails
than furniture because you could divide a supply of nails into small
purchases. And gold and silver can be broken into smaller pieces or used as
dust--without harming their inherent value in any way.
3. They are convenient to handle. Their naturally high market values make
it possible to work with small quantities. Wood wouldn't do--because you
would need so much of it to be worth a desired item that it would be
inconvenient to carry and exchange.
4. They are consistent in quality. One ounce of gold is as good as any
other ounce of the same fineness.
5. They have accepted value. They are used for such things as jewelry,
dental work, electronics, art objects, ornamentation. soldering,
photography, and other purposes. That previously determined value also tells
you how much gold and silver are worth in relationship to other commodities.
If the money commodity didn't have that separate value, you couldn't
confidently accept it in trade for what you have produced, for you wouldn't
know the worth of what you received.
One enterprising fellow notices that individuals waste a lot of time
measuring gold dust in exchange for their drinks at the bar. So he opens a
mint. He buys raw gold or silver and converts the metal into coins. He
stamps the coins with his name and the amount of gold in the coin. If an
individual trusts the coin-maker, he will probably prefer to use the coin.
Its recognizable weight makes it easier than measuring gold dust. Another
ambitious chap opens a warehouse. "Bring your gold to me," he says. "I'll
store it for you in my theft-proof vault. I'll give you a receipt for it, so
you can claim it any time you want it. I only charge a small fee for the
service of storing it for you." This means you can now keep your gold in a
safe warehouse--rather than carrying it around or leaving it at home where
it could be stolen. And as the use of the warehouse becomes more widespread,
and the integrity of the warehouseman becomes known, the receipts can serve
an additional purpose. You can exchange the receipts themselves. Why bother
going to the warehouse to get your gold, only to trade it to someone who
will probably take it back to the same warehouse for safekeeping? Instead,
you simply hand over the receipt to him.
At this important stage in the evolution of the money system, we must
remind ourselves of an important point: It is the gold that is the money;
the paper receipts are not money! Gold is money because it's a commodity
with accepted value and is convenient to use in exchange. Paper could NOT be
useful as money because the relative ease with which it is produced makes it
inexpensive by nature; you'd have to use tons of it to obtain the same
result served by a few ounces of gold. The paper takes on value only as it
can be exchanged for gold. If the warehouse were to refuse to make the gold
available, the receipt would eventually be worthless. It's similar to
storing furniture. You can't sit on a furniture receipt; you can only
exchange it for something to sit on. The paper receipts are not money; they
are money substitutes.
Along with the normal paper receipts, it is possible to have tokens. A
token is a money substitute in metallic form, rather than in paper. The
present U.S. copper-nickel tokens are a good example. These are not coins,
since there is no significant inherent value in them (perhaps two cents
worth of metal in a quarter). Like paper receipts, they can only have
lasting, constant value if they can be readily exhanged for something of
real value.
Suppose you left your gold on deposit at the bank (warehouse) and
received a receipt that you intended to spend in the marketplace. And
suppose the dishonest banker issued a second receipt for the same gold to
someone else. Two people are now trying to spend the same gold at the same
time. You now have inflation--two receipts for the same supply of gold. One
consequence of this would be the well-known "run on the bank." As soon as
anyone became suspicious that the banker was doing this, he'd get jittery
about his own money. If very many people became suspicious, you'd have a run
on the bank. And those who arrived there last would be out of luck--if the
bank really were cheating on the receipts. If it weren't, everyone would get
his gold and the bank's honesty would be proven. This would probably result
in increased business for the bank. An honest bank would not have to fear a
run. So let's coin another definition of inflation, one more to the point:
Inflation is the counterfeiting of money substitutes.
Suppose you and I form a partnership, a company that prints paper
receipts. We print 1000 new $20 bills. Then we go to Seattle where we are
not known to anyone. We start spending the bills and are immediately praised
by the local merchants and the newspapers. They proclaim that it is a great
thing for Seattle that we have come to town, for we're bringing prosperity
to a city that was in a recession. Two weeks later, we leave town with
$20000 worth of goods. The townspeople bid us a grateful farewell for all
the business we have brought to them. It's obvious that WE have benefited
from the situation. We traded paper dollars with NO real value for products
that HAVE real value. Assuming that no one ever learns our little secret,
has our gain actually hurt anyone else? In other words, does anyone ever pay
for our benefits? The merchants who received the counterfeit bills did not
lose. They could pass the bills on to others for things they wanted. We
gained; the merchants didn't lose. Apparently no one lost. But we've
overlooked a few people. Not just a few, in fact. We've overlooked everyone
else in Seattle. For everyone else will lose in order to make this gain
possible. We can see this easily as we imagine our car leaving Seattle--
loaded with goods removed from Seattle's marketplace. We leave Seattle's
residents with less property than they had before we came. There will be
fewer goods available to divide up among the people there. In exchange, they
received additional money substitutes that will circulate in the community.
But money substitutes are not wealth. This simply means there are now MORE
money substitutes to pay for FEWER goods and services. Since the money
supply has gone up and the goods and services have decreased, the result can
only be higher prices in Seattle. The price increase will be irregular.
Those who get their hands on the counterfeit money first will gain from it;
for they'll have extra spending money, and prices will not have gone up yet.
But as those extra money substitutes pass through the community, they will
bid prices upward. The other people in the marketplace will be paying for
our gain--and they will do that through the higher prices they pay for each
product.
Suppose our arrival and departure were not noticed. In other words, no
one was aware that an extra $20000 was suddenly coming into circulation. The
individual merchants who received our $20 bills would have no reason to
suppose that there was anything unusual or temporary about the increase in
business. They would simply suppose that their long-standing promotional
efforts were finally paying off--that success was on its way at last. They
would most likely hire extra clerks to handle the increased business, maybe
order a new sign and a better paint job for the store. And they would
enlarge their inventories to meet the increased demand, of which we appeared
to be an example. But as soon as it became evident that the sudden dose of
new business was purely temporary, they would have to retract their
expansion plans. They would lay off the extra clerks and cancel the orders
for remodeling. The painter who was to have done the remodeling would, in
turn, have to fire his new helpers. And what would he do with all the extra
paint he had ordered? The net result throughout the area would be a state of
gloom. Everyone would have extra commitments to pay off and shelves full of
undesired stock--all because an illusory boom caused businessmen to gear up
to a demand that never really existed. Would you call that a recession? Yes,
indeed.
Inflation is an increase in money substitutes above the stock of real
money in storage; the counterfeiting of paper money. Inflation simply means
there are more paper money receipts in circulation than there is real money
with which to back them up. As we've seen, this will cause prices to go up.
But rising prices are not inflation; they are an effect of inflation.
* End of excerpts from Browne.
* The Effects of Inflation
A hard-money standard is an integral part of a system of free enterprise,
of good faith and law, of promise-keeping and the sanctity of contract. It
is this system--and the confidence to which it gives rise--that is destroyed
by inflation.
Like every other tax, inflation acts to strongly influence the business
policies we all must follow. But unlike specific and knowable taxes,
inflation cannot be compensated for because it cannot be quantitatively
specified in advance. It discourages prudence and thrift. It encourages
squandering, gambling, and reckless waste of all kinds. It often makes it
more profitable to speculate than to produce. (This explains much of the
nature of modern stock markets.) It tears apart the whole fabric of stable
economic relationships. Its inexcusable injustices drive men toward
desperate remedies, leading them to demand totalitarian controls, thus
planting the seeds of fascism and communism. It ends invariably in bitter
disillusion and collapse. Between 1963 and 1973, of 40 countries whose
inflation rate reached 15%, 38 abolished their democratic institutions in
one way or another.
At first glance, you might think that inflation affects only the money
supply, but the more you look at it the more convinced you will become that
it is all-pervasive in its pernicious effects. In 1985, parents spent 40%
less time with their children than they had spent in 1965. This is an
excellent example of the insidious side-effects of inflation. Government
inflation of the money supply confiscates the nation's wealth; thus working
people are forced to spend more time earning money in order to maintain
their standard of living. This of course leaves them with less time to spend
with their children. I become more and more sympathetic with that majority
of Germans who, when surveyed as to which was worse, WorldWar1 or the
subsequent runaway inflation, replied: "The inflation was much worse than
the war!"
Money substitutes are certificates of debt against the true wealth of an
economy. As those substitutes decline in value (or under the impetus of a
major crisis in America), foreign holders of the paper may begin to unload
it in exchange for other kinds of paper, thus starting an avalanche of
similar domestic unloading in which a national debt (intended to be a legacy
bequeathed to your children and grandchildren) would have to be paid NOW--or
repudiated. In either case, the dollar would become worthless.
The politicians have seized the wealth of the nation, and given the
nation back a mortgage on itself. This seizure is not merely the theft of
wealth, it is the theft of your children's opportunity, of their future, of
their hope.
It will do no good to debate the subject of property rights, intellectual
or otherwise, while the foundation of all property exchange is dishonestly
corrupt.
As Mises observed, the transition from Money to Wallpaper has five steps:
1. The paper is exchangeable for a specified amount of Au or Ag
2. The paper is exchangeable for N dollars in Au or Ag
3. The paper is N dollars--exchangeable for a specified number of another
nation's bills.
4. The paper is N dollars--exchangeable at the open market rate (whatever
you can sucker some poor fool into trading for it).
5. Katastrophenbausse.
There were numerous internal checkpoints in Brazil, but our guide advised
us that a tip of five million cruzeiros would suffice to pass us without
difficulty. A one-dollar bill would suffice even better.
If your next-door neighbor told you he was kiting checks drafted on your
personal account, you think maybe you might get upset about it?
Hungary's 1946 inflation rate was so bad there aren't any words to
describe it: 4.6 x 10 to the 30th power.
* Foundations
Believe it or not, economists do not know what they know. That is, with
regard to various aspects of their field, economists cannot say "these
aspects are what we know to be true, and those aspects we know little or
nothing about." The assiduous efforts of so many people over the course of
so many years of study have not resulted in a single indisputable
conclusion. If a discipline, after centuries of intellectual activity, still
does not know what it knows, it cannot be said to be in good condition, or
based on a solid foundation. In spite of this admitted ignorance, economists
have for generations debated the merits of specific implementations of their
fantasies, frequently using abstract mathematical models whose essential
flaw is that they have little relevance to actual human behavior. (See *
Floating Abstraction in my FALLACYS file) In line with this, the vigor with
which each different model is advocated by its proponents is frequently
inversely proportional to the amount of empirical evidence supporting it.
As an example, here is a selection from a recent debate among economists:
"Miron of Boston University points out that the behavior of indicators
other than GNP appears to support Romer's position. 'Gordon has only done
GNP,' he says. 'Christie's case is on firmer, broader ground.' Although
Gordon denies the charge, Miron argues that a significant part of Gordon's
newfound volatility in the old numbers comes not from including
transportation and construction but from his choice of a particular price
index to convert nominal dollar figures to 'real' GNP. The index in question
was intended to convert consumer prices from current to constant terms, but
Gordon uses it to adjust commodity prices instead. According to Gordon's
published data, the choice of index could account for almost half of the
difference between his figures and Romer's. There is no clear consensus on
who is right. And regardless of who carries the current debate, the old
mainstream dogma of a stabilized modern economy is in trouble. Although
Romer and Gordon differ, says J. Bradford De Long of Harvard University,
their views are much closer to each other's than either one is to the view
of the past that economists treasured as recently as five years ago."
Such nonsensical antics would be laughably ridiculous except for the
harrowing fact that politicians distill their policies from the proposals of
these economists, whilst the economists are distilling their proposals from
fantasy. Herman Daly, a senior economist with the World Bank, observed with
surprising perspicacity: "My major concern about my profession today is that
our disciplinary preference for logically beautiful results over factually
grounded policies has reached such fanatical proportions that we economists
have become dangerous to the earth and its inhabitants."
If one insists on analyzing an imaginary problem which has no real-world
equivalent, it may be appropriate to use an analytical model which has no
real-world application. By the same token, if a model is designed to deal
with real-world situations, it may not be able to handle purely imaginary
problems. In either case, a solution is meaningless. But these "meaningless"
solutions do indeed have real-world consequences when they are implemented
through political coercion. A thief who presumed to justify his theft by
saying that he was really helping his victims by his spending, thus giving
retail trade a needed boost, would be slapped down without delay. But when
this same idiocy is clothed in Keynesian mathematical equations and
impressive references to the "multiplier effect," it carries far more
conviction with a public that has been bamboozled into accepting the
delusion that conventional economics is a valid tool of analysis.
In the 1989 edition of his famous textbook, ECONOMICS, Samuelson
described the Soviet Union as being proof that, contrary to what many
skeptics believe, a socialist economy can function and even thrive.
Statements such as this show a contempt for truth that would turn Paul
Goebbels green with envy. The fact that they are not considered an
embarrassment by the economics profession speaks of the fatuity of that
profession. But such statements, which tell us nothing about the real
economic world, may tell us something about the minds of the people who make
them. Many of the most dogmatic and fanatical socialists are not interested
in personal wealth and live in self-imposed poverty. They think that
asceticism is noble and virtuous (otherwise they wouldn't practice it
themselves), and believing that it is virtuous, they want everyone else to
live the same way. This is one reason why socialists never get discouraged
when their ideology doesn't work (that is, doesn't produce prosperity). THEY
NEVER REALLY WANTED IT TO. As long as socialism mandates self-sacrifice and
forestalls prosperity, its most zealous advocates will keep proclaiming it a
success. When a theory invariably achieves only the opposite of its alleged
goals, yet its advocates remain undeterred, you may be certain that the
theory is not a conviction or an ideal, but a spurious rationalization.
Commenting on economic "bubbles," Samuelson admits that "in all the
arsenal of economic theory we have absolutely no way of predicting how long
such a bubble will last." Well, anyone who takes a close look at "the
arsenal of economic theory" will readily observe it to be so filled with
fallacy that the world envisioned by Samuelson and his colleagues bears
little correspondence to the world of reality. No wonder it has so little
predictive power. Keynesian economics is unable to provide a theory that can
even describe, let alone explain, observed economic reality and experience.
If economists really knew what they are talking about, the Soviet Union
never would have collapsed.
The economists and politicians are living in some kind of fantasy world,
while the rest of us must live with the reality of the wreckage they are
creating.
Another manifestation of unreal economic analysis can be seen in Ayn
Rand's quasi-deification of industrialists as being men of punctilious
ethical scruple and rigorous logical acumen. In fact, businessmen are just
like many other people: stupid, shortsighted, and as quick to make use of
coercion if they think it will serve their purpose. In a free marketplace
they would have an ethically useful function, but the trouble is, and always
has been, that there is no FREE marketplace. Societies have always been
based on institutionalized coercion, and the people (including businessmen)
accept this as natural social behavior. This acceptance is ingrained on many
mental levels and during the entire life of the citizen, so it should be no
surprise to see it exhibited by businessmen also.
In spite of these gross flaws, economic theory lives on, surviving
largely because there are some fundamental truths about the human condition
that call for principled explanation. First enunciated in THE WEALTH OF
NATIONS, these truths are:
1) The overwhelming majority of people are naturally and unswervingly
interested in improving their material condition.
2) Repression of this natural desire leads only to impoverished
societies.
3) When this natural desire is allowed sufficient expression so that
commercial transactions are widespread, everyone does eventually indeed
improve his condition, however unequally in extent or time.
This is not all we need to know, but it is what we DO know, and it is
surely not asking too much of the economics profession that in its passion
for sophisticated methodology it not ignore this knowlege. But it does.
* Bootstrap Economics
The Bootstrap Effect
An economy will rise to the highest level of wealth creation that is
possible to it, subject to three restraints:
1. Limitation of natural resources.
2. Paucity of knowledge.
3. Politically-imposed restrictions.
The solar system, considered in its entirety, contains a sufficiency of
natural resources to provide the human race with an unlimited supply of
wealth. During the past 300 years Man has acquired enough knowledge of
technological processes to convert those natural resources into that
unlimited supply of wealth. Thus mankind is now in a position to raise its
standard of living to an unlimited height, and would indeed do so if not for
the third restraint. It is politically-imposed restrictions alone that
prevent this.
The overwhelming majority of human beings are concerned each to increase
his own standard of living, and to the extent that it is possible each will
act to do so. In fact, to the extent that it is possible each DOES act to do
so, unless he is inhibited by law. Each individual person is continually
looking for ways to improve his personal standard of living--continually
looking for ways to circumvent ANY obstacles that are placed in his path.
The aggregate expression of all of these individual concerns results in what
I call the Bootstrap Effect. Everywhere within an economic system the people
who perform economic actions will raise the level of wealth creation of that
system. And they will continue to raise it until they can find no way of
raising it any further. Until they are balked by some restriction. If that
restriction is removed, the individual people to whom it had been a barrier
will now perceive a possibility to further raise their own personal standard
of living--and will commence to do so. Increasing the general level of
wealth creation until they encounter another obstacle. And if there are no
obstacles, there is no limit to the height to which people will push their
standard of living.
* Economic Calculations
A grave deficiency in any centralized economic system results from
inadequacy of information. The controlling authorities in a centralized
system are never able to obtain a comprehensive and accurate depiction of
the society under their command.
Government reports are often meaningless on their own terms and almost
always misrepresent the nature of an economy. For example: one man spends to
build a bridge, another to destroy it. Does it make sense to sum these two
expenditures together into a "GNP"? Incompatible plans do not add up to some
kind of "super-plan" nor does spending on them add up to an aggregate
reflecting total productivity of any kind whatever.
The Gross National Product is supposedly a measure of economic
prosperity. But is it?
If I wash my car, the only effect on the GNP is the cost of the water and
soap that I use. Suppose that I give the neighbor kid $5 to wash my car. In
this case, the GNP is increased by the cost for the water and soap, plus the
$5 I give the neighbor kid. But is the economy really more productive if I
give the neighbor kid $5 than if I wash my own car?
When I get my shirt washed at a laundry for $1, the GNP is increased by
$1. Suppose I marry my laundress and then no longer pay cash to her for
washing my shirt. Is the economy more prosperous in the first case than the
second?
I go to my dentist and get a root canal. He charges me $300, and the GNP
is increased by $300. Then he hires me to paint his house and pays me $300.
Now the GNP is up $600. Now suppose that instead of paying him cash, I agree
to paint his house in exchange for the root canal. No cash changes hands.
The GNP is $600 less than if we had paid each other cash rather than
bartered. Is the economy more prosperous if we pass the $300 back and forth
than if we barter?
This suggests a simple way to increase the GNP: All we need do is get
Congress to pass a law mandating that every person in this country shine the
shoes of exactly one other individual, charge him $20,000 for shining his
shoes, and exempt such shoe-shine fees from taxation. The income of each
individual in the United States would go up by $20,000. The GNP would
skyrocket! But each individual would be left with the same amount of money
as before; each would have done a trivial amount of labor; each would have
had a trivial service performed for him. That's all. Would anyone be better
off in the wake of such a doubling of the GNP?
Government expenditures are always considered to be a productive
contribution to the economy. But in fact government is a drain, and hence
its expenditures should be subtracted from any aggregate measure of
productivity.
All government figures on economic performance are deceptive in one way
or another, each compounding itself on the others until the economic
forecasts generated by the State are as fictitious as a list of Nixon's
virtues. About the only thing the government's economic indicators
truthfully indicate is that the market has ceased to function properly. It
has ceased to function properly because the natural regulating mechanisms
have been severely crippled by government interference.
One function of prices is to guide productive people so as to apportion
the relative output of thousands of different commodities in accordance with
demand. No bureaucrat, no matter how brilliant, can solve this problem
arbitrarily. An example of the problem can be seen in The Guffey Act of
1937, which forbade the sale of coal at less than certain minimum prices
fixed by government. Though Congress had hoped to fix "the" price of coal,
the government soon found itself (because of different sizes, thousands of
mines, and shipments to thousands of different destinations by rail, truck,
ship and barge) fixing 350,000 separate prices for coal.
Prices in a free market provide suppliers with signals of what consumers
want, and relative prices are an important source of information--they
represent the relative value of alternative uses of resources. The
willingness of people to pay his price typically means that the producer is
doing a good job of providing for consumers. If that price generates high
profits, then the producer is able to obtain more resources and produce more
of the desired commodity. By allocating resources on the basis of
willingness to pay, the market results in resources being allocated to the
highest valued uses, because those who are willing to pay the price clearly
value the use of the product more than those who are unwilling to pay. As a
result, resources are guided toward their most desired uses.
But a government-controlled economy does not, and cannot, use this source
of information when determining how to allocate its resources, and thus the
flow of profit does not act as a channel directing resources toward the most
desirable uses. When a bureaucrat makes a mistake in regulating your
affairs, he does not receive any feedback, in the form of personal economic
loss, to alert him to his error. You receive all the feedback, but you are
not in a position of control, so you cannot correct the error.
Hayek calls the implicit decision structure underlying the market the
Extended Order. Nobody designed it, nobody fully understands it, and no one
knows a fracton of what it "knows." As Leonard Read pointed out, there is
not a person in the world who has the complete knowledge required to
manufacture a simple thing like a pencil. Yet the extended order knows how
to make pencils, laptop computers, nuclear-magnetic-resonance body scanners,
and hundreds of thousands of other products. It also knows where and when
they are required and in what quantity. It is the failure to comprehend this
phenomenon, more than anything else, that is the chief intellectal flaw in
Marxism and all its philosophical progeny. An ethical point to be made here
is that the thousands of people whose cooperation has made our options
viable, have put forward their respective contributions voluntarily.
Admittedly, they have agreed only to the terms of their individual
transactions, but since that is their only point of contact with the rest of
the extended order, their involvement has been a genuine case of "unanimous
consent."
"Regulating the market" is actually regulating people--preventing them
from making trades which they otherwise would have made, or forcing them to
make trades they would not have made willingly. The market is a network of
trade relationships, and a relationship can only be regulated by regulating
the individual persons involved in it. Thus price control is people control.
Being imperfect, man does indeed need a regulating mechanism, but free
enterprise does this admirably. Competition enables the businessman to
continually check his ideas against his economic environment to see whether
what he believes (and does) really works. If it doesn't, then either he does
not profit or, if he is clever, he will change his ways and go on to meet
the competition's challenge. Unfortunately, government is not regulated by
competition nor by the profit motive. Hence, no plan that government puts
into operation can be tested by a competitor. Thus an error in government
policy is almost never eradicated, except by revolution, war, or depression.
Market competition is far less painful.
* Agriculture in China: An example of central control vs. individual
control
Taken from SCIENTIFIC AMERICAN magazine, November 1996.
Since 1949, when the Communists took power, China's agricultural
practices and system of property ownership have undergone several turbulent
changes. Before the revolution, many Chinese farmers were poor tenants who
tilled fields owned by wealthy landlords. Soon after Mao's army conquered
China, however, the government confiscated the holdings of landlords and
wealthy farmers and distributed the property among all farming households on
an egalitarian basis. The new land-owning families operated small,
independent farms and sold their harvest on an open market. For the first
time in recent Chinese history, the dream of "land to the tillers" was a
reality. Farmers responded to the new system with extraordinary zeal: grain
production went up by about 15 kilograms per person each year between 1949
and 1955.
In the 1950s, under the influence of the Soviet system, Mao became imbued
with the ambition to build a powerful nation under a planned economic
system. As a result, China gradually began to collectivize its agriculture.
The government encouraged farmers to form groups known as mutual aid teams
in the early 1950s; these teams consisted of no more than 10 households and
served to coordinate the farming practices of the members. Property rights
did not change, however--each family retained ownership of its plot. Later,
during 1956 and 1957, the government further consolidated farms into
agricultural collectives, each one with as many as 300 households. In this
case, members actually had to surrender most of their land to the
collective, although they could keep small private plots for growing food
for the family.
The process of collectivization culminated in 1958, when the agricultural
collectives merged into huge communes. These communes, each with an average
size of about 4,000 families, took sole ownership of all property, including
the private plots. All the farmers worked together on the land, receiving
pay for time spent in the field, no matter how little they accomplished. And
everyone shared the excess harvest. Under this system, none of the farmers
had an individual stake in the land, so few cared about making improvements-
-in effect, the communes severed ffarmers from their land.
The result of collective farming was disastrous: in perhaps the world's
worst famine, an estimated 30 million Chinese died between 1959 and 1962.
The communal farms simply did not generate enough food for the country. In
the 1960s the government broke up the communes into more manageable units.
But collective farming continued on a smaller scale through the late 1970s,
when some Chinese leaders started to rethink its viability.
The brainchild born of this rethinking was the policy known as the
Household Responsibility System. This policy divided the collective land
among individual households, creating a nation of small family farmers. The
collective, however, maintained official ownership of the property.
Initially, the farmers' rights to the land were to be valid for up to three
years, but in 1984 the Communist Party ordered local officials to extend
contracts to 15 years. In return for the right to work the land, farmers had
to sell a small portion of their crops to the state at a fixed price. But
they could keep the rest of their harvest, either to consume or to sell for
a profit. The system clearly encouraged farmers to become more efficient:
between 1980 and 1984, grain production increased by 16.2 kilograms per
person each year, up from an annual average increase of 1.3 kilograms per
person between 1955 and 1980.
* The Tragedy of the Commons
If 100 or fewer sheep graze a certain pasture, the grass can continue to
replenish itself, but if more than 100 sheep graze the land, the grass will
diminish and ultimately vanish. Suppose the land is owned in common by ten
shepherds each of whom has ten sheep. If one shepherd acquires an additional
sheep he will see himself as 10% better off, and will see the pasture as
being only 1% worse off. Naturally, each shepherd will consider it to be in
his self-interest to increase his flock, but in the long run this is to the
detriment of all.
The sensible solution to this problem lies in private ownership: each of
the shepherds should own a tenth of the land. Then if he acquires one more
sheep, he will immediately see that his pasture will be 10% worse off.
Murray Rothbard, in FOR A NEW LIBERTY:
"In the East, the 160 acres granted free to homesteading farmers on
government land constituted a viable technological unit for farming in a
wetter climate. But in the dry climate of the West, no successful cattle or
sheep ranch could be organized on a mere 160 acres. But the federal
government refused to expand the 160-acre unit to allow the homesteading of
larger cattle ranches. Hence the open range, on which private cattle and
sheep owners were able to roam unchecked on government-owned pasture land.
But this meant that no one owned the pasture, the land itself; it was
therefore to the economic advantage of every cattle or sheep owner to graze
the land and use up the grass as quickly as possible, otherwise the grass
would be grazed by some other sheep or cattle owner. The result of this
tragically shortsighted refusal to allow private property in grazing land
itself was an overgrazing of the land...and the failure of anyone to restore
or replant the grass.... Hence the overgrazing of the West, and the onset of
the dust bowl. Hence also the illegal attempts by numerous cattlemen,
farmers, and sheepmen...to fence off the land into private property--and the
range wars that often followed."
Here again we can see that the establishment of private property rather
than government-owned "commons" could have avoided these difficulties.
The fact that government asserts domain over the air is what makes air
pollution a "tragedy of the commons" problem. In this case, the problem is
exacerbated by attempts on the part of the government to dictate specific
solutions to the problem, rather than solving it by means of some market-
oriented method of pollution control such as:
Measure the amount of pollution being emitted and assess a quantity fine
(e.g., $2/Kg/day). Gradually raise the amount of this fine, and continue to
do so until the pollution falls to an acceptable level. Thus all the choices
regarding production, handling and disposal of the pollutant would remain
within the ambit of voluntary behavior rather than being expressed through
fascist controls.
Another place in which the tragedy of the commons rears its ugly head is
in the American judicial system. Its staggering backload of cases, resulting
in years of delay in the clearing of trials, results in great part from its
being a government-owned "commons" phenomenon.
Indeed, democracy itself is perhaps the biggest example of the tragedy of
the commons. Democracy inevitably becomes a stagnant swamp of fraud and
unkept promises.
"A democracy cannot exist as a permanent form of government. It can only
exist until the voters discover that they can vote themselves largesse from
the public treasury. From that moment on, the majority always votes for the
candidates promising the most benefits from the public treasury, with the
result that a democracy always collapses over loose fiscal policy, which is
then followed by a dictatorship." ... Alexander Tyler, 1787
After reading this, you may well ask, Why aren't all the democracies
already dead? The answer lies in the fact that a democracy can endure until
the people take the largesse in sufficient quantity as to make the
producers actually stop producing.
* The Public Goods Problem
Adam Smith, in THE WEALTH OF NATIONS, remarked on "those public
institutions and those public works, which though they may be in the highest
degree advantageous to a great society, are, however, of such a nature, that
the profit could never repay the expense to any individual or small number
of individuals, and which it, therefore, cannot be expected that any
individual or small number of individuals should erect or maintain."
Remember the lighthouse, that legendary "public good" which your
professor discussed in Economics 101? Though socially valuable, the
lighthouse supposedly cannot be provided by the free market because it
contains costs that cannot be reflected in the market price. Thus it is
claimed that ships will benefit from the light without paying for the
service. Therefore, since the lighthouse owner can't exclude free riders, it
will be unprofitable to provide the lighhouse at all. However, your
professor no doubt did not tell you that long before economists developed
the theory of public goods and market failure, private entrepreneurs were
building and operating profitable lighthouses around the coast of England.
Another example, which you have all experienced:
As I was chewing on my sandwich, a couple of girls came over and plugged
the jukebox. When the music started, the boys began bouncing a little,
obviously enjoying the rhythm, and the girls chatted away as they had been
doing before. I realized that I had just witnessed a mirocosm of the "public
goods" situation. Everybody was enjoying the music but only two had paid.
They hadn't gone around shaking people down for their "fair share"; they
hadn't insisted that the music be supplied for nothing; they hadn't even
asked for contributions. The girls supplied everyone with a valuable good
because they wanted it themselves.
In the year 6 AD the emperor Augustus made a change in the Rome Fire
Brigade. He got rid of the slaves and hired freemen in their place. He
immediately discovered a tremendous improvement in the Brigade's performance
and concluded that whereas slaves don't really give a damn, people who are
free WANT to put out fires in their community.
The Public Goods fallacy assumes that people should--and indeed do--only
produce goods and services from which non-paying others cannot benefit. Yet,
think of deodorants, nice hair cuts, attractive clothing, pretty front
lawns, grand architecture, etc., etc., etc. These all provide uncompensated
benefits to others. When the voluntary, self-interested efforts of some
people create free-rider benefits for others, that is a concrete instance of
the harmony of men's interests, and should be celebrated and welcomed as
such. Living in a civilized society NECESSARILY involves being a free-rider.
One cannot help benefiting indirectly from the work of people who have a
greater productive ability than one's own. This is neither a cause for
regret nor a compromise of independence or responsibility; on the contrary,
it is one of the most important benefits of living in a civilized society.
* Fascism-Communism
There is no fundamental distinction between these two forms of society.
They are merely two variants of Socialism: the principle of government
control over the economic affairs of individuals. The fundamental
characteristic distinguishing among societies is whether your behavior is
controlled by your own choices or by someone else's choices. Under both
fascism and communism--or, for that matter, under ANY form of government--
you are not free to guide your behavior according to your own choices. The
only questions which differentiate these forms of government are to what
degree you are enslaved, and in what manner the enslavement is imposed.
Fascism: Under this system, many major choices regarding the operation of
businesses are made by government, but the individual who operates each
enterprise receives his income from the profits of the business. This is
centralized planning with decentralized execution of the plan.
In America, these are usually fascist operations: Bus companies,
Airlines, Truck lines, Radio and TV stations, Banks, Private elementary and
secondary schools, Nursing homes.
Communism: Under this system, all the business decisions are made by
government, and the people operating the business are government employees
who receive their paychecks from the government. A communist government
controls all businesses and operates them as departments of the government.
This is centralized planning AND centralized execution of the plan. The
centralized execution is in the form of precise, all-inclusive doctrine.
In America, these are communist operations: Highway maintenance, Public
Schools, most Public Libraries, Utility companies such as most water
systems, and sometimes electric systems, Police (except private police
companies, which are fascist).
What the pseudo-libertarians tout as "privatization" is quite often
merely the conversion of a portion of a communist operation over to a
fascist arrangement.
Under fascism, the people are led to believe that they are working for
themselves, even though in fact they are not. Under communism, they know
they are not working for themselves. That is why fascism is less incompetent
than communism. In fact, the level of efficiency of an economic system is a
direct consequence of the degree to which the individuals who control
specific economic activities are free to implement their own choices, and
are acting in a context in which their own personal income is dependent on
their own personal choices. This explains why communism is the least
efficient of these systems, fascism is somewhat more efficient, and a free
market is the most efficient of all. Only a free market demands competence.
Authoritarian regimes place obedience above all other considerations.
I distinguish some other controls from the above categories of fascism
and communism since these controls are not primarily oriented toward
governing business operations but are intended as general restrictions on
individual personal behavior. These are such things as driver's licenses,
marriage and divorce laws, customs and immigration regulations.
Registration of vehicles, business licenses, building permits, land
titles (deeds) and land tax are in yet another category--they are the
government's assertion of eminent domain--the assertion that government is
the ultimate owner of all property, and that the individual can make use of
that property only with permission from the government.
Of course all these are also means by which government obtains some of
its revenue.
* Marx
In Marxist economics it is assumed that there is a finite amount of goods
and services available in the marketplace. This is simply wrong. Is there a
limit to the number of songs that can be created? Are the number of computer
programs to be written finite? Are ideas about economics itself finite? No,
in reality there is potentially an infinite supply of goods and services.
According to Marx, no clear line can be drawn between economic and
political processes. In his scheme, the forces of material production are a
superhuman entity independent of the will and actions of individual men.
Industrial production and wealth, he asserts, are not to be attributed to
any individual's creative thought or action, but are a free gift of nature.
Such gifts multiply automatically across time through the intervention of
impersonal agencies called Science, Technology and Progress, and each man is
morally entitled to his fair share of these gifts. Only the State can
achieve social justice by wresting wealth from the hands of the vile, greedy
rich, who have appropriated more than their fair share, and by
redistributing it fairly among the virtuous, non-greedy poor.
This is the underlying rationale of the Welfare State.
Because the use of coercion to confiscate wealth benefits one group only
at the expense of another, Marxists are led to the belief that life must be
viewed as a zero-sum process in which original wealth-creation is ignored or
even denied. (But then, how could Marx have originally created his ideas?)
Inherent in this ideology is the view that the economic resources of the
society must be monopolized by some people in order to prevent certain other
people from satisfying their own economic desires. This reflects the "zero-
sum" assumption that economic resources and economic output are fixed--a
national pie to be distributed by the State. But this coercive
redistribution of wealth undercuts the very process that produced the wealth
in the first place, thus Marxist societies inevitably end up impoverished.
Under Marxist economics, which regards wealth as a world-wide round-robin of
purse snatching, it is inevitable that some must starve so that others may
eat.
In a free market, a man's failure, like his success, is an objective
reflection of his ability and his usefulness. It is precisely this
inexorable rule of capitalism--"to each according to his ability"--that
threatens the self-esteem of the Marxist, engendering his intense hatred for
the free market. Ironically, the most passionately voiced charge against
laissez-faire is that it is an unjust system. The man who hates and fears a
free market does not confess that what he really resents is precisely the
implacable justice of this market. The driving motive of the irrational
policies of Marxism is the desire to destroy the hated system which rewards
men according to their abilities, and to substitute a system which will give
to the frustrated mediocrities according to their needs.
Their Marxism is a wonderful tool that gives them an answer for
everything--even an answer for the failures of Marxism. A Marxist writes:
"The method of analysis Marx used to understand social domination and
conflict is the most powerful way of understanding the very failures of his
theory." But how can a theory that has failed be used to understand itself?
Thus there is no possibility of converting the committed Marxist. His
Marxism makes him invulnerable to argument.
* The Luddite Phenomenon
It is often not the widely diffused gain resulting from a new technology
that most forcibly strikes even the disinterested observer, but the
immediately obvious concentrated loss. The new machines' increased output of
shoes, at lower cost to everyone, is ignored; what is seen is a group of
cobblers thrown out of work.
The great bulk of people infinitely prefer the continuance of a problem
which they cannot explain to an explanation which they cannot understand.
The opposition to innovation entails a desire to live in narrow-minded
ignorance. Luddites are merely one type of hard-core conservatives.
* Liability
There is a current trend toward legislation, and court precedent, that
virtually insures that every real or imagined social ill will find its way
into the courtroom for resolution.
In his book LIABILITY, Peter Huber looks at the origin and consequences
of this kind of litigation. He observes that because of "a wholesale shift
from consent to coercion in the law of accidents (and) a shift from
individual to group responsibility...the number of tort suits filed has
increased steadily for over two decades. So has the probability that any
given suit will conclude in an award. And the average size of awards has
grown more rapidly still." This cancer on capitalism results in a severe
threat to fundamental features of our economic system, such as technological
innovation and the sanctity of contracts. As examples, he observes that
liability accounts for 30% of the price of a stepladder, 95% of the price of
vaccines, and 1/3rd the cost of a small airplane. And that the threat of
liability suits and/or the cost of insurance has orphaned more than 500
drugs that are invaluable for treating rare but serious diseases.
Fifty years ago, such liability litigation would not have been conceived.
Twenty-five years ago, it would have been laughed out of court. Today it is
seriously considered, and the really scary aspect is this: there is NO WAY
to tell in advance what the ruling of a court will be. The courts are not
bound by any semblance of rationality or any adherence to the principle of
Justice, and yet they exercise total dominion over the economic life of the
country.
* Productivity
The productivity potential of the American people was enormously enhanced
by the practice of capitalism during the nation's first hundred years, when
government was too small to seriously hinder personal freedom. But as
government grows larger and consumes more and more resources, a continually
growing share of that productivity potential must be devoted to the
maintenance of government itself.
Computers have enabled a tremendous productivity boost since the 1970s,
but no matter how much more wealth per capita improved technology makes
possible, there is always something to soak up the surplus and condemn
ordinary people to a lifetime of labor. No matter how much productivity
increases, people never seem to work less, only differently (harder!). The
government is consuming, at an accelerated pace, the productivity potential
of the country.
Jerry Pournelle: "It looks to me as if our choices are very limited:
increase productivity, or have a declining standard of living. Or both.
Unfortunately, most increases in productivity are eaten by new measures,
such as the Clean Air Act. It's my opinion that most of the productivity
increases made possible by small computers have disappeared into increased
regulations."
Another thing that has kept the government alive while the federal debt
curve goes up is that it is confiscating much of the wealth produced by the
women who have liberated themselves since the feminist movement began.
* Fair Trade
The American businesses that have been losing ground to Japan should be
calling for more freedom--and occasionally a few of them have been. But in
the main their response has been: "Shackle the Japanese, as we are
shackled." They have been calling for tariffs, import quotas, and every form
of protectionist legislation as the "answer" to foreign competition. Instead
of saying, "Free us up so that we can compete," they have been running to
Washington, crying, "Make it illegal for Americans to buy foreign goods."
One propaganda device of these businessmen is the claim that they are all
in favor of free trade--so long as it is "fair." The so-called "unfairness"
implied here is not to the foreign merchant nor to the American consumer,
but to a third party, the American businessman, who objects to the
transactions between them. This is an act of extreme presumptuousness. A
third party has no right to intervene in a transaction between a willing
buyer and a willing seller, especially not when the third party's complaint
is that it is "unfair" to HIM that you, the buyer, are being offered such a
bargain. What is he saying, if not that he has a right to your trade, your
money, your time, your effort, your life? It is an approach we might expect
of a medieval baron upset by someone trading with his serfs. That sort of
feudalism is what many American businessmen and labor unions are trying to
put over on you in the name of such slogans as "buy American."
The proper answer to such complaints is a venerable and very American
retort which should be taken literally: "Mind your own business!"
Another protectionist scam uses the metaphor of competing "on a level
playing field." It is very important to recognize that business is not a
game or a sport. In sports, the goals achieved--the touchdowns, homeruns,
knockouts--have no utilitarian value. Sports are activities whose meaning
lies only in the displays of athletic skill they call forth. Their entire
value is in the how, rather than the what. In business activity the opposite
is true. The how matters not at all, only the what. Consumers care not a
whit how astoundingly adept are the maneuvers accomplished in the factory by
an auto worker or how brilliant was the strategy of the company's marketing
director. All that matters to the consumer is the utilitarian outcome: how
good is the product for his intended use? The metaphor of "a level playing
field" has no meaning in business--unless it means an open marketplace
without force or fraud, where everyone competes under conditions of free
trade by voluntary consent. But open competition is precisely what the
level-fielders are opposed to. They want to hobble the foreign producers, to
hobble them either by force (tariffs) or fraud (conning Americans into
believing that buying foreign products damages our economy).
Observe the power of the connotations of words: The Japanese are engaging
in "dumping," we are told. But what is being "dumped" on us are inexpensive,
high quality products. This dumping consists of reducing the price below
what we would have to pay for similar American products. This is also known
as "underselling" and is considered a big plus when done domestically by
American businesses. How many commercials have you heard that say "we are
cheapest," "we will beat any offer," "guaranteed lowest price," etc. They
are "dumping" savings on us. The "dumping" actually consists of showering us
with wealth.
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