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."
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."
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."
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.

Friday, July 10, 2009

Personal Economics--Rule III

Unto every one that hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even that he hath. And cast ye the unprofitable servant into outer darkness.
It is the aim of good governments to stimulate production, of bad governments to encourage consumption.
Jean-Baptiste Say
Rule III used to be known as the law of markets. It says basically that production proceeds consumption, or, in other words, that we pay for what we consume from what we--or someone else--has produced. In our day, it has been renamed "Say’s Law" because the basis of Keynesian economics is essentially a denial of the validity of this law, so, in essence, Keynes rechristened it as "Say’s Opinion." Keynes, in referring to it often quoted James Mill’s attempt at an abbreviation--"supply creates its own demand." This seems to imply that anything that is produced will be sold, which, of course, is clearly not true, at least, not true if we mean by being sold "covering at least the cost of production". But the basic rule is, that production must proceed consumption and we pay for our consumption out of something that someone has produced. For Say, the critical problem is production. For Keynes it is consumption. Indeed, when listening to modern Keynesian economists, you get the feeling that they feel that production is automatic--it takes care of itself. Of course, this isn’t true and even the most die-hard Keynes disciple has to acknowledge that at some point things must be produced; hence part of the reason that modern economics is so laden with mathematics. Economists are busy calculating, using ever increasing sophisticated tools, just exactly when we need to begin to worry about production.
The effect of the denial of Say’s Law in our day is devastating and we see it all around us in a hundred different ways. At the slightest hint of a recession the headline scream, "Consumer confidence is down." Like Elvis Presley, we’ll have a "Blue Christmas" if the retail sales figures early in December indicate that people are spending less than they did the previous year. To get out of, or even to prevent, a downturn in the economy, politicians call for measures to "jump-start the economy" or to "prime the pump". They pass out stimulation money. They start government make-work projects. Anything and everything to "get money moving in the economy". Congressmen fight endlessly to keep defense plants open even if they are building archaic weapons. Military bases and installations that serve almost no useful function e.g. Fort Douglas in my own town, are somehow argued to be vital, if not to the defense of the nation, at least, to its economic welfare.
But most devastating is the effect on individuals, for two reasons. First, they lose the wealth that would have been created if all this spending had been done on productive enterprises, but even more destructive is the idea that we are serving a useful purpose just by consuming and spending.
My own favorite statement of Say’s Law on a personal level came in a graduation speech at my daughter, Natasha’s, graduation from Skyline High School. Lyn Davidson, a member of the Granite School board who had spoken at the two previous graduations I attended because older sons were graduating, admitted that he had run out of things to say on such occasions so he had asked his 90 year old mother what he could say. She responded, "You tell those young people what I told you when you graduated from high school."
"Mom," Mr Davidson complained, "that was a long time ago. I really don’t remember what you told me then. Could you remind me?"
"Well," the mother replied, "if you don’t remember that then tell them what I told you when you graduated from college."
"Mom," he protested, "that was almost as long ago. I really don’t remember."
"What I told you when you graduated from high school, " she said with great emphasis, "is what I told you when you turned 18, what I told you when you turned 21, and what I told you when you graduated from college. It isn’t turning a certain age, or getting a diploma or a degree, or a certificate or a license that makes you an adult. You don’t become an adult until you start producing more than you consume."
On that basis many Americans never become adults. Unfortunately, we don’t even expect it any more. It was with something like this in mind that our forefathers thought it was essential, even if they were famous and making most of their income from political activity, to be able to claim as a profession something in the free market. Daniel Webster, for example, was one of America’s most successful lawyers and a leader in the US Senate, but he always claimed to be a farmer. The same is true of his associates Henry Clay and John C. Calhoun.
Many Americans are eager to get on welfare roles in manner possible, partially, because they see themselves as performing a service by being consumers. Years ago when I was working as a volunteer employment specialist, a neighbor came to me asking me to help him apply for a job that had been listed. "That job is a government subsidized job that can only be given to someone who is handicapped," I informed him.
"I am handicapped." he responded.
"I’m sorry to hear that. I wasn’t aware of it. What’s your handicap?"
He responded so seriously that I didn’t dare laugh, but it took all my self-control not to. "I can’t spell", he said almost in tears. "You can’t imagine what a handicap that’s been to me."
That is an extreme example, but I am always amazed to see how eagerly people of my acquaintance claim handicapped status. I think it happens largely because it excuses them from the rigors of productive work and, after all, they are told repeatedly that what we really need in this country in this Keynesian age, is consumers. They qualify.
Rule III is, therefore, "I pay for what I consume with what I--or someone else--produces. The corollary is that except in very special circumstances if it is someone else, you never really grow up.

Thursday, July 9, 2009

Personal Economics--Rule II

Personal Economics--Rule II
"The race is run by one and one and never by two and two."
"What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom."
Adam Smith
The second rule stems from Adam Smith’s overall writing and is implied in the quote above. The rule is "whatever is right, true, correct, or moral for one person does not change if I add a person or a group of persons." This is the rule that divides economists. Most economists, when acting as economists and not as politicians or political yea-sayers will acknowledge rule I, i.e. judge others who you wish to deal with by their works and not in some other way, but rule II divides economists who are collectivists e. g. Keynesians, Marxists, etc from individuals e.g. Austrians and monetarist. It was a shock to me as a freshman when I read in the introduction to my Econ 101 text (Samuelson 5th ed.) That actions which are right and proper for individuals would be disastrous for the nation. Among the examples are the so-called "paradox of thrift", i. e. being frugal is a good thing for the individual, but collectivists believe it is diastrous for the nation as a whole. Because that belief is tied in with rule III to be discussed in the next essay I will chose an example directly from Adam Smith’s work.
Supposing that I work for a hardware store and my neighbor works for a grocery store. I approach my neighbor and say, "I have been checking the store receipts and I discover that I spent over 2000 dollars in your grocery store last year but you only spent about 200 dollars in my hardware store. This is an unforgiveable imbalance of trade. Unless you start spending more in my hardware store, I’m going to have the sheriff start confiscating your stuff to even out the difference so that the trade between us can be more balanced." If I actually went to my neighbor and said that, my neighbor would not be the only person who thought I was nuts.
We do not even carry on in that way about trade between cities. If the mayor of Provo called up the mayor of Salt Lake City and complained that the residents of Salt Lake only spent ten thousand dollars in Provo while the residents of Provo spent more than ten times that amount in Salt Lake and this is a wrong that I am going to call on the govenor to correct by increased taxation on the residents of Salt Lake. When we get to the state level we begin to see actions that approach this, and at the national level, of course, it becomes rampant with tariffs, import restrictions, and numerous other laws and regulations to address the "imbalance of trade".
In a hundred, probably a thousand, ways, we feel that an action that would appear wrong, even represhensible in some cases, as an individual is perfectly ok if we are part of a group that says the action is right. For another example, if I think I deserve a raise so I refuse to work until I get it, I would probably be severly reprimanded if I beat up or maimed anyone who showed up at my work to replace me, but if a union does that it is ok.
Because of this attitude we have replaced our sense of absolute morality with a statistical sense of morality. We recognize the immorality of an individual robbing another because he is convinced that the person he robs "is better off than I am". But we think nothing of forcing everyone who earns $40,000 a year to help out those who earn $20,000 or less. We begin to decide in some sort of statistic who is rich and who is poor and those statistics are used to decide who should be forced to help whom.
On a personal level the rule simply reauires that we ask outself when acting as part of a group, "would I do this if I were acting alone?" If the answer is "no", you can be pretty sure that what you are doing is wrong

Wednesday, July 1, 2009

Personal Economics--Rule I

"‘Ye heve read, ye have heard, ye have thought,’ he said, ‘and the tale has yet to run:
"By the love of the body that once ye had, give answer--what ha’ ye done?’"

"It is not from the benevolence of the butcher, the brewer, and the baker that we expect our dinner, but from the regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."
Adam Smith

The first rule of personal economics is derived from the work of Adam Smith. It is a rule of classical economics and is imbedded in much of his writings including the famous quote above. It is important to remember again that Adam Smith was a professor of Moral Philosophy. He believed that what was right was also, in the long run, at least, also what was smart. He is saying here that in the ordinary transactions of life, we do not judge men by their intentions or their thoughts or their hopes or anything else. We judge men the way God judges us--by their works. He does not say that we should do this, he says that in a free and reasonable society that is how we do judge them. When was the last time you were standing in line at the grocery store and the man in front of you held up a loaf of bread and said to the clerk, "If you can prove to me that the man who grew the wheat that went into this bread, the man who milled the wheat, the man who baked the flour, the man who packaged the bread and the man who delivered it to your store were all good Presbyterians, I will buy this loaf of bread."? We would probably think a man who said that was crazy. In the most peaceful interactions we have with others, that is how we do judge them. The reason for this is that most reasonable men in a free society recognize that it is simple justice to be judged by their works. This is the first rule of personal economics--"Judge others the way God judges you, by their works".
Unfortunately, while few of us wish to be judged personally by our works. We wish to be judged by our intentions or our nationality or our ancestry or in some other way that gives us an advantage over others. Politicians frequently play on this desire and try to get us to judge others in almost any way other than their works.
A favorite example of mine stems from a series of ads done by the comedian, Bob Hope, when I was a teen-ager. Because he frequently entertained American troops, he was known as a kind of super-patriot, so the American Ladies Garment Union hired him to do a series of ads for them. The gist of the ads was that when buying a garment i.e. a shirt, a dress, a tie, a pair of slacks, etc., you should not judge the person, or his garment, by his works, i.e. the quality or price of garment. That should be a secondary consideration. Before everything else, you should "look for the union label". If you do that, you can be sure that the person making your garment did not make it in their garage or basement. Union officials usually refer to people who make things in such places as "working in a sweat shop". You can also know that the person making the garment was a genuine American, or, at least, was working in America. You could have the comfort of knowing that the person making your garment was not living in Asia or South America or Europe or some other place where foreigners live. Finally, you could know that your garment--and this is probably most important of all--was not made by a man.
In Adam Smith’s day, feudalism was disappearing, but one aspect of it remained--what was called Mercantilism. The Mercantilists were very suspicious of foreigners. They should not be traded with. By sending goods to a country they were very sneakily trying to get gold out of the country. They were creating an "inbalance of trade" and trying to destroy a country’s wealth, i.e. its gold reserves. Adam Smith was simply saying we should judge the man across the river, or channel, or mountain range who happens to speak a different language, the way we judge the man next door or the man who runs the local bakery--by his works.
Rule I simply says that we don’t judge a man by his attitude, his nationality, his religion, his outlook, we judge him by his works.