Thursday, July 31, 2008

Personal Economics--The Sixth Law--Knowledge and Decisions

The sixth law stems from the work of Frederick Hayek but can also be traced to his teacher Ludwig von Mises. The sixth law says simply that the knowledge critical to the functioning of society is largely a function of individuals making everyday decisions. The corollary to this law is that there is in society a force or forces always distorting that knowledge. It is this distortion that leads to what we call the "business cycle". The forces typically causing these distortions are, above all, government, but quasi-government groups such as banks, labor unions, professional societies, and organized crime syndicates. The most common distortion with which most people have to deal that disrupts their knowledge of economic realities is inflation--the corruption and dilution of the value of the currency. Since, in a society dependent totally on the division of labor, it is absolutely essential that all values in exchange be reducible to monetary units, the distortion of the value of the unit presents an almost unsuperable obstacle to making rational decisions. Entrepreneurs, businessmen, managers and even ordinary citizens launch enterprises and undertakings only to discover that they have seriously miscalculated the cost because the unit on which they were basing that calculation is constantly changing.

Of course, inflation and other government actions are not the only forces at work in the distortion of knowledge. A labor union or professional society that uses political pressure or other means involving force and is thereby able to raise the wages of its members above their free market value sends distorted information both to the members and others who use their services.

The religious analogy to this from the Bible, is, of course, Satan, who "blindeth the eyes and hardeneth the hearts of the children of men". The political analogy is that we should be careful to live "economically" and not "politically", i. e. that we not derive our incomes from the force of law. Of course, in this area, the Apostle Paul gives valuable advice. He says that we must put on the whole armor of God when making decisions, but further states that "we wrestle not against flesh and blood" but against, among other things "spiritual wickedness in high places". In short, it is pointless to point fingers at individuals, who, like ourselves are struggling to make the best of their own lives, but against the bad ideas and philosophies, that admittedly some that are used by those in a position to exercise force and control over others. For example, the first kings of Israel, Saul, David, and Solomon are all portrayed in the Bible as remarkable men in their early lives. But the temptation to use their positions of power distorted their knowledge to the point that they made some terrible decisions. The prophet Nathan commanded by God to confront David with his misdeeds did not go in and say, "You despicable person." In other words, he did not "wrestle with flesh and blood", i. e. David as a person, who had done wonderful things, but rather he presented him an example of "spiritual wickedness in high places" which shocked David who immediately said, "This needs to be corrected and addressed." Only then did the prophet exclaim, "Thou art the man."

We are often told that "life is a struggle". In reality, the struggle is to gain the knowledge we need to make correct decisions. The fact of the matter is that the more people we have in society who are determined to live at the expense of others, the more distorted our conventional sources of knowledge are and the more widespread is human misery.

On a personal level, the sixth law warns us that we need to be careful not to use, or more correctly, misuse, the law to gain personal advantage over others above what we would obtain in a totally free market environment. Or to use the language of warning that the prophet Samuel uses in an attempt to warn the early kings of Israel, we should not "multiply horses and chariots" in an attempt to prove that we are better than others.

Monday, July 28, 2008

Personal Economics--The fifth law--The essentail entrepreneur

The fifth law of personal economics comes from another Austrian, Ludwig von Mises. While collectivists tend to downgrade and even deprecate the role of the businessman/trader/merchant/entrepreneur in favor of the central planner, the bureaucrat, but von Mises says that he is absolutely essential to the advancement and even mantainence of civilization. Intellectuals all through history have been on the side of the modern collectivists. Plato, Aristotle, and Cicero, probably the big three in ancient philosophy, could hardly agree on anything except the fact that the one thing you did not want to get involved with was business/trade. This was for lesser men. This is an attitude shared somewhat by Adam Smith himself. While possibly a little more understanding of the need for merchants, he is, nevertheless, very critical of them. The insight of their importance in the growth of civilization is an insight that grows out of the subjective theory of value as we will see.

Under the feudal system, a king ruled his subjects. We often use the language of feudalism to describe the captalistic system, but they are very different. When, for example, we speak of someone who is the president or founder of a large enterprise that has gained a commanding lead in his area of business, we sometimes refer to him as a "king". Hence, Hershey was the "chocolate king", Carnegie the "steel king" etc. But, as von Mises points out, these so-called "kings" do not rule, they serve. In reality, in a free society, it is the ordinary man, the consumer, who is "king". Bureaucrats and politicians, who tend to be envious of these men, often accuse them of controlling the market, of giving people no real choice, of forcing their desires on others, but in a free society, this is impossible. If Mr. Hershey offers only one kind of chocolate, someone else is certainly free to offer another and if he can offer something that in price and quality is more pleasing to the consumer than Mr. Hershey's brand of chocolate, Mr. Hershey will very quickly cease to be king of chocolate.

And hence, the importance of entrepreneurs, is simply that while central planners and bureaucrats believe that they can see what people need, entrepreneurs forsee what peole will need. They move resources into areas that are not currently being served, or, at least, are being under-served. When people believe the promises of politicians and bureaucrats, a sort of political entropy results. Chaos increases and nothing ever really changes for the better, but when society becomes free enough that people can use their own resources, manage and control their own property, entrepreneurs quickly begin to foresee possibilites that have escaped normal vision. The down side of all this is that it is risky. Why? Because of the subjective theory of value. No one can objectively predict what anything will be worth. An entrepreneur is always taking risks.

The religious expression of this law is found, among other places in scripture, in the parable of the talents. The servant who failed to take a chance and simply buried his talent so he could return it when required was condemned in the severest terms. He is the quintessential bureaucrat. He waits for orders before he moves. He takes no risks.

The political expression of this law is found more in custom than in writing. When our society was much freer, it was considered in very poor taste to live entirely by law, i. e. seek out a "safe existence". Even our most prominent politicians and lawyers were expected to free market professions. If you were to ask daniel Webster, for example, what was his profession, he was as likely to say he was a farmer as to say "lawyer" or even "senator". This was equally true of most of our early leaders. They could hardly even be expected to gain clients or constituents for political office if they could not claim a great deal of experience in the free market. What about Lincoln? Lincoln, was, of course, the exception and with him a great deal changed in American life.

On a personal level, the law says that we should be willing to take risks in an effort to serve others, and at the very least, we should avoid criticizing those who do.

Wednesday, July 23, 2008

Personal Economics--The Fourth Law--Subjective Value

The fourth law of personal economics comes from the work of Carl Menger and is the first rule in what we characterize as "Austrian Economics". It stems from a mistake of Adam Smith's. In speculating why Adam Smith made that mistake I look to an essay by the French economist, Frederick Bastiat. Bastiat (he never mentions Adam Smith, but attributes the problem to the French intellectuals of his day) points out that the fascination that intellectuals have with "the grandeur that was Greece and the glory that was Rome" is a source of problems for economic and political thought because that grandeur and that glory was built squarely on a foundation of the use of military force. I suspect that fascination that intellectuals of Smith's day had with the tremendous achievements of these civilizations and the control that they seemed to exercise over others led him into the trap. It is possible to control others if we can know the real value of 'things". If, for example, you could know the real value of a stock, you could make a fortune in the stock market. Adam Smith set out to solve the problem of value and decided that the real value of something was a function of the labor that went into producing it. This is the labor theory of value. Armed with this theory it is possible to make third party determinations of the real value of things. The person who can calculate those values is obviously in a controlling position over someone who can't. This theory, therefore, has tremendous appeal to those who wish to exercise control over others.

Adam Smith had such a deeply ingrained love of freedom and respect for the common man that he was not dogmatic at all about the application of his theory. In the Wealth of Nations there are sections in which he essentially ignores or even contradicts, implicitly, at least, the theory. It was his disciple, David Riccardo, who nailed it down and made it an integral part of classical economics. The kind of thinking inherit in the idea of an objective theory of value of any kind led to much mischief including Riccardo's Iron Law, Malthus's population theories and Marxist economics, of which the labor theory of value is a key component.

The labor theory of value caused much consternation among classical economists, very few of whom were very excited about Marx's theories, creating, for example, the diamond-water paradox (why are diamonds, which, at the time had no practical uses, so valuable and water, which is essential to life, so cheap). The problem was solved, as so many problems in intellectual history that have perplexed scholars for some time, independently and almost simultaneously, in this case by three different men--Stanley Jevons in England, Leon Walrus in France, and Carl Menger in Austria. The solution was called the marginal theory of value, and was tremendously appealing to economists because it has a very mathematical ring to it. But, of the three, only Menger had the insight to recognize that the marginal theory of value was essentially a subjective theory of value.

Simply stated the fourth law says that anything, a product, a parcel of land, even a theory or idea, has a value that can be determined only in exchange and that the only people who can determine that value are those who are parties to the exchange. An important corollary to this rule is that no totally free exchange ever takes place unless all parties to the exchange believe that they are getting more from the exchange than they are giving. This rule is the equivalent in religious terms to the statement (oft repeated in the New Testament) that God is no respecter of persons. The political statement of this rule is Jefferson's statement in the Declaration of Independence that all men are created equal. This simply says that no matter how important I am (or think that I am) or how well educated or politically powerful or how rich or how attractive or healthy or how strong, I cannot tell another man the value of something unless I am party to the exchange of that something. I can, of course, cousel, advize, admonish, but that is it. If I use threats or force or fraud, the exchange ceases to be a free exchange and I have falsified the value. I cannot be trusted.

Let's look at a simple example. My wife has sent me to the grocery store with instructions to buy five items. Since it is only five, I assume I can remember them, but when I arrive, I realize that I have forgotten two of the items. Rather than go home, I decide to call, but, having no cell phone, I must use the pay phone outside the store which takes only change, of which I have none, so I ask someone coming out of the store if he can make change for a dollar bill. I have set up this elaborate circumstance, because in Austrian economics, the circumstances of an exchange are all important. They are critical to understanding the reason for the exchange. At any rate, the fellow says that he does have change and proceeds to give me 4 quarters in exchange for my dollar bill. Now, of course, in the view of a banker, a politician, and probably even most onlookers, we have made the most obviously equal of exchanges. But, of course, they are not equal. I needed quarters. A dollar bill was of no use to me for what I needed at that time. Thus explained, even a collectivist economist might acknowledge that I got a better deal out of this exchange because of my circumstances at that instant. But, the point is, that the person's circumstances at the time of exchange is all that is important. What the banker, the man on the street, the mayor, or even the president of the United States says is irrelevant. But what of the man walking out of the store? He did not seek an exchange. His circumstances required no exchange. Most collectivists would say that, in a sense, he was the loser in the exchange (they always seem to feel that one person wins and one loses in an exchange; which explains why they clammer for the power to forcefully control exchanges. If they are in control, they claim, there will be fewer losers). But according to our rule based on Menger's insight, he also was a winner. He is perceived as a loser (he lost time and may have been supplied himself with quarters to make a call himself) largely because most collectivists are also materialists. His winning was the most important of all--the satisfaction of having helped someone out. Before the government started getting into the business of controlling so many exchanges in the name of taking care of everyone, it was not uncommon for someone when asked if he could make change to ask what was needed and reply that although he did not have enough change to exchange for a dollar, he did have enough for a phone call, and I was welcome to it. In the eyes of the collectivist, I have given nothing for something--the change giver is in that case a clear loser. But, again according to our rule, and always assumming a free environment, if he felt he were a loser, the exchange would not have taken place.

This rule also explains why truly free societies are the most peaceful of societies. The Prince of Peace (according to his apostle, Paul) said that it is better to give than receive. Societies that are free are peaceful because in every exchange a person is, in a sense, giving more than he is getting. Of course, he is also getting more than he is giving--the ultimate economic paradox.

Societies in which poltical action extends into areas best left to the economic areas of life are societies in which contention, quarreling, fighting, violence and fraud abound precisely because the people in that society are determined to use the political or even criminal force to make sure that they get more than they give. In such societies many, if not most, of the members are sure that they know what things are worth and are willing, even eager to enforce that confidence in any way they can. Read any speech by a politician, read any editorial or even letters to the editor and notice how sure most people are that they know, independent of being involved directly in an exchange, what things are worth. The fourth rule says they are wrong.

The fourth rule is, therefore, the key to peace, both personal and social. It tells us simply that God is no respecter of persons, that all men are created equal, and that the only people who can determine the value of something are those who are parties to an exchange of that something.

Tuesday, July 22, 2008

Personal Economics--The Third Law--Say's Law

The third law of personal economics comes from Jean Baptiste Say and says in essence that we are able to consume only after we, or someone else, has produced. In a primitive economy this is obvious, so much so, that those who in the present day evoke this "Law of the Markets" are often accused of practicing "Crusoe Economics". This insight of Say was considered the backbone or basic principle of classical economics, but it has always been the bane of collectivists. Both Marx and Keynes denied it's validity and Keynes made that denial the basis of his "new economics". Since the time of Keynes economists generally have ceased to call it The Law of Markets, but refer to it as "Say's Law", as if to say that what they really mean is that is really "Say's Opinion."

There is almost never a day goes by that a cursory reading of the paper reminds us that politicians, political pundits, and media people believe that Say's Law is not applicable to our economy. The idea that a "sagging economy" needs a "stimulus package" of cash placed willy-nilly in the hands of consumers, or that the government can "Jump-start" the economy with an increase of government spending stems from the belief that our economy has outgrown Say's Opinion. The concept of the "multiplier" stems from this same fallacy, instantly exploded if we follow Say's advice and look at consumer spending, not in terms of money--a medium or facilitator of exchange--but in terms of produced goods. When the government opens up a air force base in a community, sure, now there are additional grocery stores, gas stations, and new houses to facilitate the new employees in the community, but how many additional goods and useful services are available in the total economy because we have a new air force base? The answer is, of course, none. There are, in fact, fewer, because precious resources that would have been used for the production of useful goods and services have been extracted from the economy. The real "multiplier", whenever politicians, political activists, or media pundits refer to it, is always in the denominator.

Some years ago Tip O'Neal, who was then the equivalent of Nancy Pellosi in our government today, (and about as well informed in matters of economics), was asked why we were entering a recession. "I'll tell you why with a concrete example," he replied in an angry tone of voice. "The Republicans (Nixon was in the White House, but the Democrats controlled the congress--just as today) have cut back spending (Mr. O'Neal flunked Government 101 in which you are taught that the House controls the purse-strings), and everyone is afraid to spend any money. I visited my daughter and asked here how her new refrigerator has worked out. And you know what she told me? She told me that because she's worried about the economy she decided not to postpone buying the new refrigerator. And that's why the country is in a recession." It was precisely this sort of thinking that Ronald Reagen was parodying with the comment that "we have been trying to spend our way into prosperity". The classical economist would say that if you don't absolutely need a new refrigerator, don't buy one. It will be better for you and better for the economy because the saving can be used to purchase new tools that ultimately will increase the standard of living.

Indeed, it is partially this denial of the validity of Say's law, that has made modern political economy so much a matter of mathematics. Just as the belief in "overpopulation" implies an optimum population which should be (but never is mathematically determined), so the belief that Say's Law is not valid for advanced economies implies an optimum balance of production and consumption. And just as when we look at some African country with a population density of a few people per square mile and note the horrible poverty of it people and then contrast that with Hong Kong with its density of thousands per square mile and relative affluence, we begin to suspect that population is probably not the whole problem, maybe not even a tiny part of the problem. So also when we look at that same African country with an unemployment rate of 60 to 80% and contrast that again with countries with high savings rate, we suspect that underconsumption is not the whole problem. It is this fact that has turned so much of modern political economy into mathematical exercises. Obviously, there must be some production. Also, the "Paradox of Thrift" cannot be a total paradox, i. e. if no one ever saves anything then economic progress grinds to a halt and quickly goes into reverse. Hence, the political economist finds himself, like the business economist (who does so legitimately), dealing in charts, tables, statistics, equations to determine the optimum values of production and consumption, saving and spending. The result, of course, entails a great deal of government force, and the results are never very satisfactory.

But, while denying the validity of Say's Law has been unfortunate for the economy as a whole, for many of those who make up that economy, it has been absolutely disastrous. The reason is not hard to find. Almost everyone, at some time in his/her life expresses the sentiment, "I don't want to be a burden on others." Unfortunately, the economics on Keynes, makes it so no one is a burden as long as they are consumers. The result is that those on welfare, those who live by preditation, criminal or legal, those who live off gambling winnings, those who are supported because they are disabled or handicapped, those who have government sinecures feel that they are no burden and, hence, there number is multiplying. When I first started going to my Church, there was one handicapped parking stall. It was placed there to accomodate an elderly gentleman who had been in a wheelchair since being crippled in childhood by polio. Today there are two rows or handicapped parking stalls. People pull into them and proudly point to their handicap stickers or license plates as they hop out of their cars and skip into church.

Say's Law is really the economic expression of the scriptural admonition, "By their fruits shall ye know them" and the admonition to be "profitable servants". Until it becomes a part of our personal resolve there can be little success or happiness in the fullest sense, and until it is reinstated as a social value there can be little peace or prosperity.

Wednesday, July 16, 2008

Personal Economics--The Second Law--Individual Truth

The second law also stems from Adam Smith. It says that whatever is true, correct, beautiful, or wise for the individual or "private family" does not alter when we add a group of individuals or families. This is a common theme running through all of Adam Smith's work, but probably the most direct (and most famous) statement is, "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." It is precisely on this point that most modern economists disagree with Smith. Having read very little about economics, but having been exposed to a few quotes by Adam Smith, including, this one, I was surprised in reading the introduction to my Econ 101 text (Samuelson 5th ed.) to read this statement so directly contradicted and without any real evidence, as though it was obvious that what may be prudence for the individual may be folly for a kingdom. Since, until that time, I had assumed that Adam Smith was to economics what Isaac Newton was to physics, this statement came as a surprise to me. Of course, I knew that modern physics did not agree with Newton on every point, but I would have been surprised to find an elementary text--or any physics text--that contradicted him without any evidence or proofs. In our labs (I was a physics major) when we did contradict Newton (notably on his optics) we very carefully did experiments with gratings and slits to convince ourselves that the Great Man may have made a minor error. Here the Great Man of Economics was being flat out contradicted. Obviously, in the minds of modern economists, he was anything but the Great Man.

Of course, because he did not elaborate, I am not sure what Samuelson had in mind, but among other things he may have been thinking of the so-called Paradox of Thrift. This is the idea that although we teach that it is smart for an individual or a family to be thrifty, if everyone is thrifty it is in some mysterious way, a national disaster. This comes from the idea that spending is the road to national prosperity--an idea that we will look at more closely in the next section.

Obviously, much political action in modern day America is built on the idea that the crowd, the union, the city, the state, the nation, can and even should, operate under different rules than the individual. We sometimes get that idea because some of these entities, ideally only the government are given the right to use force. But, ideally force would only be used in those cases when it would be equally appropriate for the individual to use force, e. g. for the protection of life and property or to enforce a contract. Under this rule it is as wrong for a labor union to hire thugs to beat up on strike breakers as it would be for me to hire them to beat up on people going to work, if I wanted a raise and felt that I could get it by preventing anyone else from going to work.

There are innumerable examples of ways in which we tend to think a group of people can operate under different rules than an individual, but one good example uses Adam Smith's defense of free trade. If I work in a hardware store and my neighbor in a grocery store, most of us would admit that it would be wrong for me to go over to him and threaten to start taking away his property because I spent more in his grocery store than he did in my hardware store. Few people would justify this on the basis that I am merely trying to even out the "balance of trade" or that I am demanding "fair trade". We do not even justify this in trade between cities or states. At present, at least, if the people of Utah spend 100 million dollars in California and the people in California spend only 10 million dollars in Utah, we do not start passing laws, rules, ordinances, restricing trade to even out the "balance of trade". This sort of nonsense goes on only when the group becomes large enough to become a nation. In my lifetime I have seen the people of at least three countries demonized (first, Germany, then Japan, now China) because they don't spend as much in our country as we spend in theirs. The fact of the matter is, of course, that "America" does not spend money in "China" and vice-versa. Individual Americans make exchanges with individual Chinese. Ultimately, this has to balance out, in exactly the same way as the money spent at the grocery store and the hardware store has to balance out, if it doesn't one goes out of business.

What happens when we begin to assign different standards of right/wrong, true/false to groups we cease to use any absolute values and begin to use statistical values of right and wrong. Politicians in modern America live by statistical values. Everyone is grouped. They belong to "the Rich" or "the Poor", by race or color or national origin. The second law says merely that this is wrong.

Monday, July 14, 2008

Personal Economics--The First Law--Judge by Works

The first law--judge others the way God judges us, by their works, comes from Adam Smith. In his great book, The Wealth of Nations, he is trying essentially to convince his fellow countrymen that they should apply the Golden Rule to foreigners as well as to friends and neighbors. In his most famous quote, largely famous for the mention of the "invisible hand", he points out that we do not judge people with whom we have daily dealings by their benificence or other qualities, we judge them by their works, and such judgement leads to social good. When was the last time you heard a customer in a grocery store tell the clerk that he would only buy the loaf of bread in his cart if the clerk could prove that the baker was a good Protestant, or even a nice guy? In our daily actions we tend to judge others by their works, unless we are influenced by politicians to otherwise. And to do otherwise is one of the chief aims of many, if not most, politicians.

My favorite example of this stems from a series of TV ads I saw as a teenager. Bob Hope, who was considered a sort of "superpatriot" because of his work in entertaining the troops, was hired by The American Ladies Garment Union to do a series of ads. The main idea behind the ads was when buying a garment before you do anything else, "Look for the Union Label." In other words, do not judge the suit, or dress, or shirt, or other garment by the quality or price of the garment, i. e. the work, until you have first determined (1) that the garment was not made in a garage or a basement, but in a Union shop, (2) that the garment was not made in Korea or Brazil or anywhere else but in the good ole USA, and finally, (and maybe most important) that the garment was not made by a man.

We see politicians always attempting to get us to judge other people by almost anything but their works. It is now, of course, "politically incorrect" to judge others by their religion or race, so now we are told to judge others by the country in which they reside, or by their attitude, i. e. are they greedy, money crazy, only interested "in the bottom line" etc., their political affiliation or outlook; indeed, almost anything but their works. Unfortunately, this carries over even into the supposedly "free market" where we encounter signs proclaiming products made in USA or in the home state.

Economists, when they are acting as economists, generally agree that we should judge products, at least, by the works of those producing them, i.e. their quality and price. Politicians, on the other hand, almost always advise us to judge products and people by almost anything but their works.

Wednesday, July 2, 2008

Personal Economics--Zeroth Law

It always helps clarify thought and improve the quality of action if we define some terms. Ludwig von Mises defined economics as the science of Human Action. This is a little broad for my purposes. I will define economics as the study of exchanges.

For me, "the economy" is simply the legal, political, moral, ethical, traditional, cultural and social framework in which exchanges are made. A "good economy" is, therefore, one that allows for the maximum potential exchanges. A "bad economy" is one in which exchanges are restricted, controlled, forbidden and hampered in numerous ways. We normally do not think of a good or bad economy in this light, but when we come to discuss Hayek, I hope that the reason for defining the economy in this way will be clearer.

The market is simply the place where exchanges are made. It can, of course, be a physical location, such as a store, or a less tangible "place" such as the commodities market.

Money is ideally the medium of exchange. When we discuss the law of markets we will explore reasons that so few of us in modern coutries really think of money as a medium of exchange and why, in our country, it is much more (or less, depending on your political orientation).

We begin our discussion of rules by looking at what seems almost obvious, and, therefore, I call it "the zeroth law". This states merely that before making an exchange we should ask ourselves the question, "can what I hope to gain from this exchange be gained by exchange at all?" In the popular vernacular the question is, "can I buy it?' We can, of course, think of all kinds of things that we cannot really buy, but the temptation is to try, because everything has an exchangeable component. Take "salvation" for example. In the delightful play, "Big River", Huckleberry Finn's guardians tell him that if he doesn't learn to read and write he won't get to heaven because "he won't know how". It seems that even so intangible a thing as salvation requires that we make some very tangible exchanges. This is true of all the qualities or things that we seek, i.e. happiness, wisdom, friendship, and health.

The zeroth law simply states that we examine every exchange to see if what we hope to obtain by it is obtainable at all by exchange. It is my conviction that as society becomes more corrupt, we seek increasingly to gain by exchange things that simply cannot be obtained by exchange. A few examples may help.

Although, I plan to discuss political problems when I deal with controverseries in the next series, I begin with an example from politics, i. e. the conviction that elections can more or less be bought. Because I am a registered Republican, I have been bombared of late through phone calls, e-mails, and letters, by various campaigns and the national committee with requests for donations. Most of these are somehow prefaced with the statement that their campaigns are in a state of emergency due to the fact that the Democratic opponents have so much more money. Implicit in all this is that an office can be bought. Of course, there is a kernal of truth to this in the fact that most victors, although certainly not all, spend more than their opponents. There are, of course, notable exceptions. William Proxmire was very proud of the fact that he spent almost nothing on his reelection campaigns. Others have been elected despite being vastly outspent. But even the fact that resources, particularly monetary resources, have much influence at all, is a result, I believe, from the fact that whenever government attempts to enter into activities best left to the market, they do so on the underlying premise that things can be obtained through exchange which are essentially unexchangeable. These include health, jobs, learning, and in many counties, and even in our own at an earlier time, the example I used earlier, salvation. As we explore the rules of personal economics, we will see, I hope, why so many of these things cannot really be exchanged.

Tuesday, July 1, 2008

Personal Economics--Introduction

During July I am going to use this blog to give ideas in what I call "Personal Economics". I realize, of course, that dozens of others have written, or are currently writing, similar ideas, but a blog is, after all, an opportunity to expand on ideas, frequently not yet perfectly formulated.

I think it instructive to remember that we typically give Adam Smith the credit for first really formulating the techniques we use in the social science of economics. All schools of economic thought use those basic tools, but the collectivist schools do not agree with his conclusions. We sometimes forget that Adam Smith was a principally a moral philosopher. His job was to teach students--most of whom planned to go into the Christian ministry--why the Christian moral philosophy was not only good, but also "smart", i. e. had application to this present life as much as to the next. He was most proud of his first book, "The Theory of Moral Sentiments" in which he attempted to show why people who barely could meet their own needs were willing to sacrifice for others whom they perceived as being in greater need. But he realized, I believe, that to pursue that same line of reasoning when it came to dealing with people in other countries, it would carry little weight. The feeling was then--as now--simply too strong, that people in one's own country should be treated differently, and that ultimately, there is nothing wrong with exploiting people in other countries. The wonderful (in my opinion) book, "Against the Tide" the author includes several examples of mercantilist writing from Adam Smith's day. These, like the similar writing of Pat Buchanan in our own day, are cast in Christian terms, but have an essentially anti-Christian bottom line--i.e. the Golden Rule simply does not apply to people in other countries. To counter this line of reasoning Adam Smith developed what we now call the social science of economics. Milton Friedman, in his book, Free to Choose, justified the application of the term "Social Science" to economics by stating that all economists agree with Adam Smith on the validity of free trade. The greatest economics teacher of the 20th century, Paul Samuelson, in the last pronouncement I heard from him, essentially denied the validity of free trade. I think it safe to say that there is, therefore, little "science" in economics, but that it can be enormously helpful as a boost to personal morality--the reason for which, I believe, Adam Smith conceived his ideas in the first place.

In the next days, I hope to outline 6 principles that I see as basic to personal economics. The first two come from Adam Smith. The third from Jean Baptiste Say. We then move from classical to "Austrian" economics for the last three. The first of these comes from Carl Menger, the next from Ludwig von Mises and the final from Frederick Hayek.