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?

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."
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.
Would God that all the Lord’s people were prophets.
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.