I guess I always took it for granted that Dad always had plenty of money and could give me anything I wanted but didn’t because he felt that it would not be good for me, so he was inclined to be chintzy, supposedly for my own good. Mom, on the other hand, would always give me anything I wanted--if she could, but most of the time she couldn’t because she was as dependent upon Dad as I was and it seemed to me that he was rather chintzy with her as well. I assumed it was probably because Dad recognized Mom’s weakness toward me and had to hold back on both of us "for my own good". As I say, I felt that way until the Christmas just before I turned eight.
The first Christmases I remember were as a very young boy when we were living in Germany. I don’t remember much about them, but I do remember that I thought they were absolutely wonderful. We always got a few little toys and our wooden shoes were filled with candy--mostly hard tack, but because we didn’t get very much candy in Germany, it was a real treat. Later, after we had returned to the US I came to resent the amount of hard tack candy in my Christmas stocking, feeling that it took up room that would be much better served with jelly and chocolate candies--a feeling that I shared--rather pointedly--in a letter to Santa--a feeling he must not have sympathized with because the amount of hard tack was not diminished. Nor did he dispense with the orange--a suggestion I also made pointing out that we had plenty of oranges in the kitchen.
I always felt that if our situation could be described, it would be described as one of "plenty". I suspect that part of the reason for that feeling was that although, in a sense, we were part of the occupying US forces, we were not military, and, therefore, lived among the German people. Our situation, compared with theirs, was one of great fortune.
Many years later, Dad told me what happened when we came back to the US. Dad had always been a civil servant, and, I suspect, planned on always being one. After he graduated from George Washington U. with a law degree, he was hired as the head of Social Security for the state of Arizona. But at the meeting with the senior senator from Arizona in which his appointment was announced, the Senator looked over his resume. "How can anyone from Idaho be over Social Security in Arizona?" he bellowed. "He is far and away the best qualified candidate," the Federal Social Security administrator assured him. "I don’t care about that", the Senator roared. "I don’t care if the guy over Social Security is blind, can’t read, can’t write, and has to use an X for his signature, all I care about is that he be from Arizona!"
So Dad’s appointment was rescinded and he was made the director of Social Security for Southern Idaho with offices in Pocatello instead. It turns out, that was probably a good thing, because Loni and I were born there and it seems that the only place Mom could ever have any children was in Pocatello. But Dad was ambitious and eager to get ahead. The chance came when the position for assistant Federal Attorney (or whatever they call the District Attorney for a State) became vacant. He applied and got the job, so we moved to Boise. We hadn’t lived in Boise very long when Dad got the chance to work with the war crime trials in Germany and he jumped at the chance.
I think the two years we spent in Germany were among the happiest of parent’s married life. They got to travel. Mom got to buy some really nice figurines and other beautiful things that were always so important to her and Dad really enjoyed his work. Of course, there were concerns as well, especially during the Berlin Airlift, when it looked like we might go to war with Russia and out family was in the place most likely to be first attacked. It was, in fact, the tension created by the Berlin Airlift that created the problem for Dad that resulted in his not being a permanent civil servant. If we were involved in a war with Russia, obviously, we wanted the wholehearted support of the German people. Amongst those people, Dad’s activity--the war crime trials--was very unpopular. They were halted and Dad came home.
When he went back to Washington to apply for a field position, he was told that because of his involvement with the war crimes trials--now a politically incorrect activity to have gotten oneself tied up with--they didn’t feel that they could send him "out into the field". Dad told me that his old boss at Social Security told him, "We certainly owe you something, but it will have to be here in Washington."
Dad told me many years later that after he heard that he went out and traveled around Washington. He said he looked at the people and the businesses and other things that were going on and said to himself, "I can’t do this. I can’t raise a family in this kind of environment." So he cut ties with the government and "hung out his shingle" in his hometown, Pocatello.
But it was pretty tough sledding in the first few years. Most of the time Dad was working. We hardly ever saw him. When he did come home for dinner, it was in, out, and back to the office. I can remember several occasions when Mom would hand me a little paper bag and say, "Take this to your Dad. It is his dinner. He is studying in the law library at the courthouse." (The courthouse was only a couple of blocks from our house.) Every year in those first years back from Germany Dad would call together shortly before Christmas and say something like, "I don’t want you to expect much from Christmas because we simply don’t have much money this year." Of course, that never bothered Loni or me (or, at least, it never bothered me) because all we ever got from Mom and Dad for Christmas was clothes. All the good stuff came from Santa Claus. I didn’t care that much what I wore, so even if Dad couldn’t afford to buy us anything, it was fine with me. I knew for one thing that if we ever ran out of clothes (which didn’t seem likely) that our Grandparents would come to the rescue before we had to go school naked.
All that changed shortly before the Christmas of my eighth year. Dad, as usual, called us together and said that we should not expect much for Christmas that year. I was a little uneasy because I had asked for a bicycle--something I knew to be quite expensive. So the next day I said to Mom, "Tell Dad not to worry about Christmas. Santa will take care of it for us."
Mom paused for a minute or two and then said rather deliberately (and I wish I could remember her exact words) something like, "I’m afraid that when people are poor, Santa doesn’t give them very much because he doesn’t want poor children to be spoiled and become dissatisfied with their parents." This was rather a shock to me, to say the least, but I more or less gave up on the whole idea of a bike.
Christmas came and I got my bicycle and several other things, smaller toys candy, and, of course, clothes. There was a hitch--a very bad hitch. The bicycle was an "American Flyer". I had seen it in a catalogue, so I knew that Santa Claus had not given it to me--it was Dad.
The next day I asked Mom, "What happens if someone can’t afford something and they tell the man at the store that they will pay for it later, but they really don’t have the money to pay for it?"
"Why they send the police to take the thing back and sometimes they put the person in jail." Mom sounded to me that she was as worried as I was about Christmas.
For the next few days, indeed, until I had to go back to school, I would sit by the front window. Every time a police car went by, I was sure he was coming to take back my bike and would demand to know where Dad was, so he could arrest him. After a while, of course, I ceased to worry and when spring came, I simply enjoyed the bike. Indeed, I think it was one of two Christmas presents I received that I remember with real fondness.
Years later I asked Dad why he always called us in and gave us the "don’t-expect-much-for-Christmas" lecture and then always bought so much to insure that we had a wonderful
Christmas. "You know," he replied with obvious pleasure as he reflected back. "That was the most amazing thing. When I called you in and told your mother and you kids not to expect much, I was in real earnest. I was almost desperate. But every year in those first few years when we were struggling, clients would come in just before Christmas--in a few cases, clients I had sent so many bills to that I never really expected them to pay me at all, and they would pay their entire bill. Generally, they would say something like,’I’m sorry this has taken so long, but I want to clear this out before the end of the year’. So we always had a nice Christmas. It’s a miracle really, or at least, I always thought it was."
Some people deserve miracles--Dad was one.
Tuesday, November 10, 2009
Wednesday, August 26, 2009
Personal Economics
With this essay I bring my series on economics to a close. This essay and the previous two require extensive work, but I decided that I need to get it over with and move on. Next month I plan to do reviews.
Personal Economics--Conclusion
Ever since Adam Smith showed that, because of the benefits we all derive from the division of labor, every real advance in economics has shown us how we can better live together in peace. Peace is the reward for correct living. When men are at peace they serve each other in ways they cannot even conceive. People on the other side of the world make it possible for me to enjoy blessings that help me meet my needs, but they do it without knowing me or without me knowing them. People all over the world help each other by helping themselves when they live by the six simple rules outlined in the previous essays.
Following those simple rules helps us to avoid the pitfalls that create disharmony, contention, and finally, conflict, which, in extreme cases results in violence and war. The first pitfall is the use of force to make others adopt our ends. The second, even more destructive, is the use of force to make others serve our ends. The subjective theory of value, Rule IV, applies not only to things but even more so to ends. I cannot judge< or place a value for you, on your ends. When I do, I almost always am tempted to use force for one of the purposes above, i.e. to get you to adopt mine or to use you to serve my ends.
What real economics attempts to do is first have people clarify their ends, i.e. decide what it is that you really want. Having clarified your ends, examine the means to achieve those ends. There is no purpose in attempting to examine and evaluate other peoples ends, but there is purpose in examining and evaluating the means they use to achieve those ends.
When we examine the means people use to achieve the ends they declare in light of the 6 rules outlined in the previous essays, we find that the means frequently lead to very different ends. In the eyes of the Austrians, this is the best way to determine if means are "good" or "bad"--"moral" or "immoral". In every action we should ask ourselves, what is the end I wish to achieve and will this action--the means--achieve that end?
Personal Economics--Conclusion
Ever since Adam Smith showed that, because of the benefits we all derive from the division of labor, every real advance in economics has shown us how we can better live together in peace. Peace is the reward for correct living. When men are at peace they serve each other in ways they cannot even conceive. People on the other side of the world make it possible for me to enjoy blessings that help me meet my needs, but they do it without knowing me or without me knowing them. People all over the world help each other by helping themselves when they live by the six simple rules outlined in the previous essays.
Following those simple rules helps us to avoid the pitfalls that create disharmony, contention, and finally, conflict, which, in extreme cases results in violence and war. The first pitfall is the use of force to make others adopt our ends. The second, even more destructive, is the use of force to make others serve our ends. The subjective theory of value, Rule IV, applies not only to things but even more so to ends. I cannot judge< or place a value for you, on your ends. When I do, I almost always am tempted to use force for one of the purposes above, i.e. to get you to adopt mine or to use you to serve my ends.
What real economics attempts to do is first have people clarify their ends, i.e. decide what it is that you really want. Having clarified your ends, examine the means to achieve those ends. There is no purpose in attempting to examine and evaluate other peoples ends, but there is purpose in examining and evaluating the means they use to achieve those ends.
When we examine the means people use to achieve the ends they declare in light of the 6 rules outlined in the previous essays, we find that the means frequently lead to very different ends. In the eyes of the Austrians, this is the best way to determine if means are "good" or "bad"--"moral" or "immoral". In every action we should ask ourselves, what is the end I wish to achieve and will this action--the means--achieve that end?
Wednesday, August 12, 2009
Personal Economics--Rule VI
Personal Economics--Rule VI
"For we wrestle not against flesh and blood, but against principalities, against powers, against the rules of darkness of this world, against spiritual wickedness in high places."
Ephesians
Rule VI says basically, "Know your enemy and keep your guard up." This rule stems from the work of Ludwig von Mises and Frederick Hayek, but Hayek shared the Nobel Prize for his work in explicating it. In economics it is simply the explanation of what is called the business cycle or boom-bust cycle. Karl Marx had explained it simply as an inherent feature of capitalism. Others had tried to explain it in a more detailed manner, but had failed. For example Stanley Jevons had attempted an explanation that correlated the boom-bust cycle with sunspots. At first glance, this sounds even more mysterious than the Marx it-is-just-an-inexplicable-part-of-capitalism theory. But Jevons theory attempted to make it more rationalistic, because it would tie the boom-bust cycle to a crop productivity cycle.
What von Mises and Hayek did was to show that the boom-bust cycle in the economy was tied to credit expansion. Banks increase their profits by making more loans and, hence, the temptation is to cut back on their reserves and loan more of their available capital. Of course, if a single bank does this and becomes over-extended, they quickly get into trouble. The problem is self-correcting. The problem only becomes a national one when there is a government controlled central bank, such as the Federal Reserve. Most countries have these. They are able to extend the money supply, i.e. allow all the member banks to expand their credit, thus lowering the interest rate. Unfortunately, this creates an artificial boom. It sends false signals to entrepreneurs who are eager to launch new enterprises, but are restrained from doing so for all but the most promising enterprises by the shortage of available investment capital. When, however, the money supply is expanded, i.e. inflated, the illusion is created that there is plenty of capital for investment in enterprises that earlier seemed unpromising. Unfortunately, all that has been expanded is credit. In an uncorrupt society, capital is available only as people save--hence, leaving vital resources, e.g. capital goods, available entrepreneurs. Thrift is a virtue not only because it allows individuals and families to prepare against a rainy day, but because it permits investment in new tools, equipment and plants and, thereby, increases the value of the labor of the people who have better equipment and tools to work with. Hence, the virtue of thrift increases prosperity.
Credit expansion, i.e. inflating the money supply gives the illusion that society is ‘better off’, i.e. more virtuous, without actually being so. Entrepreneurs feel that there is more capital available but the amount of capital goods remains the same. This becomes clear when it is apparent that many entrepreneurs have invested in enterprises that cannot be sustained. They lay off workers, some even go bankrupt and the economy is said to be in the bust part of its cycle.
If, for example, I, and thousands of others, decide to put off buying a new car, and put the money saved in the bank, then there is not only money available to loan, but there is additional steel so if an entrepreneur decides to build a new factory, the necessary steel is available. If, however, I, and thousands of others, go ahead and buy the new car, and the so-called capital is available only because the money supply has been inflated, there is no additional steel available for the building of the factory and before it can be built, the price of steel rises to the point that the new factory enterprise is clearly not going to be profitable and is abandoned.
The bottom line is that the desire to have "something for nothing", to succeed without effort, to have all the good of virtuous living without any actual virtue, has put pressure on the government to expand the money supply and, hence, create a boom. This undermines the work of entrepreneurs who become bitter because they have been misled, and misinformed. They feel betrayed and turn to political entrepreneurship. People become convinced that only political action is effective and that the only way to succeed is to use the force of law. In economics, credit expansion is analogous to sin--enticing at first, but leaves disaster in its wake.
On a personal level it is a reminder that if life is getting easier, you better be awfully careful that you are not entering an artificial boom made possible by an enemy creating an illusion. Hence, it is always a good idea to "know your enemy and what he is up to."
"For we wrestle not against flesh and blood, but against principalities, against powers, against the rules of darkness of this world, against spiritual wickedness in high places."
Ephesians
Rule VI says basically, "Know your enemy and keep your guard up." This rule stems from the work of Ludwig von Mises and Frederick Hayek, but Hayek shared the Nobel Prize for his work in explicating it. In economics it is simply the explanation of what is called the business cycle or boom-bust cycle. Karl Marx had explained it simply as an inherent feature of capitalism. Others had tried to explain it in a more detailed manner, but had failed. For example Stanley Jevons had attempted an explanation that correlated the boom-bust cycle with sunspots. At first glance, this sounds even more mysterious than the Marx it-is-just-an-inexplicable-part-of-capitalism theory. But Jevons theory attempted to make it more rationalistic, because it would tie the boom-bust cycle to a crop productivity cycle.
What von Mises and Hayek did was to show that the boom-bust cycle in the economy was tied to credit expansion. Banks increase their profits by making more loans and, hence, the temptation is to cut back on their reserves and loan more of their available capital. Of course, if a single bank does this and becomes over-extended, they quickly get into trouble. The problem is self-correcting. The problem only becomes a national one when there is a government controlled central bank, such as the Federal Reserve. Most countries have these. They are able to extend the money supply, i.e. allow all the member banks to expand their credit, thus lowering the interest rate. Unfortunately, this creates an artificial boom. It sends false signals to entrepreneurs who are eager to launch new enterprises, but are restrained from doing so for all but the most promising enterprises by the shortage of available investment capital. When, however, the money supply is expanded, i.e. inflated, the illusion is created that there is plenty of capital for investment in enterprises that earlier seemed unpromising. Unfortunately, all that has been expanded is credit. In an uncorrupt society, capital is available only as people save--hence, leaving vital resources, e.g. capital goods, available entrepreneurs. Thrift is a virtue not only because it allows individuals and families to prepare against a rainy day, but because it permits investment in new tools, equipment and plants and, thereby, increases the value of the labor of the people who have better equipment and tools to work with. Hence, the virtue of thrift increases prosperity.
Credit expansion, i.e. inflating the money supply gives the illusion that society is ‘better off’, i.e. more virtuous, without actually being so. Entrepreneurs feel that there is more capital available but the amount of capital goods remains the same. This becomes clear when it is apparent that many entrepreneurs have invested in enterprises that cannot be sustained. They lay off workers, some even go bankrupt and the economy is said to be in the bust part of its cycle.
If, for example, I, and thousands of others, decide to put off buying a new car, and put the money saved in the bank, then there is not only money available to loan, but there is additional steel so if an entrepreneur decides to build a new factory, the necessary steel is available. If, however, I, and thousands of others, go ahead and buy the new car, and the so-called capital is available only because the money supply has been inflated, there is no additional steel available for the building of the factory and before it can be built, the price of steel rises to the point that the new factory enterprise is clearly not going to be profitable and is abandoned.
The bottom line is that the desire to have "something for nothing", to succeed without effort, to have all the good of virtuous living without any actual virtue, has put pressure on the government to expand the money supply and, hence, create a boom. This undermines the work of entrepreneurs who become bitter because they have been misled, and misinformed. They feel betrayed and turn to political entrepreneurship. People become convinced that only political action is effective and that the only way to succeed is to use the force of law. In economics, credit expansion is analogous to sin--enticing at first, but leaves disaster in its wake.
On a personal level it is a reminder that if life is getting easier, you better be awfully careful that you are not entering an artificial boom made possible by an enemy creating an illusion. Hence, it is always a good idea to "know your enemy and what he is up to."
Friday, August 7, 2009
Personal Economics--Rule V.
Personal Economics--Rule V
Whosoever will be chief among you, let him be your servant.
Matthew
Would God that all the Lord’s people were prophets.
Numbers
Rule V says simply that it is the entrepreneurial component of our exchanges that improves our lives, increases our choices, hence, our freedom, and advances civilization. Of course, in the ordinary exchanges that we make every day, it is hard to recognize an entrepreneurial component at all. An entrepreneurial component occurs when something has changed, when things are no longer as they have been and that change results in an opportunity for us to serve in a way that requires us to foresee future events and that will help people in ways they have not been previously helped--as we say, "to do something different."
The most successful entrepreneurs are envied because they reap what are called profits. Real profit is a very poorly understood concept. In a sense, if I plant a seed and reap twenty, forty, or even sixty times what I planted even after subtracting the cost of fertilizers, water and other inputs we refer to that as profit, but it becomes entrepreneurial profit only if it is serving a need that has come about as a result of a change. If, for example, I realize that people need bread so I purchase an existing farm and begin growing wheat, I am not in the strictest Austrian sense an entrepreneur. If thousands of others have done likewise and there is, consequently, a large surplus of wheat so that I and the other thousands cannot even break even on our venture, and in that extremity, I use my wheat for something entirely different, or market it in a new way, or in some other way use my wheat to bring something to consumers that they want but is new to them, then I become an entrepreneur.
It is important to recognize the difference between technical components of exchange and entrepreneurial components. George Washington Carver, for example, discovered many new products that could be made with peanuts, because so many people were growing peanuts that the situation was for them like the one outlined above for wheat farmers. What he did was provide technical input. If he, or anyone else, actually made and marketed any of those new products and consequently, gained more resources in the making and marketing than were used in the growing of the peanuts, he became an entrepreneur..
It is important to recognize that it is the entrepreneurial component of every exchange that enriches our lives and advances civilization. But it is also true that because entrepreneurs are envied and because so many people are eager to live without having to actually serve that entrepreneurs are almost always--and particularly in corrupt cultures--vilified. In our country where kings are looked down on, extremely successful entrepreneurs are referred to pejoratively as "kings". Hence, Andrew Carnegie was the "steel king", Hershey the "chocolate king". Our history books refer to these men as being powerful and often, devious and underhanded, and other characteristics we associate with kings. But it is important, indeed, it is critical to remember that kings, like Henry VIII and Louis XIV, were powerful because they ruled. An entrepreneurial king is powerful only to the extent that he serves. The day that consumers feel that Nestle’s chocolate it cheaper or better (or both) than Hershey’s, is the day that Hershey becomes the "former chocolate king".
All too often we confuse technical ability and expertise with entrepreneurship. Two examples, that I like to use to illustrate the difference are Thomas Edison and Gilbert and Sullivan.
Thomas Edison is often criticized as having borrowed other’s ideas, purchased their patents and then taken credit for the invention himself. For example, Joseph Swann’s English patent on the electric light bulb preceded Edison’s and numerous other inventors had patents relating to the electric light bulb, some of which Edison purchased, but the fact remains that without Edison we would not have had a working electric light bulb in people’s homes anywhere near as soon as we did, and possibly not ever. Edison and his team got all the financing and made all the auxiliary inventions and equipment necessary to make the electric light bulb available to the ordinary consumer.
My personal favorite is Gilbert and Sullivan. I very much enjoy their operettas, particularly, "Pirates", "Gondoliers", and "Patience". But the fact of the matter is that we would not have had those many operettas were it not for the entrepreneur who worked so hard to get the two to work together, Richard D’Oily Carte. Indeed, the real end of the relationship (with the "Gondoliers") came largely because Carte abandoned his role as entrepreneur and took sides with Sullivan. Recognizing his mistake, he tried to heal the breech, and the two did, in fact, collaborate on two more operettas, but so half-heartedly that they are never performed except by companies determined to claim to have done them all. Like all entrepreneurs, Carte took risks. For example, he was the first person in England to install electric lighting in a theater. Like most, he also had his failures. For example, he built a theater that was to be used exclusively for English operas. The first one (by Sullivan) ran for 160 consecutive performances--probably a world record for consecutive performances for an opera, but their was no second "English opera" so Carte had to sell his theater to a vaudeville company.
Rule V says simply that we should strive to increase the entrepreneur component of all our interactions. Real entrepreneurs are essential to the free society. The essential ingredients in entrepreneurial activity are courage and foresight--two qualitites almost totally missing in government planners, bureaucrats, politicians, and, alas, in most, corporate managers.
Whosoever will be chief among you, let him be your servant.
Matthew
Would God that all the Lord’s people were prophets.
Numbers
Rule V says simply that it is the entrepreneurial component of our exchanges that improves our lives, increases our choices, hence, our freedom, and advances civilization. Of course, in the ordinary exchanges that we make every day, it is hard to recognize an entrepreneurial component at all. An entrepreneurial component occurs when something has changed, when things are no longer as they have been and that change results in an opportunity for us to serve in a way that requires us to foresee future events and that will help people in ways they have not been previously helped--as we say, "to do something different."
The most successful entrepreneurs are envied because they reap what are called profits. Real profit is a very poorly understood concept. In a sense, if I plant a seed and reap twenty, forty, or even sixty times what I planted even after subtracting the cost of fertilizers, water and other inputs we refer to that as profit, but it becomes entrepreneurial profit only if it is serving a need that has come about as a result of a change. If, for example, I realize that people need bread so I purchase an existing farm and begin growing wheat, I am not in the strictest Austrian sense an entrepreneur. If thousands of others have done likewise and there is, consequently, a large surplus of wheat so that I and the other thousands cannot even break even on our venture, and in that extremity, I use my wheat for something entirely different, or market it in a new way, or in some other way use my wheat to bring something to consumers that they want but is new to them, then I become an entrepreneur.
It is important to recognize the difference between technical components of exchange and entrepreneurial components. George Washington Carver, for example, discovered many new products that could be made with peanuts, because so many people were growing peanuts that the situation was for them like the one outlined above for wheat farmers. What he did was provide technical input. If he, or anyone else, actually made and marketed any of those new products and consequently, gained more resources in the making and marketing than were used in the growing of the peanuts, he became an entrepreneur..
It is important to recognize that it is the entrepreneurial component of every exchange that enriches our lives and advances civilization. But it is also true that because entrepreneurs are envied and because so many people are eager to live without having to actually serve that entrepreneurs are almost always--and particularly in corrupt cultures--vilified. In our country where kings are looked down on, extremely successful entrepreneurs are referred to pejoratively as "kings". Hence, Andrew Carnegie was the "steel king", Hershey the "chocolate king". Our history books refer to these men as being powerful and often, devious and underhanded, and other characteristics we associate with kings. But it is important, indeed, it is critical to remember that kings, like Henry VIII and Louis XIV, were powerful because they ruled. An entrepreneurial king is powerful only to the extent that he serves. The day that consumers feel that Nestle’s chocolate it cheaper or better (or both) than Hershey’s, is the day that Hershey becomes the "former chocolate king".
All too often we confuse technical ability and expertise with entrepreneurship. Two examples, that I like to use to illustrate the difference are Thomas Edison and Gilbert and Sullivan.
Thomas Edison is often criticized as having borrowed other’s ideas, purchased their patents and then taken credit for the invention himself. For example, Joseph Swann’s English patent on the electric light bulb preceded Edison’s and numerous other inventors had patents relating to the electric light bulb, some of which Edison purchased, but the fact remains that without Edison we would not have had a working electric light bulb in people’s homes anywhere near as soon as we did, and possibly not ever. Edison and his team got all the financing and made all the auxiliary inventions and equipment necessary to make the electric light bulb available to the ordinary consumer.
My personal favorite is Gilbert and Sullivan. I very much enjoy their operettas, particularly, "Pirates", "Gondoliers", and "Patience". But the fact of the matter is that we would not have had those many operettas were it not for the entrepreneur who worked so hard to get the two to work together, Richard D’Oily Carte. Indeed, the real end of the relationship (with the "Gondoliers") came largely because Carte abandoned his role as entrepreneur and took sides with Sullivan. Recognizing his mistake, he tried to heal the breech, and the two did, in fact, collaborate on two more operettas, but so half-heartedly that they are never performed except by companies determined to claim to have done them all. Like all entrepreneurs, Carte took risks. For example, he was the first person in England to install electric lighting in a theater. Like most, he also had his failures. For example, he built a theater that was to be used exclusively for English operas. The first one (by Sullivan) ran for 160 consecutive performances--probably a world record for consecutive performances for an opera, but their was no second "English opera" so Carte had to sell his theater to a vaudeville company.
Rule V says simply that we should strive to increase the entrepreneur component of all our interactions. Real entrepreneurs are essential to the free society. The essential ingredients in entrepreneurial activity are courage and foresight--two qualitites almost totally missing in government planners, bureaucrats, politicians, and, alas, in most, corporate managers.
Monday, July 20, 2009
Personal Economics--Rule IV
Personal Economics--Rule IV
"We hold these truths to be self-evident, that all men are created equal....."
Declaration of Independence
"Of a truth I perceive that God is no respecter of persons."
Acts
Rule IV in personal economics was originally formulated by Carl Menger--an Austrian. It says simply that the value of anything can be determined only in exchange and the only people who make that determination are those who are parties to the exchange. There is no such thing as a value in use--a concept that grew out of the idea that value can be objectively determined. Likewise, the moment an exchange is made, the value of the exchanged items becomes a fact of history, but not of economics--a reality known to almost anyone who has ever purchased a new automobile and then soon decides he would like to sell it.
This rule, based on the subjective theory of value, is the basis for peaceful relations between people and peoples. Some people believe that the idea of the division of labor is sufficient to guarantee peace. This results in a sort of "enlightened self-interest", but unfortunately, this is seldom enough to guarantee peace for the simple reason that when we are stressed, we tend to feel that our interests are more important than others. It is only in the constant reminder, through every means possible, religious, moral, political, and economic, that every other man or woman is as important as we are, that we can hope to achieve lasting peace. The political statement of that fact is in our founding document, the Declaration of Independence. The economic statement of that fact, and the necessary adjunct to the political statement is rule IV i.e. the subjective theory of value.
We see the violation of this rule on every hand. A common example is the price of gasoline. As soon as the price rises, there is a hue and cry for politicians to use the force of law to bring the price down. Rule IV says, however, that no one can determine what the price of gasoline should be except those who are exchanging something to obtain it. The obvious remedy if a person feels that the price is too high is not buy any. The usual response to this suggestion is, "I have no choice. I need gasoline to run my car and I need the car to go to work." This is, of course, false. A person always has alternatives in a free society. By calling for the use of force, a person is simply saying that he wishes everything to stay the same and is, therefore, willing, even eager, to use force to adjust things to suit himself.
Of course, if the price is high because the government is subsidizing it or regulating it or in some other way using the force of law to maintain it, the complaint is legitimate, but the means are not. It hardly justifies using force on your side because force is being used on the other. Rule IV still applies, however, making an attempt to get the subsidies, regulations, etc, removed is, naturally, a legitimate effort. When Ronald Reagan announced that he would remove all regulations from the price of gasoline, his critics countered that the price would quickly rise dramatically to #3 a gallon. The price at the time was just under $2 a gallon. They were right. The price quickly rose, but then steadily declined until it got down to almost $1 a gallon. Reagan was simply applying Rule IV to gasoline. Nobody knows what it "should" cost except those who are buying and/or selling it. Once the transaction, i.e. the sale, is completed, the price, while of interest, is not an economic fact, it is a historical fact, interesting, but not determining.
I well remember going into the gas station where I usually buy gas a few weeks after Reagan made his announcement. The manager told his clerk in a very discouraged tone of voice, "I’ve got to go out and lower the prices again." Before Reagan made his announcement and for a few weeks after, the price was always raised in the middle of the night just as the station was closing, but now it was being lowered in the middle of the day so everyone could see that the station owner was trying to remain competitive. The station closest to my house went out of business at this time. I guess the owner felt that at that low a price, he simply could not compete. His last act upon closing the station for the last time was list the price of gasoline on the big markee as being $5.99 per gallon. That is undoubtedly what he wished he could charge and possibly felt that it would take that price to stay in business, but he knew that he would get no takers, so he went quietly into the night--no longer a gas station owner.
Rule IV is most controversial when it is applied to labor. People selling their services tend to feel that they are better than others. When they buy services, e. g. hire someone to mow their lawn, they typically do it in the way they would buy anything else, i.e. they offer to pay a certain amount in exchange for the service. But when they are selling their services they are eager to use the force of law on their side and burden the cost of their labor with all kinds of benefits and extensions and provisions making it difficult to be laid off or fired. They then comment, "You shouldn’t be able to buy a man’s work like you would buy a sack of potatoes." What the person is saying, of course, is that in his mind he is better than others and deserves to be treated better.
Politicians, political activists, lobbyists, lawyers, have been eager to use this conceit to get laws passed and become advocates for the "working man". The result, of course, is that labor is enormously burdened and unemployment is common.
Of course, Rule IV actually extends to all values, not just exchangeable goods, because in a civilized society we are always exchanging--ideas, thoughts, information, theories as well as tangible goods. Rule IV says that we can only judge another person’s values in such exchanges. His opinion, his ideas, his lifestyle, is equal to everyone else’s until he must bring them somehow into the marketplace for exchange. Then his value, and his values, can be objectively determined, but only by those who are party to the exchange.
"We hold these truths to be self-evident, that all men are created equal....."
Declaration of Independence
"Of a truth I perceive that God is no respecter of persons."
Acts
Rule IV in personal economics was originally formulated by Carl Menger--an Austrian. It says simply that the value of anything can be determined only in exchange and the only people who make that determination are those who are parties to the exchange. There is no such thing as a value in use--a concept that grew out of the idea that value can be objectively determined. Likewise, the moment an exchange is made, the value of the exchanged items becomes a fact of history, but not of economics--a reality known to almost anyone who has ever purchased a new automobile and then soon decides he would like to sell it.
This rule, based on the subjective theory of value, is the basis for peaceful relations between people and peoples. Some people believe that the idea of the division of labor is sufficient to guarantee peace. This results in a sort of "enlightened self-interest", but unfortunately, this is seldom enough to guarantee peace for the simple reason that when we are stressed, we tend to feel that our interests are more important than others. It is only in the constant reminder, through every means possible, religious, moral, political, and economic, that every other man or woman is as important as we are, that we can hope to achieve lasting peace. The political statement of that fact is in our founding document, the Declaration of Independence. The economic statement of that fact, and the necessary adjunct to the political statement is rule IV i.e. the subjective theory of value.
We see the violation of this rule on every hand. A common example is the price of gasoline. As soon as the price rises, there is a hue and cry for politicians to use the force of law to bring the price down. Rule IV says, however, that no one can determine what the price of gasoline should be except those who are exchanging something to obtain it. The obvious remedy if a person feels that the price is too high is not buy any. The usual response to this suggestion is, "I have no choice. I need gasoline to run my car and I need the car to go to work." This is, of course, false. A person always has alternatives in a free society. By calling for the use of force, a person is simply saying that he wishes everything to stay the same and is, therefore, willing, even eager, to use force to adjust things to suit himself.
Of course, if the price is high because the government is subsidizing it or regulating it or in some other way using the force of law to maintain it, the complaint is legitimate, but the means are not. It hardly justifies using force on your side because force is being used on the other. Rule IV still applies, however, making an attempt to get the subsidies, regulations, etc, removed is, naturally, a legitimate effort. When Ronald Reagan announced that he would remove all regulations from the price of gasoline, his critics countered that the price would quickly rise dramatically to #3 a gallon. The price at the time was just under $2 a gallon. They were right. The price quickly rose, but then steadily declined until it got down to almost $1 a gallon. Reagan was simply applying Rule IV to gasoline. Nobody knows what it "should" cost except those who are buying and/or selling it. Once the transaction, i.e. the sale, is completed, the price, while of interest, is not an economic fact, it is a historical fact, interesting, but not determining.
I well remember going into the gas station where I usually buy gas a few weeks after Reagan made his announcement. The manager told his clerk in a very discouraged tone of voice, "I’ve got to go out and lower the prices again." Before Reagan made his announcement and for a few weeks after, the price was always raised in the middle of the night just as the station was closing, but now it was being lowered in the middle of the day so everyone could see that the station owner was trying to remain competitive. The station closest to my house went out of business at this time. I guess the owner felt that at that low a price, he simply could not compete. His last act upon closing the station for the last time was list the price of gasoline on the big markee as being $5.99 per gallon. That is undoubtedly what he wished he could charge and possibly felt that it would take that price to stay in business, but he knew that he would get no takers, so he went quietly into the night--no longer a gas station owner.
Rule IV is most controversial when it is applied to labor. People selling their services tend to feel that they are better than others. When they buy services, e. g. hire someone to mow their lawn, they typically do it in the way they would buy anything else, i.e. they offer to pay a certain amount in exchange for the service. But when they are selling their services they are eager to use the force of law on their side and burden the cost of their labor with all kinds of benefits and extensions and provisions making it difficult to be laid off or fired. They then comment, "You shouldn’t be able to buy a man’s work like you would buy a sack of potatoes." What the person is saying, of course, is that in his mind he is better than others and deserves to be treated better.
Politicians, political activists, lobbyists, lawyers, have been eager to use this conceit to get laws passed and become advocates for the "working man". The result, of course, is that labor is enormously burdened and unemployment is common.
Of course, Rule IV actually extends to all values, not just exchangeable goods, because in a civilized society we are always exchanging--ideas, thoughts, information, theories as well as tangible goods. Rule IV says that we can only judge another person’s values in such exchanges. His opinion, his ideas, his lifestyle, is equal to everyone else’s until he must bring them somehow into the marketplace for exchange. Then his value, and his values, can be objectively determined, but only by those who are party to the exchange.
Tuesday, July 14, 2009
Personal Economics--Prelude to Austrian Rules--II
Personal Economics--Prelude to Austrian Rules--II
"I have shewed you all things, how that so laboring ye ought to support the weak, and to remember the words of the Lord Jesus, how he said, It is more blessed to give than to receive."
Acts
Most economists today are collectivist in outlook, as are most ordinary people, unfortunately. When we think about economics we do it in terms of collectives e.g. the rich, the poor, the employers, the working man, the middle class, etc. We measure national wealth, not as Adam Smith did, by looking to see how well off the individual worker is, but in terms of Gross National Product, or the unemployment rate, or the Dow Jones Industrial Average.
But the Austrians, starting with Carl Menger, returned the study of economics to its roots by making the study of economics the study of individuals and their actions in the marketplace. Everything boils down to the individual exchange. Indeed, "the economy" can be defined as the framework--physical, cultural, social, legal, moral--in which exchanges are made. A "good economy" is simply one in which exchanges are unhampered. A "bad economy" is one in which exchanges are regulated, controlled, or uncertain in their results. The worst economy is one in which the legal or moral or cultural climate is so unfavorable to exchanges that they become difficult, almost impossible, as for example, when criminals are in charge and stealing or fraud are prevalent, or when corrupt politicians control government so that the medium of exchange is being rendered increasingly worthless by the government pilfering we now call inflation.
Let us look at simple exchange from an Austrian perspective and see what we can learn from it before we get into the rules of personal economics that result from Austrian perspectives.
Suppose my wife sends me to the grocery store with instructions to buy five items. Convinced that I can easily remember so short a list I take off without bothering to put pencil to paper. I arrive at the store, go over the list in my mind, and realize that I have forgotten two items. I try various memory tricks, such as going up and down the isles mentally and recalling my wife’s actions as she was dictating the list, but nothing works. Two items have escaped me. I decide that rather than go all the way back home, I will simply use the pay phone outside the store to call my wife, I discover, however, to my chagrin, that it only takes change and that I have only bills. I, therefore, stop a fellow as he is coming out of the store and ask him if he can give me coins in exchange for a dollar bill. He very obligingly reaches into his pocket and announces that he can.
At this point we pause and examine this exchange about to take place. The first insight of Austrian economics is that exchanges are very much a function of time, place and circumstance, such as outlined above. This is indicated, in the example above, by the fact that as the fellow reaches into his pocket to see if he has enough coins, I may look into his shopping cart and the sight of what he has purchased may jog my memory so that I say, "Never mind, seeing the butter and eggs in you shopping cart reminded me that that is what I needed to buy. I don’t need the coins to make a call any more. Thanks anyway." The circumstances have changed and no exchange takes place. I could also look at my watch and realize that I have wasted so much time trying to remember what I was supposed to buy that I no longer have time to shop before I must be at an apointment and, therefore, I call off the exchange. The point is that every exchange is a function of time, place, and circumstances which no central authority can possibly foresee.
More important, however, is the actual exchange itself. If the exchange does in fact take place, an onlooker e.g. the banker, the beaurocrat at the mint, the politician regulating various exchanges, would say that the exchange was an exchange of equal values, i.e. four quarters for a dollar bill. Indeed, collectivists say that all exchanges are ideally exchanges of equal value.
For the Austrian, however, exhanges of equal value never take place. This is a crucial point. An exchange always involves some effort and some thought. If, therefore, I thought I would be exactly as well off after the exchange as before, why would I even bother to make it? The answer, of course, is that I wouldn’t. Of course, even the banker, the bureaucrat, the politician, would probably acknowledge that because of my circumstances, my need for coins, I really was better off after the exchange, but what of the other fellow? He didn’t come out of the store hoping to relieve himself of his coins. If he really wanted fewer coins, he could have used them in making his purchases in the store. In what way can he be said to have been better off for making the exhange?
In answering that question, we get at the wonder of the free market. Austrian economists, like Adam Smith before them, realized that there is a factor— a vital factor--in the market that transcends the material exchange. This factor, depending on the outlook of the observer, is labeled as moral, as spiritual, as psychic. But it is critically important. When exhanges are controlled, hampered, undermined, and freedom of exchange is violated in any way, men become increasingly materialistic. As exchanges become freer, men become less materialistic. Art, music, culture, religion and innumerable other non-materialistic aspects of life--what we sometimes refer to as "civilization" become increasingly important in our exchanges. The fellow who gave up his quarters came off better because his was a spiritual or psychic gain.
This is, in fact, the power of the free market. Both parties in an exchange feel like they were the winner in that exchange. Anytime we make a free exchange we can be confident that we gave more than we got. At the same time we got more than we gave. That is why free markets are so peaceful. Everyone who uses it feels he is a winner. In every exchange we feel that we have made not only a gain in some material item but we have gained a friend. Looking at the marvel of free and willing exchange, Austrian economist said that even so materialistic (or even "grubby", in common political terms today) as profit is really a psychic or spiritual phenomenon.
"I have shewed you all things, how that so laboring ye ought to support the weak, and to remember the words of the Lord Jesus, how he said, It is more blessed to give than to receive."
Acts
Most economists today are collectivist in outlook, as are most ordinary people, unfortunately. When we think about economics we do it in terms of collectives e.g. the rich, the poor, the employers, the working man, the middle class, etc. We measure national wealth, not as Adam Smith did, by looking to see how well off the individual worker is, but in terms of Gross National Product, or the unemployment rate, or the Dow Jones Industrial Average.
But the Austrians, starting with Carl Menger, returned the study of economics to its roots by making the study of economics the study of individuals and their actions in the marketplace. Everything boils down to the individual exchange. Indeed, "the economy" can be defined as the framework--physical, cultural, social, legal, moral--in which exchanges are made. A "good economy" is simply one in which exchanges are unhampered. A "bad economy" is one in which exchanges are regulated, controlled, or uncertain in their results. The worst economy is one in which the legal or moral or cultural climate is so unfavorable to exchanges that they become difficult, almost impossible, as for example, when criminals are in charge and stealing or fraud are prevalent, or when corrupt politicians control government so that the medium of exchange is being rendered increasingly worthless by the government pilfering we now call inflation.
Let us look at simple exchange from an Austrian perspective and see what we can learn from it before we get into the rules of personal economics that result from Austrian perspectives.
Suppose my wife sends me to the grocery store with instructions to buy five items. Convinced that I can easily remember so short a list I take off without bothering to put pencil to paper. I arrive at the store, go over the list in my mind, and realize that I have forgotten two items. I try various memory tricks, such as going up and down the isles mentally and recalling my wife’s actions as she was dictating the list, but nothing works. Two items have escaped me. I decide that rather than go all the way back home, I will simply use the pay phone outside the store to call my wife, I discover, however, to my chagrin, that it only takes change and that I have only bills. I, therefore, stop a fellow as he is coming out of the store and ask him if he can give me coins in exchange for a dollar bill. He very obligingly reaches into his pocket and announces that he can.
At this point we pause and examine this exchange about to take place. The first insight of Austrian economics is that exchanges are very much a function of time, place and circumstance, such as outlined above. This is indicated, in the example above, by the fact that as the fellow reaches into his pocket to see if he has enough coins, I may look into his shopping cart and the sight of what he has purchased may jog my memory so that I say, "Never mind, seeing the butter and eggs in you shopping cart reminded me that that is what I needed to buy. I don’t need the coins to make a call any more. Thanks anyway." The circumstances have changed and no exchange takes place. I could also look at my watch and realize that I have wasted so much time trying to remember what I was supposed to buy that I no longer have time to shop before I must be at an apointment and, therefore, I call off the exchange. The point is that every exchange is a function of time, place, and circumstances which no central authority can possibly foresee.
More important, however, is the actual exchange itself. If the exchange does in fact take place, an onlooker e.g. the banker, the beaurocrat at the mint, the politician regulating various exchanges, would say that the exchange was an exchange of equal values, i.e. four quarters for a dollar bill. Indeed, collectivists say that all exchanges are ideally exchanges of equal value.
For the Austrian, however, exhanges of equal value never take place. This is a crucial point. An exchange always involves some effort and some thought. If, therefore, I thought I would be exactly as well off after the exchange as before, why would I even bother to make it? The answer, of course, is that I wouldn’t. Of course, even the banker, the bureaucrat, the politician, would probably acknowledge that because of my circumstances, my need for coins, I really was better off after the exchange, but what of the other fellow? He didn’t come out of the store hoping to relieve himself of his coins. If he really wanted fewer coins, he could have used them in making his purchases in the store. In what way can he be said to have been better off for making the exhange?
In answering that question, we get at the wonder of the free market. Austrian economists, like Adam Smith before them, realized that there is a factor— a vital factor--in the market that transcends the material exchange. This factor, depending on the outlook of the observer, is labeled as moral, as spiritual, as psychic. But it is critically important. When exhanges are controlled, hampered, undermined, and freedom of exchange is violated in any way, men become increasingly materialistic. As exchanges become freer, men become less materialistic. Art, music, culture, religion and innumerable other non-materialistic aspects of life--what we sometimes refer to as "civilization" become increasingly important in our exchanges. The fellow who gave up his quarters came off better because his was a spiritual or psychic gain.
This is, in fact, the power of the free market. Both parties in an exchange feel like they were the winner in that exchange. Anytime we make a free exchange we can be confident that we gave more than we got. At the same time we got more than we gave. That is why free markets are so peaceful. Everyone who uses it feels he is a winner. In every exchange we feel that we have made not only a gain in some material item but we have gained a friend. Looking at the marvel of free and willing exchange, Austrian economist said that even so materialistic (or even "grubby", in common political terms today) as profit is really a psychic or spiritual phenomenon.
Monday, July 13, 2009
Personal Economics--Prelude to Austrian Rules-I
Personal Economics--Prelude to Austrian Rules
"..nine tenths of the calamities that have befallen the human race had no other origin than the union of high intelligence with low desires."
Macaulay
The first three rules come from "Classical Economics"--the first two from Adam Smith and the third from Jean-Baptiste Say. Unfortunately, Adam Smith made a mistake that took economics off course for many years. The mistake is called the labor theory of value. Adam Smith loved the individual person so much and was so convinced of his natural system of liberty and in the ultimate harmony of interests amongst people--all of which conflict with the labor theory of value, that he was not really dogmatic about it. In his first book and even in much of the Wealth of Nations, he either ignores it or flat out contradicts it. It remained for a disciple--David Ricardo--who extended Smith’s economics but was frequently in conflict with his basic philosophy--to nail down the labor theory of value and make it a pillar of classical economics.
Marx made the labor theory of value the foundation for his own economics, with the tragic results that have plagued modern history, but the majority of 19th century economists, who were not particularly excited about Marxist ideas struggled, while still attempting to hold onto the labor theory of value. The question is, what caused Adam Smith to make his mistake in the first place? There is a wonderful essay by the French economist, Frederick Bastiat that I think explains it better than anyone. He said that the problem stems from the fact that in the 18th and early 19th centuries, intellectuals were enamored of the classical Greek and Roman cultures. Much of this stemmed from the fact that everyone aspiring to a university degree was required to learn Greek and Latin. In the time of John Milton this made sense, especially Latin, because it was used as the language of communication for all of Europe. Milton wrote anything he wanted read outside of England in Latin. Newton wrote his great treatise in Latin so that people outside of England could read it. But by the time of Adam Smith, Latin no longer served that purpose. Almost all valuable treatises were published either in English French or German and usually made available in translation. The real motivation for the learning of Latin and Greek was, in Macaulay’s words, "the glory that was Greece and the grandeur that was Rome". Intellectuals envied these two cultures because they were able to control so much of the world. Unfortunately, as Bastiat points out, it was a control based on violence. I believe, that Adam Smith’s mistakes and indeed the mistakes in economic and political thought of many intellectuals, including Hugh Nibley at my own university, can be traced to this admiration of these two ancient cultures. Adam Smith, I believe, felt that that same control could be obtained in a more peaceful way, if a person could somehow figure out what everything was really worth; hence, the labor theory of value.
This stranglehold on economics was finally solved, as so many problems are in human history, independently and almost simultaneously by three men--Stanley Jevons in English, Leon Walrus in French, and Carl Menger in German. The solution was called the marginal theory of value and had enormous appeal because it has a very mathematical ring to it.. But of the three, only Carl Menger carried the marginal theory of value to its logical conclusion. Because Menger was actually Austrian as were his early disciples, the insights developed from his initial insight have come to be known as Austrian economics. In the next installment I will attempt to explore the Austrian return to Adam Smith’s principal insight, i.e. that wealth, even the wealth of nations did not depend upon the work of the nobles and aristocrats, but rather on the work of the ordinary citizen. All of their incredible understanding of economics begins with the actions of individuals. So in the next section we will explore a simple transaction and see what we can learn from it and then explore the three rules growing out of Austrian economics.
"..nine tenths of the calamities that have befallen the human race had no other origin than the union of high intelligence with low desires."
Macaulay
The first three rules come from "Classical Economics"--the first two from Adam Smith and the third from Jean-Baptiste Say. Unfortunately, Adam Smith made a mistake that took economics off course for many years. The mistake is called the labor theory of value. Adam Smith loved the individual person so much and was so convinced of his natural system of liberty and in the ultimate harmony of interests amongst people--all of which conflict with the labor theory of value, that he was not really dogmatic about it. In his first book and even in much of the Wealth of Nations, he either ignores it or flat out contradicts it. It remained for a disciple--David Ricardo--who extended Smith’s economics but was frequently in conflict with his basic philosophy--to nail down the labor theory of value and make it a pillar of classical economics.
Marx made the labor theory of value the foundation for his own economics, with the tragic results that have plagued modern history, but the majority of 19th century economists, who were not particularly excited about Marxist ideas struggled, while still attempting to hold onto the labor theory of value. The question is, what caused Adam Smith to make his mistake in the first place? There is a wonderful essay by the French economist, Frederick Bastiat that I think explains it better than anyone. He said that the problem stems from the fact that in the 18th and early 19th centuries, intellectuals were enamored of the classical Greek and Roman cultures. Much of this stemmed from the fact that everyone aspiring to a university degree was required to learn Greek and Latin. In the time of John Milton this made sense, especially Latin, because it was used as the language of communication for all of Europe. Milton wrote anything he wanted read outside of England in Latin. Newton wrote his great treatise in Latin so that people outside of England could read it. But by the time of Adam Smith, Latin no longer served that purpose. Almost all valuable treatises were published either in English French or German and usually made available in translation. The real motivation for the learning of Latin and Greek was, in Macaulay’s words, "the glory that was Greece and the grandeur that was Rome". Intellectuals envied these two cultures because they were able to control so much of the world. Unfortunately, as Bastiat points out, it was a control based on violence. I believe, that Adam Smith’s mistakes and indeed the mistakes in economic and political thought of many intellectuals, including Hugh Nibley at my own university, can be traced to this admiration of these two ancient cultures. Adam Smith, I believe, felt that that same control could be obtained in a more peaceful way, if a person could somehow figure out what everything was really worth; hence, the labor theory of value.
This stranglehold on economics was finally solved, as so many problems are in human history, independently and almost simultaneously by three men--Stanley Jevons in English, Leon Walrus in French, and Carl Menger in German. The solution was called the marginal theory of value and had enormous appeal because it has a very mathematical ring to it.. But of the three, only Carl Menger carried the marginal theory of value to its logical conclusion. Because Menger was actually Austrian as were his early disciples, the insights developed from his initial insight have come to be known as Austrian economics. In the next installment I will attempt to explore the Austrian return to Adam Smith’s principal insight, i.e. that wealth, even the wealth of nations did not depend upon the work of the nobles and aristocrats, but rather on the work of the ordinary citizen. All of their incredible understanding of economics begins with the actions of individuals. So in the next section we will explore a simple transaction and see what we can learn from it and then explore the three rules growing out of Austrian economics.
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