This is a very long treatise on economics that includes
Power and Market in the Scholar's Edition, and is accompanied by a Study Guide. The Guide must be purchased as a separate item from the store at
http://www.mises.org/.
The very long Introduction is worth reading if one is interested in how the book developed, as there are excerpts of letters Dr. Rothbard wrote to his sponsors giving them updates on the progress of the book. I would warn the reader not to be afraid of certain terms used, such as “conservative” and “old right” but simply to ignore them, as Rothbard's pure libertarian philosophy could only be described as progressive and liberal if one uses the dictionary definitions of these terms.
As I have stated numerous times, one needs to realize that, in many ways, especially in regards to education, “progressive” has been used to describe some very backward ideas, very unlike anything the dictionary could describe as “progressive.” And, today, “liberal” is used to describe anything but liberal.
The Volker Fund commissioned the project in 1952, and it took until 1960 to complete. Dr. Rothbard was meanwhile working on his doctoral dissertation, and he had other projects going as well. He was keeping up with current events too. Only Murray Rothbard could multi-task like this! Most of us would never attempt it; I would have a nervous breakdown.
In any case, at the time his book began it was originally going to be a college textbook that could also be used by the intelligent layman who wanted to learn some economics. Economics textbooks were then, as now, cluttered with mathematical formulas, charts, graphs and the like. There were lots of statistics but not much theory.
This is still true. A few years back, I took a beginning and then a second-level course in macroeconomics. It was difficult. Fortunately I am naturally good with math formulas, and can understand charts and graphs with ease. But I still had to work like a dog to understand all the material and to complete assignments.
And, absent a good background in Austrian school (truly free market) economics, I might have been suckered into believing in the need for taxation, regulation, and government “leadership” in the economy.
The courses were still worth taking, because now I understood why people are sucked into advocating establishment policies that actually work against their own interests. Also, I am now familiar with the contents of the courses (the Solow model for instance that took up a whole month, the Phillips curve, the Laffer curve, etc.) which do make a measure of sense. What is ignored is the fact that human beings have a free will and are fickle. They change their minds continually, and there is no way to determine what consumers in the marketplace are going to do next. So all the “real time” numbers you see are obsolete before they hit your computer screen.
And all the seven-year, fourteen-year, and five-year plans the Bush administration can muster will come to naught. All they do is mess up your own plans. How are you supposed to make your plans when the government hands down all these “policies”? They certainly don't plan around you. They don't even know you are alive, and couldn't care less until you break some rule or fail to pay a tax. You have to plan around them, and when policies change, you have to plan all over again.
Because the courses in middle-of-the-road macroeconomics are so difficult, and because sound Austrian economics is relatively straightforward, I have to wonder if there isn't some reason for this. Most students think of economics as a “dismal science” (which term actually was coined way back by Thomas Carlyle) or far too difficult, and as a result do not care to get too far into it. They would major in something else, and leave the management of the economy to “experts,” meaning high-paid government policy-makers. This is exactly what the establishment wants, and this is an important reason wealth and power gravitate towards establishment interests. And it is, I think, the main reason Rothbard wanted so much for people like you to learn sound economics.
Anyway, back to the book, it was originally going to be a textbook, but later Dr. Rothbard changed it into a treatise. This would permit some manuscript that would be classified as more opinion than fact. Otherwise I am not sure how this would change it. I do know that it has been used as a macroeconomics text, and while reading it I concluded that it would be a very good one.
Later, problems set in due to the actual length of the book. Publishers were not sure publication was worth the risk of losing money. So Power and Market was cut off the end and turned into a separate work.
Now, the new Scholar's Edition contains everything.
At the end of the Introduction, some early reviews of the book were discussed. Of course, those reviews from the educated were glowing, and those from establishment sources were not-so-glowing, to put it mildly. Well, that is no big surprise. The book absolutely demolishes the establishment to smithereens and then pulverizes the smithereens.
So, let's get in, start 'er up, floor it, and forget about seat belts!
Chapter 1, “The Fundamentals of Human Action,” is key. I strongly suggest reading and understanding this chapter thoroughly before continuing. Most of the material is really stuff we are already familiar with and might think of as obvious, but only subconsciously. It is important to spell it all out, so that it is not only conscious knowledge, but crystal clear. This is done in page after page until Dr. Rothbard has said it all. We need to understand this!
Economics is actually the study of human action, meaning purposeful behavior. If economics is dismal, then human action is uninteresting. But, I defy anyone to deny an interest in human action or purposeful human behavior. It is the most interesting subject there is! Sex and money are part of this subject. Now, are you still uninterested?
An action has an end and a motive. Individuals act because they have a motive to act to achieve an end. If a human's actions are purposeful, then these actions can be interpreted by someone else.
Humans act. This is part of being human. Individuals do the acting. Groups do not. A group's existence is dependent on individuals in the group. Without the individuals, there is no group. Of course, individuals are not isolated; an individual's actions may depend on the actions of other individuals. But only individuals act.
When an individual acts, it is because he (or she) has an idea that he can achieve his end and how to do it. It will include making some changes in his environment.
I want to eat a piece of pie. So I have to go to the pie or the pie has to come to me. That is a change in environment. I could wait in the chair for the pie to come to me, but that might take a while. Maybe even until tomorrow. I get another idea: if I go to the kitchen, and get the pie, I can then eat it. The motive is the desire to eat the pie. I act.
But, that isn't all. Whether or not I actually get out of the chair, get the pie, and eat it does not only depend on hunger for the pie. It also depends on whether I am willing to expend the time necessary to get and eat the pie. It might take only ten minutes, but that ten minutes has to be taken away from something else. That something else might be lazing around in the chair, leaving on time for an important libertarian meeting, or anything in between. Either way, it is action. I act. I must choose which way to act, and the choice will be based on my scale of values.
The point is, time is scarce. So is pie. In fact, all means to ends are scarce, so choices have to be made, and any choice constitutes action.
Humans need to change their situation, to improve it. We cannot predict the future but we can act to improve the prospects. We cannot predict how people are going to act except to say that individuals are always going to act in their rational self-interest as they perceive it.
Time is not the only means to an end, of course. The means to ends are goods. To get the pie, I not only need time, I need labor (my own labor since I do not have anyone at my beck and call, with the price of labor these days, price including not just labor but endless government and union rules that I refuse to follow). Also, I need land, meaning a place to put my behind down and a place to put the pie. Then, of course, the pie had to come from somewhere. Either I bought it or I made it. In any case, materials, more time, and labor were involved. It had to go through stages. The flour, shortening, sugar and berries had to be grown and stages go all the way back to the seeds for the wheat and berry plants. And, of course, the metal for the stove goes all the way back to a mine in the ground. If you go back far enough, land and labor are all there are.
The progress from land-and-labor-only to pie-on-my-table is accomplished by the use of technology, and technology is brought about by ideas. People get ideas and plan for the future based on these ideas. They act on the basis of these plans. How wheat is transformed into piecrust and berries transformed into filling is based on an endless number of technological ideas.
Each of these ideas was thought of and acted on by an individual, not a group.
Every acting person wants to achieve his ends as soon as possible. When I made or bought the pie, I worked as fast as I could, not only because time is valuable but because I looked forward to eating it. Economists call this “time preference.” A small piece of pie today is better than a big one tomorrow. (Of course, it also depends on how small, how big, and how much of today is left before tomorrow.) But, if the piece of pie today is of the same size and quality as the piece tomorrow, you can be sure, all else equal, I will choose today. The desire not to go to bed hungry might or might not be just an excuse.
This time preference, or present vs. future orientation, is what a person is expressing when he is planning the future: The preference is “high” when he thinks only of right now or the immediate future; it is “low” when he plans way ahead. You cannot really do both. The means to attain ends are scarce, and means to attain immediate ends cannot be used to attain long-term ends. You cannot have your cake (or your pie) and eat it too. Any pie that I eat right now cannot be saved for tomorrow. Choices, then, have to be made according to one's scale of values. Because everyone's scale of values is different, nobody can tell me I made the wrong choice. When they say that, what they really mean is that they would have made a different choice because they have a different scale of values (1).
Of course, individuals can change. Their time preferences may go up or down depending on a number of things. One might have a higher time preference expressed by a propensity to spend rather than to save. When she learns that there is a baby on the way, this might change. She must think about a longer term. She must think about the expenses of a child. I'd like to believe she would think about education, good private schooling, or even home schooling, and the cost of higher education through college and even medical school. She needs to think about her own health now and in the long run. Her perspective changes drastically and she becomes more future-oriented. Many things can happen, big or small, for someone to change her time preference.
In any case, all action is geared to the exchange of a less satisfactory state of affairs to a more satisfactory one (2). All action implies exchange. If the end sought is indeed more satisfactory (and it might not be; we all make mistakes), then the individual profits.
So ends are valued. Therefore, the means to ends are valued too. The piece of pie is something I value. Therefore, I value its ingredients all the way back to the wheat and berry seeds.
In this book, one of the main things Dr. Rothbard is trying to do is illustrate how value imputation can be accomplished in a modern economy. There are billions of people, each with an ever-changing scale of values and time preference. This is complicated. One thing we can do right now is to lay to rest any notion the government can direct the economy without harming everybody's life.
Rothbard then discusses marginal utility. This is similar to, but not the same as, diminishing returns. Marginal utility refers to your having only a certain amount of means to an end, and you will use that means in the most urgent way first. I have a filthy apartment, and only so much soap. So I use that soap first to clean the most important area. If any is left, I clean the second most important area. Four areas might be cleaned before I run out, but if an accident destroys some soap, I will have to leave the fourth area dirty and clean only three. The soap lost was the “marginal unit,” and the cleaning of the fourth area was the “marginal utility.” Had I had a very large, abundant supply of soap, then the whole apartment would have been cleaned, and the “marginal utility” of soap would have been much less, only as much as the next apartment cleaning. This is because the greater the supply of the good, the lower its marginal utility (3).
This law of marginal utility is key. As obvious as it is, people do not seem to be aware of it.
It gets more complicated as one gets into the marginal utilities of the factors of production as seen over the next 20 pages or so. The main point, I think, is actually that value imputations are very complex and there is no central authority with the know-how to assign them, especially when they change all the time.
Once marginal utility is treated, Rothbard turns to the formation of capital, using the Robinson Crusoe lessons again. This teaches how saving will, in the long run, increase wealth. It is easy to understand, and subconsciously everybody knows but, again, it needs to be raised to a conscious level to bring it into focus.
To use the apartment-cleaning example again, it is basically this. The job will take eight hours, but if I get a scrub brush it will take six. I really value my time and want to finish the job. So, is it worth the time I must take to interrupt the job to go after one, i.e., shall I invest the time in the brush? The answer is: How long did it take me to earn the money for gasoline to go to the store (divided by the number of errands I can combine this one with)? To earn the money to buy the brush (divided by the number of times I will do this or a similar job with the brush)? How long will it take me to go after the brush? If all of that totals up to less than two hours, then it is worth the investment. The brush is called “capital”; it will make me more productive on that job. The time I save could go into leisure or into another job. So the “capital” brings me more than just the scrubbing.
In order to go out and buy the scrub brush, I had to leave a job that I really wanted to finish for long enough to go. I had to lower my time preference in order to set that job aside. The incentive to do so was knowing that in the long run I would finish sooner.
Crusoe had berries and nothing else. It took most of his time just to obtain enough berries to live on. He needed help from a berry-picking tool (capital) if he was going to satisfy any other want. So he had to take time away from the berry-picking, or from what little leisure he had, and make (or invest that time in) the tool. Once the tool was made, he had a lot more food and leisure, so he could go on to satisfy other needs. Thus, the capital not only gives him more berries, but gives him other things besides.
What Crusoe did (and what I did) was to express a lower, or more future-oriented, time preference. It was worth the sacrifice of a present good in favor of a greater future good.
Dr. Rothbard points out that the land and other natural resources, once worked on and “improved” (i.e., made useful to human beings), became “capital” (4).
This hearkens back to The Ethics of Liberty as he discusses John Locke's “mixing labor” with the land and how an individual comes into possession of unowned property. When Crusoe found land that was satisfactory to him, he began to clear it for a house or to work it for another future end. While doing that he had to sacrifice present wants as it was an investment for his future, but he was also “mixing his labor” with the previously unowned land, so that land was his.
Also, the tools (capital goods or producers' goods) one uses for his work had to be made, and the factors involved with that can be traced all the way back to the mine the metal came from or the forest the wood came from, and all the way back to when the mine or the forest was first discovered and worked (5).
The capital or producers' goods can be traced forward to the consumers' goods you are making as you act at work, that you expect people will want.
Action is also an exchange. In the examples above, you act to exchange present goods for future goods, or vice versa. One has to give up something in order to get something. At this particular time I am choosing to work on this essay. I also have e-mail to read, dishes to do, and some paperwork, and these should all be done today. I am giving up these jobs to do this one right at this particular time. You are reading my blog, and it gives me great satisfaction to know that out of all the other things you have to do, you pick that. It is an exchange, and we choose. We choose according to our rational self-interest; we give up something of lesser utility for something of greater utility.
Chapter 1 is very important because it explains what economics is really all about: human action. Anyone who has any interest in what makes people tick absolutely must read it.
In Chapter 2, Rothbard discusses interpersonal action. Up until now he has only dealt with the action of isolated individuals. We are individuals first. Most of our actions are as isolated individuals, but obviously we do interact and these actions are important, too.
There are many kinds of interaction. If Crusoe finds there is another person on the island, he can respond in any of a few ways. He could simply ignore the person and continue on as before. Or he could, in an effort to steal the person's property that could include murder or enslavement, perpetrate violence. Crusoe has to decide what to do.
He might opt not to use force or violence at all, either because it goes against his beliefs or because in the long run it will not be utilitarian.
He could engage in voluntary interaction with the man. From this point on in Chapter 2, Rothbard deals with “the workings of a society based on voluntary action, entirely unhampered by violence or threats of violence” (6). He does examine the effects of violence here and there, but for the most part the book describes economics in a free market.
You have to give up something to get something. That is exchange. Crusoe gave up present berries in order to make a tool so as to get future berries. By the same token, if I want what you have, I offer you something you want in exchange for it. One thing that drives the market (series of exchanges) is the fact that people's scales of priorities differ.
Rock concert promoters are in business to make money, obviously. They set up a show and have tickets to sell. A promoter with 10,000 tickets wants to sell as many as possible and sets the price in such a way that he believes all of them will be sold at the highest price he thinks he can get. Meanwhile, I am happy to hear that my favorite band is to play nearby. I get on the Internet or go to the ticket outlet to buy a ticket. Chances are I will not refuse to buy the ticket because of a high price because I really want that ticket. I buy the ticket if I value the ticket more than the money I pay plus the time and expense of going after the ticket plus the time and expense of actually going to the show itself. The promoter, on the other hand, works very hard and has very high expenses in putting on the show. Hiring the band, hiring the venue, transporting and lodging the band and the umpteen truckloads of equipment, and overseeing the whole enchilada is a major job. And, of course, the government, natural enemy of rock concerts, imposes regulations that go on forever and can capriciously cancel a show at the last minute, making the promoter walk on egg shells. So promoters need all the money they can get and are very anxious to sell tickets. It is a business and a profit has to be made or else they will go out of business or maybe even wind up on the streets.
I value the ticket more than the money; the promoter values the money more than the ticket. Each actor in the marketplace has a different scale of values.
Crusoe has learned how to obtain berries quickly by experimenting and making tools. He has lots of berries but no meat. The new man seems to have quite a bit of meat over there, but can't seem to get his fill of berries. Crusoe, therefore, goes over and suggests a swap. The different value scales and marginal utility make it only a matter of time before trading begins.
If two people can benefit this much from one another's differing abilities and preferences, then the more the merrier. The more people present (to a point, of course, since too many people will get in one another's way) the more exchanges can take place. We now have social cooperation, or a “society” and a “marketplace” (7). We also have the kind of diversity that really matters.
As I said before, and as Rothbard emphasizes, there really is no such entity as “society”; it is only the individuals and their cooperative workings, with each individual benefiting from exchanges he and the other party have chosen to make.
The series of exchanges, in the absence of violence or the threat thereof, and in the presence of self-responsibility and the freedom to choose, are a free market. This means a truly free market. When President Bush talks about “freedom,” “democracy” and a “free market,” he means something entirely different. My purpose is to illustrate that to you and show that what Dr. Murray Rothbard is advocating is what will really work, whether it be on a small Crusoe scale or a large world-wide scale.
The point is, and this is regardless of the “greedy capitalists” the left is always talking about (most of whom are actually very generous), when one acts in one's rational self-interest by exchanging in the marketplace, one benefits others (8).
The question is raised: How is it determined how much of what is exchanged for how much of what? It is determined by the value scales of those who are exchanging at the time the exchange is either made or falls through.
After a discussion of pricing when several prospective exchanges of one item for another are brought in, the law of supply and demand and equilibrium price are made clear. This is familiar to all who have studied any economics at all, even mainstream economics.
I believe I learned in economics that the establishment fought bitterly, but finally had to concede to the law of supply and demand, which is part of bedrock free market economics. This is why price controls do not work. When President Nixon, a thoroughgoing Keynesian and arch-enemy of anything even remotely resembling freedom, imposed controls, I already knew that there would be acute shortages of many commodities, while other commodities would gather dust on the shelves (9). Sure enough, that was exactly what happened, and friends asked me how I knew. Did I have an eye into the future? Well ... yeah ... in fact I do. The sun will set this evening and rise again in the morning. Some things just follow. It does not take any special talent to know cause and effect.
People will act in their rational self-interest every single time. And, this is what Dr. Rothbard is spelling out in the book. Of course people make mistakes; they do something and later discover that they shouldn't have. Then they get to work and make corrections.
Nobody has a crystal ball, at least not one that predicts accurately, but some people are better at predicting the future than others. I am poor at this (the above was a no-brainer for the student of economics), so I worked for someone else and picked up a paycheck every two weeks. At least I had enough of an ability to think for myself to set aside a portion of that paycheck for a rainy day and to pay my Individual Retirement Account every January. And I never got a credit card. It was years before I would even get a debit card, which is entirely different. One can order on the Internet or over the phone with a debit card (I am not sure how wise this is now while the government snoops and behaves as though it favors identity thieves). The difference is, when you pay with a debit card the money is taken out of your checking account right then and there, and if you have insufficient funds, the card will not go through. You do not incur debt. I take a great deal of pride in not owing anybody a nickel.
Oh! If only we had an administration that did not spend like a drunken sailor (my apologies to drunken sailors as this comparison is unfair to them), and a populace that practiced these frugal principles, we would be much better off, even with all the socialistic micromanagement of our lives.
But, I digress. I am poor at forecasting. There are some things I can predict, as I mentioned such as night following day or a generalized economic recession at some point because of irresponsible policies, but some people are really pretty good at it. They make intelligent guesses at what the consuming public might want. These people make good entrepreneurs. Whoever went into the business of making hula hoops in the summer of 1958 is rich to this day as they were a huge fad. Nobody under the age of 40 or so could live without one. Their job is to forecast correctly what people are going to want and then supply it. The rock concert promoter is an entrepreneur. Entrepreneurs take a risk. A major one, because if they are wrong they could wind up on the streets. They had better be good at what they do, and not everybody can be an entrepreneur (10).
Dr. Rothbard expends the last portion of Chapter 2 on a reiteration of some very basic points: the necessity of the private ownership of land, how it came about, how the ownership of all goods came from it, and principles involved with exchange. There is also an introduction to the principles behind storage for future use and the hiring of storage (11). This is a small hint of the passages on banking that come later in the book.
On to Chapter 3. I have gotten the idea, as Chapter 2 wound down, that Dr. Rothbard was leading up to something big. He was. In Chapter 3, he pointed out that, so far, he had been talking about exchanging one item for another without any difficulty in finding someone who wants what you have and has what you want. This would be a very primitive economy where a Crusoe can trade his extra berries for someone else's extra meat.
Today I might want to buy a ticket for a concert that is sold out. Someone has a ticket he does not want, but he wants a dog. I dearly love the band but I refuse to give up my sweet little dog to see them! I must hunt for someone else who has a ticket he is willing to exchange for something I am willing to give up.
That is really cumbersome. I might, on the other hand, have something that someone wants badly enough to give up their dog or their ticket for. I have a freezer full of steaks. Maybe someone will accept those! I think of everything I have that a lot of people might want. The steaks might be the best thing to offer, i.e., they might be the most marketable thing I have. I offer these to everyone I can find with a ticket in exchange for the ticket. Or, I might offer them in exchange for a dog, and then take the dog to the person who is willing to give me his ticket in exchange for the dog.
As the economy grows, people discover what everyone wants and what is easiest to trade, and what can be traded in varying amounts. Whatever it is can be useful as a consumer good, such as a food item. Or it can be useful as something to re-trade. The recipient of the steaks might eat some or all of them, or use some or all of them in exchange for something else.
As time went on, people learned that gold (or silver) was ideal to use in trade, as it seemed to be the most marketable commodity. It is ideal because it is scarce but not too scarce, does not spoil and is valuable enough in small pieces. This is how money came about. Everybody wants it because they can exchange it for useful items. This marketable commodity became a medium of exchange, or money. I don't have to give up my dog to see the concert. The ticket-owner does not have to settle for a concert when he would rather have a dog. Rather, I will pay him money in the amount agreed upon by him and me, which he may or may not use to buy the dog. The use of money will speed up exchanges across the economy, making the standard of living immensely higher.
Of course, gold or silver does not have to be the medium of exchange. Many different commodities have been marketable enough to use in other cultures (12). (On the island of Yap, huge stone circles are used. Thanks to National Geographic for that info.) But gold and silver have won out.
When I took my mainstream economics courses, the advent of money was taught in much the same way except for one very major detail. We were told that government directed all of this and that these ideas came from bureaucrats and politicians. Dr. Rothbard makes no mention of any government involvement. His assumption seems to be that, over a great deal of time, people came up with these ideas and the ideas were implemented gradually, and they caught on because they made things easier for people (13). I was not there, of course, so I do not know first hand, but the Rothbard version makes much better sense. It is unlikely that bureaucrats, in whose interest the status quo is, would come up with a free-market commodity medium of exchange. It is too much in the interest of the little guy, and contrary to the interests of the status quo.
Rothbard points out the obvious. People will strive for the highest income or the highest return on their investments. Of course, in this age of group supremacy and socialistic self-effacing sacrifice of the individual, maybe that is not so obvious. Everyone seems to want to be “average” and not stand out. Maybe I am being sarcastic. I am not so sure about that, but I am sure that every person acts in what he perceives as his rational self-interest.
Rothbard points out the obvious in order to stress the not-so-obvious.
The obvious is, of course, that people will increase their income to the greatest amount possible. This does not mean only monetary income, as he is quick to point out, but it also means psychic income, which I think really means satisfaction. For instance, because of your principles, you might rather deal in Bibles than in dope, even though dope is far more lucrative. Because of your belief system, the extra money made by selling dope might not be worth it, and you are happier selling Bibles and receiving a lower monetary income. You are maximizing your psychic income, and Dr. Rothbard is saying this is what everybody does.
Likewise, when a person takes a job, the higher the pay the better, but a person might choose a lower-paying job if he likes to do that work but does not like to do the work in a higher-paying job. There is no way you could pay me enough to be the night watchperson in a funeral parlor, but to relocate people's dogs to places within a radius of a few hundred miles would be so much fun that the cost of the trip might almost compensate. I love dogs, but not dead folks.
Conversely, a person spending money will want to get the most “bang for the buck” for all the same reasons that the seller of labor or any good wants maximum income. The least-high-priced gasoline in town is next door to where we have our monthly Libertarian Party meetings ... you know the rest.
So, goods and services are bought and sold at prices that are of at least some benefit to both buyer and seller on their varying scales of value. Buy low and sell high!
But, as Dr. Rothbard asks at the end of Chapter 3, just what does determine money prices? The long Chapter 4, “Prices and Consumption,” begins.
What determines money prices in the free market is the individual value scales of all the participants. We must review an individual's scale of values and point out that over a certain price an item is too expensive in the individual's opinion so he will not buy it. If the price goes down, he might then buy which means he gives up some money. Less money remaining in his wallet means he is more anxious to keep what is left, that is to say that the marginal value of every dollar he now has is greater to him. If you find that you are spending more than you should be, you slow down your spending. So, he might only buy one unit of the item. If this item then goes “on sale,” i.e. the price is lowered again, he is inclined to buy more of the item.
I am always on the lookout for nice T-shirts. If I see a rack of really nice ones at $10 each, I might buy only one, the best looking one there. Or I might not. Usually I will not buy any. I might buy two if I can get the second one for $5. However, at the thrift store there are often some very nice used ones for $1 each and I might buy as many good ones as they have. It is my scale of values. A really good new T-shirt is about the same in value as $8 or $9 to me at this time. A fairly good T-shirt might be worth $2 to me at this time. I recently took clothing inventory and I have about 35 T-shirts that I wear on a rotating basis, so possibly I will leave the T-shirt market until a few wear out or are given to the thrift store. My T-shirt related valuation varies from time to time (14).
Observe your own behavior. You can create your own “demand schedule” (15) for some product you buy or mine for T-shirts, and even draw a “demand curve” (16).
Obviously each person has his own value scales vis-à-vis T-shirts or any other item. My demand curve for T-shirts is added to all other T-shirt buyers' curves. The quantity demanded is going to depend on the price. (The actual demand itself will depend on how badly people want to buy T-shirts for other reasons.) So we have the sum total of all the demand schedules.
We have to emphasize that all this is based on the subjective perceptions of individual human beings. This is part of how people behave, or what makes people tick, and that is why it is in the interest of all of us to understand these principles if we ever hope to restore economic freedom, which as we will see is really the same as civil liberty.
Once we understand the total of the demand schedules (or curves) of all the buyers, we soon understand that the other side of the coin, supply, is not really that different. The seller compares the value of the T-shirt to him with the money he can get from the person who is the most interested in buying the shirt. He has a very nice National Basketball Association shirt. I am tall and energetic and, next to volleyball, basketball has always been my favorite game to play (even though these are team sports and I normally prefer individual sports). So I want that shirt. There is a certain number of buyers like that, so if I do not come into the store, someone else will. The seller knows there is a thrift shop nearby that sells some pretty nice shirts; he is not sure he can move his stock of very nice shirts for $10 each, so he might or might not lower the price right away or at all. He has to make an educated guess, taking his own value scale into consideration. How badly does he need money right now? What would it cost him to keep unsold shirts? What season is it, and how brisk is business in general?
As I write this, it is mid-January and President Bush has announced a “tax rebate” of maybe $600 and is begging people to go out and spend it to stimulate an economy that is verging on recession. Now, while I have never met a tax break I didn't like, there are many issues with this. If you have read Rothbard and/or Mises, you know what some of these issues are. Suffice it to say that the “tax rebate” will give a little temporary relief (especially if this money is taken away from other government spending rather than created out of thin air but I fear the latter is the case given the robo-Keynesian “economics” of freedom-enemy Bush's administration). I hope and pray people will pay off some debts and/or will save this money in trust funds, CDs or at least simple savings accounts. But, people being what they are nowadays with their stratospheric time preferences, there will likely be a mega-spending spree!
Saving and investment are terribly important, as Dr. Rothbard explains further on in the book (17), because this is the money that goes into capital, or tools that will be used to make consumer goods for the future. If present tools wear out and there is no money to replace them, production will slow down, adversely impacting future jobs and consumption.
People will spend. And many people will spend on frivolous things because Big Brother told them to, and because they believe it is good for “society,” but mostly (at least there is this little spark of individualism that has not died out yet) because they want stuff! They are not economically literate enough to see how this will adversely affect their future.
In the long run, and the long run becomes the short run before any of us are ready, this tax rebate will not prevent a recession. It will only postpone it and worsen it. The Bush administration's fiscal and monetary policies have been as dismal as its international policy and its civil liberties record. Not only am I livid about this, but I actually feel a low-grade fear. Barring a Libertarian or at least a libertarian victory, which I fervently pray for, or the Second Coming, we can write off our country as a total loss at some point. Since I am getting older, it could be that I will be gone when the mud hits the fan. I expect, however, to be alive until around 2040, so I cannot count on that.
But, to go back to the subject (actually all of that really is the subject; the supply and demand schedules for T-shirts is really to begin to illustrate that), say you are the owner or manager and it is your job to set the prices of those really good NBA shirts. How will you set them? If taxpayers have received the $800 from Big Brother with the admonition to go forth and spend, how will you set the prices? I don't need to explain any more.
Conversely, if the recession is on and people are tightening their belts, what will you do? Remember, if you don't sell the shirts you have to throw them out or store them, meaning that you will pay rather than be paid. What is the greatest amount you think you can get for them in the time frame you need to sell them, considering all the factors? One factor is, how many do you have in stock? The more you have, the less you value each one (18). You might have to lower the price if the shirts don't move. Other sellers are doing the same thing. (One thing is not a factor and that is how much you paid for them. That is money down the drain and will not affect a customer's decision to buy.) This, along with consumers' demand schedules, is how market prices are set. The consumers' scales of values and demand schedules combined with the sellers' scales of values and supply schedules set the market price as shown on P. 243 and explained on P. 246, and that is where both buyers and sellers are satisfied. Few goods are left over and few buyers are turned away (19).
Speculators need to anticipate the market, i.e., to do what needs to be done now for good results in the future. The better they can do this, the more money they will make. Profit is their reward for correct speculation, and most people cannot do this really well. Some can. They have to know what they are doing, even though non-market (incorrect) price-setting becomes obvious right away, since every minute counts when they are competing with other sellers. And, as we have been emphasizing, the market is fickle; things can turn on a dime.
There is no way on the planet that some bureaucrat in Washington or even in local government can decree prices correctly. Establishment economists finally gave up on government price-fixing, especially after freedom-enemy Nixon messed up the entire economy by imposing price controls in an effort to halt inflation. Some needed items were impossible to find. One had to go to a different store for each item and then often had to settle for an item a bit different from the wanted item. Other items gathered dust on store shelves.
Individuals, both buyers and sellers, are best at determining what is in their rational self-interest. Exchanges occur only when it is in the interest of both parties to the exchange (20).
As for money, it is just like any other commodity on the individual value scales, following the law of marginal utility. People want to keep a high cash balance not only so they can exchange it for things, but because they do not know what the future holds regarding their own value scales and the right time to make purchases. “Saving for a rainy day” is basic. It is not necessarily the prediction of trouble. It is that we flat-out do not know what the future holds. One might be able to predict a little bit. Not much. It is late January and I can predict a warming trend over the next four months in the northern hemisphere, based on what I have read and experienced over the years. I can also predict (not quite as accurately) that there will be a speedup in inflation because of the completely irresponsible, maybe even malicious (they must know!), actions of the Bush administration and the Federal Reserve of late.
Predicting inflation, I allowed my cash reserves to decrease by buying a new car about a week ago. My old one had nearly 200,000 miles on it, so I decided it would be better to trade now rather than risk sinking thousands (not to mention time in unanticipated delays) into repairs during the very active upcoming summer. The money will not be worth what it is now, and the money price of a new car is more than likely to rise.
And, thanks to a good education in economics, I saw this coming years ago and bought up a few gold medallions. My only regret is I didn't buy more.
Another individual might predict differently, and make different decisions.
Even then, I do not for sure know that inflation will happen. Maybe the Ron Paul Revolution will take hold and shame the establishment into backing off! Unlikely? Sure. Impossible? No. But right now it looks like inflation will happen, or rather continue. The mud will hit the fan. We just don't know when.
Dr. Rothbard's point is we cannot predict. We must be ready, so a cash reserve is indicated.
In a further discussion on the origin of money, he makes it plain that money, in a strong and free economy, has to be a commodity, and cannot be created out of thin air by government edict (21).
I have plenty to say about that, especially now in January, 2008, but I will not at this time, primarily because Dr. Rothbard touched on the idea of plans (22).
Planning is important. Scheduling is very important. Without scheduling, there is no way I could get everything done, much less this project, and I am retired! If you are working, supporting a family on half what you earn as the other half has to be flushed down the tax toilet, caring for children and/or elderly parents, then your whole life is about scheduling. You have to budget your time just as you do your money.
But this is not quite what Dr. Rothbard is referring to. You plan. Even someone who has lots of free time, and makes it hard for me to obey God's command not to be envious, plans. Maybe he or she plans a trip to the mall today. The child who buys an ice cream cone plans to eat it. I plan to put dinner in the oven in about an hour. You might plan to buy a car next year.
Everybody plans. The problem is, so does the Bush administration. You hear things like a “one-year plan,” or a “six-year program,” all the time (23). These plans are made without the slightest regard for your plans. If Hillary Clinton or Barack Obama wins the 2008 election (or even if Bush-clone John Mc Cain wins), these plans and programs will change, forcing you to change yours, and not for the better.
This is really just one more way to illustrate the main point of the book: A free market economy, unhampered by government interference, is the best for people to pursue and achieve their goals.
Of course, “the best laid plans of mice and men” can go awry, and even under the best of conditions there are no guarantees; as I said, one can only predict to a point. Not only can government policy change, over which you have zero influence, but so can everything else, including your own value scale.
In Chapter 5, Dr. Rothbard starts on a five-chapter discourse on production, so we might as well settle in for a long ride. Production is important enough to warrant this, as without it we would have nothing at all.
Humans act, and act purposefully. They act in what they perceive to be their own interests. They want goods, in fact they want all they can get, and resources are scarce. Humans must act to change natural resources in such a way as to make them useful as the goods they want. This is what economics is about. Since everyone is different, and each has his own particular talents, time preferences and scales of values, humans find it in their own interest to cooperate and exchange. This way each can obtain more of what he needs. Camaraderie and friendship are one of the best fringe benefits of that. And individuals tend to think that a present satisfaction is more important than the same satisfaction in the future.
We hearken back to Chapter 1, the Crusoe economy and the very basic lessons taught.
The basic thing is, Change occurs. People are fickle. Time preferences and scales of values change. So does technology. Supply and demand curves are always moving toward equilibrium, but before they can reach it, more changes occur. In order to examine the human action of production, Rothbard stops the whole thing in its tracks, like a freeze frame, and discusses the “evenly rotating economy,” which obviously does not exist but is useful for study. In it, we have equilibrium and there is no change in the repeating patterns of production and consumption. This study needs to be done before we can discuss ever-changing factors.
I guess it is like the novice who has newly decided to exercise her God-given, constitutionally guaranteed individual right to keep and bear arms, who must learn to shoot at a stationary target before learning a moving one.
So we must study a stationary, or “evenly rotating,” economy first, as a “scientific” explanation of human action (24). There are dangers that need to be paid attention to at all times with this concept, and one is that it is easy to fall into a “mathematical economics” mode, or the establishment mode where people are not much more than automatons, and the economy can be kept at “equilibrium.” Of course, as long as humans act, there is no way for that to occur. The evenly rotating economy is a mental construct to help us understand human activities in the market (25).
Once that point is made clear, Rothbard points out something that is obvious after you read it, which is so true of a lot of things related to human behavior. He describes how money flow would be if all resources and producers' goods were specific to one use to produce one consumer good only. Of course the economy is not like that. Resources and producers' goods are usually not completely specific; some are very non-specific and can be used for many different things. But this specificity was an illustration to give us an idea of the flow of money.
To produce, it is necessary to curtail present spending so that money can go into “capital” goods, i.e., the goods used in production. The “capitalist” is the one who gives up present satisfactions to do this in hopes of future satisfactions. Without this, production could not occur. The capitalist is the person who advances the money.
The left-wing vendetta against the capitalists is silly. The capitalist advances the money and risks losing everything (although obviously hopes to gain or he wouldn't do it) so that goods and services can be produced for us all. Many of these leftists are capitalists themselves and do not even know it! The only reason they single out this group is the establishment insists the economic system we have now is “capitalist,” while it is not even close to capitalist. It is actually mercantilist as I have pointed out numerous times.
This leftist vendetta makes about as much sense as one of the left's other idiocies: They rail against the Bush administration as much as I do but then they agitate to have the very same administration (or a Democrat administration that will be exactly the same) to take everyone's guns away.
There should be many more capitalists! The capitalist, by investing for future gain, is showing a lower, i.e., more future-oriented, time preference. Even the bearer of a simple savings account is also being a capitalist. This person, like Crusoe when he was willing to forgo immediate berries and take time out from the picking to make a tool, is forgoing present consumption in favor of more future consumption.
The question is, how much of a return does he want on his money? A lot, of course, but what will he accept? We are getting into interest rates now. In a free market, the interest rate is set by the sum total (or maybe it is better to say average) of people's time preferences. Will you forgo $100 today in exchange for $105 a year from now, or $110, or how much? The answer depends on how much you prefer your money right now to it a year from now. The interest is how much you are paid to wait. This return is what the capitalist is concerned with. Or, put another way, the capitalist is buying $105, or $110, or however much worth of future goods with today's $100.
This also touches on the fact that the price of a product is not determined by the cost of production, but it is actually the other way around (26). The capitalist is not guaranteed even a break-even return, and this is because no matter how much is spent to produce a product, the price is still set by how much customers are willing to pay for it. If the cost of production is more than what people will pay, then either ways to reduce the cost will have to be found or else the product is not worth producing at all. Dr. Rothbard, because labor is a major cost of production, demonstrates that the “labor theory of value” is a major error. No matter how hard you work, you will get only what the consuming public is willing to pay.
As fickle as people are, the capitalist is taking a major risk. Recent economic trends and recent consumer fads might help a capitalist or entrepreneur make decisions, but economics, unlike the physical sciences, has no repeatability, so there is always risk involved.
In a free market, the capitalist, entrepreneur, or businessperson must absorb all losses, but reaps all profits too. In our present economy, he must absorb all losses but is forced to share profits with government. This is very lopsided against the successful producer and in favor of the non-productive bureaucrats who do not supply the market and of the politicians who exchange favors for political support.
So capitalists have it very tough in any case. They need to predict the future in order to come out ahead, and I do not mean the prediction of when the sun will rise next. If you are like me and sunrise is the best you can predict, then you are probably better off working for a wage or salary, since that way you will probably be paid no matter what.
In Chapter 6, “Production: The Rate of Interest and Its Determination,” we get into a more realistic scenario (although the forgoing evenly rotating economy was realistic to a point) where the factors of production vary in specificity and the production of any consumer good goes through a varying number of stages. This means there are likely to be many different firms and many capitalists involved as the product is sold from one to another in various stages of completion. The capitalist advances the money ahead of time for a stage of production and hopes for a profitable return.
Rothbard then examines interest rates in Chapter 6, and right away (27) points out that interest is more than just the price of borrowing money. It is really about time and time preference. It is about human nature and the fact that all of us prefer goodies now to the same goodies later. If we are going to wait for goodies, then they will have to be better goodies. A child will always prefer a cookie now to the same cookie later, but he might not eat the cookie if he finds out he will have another cookie added to it if he saves it for later. This does not change with age. For an adult it might be one shirt now or two next week. Or it might be $1,000 to spend now or to place in a CD at 5 percent, giving one $1,050 in a year. Because everyone is different, the market interest rate is a sort of mean or average, and is determined by many factors, including the hopeful capitalist who advances money in various stages of production of various goods. He advances it into the area he believes will yield the highest return, though competition tends to make these yields fairly equal over the longer haul. The capitalist, then, must be alert to opportunities that vanish quickly. The sharpest investor is rewarded with the most profits. But it's not just the sharpest investor. It is also the investor who is the most willing to give up present satisfactions for future ones (i.e., has the lower time preference). He gets the best return, or as Dr. Rothbard and other economists often say, he gets future goods “at a discount.”
The person who puts $1,000 into a 5 percent CD for a year gets $1,050 worth of goods after that year “at a 5 percent discount” (28). The 5 percent is the return on the investment of time and is the interest rate.
All the many, many factors discussed by Dr. Rothbard go into how people decide their time preferences, but individual quirks and moods are also factors. All the various time preferences determine interest rates, and the actions of any central bank cannot do any good but can only do harm.
Individual value scales are at the root of this matter, and every other market place matter. The aggregate of individual scales and time preferences (which are a part of the value scale) determines interest rates just as it determines aggregate supply and aggregate demand. Many believe it is the other way around, that interest rates determine individual time preferences. They are only right in that the market interest rates influence an individual's choice regarding time preference. In the free market, however, aggregate time preferences determine interest rates.
This aggregate of time preferences includes everyone. It makes no difference if one is a capitalist, laborer, or landowner. Many are all three. In fact, anyone can become a capitalist simply by the act of saving! The Marxists are all wet; actually the whole collectivist left (which I think would include the neoconservatives since they are just as collectivist) is all wet as it assumes that entrepreneurs, capitalists, landowners, and laborers are distinct classes (almost castes, Rothbard says) when actually they are very much the same people (29)!
The discussion of “marginal value product,” which starts Chapter 7 (but please pay close attention to P. 456 where Dr. Rothbard explains exactly what it is), is really very important. The marginal value product, or MVP for short, to put it in my own simplistic terms, is what a factor of production must produce in order to make it worthwhile to have. The concept is very important because labor (which includes most of us) is a factor of production and therefore MVP applies to human beings who work for a living. This is another example of why the study of economics by everyone would soon bring about major changes in the system.
I would dearly love to see the working people who get up early five, six, or even seven days every week to work all day long until suppertime, even into the night, be paid a lot more than they are. However, in order for his or her employment to be worth while to the employer, his MVP, or productivity to that employer, must meet or exceed the expense of his employment to his employer. The cost to the employer in a free market would be salary and benefits for the most part. Use of the restroom, break room, and the like might be negligible but are included in the expense to the employer. If the employee's MVP does not cover these expenses, then the employer is losing money by hiring this employee. Something must be done to change this before too long and that is likely to be a cut in pay or dismissal. Conversely, if the employer is not paying the employee enough to make it worthwhile to the employee to work there, then the employee is likely to leave and go work for another employer who will pay sufficiently.
So, there is a limit to how much a worker can be paid, and that limit is the worker's MVP.
Now, the way things are today with our very unfree market, this MVP must cover income taxes, Social Security taxes, and other government-mandated costs, along with the higher overhead costs to the firm from government regulations that seem to go on forever. (This is not even touching on the fact that an employee's take-home pay must cover various taxes he must pay before he can even start to put food on the table.) Pensions and health insurance are also required in many cases. These things that may appear beneficial at first glance (trust me, the government does not really care about individuals but only cares about perpetuating its own power) actually force people to work harder to bolster their MVP's and/or to accept a cut in take-home pay. Fortunately, technological advances have helped workers to increase their MVPs.
If people would understand that the wage (including all employer expense) cannot exceed MVP for long, rather than clamoring for higher wages they would instead clamor for government to repeal the income tax, make Social Security voluntary, and generally to step aside. This would bring about the biggest hike in take-home pay in world history.
Look at your paycheck stub and see how much of your hard work is being sunk into the black hole of the income tax each and every pay period. You earned that money, and you should get to keep it.
We mustn't forget that employees are paid immediately (meaning every two weeks or every month) while the firms that employ them are paid only after product is produced and sold. We remember that the capitalists give up present payments for (they hope, but not necessarily) bigger future ones, while the workers on their assembly lines are paid right away, like clockwork.
After an explanation of marginal value product and discounted marginal value product (DMVP, “discounted” because labor factors are paid right away instead of in the future), Dr. Rothbard points out what is now apparent and that is that capital, not consumption, is the source of most (admittedly not all, but most) wages (30). You would think it were both. In a way it is, because were it not for consumption, capital would be unnecessary. But saving and investment are necessary for consumption in an advanced economy just as they are for more than the hand-to-mouth berry-picking in the Crusoe economy.
The establishment would have you believe otherwise. This is why they are so gung-ho about urging you to spend your tax rebate. Well, I am urging you to save, and I am pretty sure Dr. Rothbard would too if he were still living. If you have to spend it, buy gold!!
Most people, including me until I read Dr. Rothbard's explanation, only understand superficially that saving rather than spending will help insure future prosperity. You cannot spend yourself rich and it is smart to save for a rainy day. Most people understand this, but do not understand the actual “how” of it. What happens is, when money is saved, the investment benefits higher order producers' goods, meaning the capital closest to the beginning of production. Everything we have is taken from nature. The metals had to be mined and the wood had to be cut. Such goods as mined metal and cut trees are the highest order of goods, and the finished product you buy in the store for yourself as a consumer good is the lowest. Without the higher orders of goods, there would be no lower. Saved and invested money goes toward the production of higher order goods and maintenance of capital. Money spent by consumers goes toward the lower order goods. So saving must be done now or there will be no goods to spend on later. This is why saving is so important (31).
Ludwig von Mises points out that interest rates determine in the market how much capital is used for immediate consumption and how much is used for the more remote future (32). That's important and I have to wonder if this is why the government, through the Federal Reserve, is so determined to control interest rates.
What a loss our movement sustained with the 1995 death of Dr. Rothbard, AKA Mr. Libertarian!
There is no way that some of the establishment wheels do not know this! One absolutely must consider that the conspiracy theorist wing of the libertarian movement might be correct! Look at what the lapdog media has overtly done to Rothbardian/Misean libertarian Ron Paul This bull in the china shop is obvious to the most superficial observer. Paul beat McCain in two primaries, receiving 19 percent in Maine, but out West nobody knows it unless they are actually looking for it online. The media are going out of their way to hush it up. Paul's time in the debates was blatantly shortened, right in front of all our faces!
All these facts are interconnected. The libertarian message is being blacked out. We must turn up the volume!
Anyway, getting back to the subject of human action, the capitalist invests his or her money in future consumer goods and hopes he is right about what people will want. He must be better than average at predicting. If he is right, he will make a profit, that is, he will make more than the interest rate. If he is wrong, he will make less, maybe even go broke. He looks for opportunities to jump into an area where the factors of production are under-priced, and then, when the finished product is sold, he pockets the difference. And he had better hustle, because other capitalists are probably rushing into the same market. So he has to be not only a seer into the future, but a quick one. The onrush of capitalists into a market causes the disappearance of unusually high profits. Profits are the reward for the early detection and satisfaction of consumer desires. Loses are what slower capitalists get.
The importance of saving for capital purchase has been made clear. The left is always harping on helping the poor in undeveloped countries. They are entirely correct in that their hearts are in the right place. But you need to think with your brain and not with your heart. Absent knowledge of free-market economics, they grovel to governments, primarily the U.S. government, and the United Nations for funds to throw to (or at) the governments of undeveloped countries. Of course, the Bush administration, with all its ulterior motives and/or economic malevolence and ignorance, is happy to oblige.
What is needed in these countries is capital, and the know-how to use it (32). Know-how is not difficult to acquire, but all the knowledge in the world will not help if the capital needed is unaffordable. Therefore, someone somewhere needs to save for capital in these places.
It does not take anything big to help. Capital can be as simple as a nanny-goat. That is a start. World Vision Canada is doing a good job in adding capital to dirt-poor rural areas in Africa. Some homes are a lot better off if they have a goat. They can use and sell the milk. Some homes need a supply of water nearby since in some cases a family member has to walk hours each day to go after water. A nearby supply would help with hygiene and with crops that can be sold. And not having to walk for hours for water frees up someone's time for another pursuit, just as the berry-picking tool allowed Crusoe to see to other needs besides food. World Vision is helping people with these things. It is also supplying health care, so laborers can increase their “capital” of ability to work, and it is helping to educate children, so they will have the “capital” of knowledge. These are not big things, but these are things that stimulate saving, which in turn will create more capital.
This will not only “Make Poverty History,” as one group is called, but will create good relations, diminishing the likelihood of future wars.
The leftists have shown abysmal ignorance if they believe governments, or the United Nations, a world government wannabe, or government officials are really in favor of these goals. They are not, and it is hopelessly naive to grovel to these fat cats, whose cushy, prestigious positions depend on the continuation of the poverty and sickness they are supposed to be alleviating.
Human nature, being what it is, just about guarantees that, just like the rest of us, powerful government and U.N. officials will skewer things towards their own prurient interests. Charitable organizations must shun them.
Dr. Rothbard continues with particulars of the workings of the free market and how it tends toward equilibrium. Of course, it never actually reaches equilibrium since the consuming public's demands change all the time. In the absence of interference, the market rushes to fulfill these demands. As we have already seen while discussing division of labor, it is really a good thing that people are not all alike; in fact, no two are alike (33). Less-necessary skills that few people have will command better pay than more-necessary skills that many might have. This is why the essential task of garbage pickup will pay less than the actually non-essential task of being a rock star. Anyone can, with some training, drive a garbage truck, but all the coaching and electronic wizardry in the world will not put me on the hit parade. This is why Bono is rich and I'm not (34). Each individual, in a free market, is paid whatever he or she is worth to the consuming public. Scarce things like musical talent or gold are worth more than common things like garbage-truck-driving ability or bread.
The discussion on unemployment (35) shows that in a free market anybody can find work because there is a shortage of labor. I must hasten to explain this in the light of our situation now where so many job-seekers seem to be out of luck.
Throughout the book Dr. Rothbard is discussing the free market. This means a market untaxed and unhampered by government regulation. It is a far cry from what we actually have. He is trying to teach us free-market economics, not describe what we have. He points to the final chapter of the book to describe the sorry results of government intervention. My understanding is that Power and Market is also about that. Joblessness is one of these results. I look forward to next fall when I expect to go through Power and Market.
Within Chapter 9, there is a section called “Market Calculation and Implicit Earnings” (36). This shows how an entrepreneur or businessperson must do calculations to determine profits and losses, and to decide if changes need to be made in order to enhance income. It is interesting in its own right to an accountant, I guess, but it is critical in the light of the fact that in a socialist economy no such calculations can be made. Dr. Rothbard, Ludwig von Mises, and other economists have driven this point home again and again, because this is the main reason socialism does not work (37). The calculations cannot be made without a market frame of reference which exists only in a real market, which a socialist system does not permit. Even a badly hampered market such as ours micromanaged by government rules is still a market with enough freedom to establish prices by which to calculate.
Chapter 10, as important as it is, I will not discuss here at length. It is titled “Monopoly and Competition,” and it sets us all straight on cartels, monopolies, and the like. It is a very long chapter, about 125 pages, and is packed with insight. I urge the reader to get a copy of this or read it online (38). Let us remember the government is actually a monopoly itself, and it does protect certain monopolies such as utility companies and unions. Let us not forget the compulsory cartels of the Roosevelt era and the harm done by these. The harm caused by monopolies and cartels is the result of government coercion. Monopolies and cartels that exist in a free market cannot do much harm because they cannot be compulsory, and in a free market there is always free entry and free exit for any entrepreneur.
Rothbard goes into how “monopoly” is defined, and that needs to be straightened out before an intelligent opinion can be expressed (39). But if you say that to someone on the left, chances are you will be loudly interrupted and not allowed to be heard further.
On the free market, as Dr. Rothbard explains at length, there is no real monopoly, since in order for a monopoly to exist for any length of time government protection is necessary. Monopoly prices cannot be shown to exist either. We know that a monopoly price is higher than the competitive price, but since the competitive price cannot really be identified, then neither can the monopoly price (40). He lays the whole thing out with clarity.
Once done with that, Dr. Rothbard discusses labor unions. It was gratifying to see that he, unlike some libertarian economists, believes that there is some room for unions on the free market. I always believed that free association is a right. Teenage St. Thomas Aquinas had the right to join a monastery or date a girlfriend. By the same token, an individual has the right to organize or join a union or a quilting bee.
The issue about unions, and the reason I was fiercely determined never to join one, is the “closed shop” or the compulsory union membership for those in a particular labor market. Had I been in one of those labor markets I would have refused to join precisely because someone was trying to make me. When there was talk of unionizing and 100 percent participation at an employees' meeting one day, I stood up and said, “You will not get 100 percent to join a union as long as I am here. You are on notice. I will not join a union nor will I discuss it.”
With that, I walked out of the meeting and went back to work.
But if they wanted to freely associate (on their own time) and organize, that was their right. But they did not have the right to compel someone to join who didn't want to.
Rothbard (41) is showing that, on the free market, unions do not raise wages at all, but might get in the way of productivity, and it is not because they cannot be compulsory. He demolishes the most common pro-union arguments.
Chapter 11, “Money and its Purchasing Power,” was particularly interesting especially in the light of developments right at this time (the week of March 17, 2008, as Bear Stearns goes belly-up). The Federal Reserve's actions and the Bush administration's actions can only be described as irresponsible, and, even then, I am being charitable. Some bloggers have said this is downright socialism and I guess I have to agree.
The demand for and supply of money itself must be left to the free market just as must the demand for and supply of anything else. The same goes for the “hoarding” and “dishoarding” of money. The Keynesians tried to show that “hoarding” money causes unemployment on the free market. Rothbard handily disproves that. For one thing, taking money out of the economy, which “hoarding” does, simply exerts a downward pressure on all prices, including wages, and even that is infinitesimal unless a large number of people “hoard.” The biggest cause of unemployment is wages kept artificially high by government or union coercion. Employers are less inclined to hire under these conditions.
The Keynesians, as I have pointed out, use all these mathematical formulas to describe what they cannot describe: human action on the part of human beings with a free will (42). On the free market, it is these individuals' value scales that determine the supply, demand and “hoarding” of money. It is their time preferences that determine the interest rates, too. The Keynesians have everything backwards because they forget about the fact they are dealing with human beings and not inanimate objects that are subject to the laws of physics. (Of course, the body is subject to the law of gravity and other physical laws, but the mind is not.)
Chapter 11 includes a brief discourse, greatly simplified, on banking. The upshot of this is really to show that fractional reserve banking is entirely wrong and downright dishonest. In the system of government intervention we are being subjected to now, of course, it is not only legal but it is overt. The establishment has the populace fooled into accepting it. We who know better also have to accept it in order to function in the marketplace, such as it is now. This, along with fiat (paper backed up by faith alone) money, is the root cause of our serious economic problems today, and is the reason wealth seems to gravitate to establishment interests (43).
Before I finish the series on Murray Rothbard, I will be discussing his very short books, The Case Against the Fed, and What Has Government Done to Our Money? These books are of utmost importance to anyone who wants to understand the nature of money. And, at a time like this, it is critical. If we are to secure our future and that of coming generations, we must understand this and do what we can to counter the damage that is being done.
Don't wait for me, however! Please go to
http://www.mises.org/ to read these online or to purchase them at the online store (44).
So, why is the government getting away with this and other wrongs such as war, the ban or restriction of inanimate objects, and the general micromanagement of all our lives? Because it is generally accepted today that government people know more and are generally better than the rest of us.
I already discussed how prices are set. Chapter 11 goes into that, and toward the end Dr. Rothbard discusses the value of money, which does change (45). The value of money cannot be measured in the same way weights and distances are. Its purchasing power can vary. Not only that, market prices of various items do not necessarily move together. Individuals' valuations of various goods change, so the supply and demand curves change. Of course, today we do not have a free market and we are faced with changes in the money supply. The Fed has lowered interest rates many times in a just a few weeks now, towards the end of March, and this signals an increase in the money supply. Generally speaking, this will cause a general drop in the purchasing power of a dollar, but all prices will not go up, and those that do will do so to different degrees.
Price stability seems to be an establishment sacred cow. It is trying to tell us the free market can be “improved” by government (or the Federal Reserve) injecting the economy with money or taking it out based on how prices rise or fall. Of course, this means an end to the commodity standard and it means government control of money (46).
But why do we need “price stability”? In the light of the fact that purposeful human action determines prices, and humans are fickle, there never will be “price stability” for very long on the free market.
Dr. Rothbard shows that “price stability” cannot even be defined, let alone controlled (47). The attempt to control it actually causes destabilization by distorting exchange values and keeping people from making informed decisions about how much money to hold on to (48).
Other Keynesian fallacies are discussed later in the chapter. The Consumption Function, the Multiplier Effect, and the Acceleration Principle, three real staples of the macroeconomics courses I took, were clearly disproved. The main point in each instance is that laws like those of physics cannot apply to human action.
The final chapter, Chapter 12, states from the get-go that the book up until now has dealt with the free market only. We now know bedrock free market economics. Chapter 12, “The Economics of Violent Intervention in the Market,” now turns to the monkey wrench of coercive interference with freedom, and Dr. Rothbard calls it right away by its right name: Socialism (49).
So, before we literally close the book on this winter's project, let's see what happens to this well-oiled machine when a monkey wrench is thrown in. It is not good!
Coercion is being substituted for voluntary actions. Because coercion by anyone other than government is illegal and government coercion is legal ... well, sort of ... actually here in the U.S. the government is breaking the law when it oversteps its strict Constitutional limits, but we will have to ignore that in order to prove our point. Only government coercion is “legal,” so most economic coercion comes from government.
Government interventions are of different kinds, but are always hegemonic, or bear the relation of command and obedience (50). Unless the person who is being ordered is ordered to do exactly what he or she would have done if left free, the person loses. There is no way to gain. If anybody is to gain, it is the official (or the government) that is exploiting the citizen who must carry out the order.
Taxation is a coercive intervention that really upsets the economic applecart, as all interventions depend on the government's ability to tax.
Those who support government interventions in the economy to “protect” consumers from their own “incompetence” also seem to be those who bleat about “democracy,” i.e., allowing these same “incompetent” individuals to elect their rulers (51). This makes no sense. Most government programs make no more sense.
Actually, it is far simpler to make informed decisions as a consumer in the marketplace, with all the helps available, than it is to vote for a politician who is truly on your side (how many Ron Pauls are there, anyway?), with all the lying that politicians get away with. Even without the lying, a voter has no way of knowing the candidate very well. In the marketplace, you are usually right there. You are not present at a candidate's closed-door sessions.
As an aside, speaking of closed-door sessions, last week (late March, 2008) Sen. Harry Reid, who is a wheel in the Democrat Party, held a very important closed-door session with some other top Democrats. This is happening as Barack Obama is slightly ahead of Hillary Clinton in delegate strength for the Democrat convention, and while Bush-clone John McCain has apparently clinched the Republican nomination. The closed-door session might have been about the Obama/Clinton schism in the Democrat Party and how to unite the party, at least news commentators were hinting at that. My own theory is that the establishment wants to make sure John McCain will win the general election in November, so as to carry on with the Bush policies. Now, a few days later, Hillary Clinton is being urged to drop out of the race. I think an Obama/McCain race in November will result in a Republican sweep, but that Clinton stands a better chance.
As a voter, I do not support any of them of course, since I am a staunch radical Libertarian. But for me to attend that closed-door session? That is a no-brainer, but the point is I do not really know what happened, and a supporter of one of the top three candidates has no clue what to do about this. It makes choosing a new car appear to be a snap.
In any case, even if it can be argued the rulers know more than the ruled, i.e., if government agents are better than the rest of us, Dr. Rothbard succeeds in this final chapter in showing that government intervention in the economy always results in an outcome worse than if the economy were left alone (52). Examples are shown.
The obvious example of price controls leads off. This is pretty straightforward, so much so that the interventionists have long since thrown in the towel on this, certainly after the Nixonian debacle in the early 1970s which is described in general terms by Rothbard here (53).
Minimum wage laws still prevail, however, in spite of the general acknowledgement of the harm from price controls. Wages are the prices of labor sold, but they are not called “prices,” so many people do not regard them as the same as other prices. People are thrown out of work as a result, when the MVP is below the minimum wage. Fortunately, the minimum wage is low enough that only a few are affected, but it is a catastrophe for those few. And, if it is a catastrophe for one individual, then it is a catastrophe, period. The individual comes first.
Dr. Rothbard then turns to the kind of interventionism whereby inanimate objects are prohibited or restricted. What comes to mind is the alcohol prohibition era, but it also applies to “illicit” and prescription drugs, to guns, to cigarettes, and possibly a few other things. If you paint this with a broad enough brush, it could include just about anything. In this case, and this applies no matter how you or I feel about these items, sellers' profits are interfered with and consumer wants are interfered with. The items become expensive because of their scarcity, and the quality might be poor because customers cannot report dishonest vendors without risking arrest themselves.
Besides the above, other ways of restricting include rationing whereby a person may not buy more than a certain amount of a product, and monopoly grants whereby a product is not allowed to be produced except by one firm or a few firms and there is no free entry into that market (54). Monopoly prices cannot exist in a free market, as Dr. Rothbard demonstrated in Chapter 10, but in a market regulated by government where compulsory monopoly special privilege is allowed, monopoly prices occur and Dr. Rothbard explains why (55). It is because consumers lose control of their demand curves by being forcibly restricted in their choices.
Economic regulations, ranging from the above to taxation to rules and regulations that regulate a person's life, are all interventions that can only harm a person. Individuals act, and they always act in their rational self-interest as they see it, and any interventions that change the way they act can only harm them.
Government intervention destroys opportunities for individuals to pursue their own interests, but big government costs in more than just lowering taxpayers' income. It also distorts what is left of the economy. In beginning economics we all heard about “guns vs. butter.” I prefer to use the term “war materials” because I fiercely support gun ownership by the regular citizen. Government buys war materials (and other things) from the private sector. This bolsters the war materials industry by shifting aggregate demand to this industry and encouraging investment in this industry. This takes aggregate demand and investment away from “butter,” i.e., food, clothing, shelter, education, entertainment, and other industries that do people good. The same applies to labor. Labor used by the government is labor taken away from the private sector. All of this skews the economy away from things people want toward things government wants.
I would rather buy myself a cross-country trip than be forced to contribute to the purchase of police equipment that detects marijuana gro-ops or to the financing of warrant-less searches for guns which, mark my words, will happen unless the Supreme Court hands down a really strong pro-gun ruling in the Heller v. D.C. case (56). It might happen anyway. According to Internet articles, it is already happening in Washington, D.C., and Boston, Mass.
Intervention by government lowers the aggregate demand for cross-country trips or whatever it is you would like, and raises it for war materials that are used not only in wars like this illegal and immoral one in Iraq, they are used against peaceful citizens at home as the Federal government subsidizes state and local police.
One cannot say government expenditures contribute to the economy, since the “value” of government cannot be measured and payments to it are involuntary. We have to consider its value as zero, especially since we will never know what we have lost by government grabbing up so much productivity. It could be more than just cross-country trips. It could be a cure for cancer or heart disease or Alzheimer’s. No telling what we have lost out on, all to satisfy the whims of government officials who think they are better (57).
Government attempts to compel saving and investment are also harmful since saving and investment not encouraged by free market profit incentives are skewed at best, and usually wasted (58).
All attempts to change the way government works, the way it supplies services for “free” or for a fee, the way it might try to run a bureaucracy like a “business” (e.g., the Postal Service) just shows that nothing seems to work, proving Harry Browne's point in Why Government Doesn't Work (59). It doesn't work because profits and losses cannot be calculated. Because government can tax, it will tax, and losses can go undetected.
This is not the only reason why government services are inferior. The services tend to be one-size-fits-all (60). Well, one size does not fit all! Education is a fine example, comparing public (read government) assembly-line “education” with the variety of private education. When they say “publicly owned,” we might as well read “government owned” since it is actually government officials who exercise ownership rights. If you doubt this, just try to claim your “share,” and prepare for a mandatory psychiatric exam.
Later on in the chapter, Dr. Rothbard goes into some general considerations in a centrally planned economy. It's about control. People control. Individuals' desires and plans are ruined by central planners. An innovative inventor may be forced to be a garbage collector in such an economy, depriving us all of whatever he might have invented. A good student in science wants to be a doctor but is told to be an astronomer. We gain a mediocre astronomer but we lose a good doctor.
Once the sorry Roosevelt/WW II era ended, some of the interventions in the economy were lifted, causing a prosperity the world had never seen before. The less government, the less poverty there was. Collectivists had to look under rocks for reasons to support intervention. An economist named John Kenneth Galbraith came up with a solution to the “problem” of too much prosperity (meaning not enough poverty I guess...) in a book called The Affluent Society (61), a best-seller which I heard about but never read. What I got was that we were so prosperous that it was embarrassing when other nations were poor, and that we had to apply some brakes. My immediate response was, rather than brake prosperity here, why don't these economists go to these poor nations and teach people how to bring about prosperity there? Of course now I know the establishment does not want Joe Average (or Juan Average or Pierre Average or Ahmed Average or …) to prosper, as that would end Mr. Average’s dependence on the establishment.
But, according to Rothbard, Galbraith was worried about the satiation of wants. I don't think anyone needs to be worried about that, since wants go on forever and resources are scarce. Were there satiation, nobody would go on producing, and everybody would live lives of leisure. It's not happening! But Galbraith retorted advertising creates wants (62). Maybe some people allow themselves to be swayed by advertisements but an end to want is most unlikely.
I have to wonder if Galbraith realized that by writing his book and having it wind up on the best-seller list he was himself trying to create a want for more government! Not to mention a want for his own work.
Rothbard continues in his critique of Galbraith, the latter being totally establishment in his economic and social outlook.
Next, there is another discussion on monetary intervention. After a brief review of what we learned in Chapter 11 about what happens if interest rates are lowered by fiat and banks “create” money on pure faith, he shows that when this new money is injected into the economy, some people gain and others lose. Those who receive the new money first can spend it before inflation hits prices, while others who get it later find prices have gone up before they get it. There is no net social gain, but wealth is actually transferred from the latter group to the former. The former tend to be establishment interests, and this is how the wealth tends to gravitate to establishment interests. The new money enters the economy on the credit market and this is credit expansion (63). The new credit is not from saved funds, but is new money issued with no backing at all. This was the main cause of the Great Depression, and is the main cause of our economic problems today.
They say history repeats itself. It does to the extent that people do not learn from past mistakes. We might well enter another depression as bad as, if not worse than, the one of the 1930s, mainly because freedom-enemy Bush is following the same path as freedom-enemy Roosevelt, or at least Hoover before him, who was not a free-marketer at all.
The business cycle is described very briefly (64) after a more detailed discussion of what happens with investments at various stages of production and why. When the money supply is added to by money backed up by nothing, the interest rates change, and this gives wrong signals to entrepreneurs, who then make erroneous judgments. They over-extend themselves without knowing it, and consume their capital.
Depressions and recessions are tough on everyone, especially the not-so-wealthy, but as Dr. Rothbard says (65), this phase of the business cycle is absolutely necessary for recovery. Government involvement such as that during the Great Depression only deepens and prolongs the suffering as we saw in my The Three Worst American Enemies of Freedom (66) on this blog in 2005, and as we will see again as we go through Rothbard's works. Government intervention is what causes these in the first place, and it is not a cure, any more than heroin is a cure for heroin addiction. The admonition to spend more is particularly wrong. Spending and credit expansion are major causes of recessions while thrift and saving are cures.
For the stated purpose (but not the real one) of avoiding recession and keeping the economic boom going (which is what people want), the central bank continues to inject new money into the economy. This cannot go on forever because ever-increasing money injections are necessary, just as the addict must increase the drug dosage to avoid a crash. The drug addict will soon crash or die. Similarly, the economy will be faced with a major crash or depression. There is no alternative once this route is taken.
The only reason the central bank can inject money into the economy at will is that we are not on a commodity standard such as a gold standard. What is really needed is a return to the gold standard and the 100 percent reserve.
Because credit expansion benefits the establishment over the long haul, the government promotes it. Dr. Rothbard gives a rundown on how this works (67) and the results of hyper-inflation which will certainly occur if the recession is not allowed to happen (68). The result is impoverishment. We must recall what happened in Germany in 1923, which was an important factor in the rise of Hitler. It can happen here, and it will if We the People do not wake up and demand that our government, meaning government at all levels, get back in line with the Constitution.
1. This is not to say that all values are relative. Some values, such as the difference between right and wrong, are absolute. Truth is absolute. What is, is. A is A. To say to me, “OK, if A is A to you, that's fine, then A is A to you” is nonsense. A is A. Period.
2. Rothbard, Murray, Man, Economy and State with Power and Market (Auburn: Ludwig von Mises Institute, 2004) P. 19, 20.
3. Ibid. P. 27.
4. Ibid. P. 69.
5. By the way, on a side note, if the establishment wants to ban guns entirely, it will have to either ban or strictly regulate all the products that guns could possibly be made out of, all the way back to the ore in the ground, even the ground itself. So you're anti-fascist? Then, be pro-gun.
6. Ibid. P. 84, 85, emphasis his.
7. Ibid. P. 90, 91.
8. Ibid. P. 100.
9. Ibid. P. 116 - 118.
10. Ibid. P. 64.
11. Ibid. P. 165, 166.
12. Ibid. P. 192.
13. Ibid. P. 193.
14. Ibid. P. 238, 239.
15. Ibid. P. 239, 240.
16. Ibid. P. 240.
17. Ibid. P. 400.
18. Ibid. P. 244.
19. There is further discussion of price setting and major establishment fallacies in Chapter 11, P. 831 - 843.
20. Ibid. P. 257.
21. Ibid. P. 268 - 276, esp. P. 275.
22. Ibid. P. 279, 280.
23. Doesn't this remind you of the Communist USSR and its “Five Year Plans”?
24. Ibid. P. 322.
25. Ibid. P. 327, 328.
26. Ibid. P. 354, 355.
27. Ibid. P. 371, 372.
28. Of course, the inflation factor is ignored here as a free market is assumed, and inflation is almost always the result of government intervention.
29. Ibid. P. 415, 416.
30. Ibid. P. 478, 479.
31. Ibid. P. 527 - 536.
32. Ibid. P. 539.
33. Ibid. P. 576 - 578.
34. I really wish Bono would stick to his amazing talent and leave the politics to me.
35. Ibid. P. 581 - 588.
36. Ibid. P. 606 - 616, esp. P. 614, 615.
37. In particular, see Mises, Ludwig von, Socialism: An Economic and Sociological Analysis, (London: John Dickens and Co., 1969 edition) Part II, but P. 119 nails it.
38. Man, Economy and State can be read online at
http://www.mises.org/resources/e8f5e0fa-d5bb-4844-9a4b-831c6a090d9e39. Rothbard, P. 665 - 671.
40. Ibid. P. 687 - 698.
41. Ibid. P. 704 - 719.
42. Ibid P. 785, 786.
43. Ibid. P. 805 - 811.
44.
http://www.mises.org/resources has a complete list of on-line books.
45. Ibid. P. 843.
46. Ibid. P. 847 - 851.
47. Ibid. P. 849.
48. Ibid. P. 850, 851.
49. Ibid. P. 875.
50. Ibid. P. 877, 878.
51. Ibid. P. 886.
52. Ibid. P. 891.
53. Ibid. P. 895, 896.
54. Ibid. P. 903.
55. Ibid. P. 904, 905.
56. See
http://www.jpfo.org/ and search “Heller” for numerous articles.
57. Ibid. P. 940, 941.
58. Ibid. P. 962 - 973.
59. Browne, Harry,
Why Government Doesn't Work, (New York: St. Martin's Press, 1995)
60. Rothbard, P. 953 - 955.
61. Galbraith, John Kenneth,
The Affluent Society, (Boston: Houghton Mifflin Co., 1958)
62. Rothbard, P. 977, 978.
63. Ibid. P. 991.
64. Ibid. P. 1000.
65. Ibid. P. 1000, 1001.
66.
http://alicelillieandher.blogspot.com/2005_05_01_archive.html or, check the sidebar here.
67. Rothbard, P. 1014 - 1018.
68. Ibid. P. 1018 - 1021.
