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                                   Chapter 4 
   * 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 
   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 
   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 

   * 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 farmers 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 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. On to Chapter 5
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