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.

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