Chapter 4
ECONOMICS FROM AN OBJECTIVIST VIEWPOINT
* Objective vs Subjective Economic Value
* History
* The Corporate Enterprise
* Political Power vs Economic Power
* Property
* What is property?
* The right to property
* Why must we recognize property rights?
* Philosophical underpinnings
* Ownership
* John Locke on Property
* Some questions about the Lockean thesis
* Intellectual Property - Information as Property
* Some false arguments
* Digital information
* 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
* The Gross National Product
* Objective vs Subjective Economic Value
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 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 any characteristic of an
inanimate object.
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, with zero value.
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 a voluntary 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 the dynamic flow of commerce which we know as the 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 realm within which trade could be conducted with freedom from
coercion by political authorities. This freedom also opened the door to the
extensive development of towns and cities, some of which were virtually
independent political entities outside the feudal system.
During the 16th through the 18th centuries, maritime trade with overseas
markets was at once a major field of economic growth and an area intractably
resistant to medieval principles of political control. The efforts of the
emerging nation-states to control maritime commerce lacked the universal
recognition necessary to confer legitimacy and were, on the contrary,
competing, contradictory, and mutually self-defeating.
The political/economic situation in China was quite a bit different. The
Imperial Examination determined entry into the bureaucracy and thus assured
the continuation of a centralized elite, drawing into itself the best brains
of each generation. The basic ideology of the mandarinate was opposed to the
value-systems of the merchants. Capital accumulation in Chinese society
could indeed occur, but the application of it to permanently productive
industrial enterprises was strongly inhibited 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 in adapting 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.
* 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 produced 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
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 the foundation of theft. The ultimate
source of political power is the weapon which is used to commit the act of
theft (called taxation) that provides the wealth of the state. The
distinction between politics and economics is the distinction between the
power to coerce and the power to produce. Politics is also characterized by
other types of coercion than the theft of wealth, but it is this act of
theft that constitutes the economic foundation of political systems, whereas
other forms of economic activity (excluding non-governmental theft) rest on
the production of wealth rather than its expropriation.
On the one hand lies economic power, exercised by means of a positive: by
offering men a reward, an incentive, a payment, a value. On the other hand
is political power, exercised by means of a negative: by the threat of
punishment, injury, imprisonment, destruction. The businessman's tool is
values; the government's tool is fear.
The power of a politician is the power to impose punishment on people who
fail to obey his commands. To the extent that he can grant rewards, those
rewards 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 for the favor of the consumers in a market with other
businessmen offering similar goods or services. He must persuade consumers
to buy his product, while 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. 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.
If you believe that government should do this or that, enacting laws
against drugs, pornography, homosexuality, etc., keep in mind that
government acts through coercion or threat of coercion. If you want the
government to tax other people for your pet project, you are in effect
holding a sword over those people and forcing them to pay for the
implementation of your ideas. You don't wield the sword yourself, but the
government agent wields it on your behalf. Remember too, that it is a
double-edged sword: if the government can coerce others in order to achieve
your goals, it can also coerce you in order to promote someone else's goals.
Any scheme to loot "the other fellow" can work only if there are enough
productive people around for each to be somebody else's "other fellow."
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.
Underlying politics is human choice. Underlying economics are the facts
of reality (you WILL starve if somebody doesn't produce food for you).
Politics can never be a science, but economics must be. The attempt to fuse
these two disparate realms together is an attempt to assert dominance over
(economic) reality by one's (political) hopes, wishes, whims or fears.
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 unfit to be a
producer.
The bottom line is that, just as people can use a TV without
understanding anything about how it works, America has become wealthy but
Americans don't know 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 immense corporate enterprises.
* 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
* Some false arguments
* Digital information
* 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 of use to mankind, 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?
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 a piece of real estate and employs some
physical object. In the absence of criteria for non-conflicting ownership
and behavior, 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.
Since I have chosen to be rational, the questions do not apply to me; the
logical consequences of my choice are the determinators of my behavior.
Since the thief has chosen to be a thief, the questions do not apply to
him; he is not amenable to reasons. And THAT'S why we need a suitable social
institution!
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 can be conflicts between individuals over who gets to consume and
control various scarce goods. Because of the possibility of such conflicts
and the necessity of humans using physical goods to survive in the world, we
must have a system of property rights that solve such conflicts by
allocating specific scarce goods to specific individuals."
Much modern ethics implicitly assumes that a fusion of Christian Original
Sin and Marxist zero-sum economics leads inevitably to inherent conflicts of
interest and the need for sacrifice. A frequent result is the thesis
(presented above) that scarcity is the basis of property rights. This
fallacious view regards rights as a function of material conditions rather
than as being inherent in human nature. There is no "reason" for "needing"
property rights. Rights exist, they are not created. The proper subject for
discussion is not a reason for needing them, it is the correct
identification of them and the reasons why we must recognize them.
* Philosophical underpinnings
Leonard Peikoff:
It is not an axiom that "man has property rights." Property rights are a
consequence of a man's right to life: which latter we can establish only if
we know the nature and value of man's life; which presupposes, among other
things, that objective value-judgments are possible; which presupposes that
objective knowledge is possible; which depends on a certain relation between
man's mind and reality, i.e., between consciousness and existence. If you do
not know and conform to this kind of structure, you can neither defend
property rights nor define the concept nor apply it properly.
David Kelley:
Property rights exist because man needs to support his life by the use of
his reason. His primary task is to create values that satisfy human needs,
rather than merely relying on what he finds in nature, as animals do.
Therefore the essential basis of property rights lies in the necessity of
creating values.
Life, Liberty, and Property. These three are so bound together as to be
essentially one right. To allow a man his life, but to deny him his liberty,
is to take from him all that makes life worth being lived. To allow him his
liberty, but to take from him his property, is to deny him all that makes
life able to be lived. Depriving a man of property is depriving him of the
means by which he maintains his life. This is why the right to property is
as important as the right to life.
See Chapter 5 for a discussion of the nature of rights.
See reference
* Ownership
Ownership is the rightfully acquired ability to use and dispose of
property. A person justly owns whatever he has acquired without violating
the principles of justice in acquisition and justice in transfer.
There are two forms of control over property:
Possession with ownership is the Prescriptive (Normative) form of
control.
Possession without ownership is the Descriptive (Positive) form.
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 ownership. 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.
The multiple uses of property may be controlled separately by different
people, contrary to Von Mises' definition that implicitly assumes ownership
must involve controlling ALL the functions of a thing. Many manifestations
of ownership consist of shared or delegated control. Nonetheless, that which
is controlled IS owned property. Ownership can be vested in groups as well
as in individuals.
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 it would
indeed be mine.
"If you go to a forest, the fruit you pluck 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 all right 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 your land you may have a rightful claim
to them, and what you take out belongs to you, just like taking salt out of
the sea or fish out of a river, you surely have no right to sully the water
or wind which flow OFF your land and onto someone else's land. What flows
beyond your land becomes the property of someone else. You would be dumping
your junk onto your neighbor's property. You have no right to stink up your
neighbor's home by burning trash in your 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. I do not
make any claim to the resulting empty space (the hole), unless I put some
manufactured object into it. But 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
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.
You will frequently hear the claim that intangibles such as ideas are the
exact opposite of a scarce good: one person may learn of and use another's
idea without diminishing his 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 ownership of the idea. Ownership means "exclusive control
over the use of the thing." A consequence of this loss of control is that if
the idea has potential economic value (such as Tom's serpentine walls) then
the loss of control over that idea will deprive Tom of some of his potential
income.
Unless the owner's exclusive control over the use of his property is
ensured, the right of ownership can be, and surely will be, violated.
We must keep in mind 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 value, and your neighbor has every right to dig up
his garden even if it reduces the value of your property.
* Some false arguments
Following are some arguments derived from the erroneous notion that
scarcity is the basis of property rights. I think they can be more easily
recognized and better understood with a grasp of the principles I have
presented.
Property has traditionally been something that can be transferred from
place to place or person to person. Theft could thus be defined as depriving
the owner of the use thereof. But in an electronic environment, although a
piece of software or a component of a data base may be valuable, the
intruder who accesses it without authorization is not depriving the owner of
its use, although he may well be making the product less valuable to its
owner.
Knowledge is the only product that is not subject to diminishing returns.
You can give software 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 property, but whereas property is by nature scarce, information
has no inherent scarcity, consequently traditional economic ideas do not
adequately encompass the phenomenon of "information as property."
Contrary to the proverbial wisdom, in a digital universe you can eat your
cake and have it, too. You can keep your original but still digest it on
your own terms: alter it, reformat it, transform its components, and, at the
end of this process, the original can be summoned back with a keystroke. And
because digital code is replicable without material cost, you can also give
your cake away.
Printed books created the modern idea of intellectual property because
they were fixed in form and difficult to replicate. One could therefore sell
and own them, and the livelihoods of printer and author could be sustained.
This copyright structure collapses when we introduce the changeable digital
signal. We will have to invent another 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, 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 RSA 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 gives him the appropriate
decryption key.
In considering such schemes, keep in mind that most people pirate for one
of two reasons: a large cost difference or a large convenience difference.
Therefore it's not enough for the legal copy to be reasonably priced, it
must also be convenient.
* Digital information
Printed documents are fixed snapshots of changing ideas; they limit the
content of communications to the fixed paper on which they are stored. But
in electronic form, documents can become fluid raw material for computer
literati who can extract, catalogue and rearrange the ideas presented.
Electronic technology can separate the message from the medium so that we
can access the message wherever, whenever and in whatever form we want.
Computer programs, like living organisms, evolve. So do ideas. They can
do so most readily, however, only in the peculiar ecosystem of electronic
technology where human designers and users, coupled with computers, provide
the environment essential to breeding, modification and reproduction.
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."
* Bibliography
THE OBJECTIVIST NEWSLETTER
April 1964 - The property status of the radio spectrum
May 1964 - Patents and Copyrights
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
In thinking about capitalism I started by considering all the definitions
I could find. None of them, not even the one derived by the Randites, seemed
fundamentally valid. They all try to distinguish among supposedly different
forms of economic behavior, but actually just make spurious distinctions
based on the type of social organization in which economic behavior occurs.
I had also been thinking about the fundamental nature of rationality, and
I observed that there is a connection between wealth-creation and
rationality: before you can create material wealth you must know and
understand at least something about reality. I realized that rationality and
wealth-creation are two correlative aspects of human behavior. Rationality
is the means by which man uses his mind to know and understand reality.
Wealth-creation is the means by which man manipulates reality to fulfill the
physical requirements of his existence. Rationality and wealth-creation go
hand-in-hand and both are fundamental requirements of man's life.
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 observation 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 on to produce more wealth? If it is to be used later on,
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 cultures
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
culture 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. 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.
A result 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 "worth" twice as much. 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 commerce.
* 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 develop, 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. Nevertheless, 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 beomes 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 the 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 gave rise - that is being
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. 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, 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.
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?
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 more.
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." 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 theories, frequently using abstract mathematical
models whose essential flaw is that they have little relevance to actual
human behavior. 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 that it is correct.
As an example, here is a selection from a recent debate between two
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. As Herman Daly, a senior economist with the World Bank, eloquently
observed: "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
"mystique" 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
if 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.
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.
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 economic theory 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 and economic institutions 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 from doing so. Each individual person is
continually looking for a way to improve his personal standard of living -
continually looking for a way 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 data is often meaningless on its own terms and almost always
misrepresents 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.
Also, 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 of productivity.
All figures on economic performance are false 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 the factors of production 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 started out 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 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. Willingness to pay a high
price typically means that the producer is doing a good job of providing for
consumers. If that high price generates high profits, then the producer is
able to obtain more of the 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 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 living 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 was the failure to comprehend this
phenomenon, more than anything else, that was the chief intellectal flaw in
Marxism and all its philosophical progeny. An ethical point here is that the
thousands of people whose unwitting 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. The market is a network of trade
relationships, and a relationship can only be regulated by regulating the
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 goes
under 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. 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 Tse-tung's peasant
army conquered China, however, the government confiscated the holdings
oflandlords and wealthy farmers and distributed the property among all
farming households on an egalitarian basis. The new landowning 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 less sheep graze a certain pasture, the grass will continue to
replenish itself, but if more than 100 sheep graze the land, the grass will
diminish and ultimately vanish. Suppose the land is owned in common by ten
shepherds each of whom has ten sheep. If one shepherd acquires an additional
sheep he will see himself as 10% better off, and will see the pasture as
being only 1% worse off. Naturally, each shepherd will consider it to be in
his self-interest to increase his flock, but in the long run this is to the
detriment of all.
The sensible solution to this problem lies in private ownership: each of
the shepherds should own a tenth of the land. Then if he acquires one more
sheep, he will immediately see that his pasture will be 10% worse off.
Murray Rothbard, in FOR A NEW LIBERTY:
"In the East, the 160 acres granted free to homesteading farmers on
government land constituted a viable technological unit for farming in a
wetter climate. But in the dry climate of the West, no successful cattle or
sheep ranch could be organized on a mere 160 acres. But the federal
government refused to expand the 160-acre unit to allow the homesteading of
larger cattle ranches. Hence the open range, on which private cattle and
sheep owners were able to roam unchecked on government-owned pasture land.
But this meant that no one owned the pasture, the land itself; it was
therefore to the economic advantage of every cattle or sheep owner to graze
the land and use up the grass as quickly as possible, otherwise the grass
would be grazed by some other sheep or cattle owner. The result of this
tragically shortsighted refusal to allow private property in grazing land
itself was an overgrazing of the land ... and the failure of anyone to
restore or replant the grass.... Hence the overgrazing of the West, and the
onset of the dust bowl. Hence also the illegal attempts by numerous
cattlemen, farmers, and sheepmen... to fence off the land into private
property - and the range wars that often followed."
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.
* 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 throughout 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 (Julius Caesar's stepson) 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 means by which government
asserts control over the economic affairs of individuals. The fundamental
characteristic distinguishing among markets 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 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.
Communism: Under this system, all the business decisions are made by
government, and the people operating the enterprise are government employees
who receive their income from the government. A communist government
expropriates 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, 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 context.
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? (If
so, what is the validity of the internal self-referential logic of Marx's
idea that economic ideas are finite?) No, 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 in order to prevent certain other people from
satisfying their own economic wants. 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 it
is inevitable that some must starve so that others can eat.
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.
In a free market, a man's long-range failure, like his long-range
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 one 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 controverting 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. 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.
Twentyfive 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 the 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 its 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.
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 1960s.
* 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. 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."
In this context, there is no such thing us "unfair" trade. The so-called
"unfairness" here is not to the merchant nor to the consumer, but to a third
party who objects to the transaction. 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 and 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 Americanism.
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 excellence 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 is the utilitarian outcome: how good is
the product for our 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 runners in the race, to
hobble them either by force (tariffs) or fraud (conning Americans into
believing that buying foreign products damages our economy).
Note 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. Their dumping consists of reducing the price below
what we would have to pay for 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.
* The Gross National Product
The Gross National Product is proposed as a measure of our 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
double! 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?
On to Chapter 5
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