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.

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