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Chapter 4: Economics 101 Reviewed

This chapter is an Economics 101 review for those who have labored through college economics classes, and an introduction for those who have not. While this chapter cannot possibly be the last word on the subject, if it takes some of the mysticism (and voodoo?) out of economics, it will have done its job.

What is Economics?

The systematic study of economic behavior is a recent development in human history. Adam Smith, the author of An Inquiry Into the Nature and Causes of the Wealth of Nations, is credited with having offered a new conceptual framework for understanding economic behavior. Before 1776, "the idea of abstract land or abstract labor did not immediately suggest itself to the human mind any more than did the idea of abstract energy or matter."¹ (Incidentally, Adam Smith was a moral philosopher who addressed wealth creation and exchange relationships as a small part of a much larger picture.)

Making economics into a science offers both advantages and disadvantages. The major advantage is that conceptual frameworks are helpful for understanding disconnected and in themselves meaningless scraps of information. However, there are negatives as well. We can become so mesmerized by our concepts that we make our theories about people more real to us than the people themselves. This is called the fallacy of reification.²

For years economics has been called the "dismal science."³ When I was studying economics while in pursuit of my business degree, I was inclined to agree with that description. While some interesting and useful ideas like "supply and demand," and "elasticity of demand," were presented, the main emphasis seemed to be much the same as my Quantitative Decision Making class&emdash;apply numerical values to subjective phenomena, run a string of such values through a complex statistical formula, and then hope that a series of small guesses so analyzed will be closer to reality than one big guess. Overall, my economics classes seemed like one long pep talk designed to make us believe that our economic planners were our saviors.

A definition of economics that makes more sense to me is this: "The study of economics is simply a study of the results of the actions that people and their governments take that affect the production and distribution of food and goods."⁴ An economy is nothing more than the aggregate of the results of the actions of many individuals attempting to fulfill their needs and desires in the best way they know how. Put more simply, the study of economics is the "science of human action."⁵

To put our present subject in perspective, let's review what we have covered so far in this book. The Introduction established that we must eat on a regular basis and maintain our bodies within an acceptable temperature range. From there we concluded that survival requires access to resources. In Chapter 1, we acknowledged that our "intellectual brains," or our faculty of reason, can be used effectively to compensate for weak legs, flat teeth and dull fingernails. It was also noted that "inferior" intellects located closer to a problem can often solve it more effectively than "great intellects" can from a distance.

In Chapter 2, we explored the four types of labor that make up the production process. Also, we noted that production only happens when people stop fighting long enough to get some work done. Chapter 3 attempted to cut through some popular euphemisms by increasing our awareness of the difference between voluntary association and coercion. In this chapter, we will explore individual and group economic behavior and its relationship to both market and non-market forces.

Economic theory addresses three basic issues: how individuals make choices from among a range of options, how individuals make exchanges with other individuals, and how national economies perform in the aggregate. In the following paragraphs, each issue will be looked into in the order mentioned above.

Microeconomics I: The Individual Economic Actor

Generally, we think of economists as people who make a living advising businesses on strategy and governments on policy. That sounds good. But, really, what does an economist do? She studies different investment-mixes in order to determine which one will yield the greatest return. In other words, an economist's objective is no different than anyone else's&emdash;achieving maximum satisfaction from limited resources.

Who Is An Economist?

The classic problem of economics is summed up as, "unlimited wants, limited resources." Everyone, no matter how wealthy or privileged, is forced to choose some things, and in turn, obliged to forego others. Even if a person had all the money in the world, she would still not have time to do everything.

Because we all must make choices, everyone is an economist. In fact, every creature&emdash;not just us "human critters"&emdash;must weigh costs and benefits while making choices among available alternatives. Even one-celled economists have been discovered on this planet! The source escapes me, but I remember reading about an experiment performed on some type of one-celled creature which was given two types of food. One type of food was preferable to the other, so the experiment focused on how much further it would travel to get its preferred food. As expected, our one-celled friend did travel further for its preferred food, but if its favorite food was positioned too far away, our one-celled friend would settle for its second choice. From there we can surmise that the cost of additional travel exceeded the benefits of better taste.

In another instance, a token economy was set up in several mental hospitals. The token economy provided rewards for tasks performed with tokens which could then be used to purchase things that patients wanted. "Disciplinary problems became relatively unimportant with the token economies. Further, when difficulties did arise, in general they could be dealt with very simply and easily by changing the price. For example, in one hospital, the patients objected to mopping the floor. The caretakers simply raised the wage for floor mopping and found themselves deluged with volunteers."⁶ After various experiments, they concluded: "In general, what these experiments indicate is that standards of rationality required for economic behavior are so low that certified patients in mental hospitals&emdash;sometimes, certified basket cases&emdash;meet them."⁷

Economic principles affect every area of our lives, not just business relationships and monetary transactions. All relationships impose costs and (hopefully) confer benefits. For instance, it often happens that men and women, after one or two dates, suggest to each other, "let's just be friends." What is being said is, "I perceive you as being capable of offering only enough value to justify a friendship, and nothing more."⁸ Although the primary currency of intimate and friendship exchange is not material or monetary in nature, exchanges still take place.

Any time we choose a value, whether it be material or non-material, we are giving up the next best alternative available to us at that time. Of course, our choices are many, and we must choose according to our values. One person may choose a nice car and an older house; another may choose a nice house and an older car; and a third person might choose an older car, a small apartment and lots of free time to write a book called A Farm Boy's Testament to the United Nations.

Microeconomics II: Exchange Relationships Among Individuals

Economics exists as a science not only because people must make choices among alternatives, but also because they trade goods and services with one another. Were everyone a Robinson Crusoe living on their isolated little island, economics would not have to go beyond "choice theory". Direct commodity production requires knowledge of how to turn raw materials into consumable goods (food, shelter, etc.) and capital goods (tools), but it does not require an understanding of the principles of exchange.

James Buchanan develops on the Robinson Crusoe scenario thusly: "The uniquely symbiotic aspects of behavior, of human choice, arise only when Friday steps on the island, and Crusoe is forced into association with another human being. The fact of association requires that a wholly different, and wholly new, sort of behavior take place, that of 'exchange,' 'trade,' or 'agreement.' Crusoe may, of course, fail to recognize this new fact. He may treat Friday simply as a means to his own ends, as a part of 'nature,' so to speak. If he does so, a 'fight' ensues, and to the victor go the spoils."⁹ In this situation, it quickly becomes apparent that Mr. Crusoe will live better if he chooses to employ Friday's skills than if he decides to kill him to take his "property."

Specialization and Economies of Scale

In an industrial society, a great deal of knowledge is embodied in many of the products we use daily and take for granted. Chapter 2 explored the complexity of making a simple pencil. The main point was that the knowledge involved in making even a pencil is so extensive that no one person on the planet knows every step in its most minute detail. It is only the combined knowledge of many people that makes it possible to make a pencil. This process becomes even more remarkable when we consider how long it would take for each of us to make a pencil compared to how long we have to work at even a menial job in order to buy one at the store. In America, for instance, a person working at minimum wage can purchase a package of ten pencils in exchange for fifteen minutes of work. Try making even one pencil in fifteen minutes by yourself!

Specialization of Labor

One important benefit of an exchange economy is the improved efficiency that comes from specialization. For instance, let's consider this hypothetical example. I raise corn, and I want to buy a chair. With years of experience, I have become very good at growing corn. On the other hand, my chair-making skills are very poor. Consequently, if I can find someone who is good at making chairs, and who has not yet broken the habit of eating, maybe I can trade some of my corn for her chair, allowing me to enjoy the best of both worlds.

Each skill&emdash;raising corn and making chairs&emdash;requires its own type of knowledge. The more we can focus on one type of work, being confident that we can trade any excess production, the more the general wealth will improve.

Specialization of Resources

Along with the benefits of increased productivity that comes from specialization in labor, we can also benefit from specialization in resource availability. For instance, Iowa's climate is ideal for growing corn while Florida is better suited for growing oranges. Of course, it doesn't take a genius to figure out that growing oranges in Iowa and growing corn in Florida will require more effort than allowing nature to do more of the work. To not allow nature to do as much of the work as possible is the equivalent of another hypothetical Robinson Crusoe scenario:

But perhaps you do not know this: just as he was about to strike the first blow with his axe, Robinson Crusoe noticed a plank cast up on the beach by the waves."
Oh, what a lucky accident! He ran to pick it up?
That was his first impulse; but then he stopped and reasoned as follows:
"If I go to get that plank, it will cost me only the exertion of carrying it, and the time needed to go down to the beach and climb back up the cliff.
"But if I make a plank with my axe, first of all, I shall be assuring myself two weeks' labor; then, my axe will become dull, which will provide me with the job of sharpening it; and I shall consume my provisions, making a third source of employment, since I shall have to replace them. Now, labor is wealth. It is clear that I shall only be hurting my own interests if I go down to the beach to pick up that piece of driftwood. It is vital for me to protect my personal labor, and, now that I think of it, I can even create additional labor for myself by going down and kicking that plank right back into the sea!"¹⁰

This brings us back to the age-old question: do we want labor, or the results of labor?

The Economic Machine

In any system of commodity production there are five steps that take place regardless of the political system people live under. These steps are: 1) human desire, 2) labor, 3) resource processing, 4) distribution, and 5) marginal satisfaction. When step five has been completed, human aspirations are generally heightened, or at the very least, people get hungry again and the cycle begins anew. Once again, these five factors take place regardless of how they are managed politically. Figure 4-1 has been developed in order to illustrate this concept visually.

Let's consider these steps one at a time:

Human Desire

Desire is our motivation to action&emdash;the engine that drives production, if you will. Of course, desire does not escape criticism. For every person who equates desire with divine discontent, at least one other person equates desire with lust and corruption. The second perspective was portrayed well by a cartoon I once saw which showed Moses holding the stone tablets, looking upward, and asking, "No greed? But what's to become of the economy?"

While it can be argued that people can easily fall into the trap of materialism, being too aesthetic can cause its own problems. "Often when we renounce superfluities we end up lacking in necessities."¹¹ In any case, whether desire is right or wrong, good or bad, it remains the motive force behind all human endeavor. (Thus, wise economic policy is made by considering the effect new policies will have on people's inspiration to return to work the day after they have felt the effects of those policies.)

Labor

Once human desire has been "fired up," the next step is to perform some type of labor. In the Chapter 1 we considered the concept that says there are four types of labor: physical labor, inventive-labor, management-labor and capital-labor. Also, we considered the idea that if we wish to improve our lives, we will be wise to learn how to perform as many of those four types of labor as possible. Although we can debate whether individual initiative or chance circumstance is the primary determinant of human destiny, and we can debate whether it is fair for some people to start life with more abilities and capital than others, the "iron law" of survival remains constant: If somebody doesn't work nobody eats (or lives indoors).

Resource Conversion

The end-goal of labor is to convert raw materials into finished products that support survival and comfort. Except for places with climates that can consistently provide food merely for the picking and also eliminate the need for clothing and shelter, raw materials must be pulverized and modified to enable us to live at all, much less to live comfortably. This is a reality of life that is being lost on many people&emdash;especially people who enjoy life-styles that isolate them from the elements. While there may be a vocal few who hate people without reservation (all the while loving humanity), it appears that most of those supporting "resource lock-up" simply do not understand the connection between resources in nature and the homes, cars and food they take for granted.

The connection between resource use and survival was made very clear to me at an early age. When I was a teenager on the farm, we were busy converting raw materials into life-sustaining commodities from sun-up to sundown. In fact, we were always struggling just to keep up with everything that needed to be done.

One of the jobs I hated most was picking up the latest crop of rocks off the fields after each plowing. Most of the time we picked rocks when it was too cold to do anything else. As I am not the most warm-blooded creature, my fingers would get so cold that I would just lock them into position, grit my teeth, and envy the mechanic downtown and the warm garage he worked in.

Even today, when I am driving in a storm with the heater running and seeing the bitter cold and snow just three feet away, I treasure my comfort and I feel an exhilarating sense of triumph over nature. You might say I am most grateful for those resources which have been transformed into automobiles. (When I read Aleksandr Solzhenitsyn's books, The Gulag Archipelago and The Gulag Archipelago Two, I experienced strong sympathy for the people who endured extreme cold weather while working in Siberian labor camps.) In short, you will not find me joining in a chorus with intellectuals like Eric Fromm who glorified the Middle Ages. If there is an easier way to convert raw materials into life-supporting products, I am interested!

Raw materials do not become resources until someone figures out a use for them. Wood was not a resource for heating until someone discovered fire. Whale oil was not a resource until someone figured out that it would burn. Fossil fuel, known by some as "dinosaur squeezins", was not a resource until someone figured out how to use it. Until then, it merely polluted otherwise good farmland.

Before we throw in the towel and declare that doomsday is just around the corner, we might consider the development of computers. When computers were first invented, they were big, used lots of electrical power, required lots of air conditioning, and burned out tubes on an average of one every seven minutes. Now that same computing power can sit on a desk, use power equivalent to a couple of light bulbs, be composed of minute amounts of a common material, and boast thousands of hours "mean time between failure."

Ultimately, resource availability is as abundant as human creativity will allow. (And human creativity is as abundant as social and political systems will allow.)

Distribution

Once raw materials have been converted into consumable goods, we must figure out how to distribute the excess beyond our personal consumption. (Even if we are only marginally competent, it is not difficult to produce a greater quantity of a single product than we can use personally.) Even primitive cultures often create surpluses, thanks to small-scale specialization of labor: one person hunts, another makes baskets, and so on. This means that in all but the most tribal cultures, some form of exchange or distribution is necessary.

Distribution can be done in several ways: voluntary donations, forceful confiscation, or voluntary exchange in the market through barter or monetary transactions. Utopians generally advocate the first method by offering the ideal of everyone throwing their production into a communal pot. However, human nature being what it is, utopians quickly become frustrated, and then they start advocating the second method. (Lenin, for instance, vowed to change human nature.) The third method, voluntary exchange, is advocated only by a few stubborn souls who refuse to believe that the well-being of one person can only be improved at the expense of another person. Summed up: "If any person or nation wants more than they have, they must produce more. The alternative is to seize the production of others, by theft or war or political action."¹²

As was mentioned in the last chapter, we have a choice between voluntary exchange or coercive exchange. (Voluntary donations fall into the category of voluntary exchange, leaving us with two primary categories.)

Distribution through Voluntary Exchange

The first method of distribution is called "voluntary exchange in a free market." In this scenario, people who care little for one another strike hard bargains with only their own personal interests at heart. However, in spite of the apparent lack of a loving and humanitarian spirit, they somehow refrain from using force or fraud to close the sale. If both parties cannot agree, they part company and the transaction simply does not take place&emdash;they seek for a successful exchange elsewhere.

Actually, a true free market has never been tried. However, every culture has pockets of free market activity. The freer the culture, the greater the amount of market activity. In regulated economies, these pockets are called the "black market" and the more regulated the economy, the larger and more active the black market. (To comprehend how strong is peoples' desire to trade with one another, we only have to consider that people are willing to deceive even their own governments in order to exchange goods and services.)

Another dimension of voluntary exchange is free-will donation to charity. Contrary to philosophers who wish to disparage human nature, there is a large demand for the good feelings that come from helping others. When we give to someone else, we are affirming our own competence in life&emdash;we not only create enough for ourselves, we create even more than we need.

Of course, some people get in a hurry to return to the garden, so they set out to give humanity a push in the direction they believe we should go. These people seek to facilitate exchange "by other means."

Distribution through Political Action

A popular form of distribution is called political distribution&emdash;better known as redistribution. Some people find themselves unhappy with "market outcomes" in the allocation of goods and resources, so they look to the government to redirect resource allocation in a manner more to their liking. This approach is considered civilized because confiscation is effected with a ballot instead of a bullet.

However, as confiscation becomes an increasingly acceptable means of distributing goods and resources, it also becomes less subtle. In Bosnia, Serbs are attempting to purchase large tracts of land for the price of a few bullets and mortar shells. In Somalia, warlords are vying with one another for control/ownership of both the land and the biped creatures who cultivate the land. And of course, there are scores of skirmishes around the planet at any given time. These, of course, represent the extremes of political persuasion&emdash;war is politics run amuck.

Political inputs of coercion into the market place often have unintended consequences, modifying people's behavior in unexpected ways as they adapt to forced changes in the incentive structure. In the former Soviet Union, for instance, it was common for people to say, "We pretend like we are working and they pretend like they are paying us."

Later in this chapter we will take a closer look at some specific strategies that are used to effect "exchange by other means." Indeed, much is being accomplished through subtlety and craft that could not be accomplished through outright belligerence.

Marginal Satisfaction

At the end of each economic cycle, we achieve "marginal satisfaction". Then we begin the cycle anew. Depending on how we fared during the last cycle, we will either redouble our efforts, or we will slack off, or we might even decide to fight because we have determined that our productive efforts were futile.

Except for an occasional Buddha here and there, complete satisfaction is rare in human experience. In fact, nature's agenda mitigates against it. It is not common for people to eat only once, sleep only once, or have sex only once, and then say, "That was an interesting experience. Now that that's behind me, I can do something else with the rest of my life." (Or as they say on television, "been there, done that.") Consequently, we get back on the economic cycle and go for yet another ride.

Establishing Comparative Value Among Goods and Services

In addition to the issue of marginal satisfaction, we need to consider comparative value. When we seek to maximize our satisfaction, we must choose things we value more and forgo other things we value less. (The true cost of any choice is the second best alternative we gave up for it.) In a larger market, where many people are making choices daily, we soon discover that the demand for some items exceed the supply while the reverse is true for other items. Generally, these demand/supply ratios are reflected in the market through higher and lower prices. This principle holds true in both open markets and in black markets.

While this principle is simple, much intellectual and political energy has been spent fighting these principles. Many philosophers insist that subjective valuations in the market do not determine the true value of a good or service, and point to other methods of measuring value. Other philosophers concede that the market price does reflect people's subjective valuations of goods and services, but they insist that a superior method should be found. (Some philosophers who resent "cold cash" have discovered that "happiness is a warm gun.")

Some philosophers insist that the true value of a good is determined by the amount of labor it takes to make it. Others insist that the overall cost of producing a good determines its value. Finally, there are those who accept the subjective valuations of individuals as a rational and just way of establishing comparative value. Let's consider each in its turn.

The Labor Theory of Value

The idea that value is completely created by labor is primarily a Marxian concept. However, Karl Marx was not the only person to point to labor as a creator of value. Frederick Bastiat, an ardent opponent of Socialism made this observation: "Exchange involves the bartering of values; and since competition makes value the equivalent of labor, exchange involves the bartering of equal quantities of labor. What Nature has contributed to the products in the exchange is given by both parties to the transaction free of charge and into the bargain, . . ."¹³

We noted in an earlier chapter that Marx saw physical labor as the only labor deserving of reward. This view contrasts sharply with a perspective that includes four types of labor. Adding the cost of all four types of labor together would lead us to the next approach to valuation&emdash;cost of production. (Could this be the philosophical origin of those sweet cost-plus government contracts?)

Cost of Production

Costs of production include everything that is necessary to produce a product or service. These factors include education, market research, planning, investment in tools, organizing, and the hands-on work itself. As was noted in Chapter 2, a lot of knowledge is required to make even simple products.

Because so much knowledge and effort is required to make even simple products, it is little wonder that people become attached to the results of all their hard work. Naturally, they expect to be rewarded well for their efforts. Unfortunately, producers are often disappointed when they learn that consumers do not value their goods and services to the same degree. (Which is why people who promote non-market methods of establishing value have to supplement their productive activities with political action.)

The major weakness in both the Labor Theory of Value and the Cost of Production approaches is that they declare, in effect, that "the worth of a good or service is determined not by individual evaluations but by the amount of effort exerted: if as much effort is used to make a mud pie as to make a mince pie, they are of equal worth!"¹⁴ And because mud pie manufacturers deserve a "fair profit," we find them and their representatives lining the halls of capitol buildings around the world.

An Overall Assessment of the Nature of Value

In the end, we discover that the true value of a good or service is what someone else will voluntarily exchange for it. John Ruskin offered this formulation: "Value is the life-giving power of anything; cost, the quantity of labor required to produce it; price, the quantity of labor which its possessor will take in exchange for it." This leaves one final question&emdash;will the prospective buyer agree to the price that the producer wants for the product of their labor? As producers, we generally sell our products and services for less than we would like to, but not for less than we are willing to. Likewise, as buyers we generally pay more for goods and services than we want, but not more than we are willing to.

Money and Monetary Systems

The first level of an exchange economy is called a barter economy. Earlier in this chapter we explored the improvements possible due to specialization within the limits of a barter economy. In a barter economy, efficiency is increased somewhat thanks to the specialization and exchange that can take place on a local scale. However, if we wish to improve our efficiency beyond that allowed by barter, we need to use a commodity called money, which will further increase both the flexibility of our transactions and our "economy of scale."¹⁵

The Function of Money

Back in 1984, I stopped one day and asked myself, what is money? The long form of the question was: what does money do for a society that justifies the massive investment in paper and metal, buildings, transportation and people? After all, without a monetary system, those resources could be used elsewhere.

Given that I had acquired a Bachelors Degree in Business Administration with eight semester hours of study in economics, I figured that just sitting down in purposeful thought would give me the answer. Instead, my contemplation yielded no answers. Consequently, I ended up adding economics to my study regimen.

A barter economy is not a bad system. (It is certainly an improvement over having to make everything oneself.) However, if I want to exchange some corn for a few chairs, I have to spend time talking to a number of chair-makers until I find one who is in the market for corn. This can be time consuming, and that time could be spent doing what I do best&emdash;growing corn. Furthermore, what happens if the chairs I like most are made by a chair-maker who does not need corn?

On the other hand, when money is generally recognized as a store of value, my options expand. Now I can sell my corn to anyone wanting corn, and then buy my chairs from anyone selling chairs, including the person who makes my favorite chairs. I am relieved from having to store corn while waiting to find someone with the chairs I want, and I don't feel the pressure of having to spend all my corn in the same place so I can get back to work.

This brings us to the next function of money: it needs to be divisible. The person selling chairs probably wants more than just corn in exchange for her chairs. With the help of money, after she has sold her chairs, she can buy smaller quantities of any number of goods and services offered in the larger market.

The divisible nature of money is also useful for joining together resources for larger capital ventures. Let's say that I have an idea of buying a corn press in order to make oil from the corn that has, till now, been going to waste. However, I do not have enough money to personally buy the press. With the help of money, I can solicit investors who will pool their money together so we can achieve through group action what none of us alone could hope to accomplish. (A result usually ascribed to political action.) In short, because of the divisibility of money, everyone's range of choices improves, and less time is spent transacting business as well.

The next quality of money is that it is portable. What if I want to take a trip. Chances are it would be difficult to load enough corn on my back or even on the back of my mule (or automobile for that matter) in order to support myself for a long journey. However, with the help of money, I can travel much further.

Another benefit that comes from money being portable is that as the area in which a specie of money is accepted widens, the opportunities for trade increase proportionally. An example of the benefits of trading over a larger geographical area was given by Frederick Bastiat. "Labor and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. . . . If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market."¹⁶ In other words, when money is portable and recognized over larger areas, people do not have to live in a particular climate in order to enjoy its benefits.

The next function of money is to represent a store of value over time. If I grow more corn than I need now, I can accept money in exchange for the excess corn with the expectation that if I need something later, I can buy it then. In addition, it is worth noting that corn does not store as economically as that non-biodegradable commodity we call money.

It was at this point that I began to suspect that something was wrong. Granted, the dollar was generally recognized as a store of value, it was divisible, and it was portable. However, the 1984 dollar did not purchase as much as it did even a few years earlier, much less fifty years earlier. Then I recalled a class discussion in high school in the late 1960s where the teacher was talking about an example where someone, instead of buying hamburger for a party, put the money in the bank with the idea of having an even bigger party ten years later. After the ten years had passed, the money was taken out in anticipation of a good party. However, it turned out that even with interest on her savings, she bought less hamburger than the principle alone would have purchased ten years earlier. Fortunately, she did not have a heart attack. Thanks, in part, to her not eating that hamburger ten years earlier, she had a stronger heart with which to withstand the shock. Nevertheless, the mystery remained&emdash;where did that lost purchasing power go?

Inflation: Its Cause and Its Effects

Inflation is an elusive phenomenon. For years we have been hearing inflation being blamed on "greedy businessmen" and "spendthrift housewives". Business owners are accused of arbitrarily increasing prices and housewives accused of mindlessly bidding up prices. In economics text books, the first is called "cost-push inflation" while the latter is called "demand-pull inflation."

Cost-push and demand-pull theories of inflation are useful up to a point. It is general knowledge that as the supply of a good or service increases relative to demand, prices will go down. Conversely, as the supply decreases relative to demand, prices will go up. However, these theories are only useful for understanding isolated price increases. If costs keep going up and there is no market willing to pay the higher prices, production of that good or service will slow down or stop, thereby lowering the supply to match the demand. On the other hand, if demand increases, thereby bidding up the prices, a signal is given to producers to start making more. In response to these influences, prices will have a porpoising effect rather than a general increase.

To account for a general increase in the price of everything, a different theory will have to be developed. Our first clue comes from a term used earlier to describe money: exchange commodity. Like any other commodity, money's value is measured in terms of its ability to purchase other commodities. In a sense, one could say that the value of a dollar is the amount of goods and services one has to give up in order to acquire or hold it. Consequently, looking at the quantity of money relative to the quantity of all the goods and services it is called upon to represent will help us better understand the cause of inflation.

Inflation and Its Relation to the Money Supply

The dictionary describes inflation this way: "Inflation: Economics. An abnormal increase in available currency and credit beyond the proportion of available goods, resulting in a sharp and continuing rise in price levels."¹⁷ While it is common for the prices of individual goods to go up and down as quantities of goods change in relation to demand, the supply of money must increase for everything to go up in price at the same time.

This understanding of inflation is not common knowledge. John Adams, America's second president, made this observation over two-hundred years ago: "All the perplexities, confusion and distresses in America arise not from defects in Constitution or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation."¹⁸ More recently, no less of an authority than John Maynard Keynes asserted: "Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. . . . Lenin was certainly right. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which one man in a million is able to diagnose."¹⁹

The Mirage of Inflation

It is common for people to assume that if the price of a commodity or service goes up, the value of that commodity has gone up too. As the last paragraph suggested indirectly, that is not always the case. In the late 1970s, farms that sold for $20,000 in the early 1960s were selling for $250,000. People were thrilled to discover that their land had "gone up in value".

About this time, I was studying economics in college. My calculator was vibrating with excitement as I computed that my parents could sell the farm and live very nicely on the proceeds at 12% interest. My father, with his eighth grade education and a vivid memory of the Great Depression, shrugged off my "sagely" recommendations²⁰ by saying, "Just as surely as I sell this place, the banks will go broke and I will lose it all."

Of course, I knew that couldn't happen because my economics textbooks told me that the government had already taken steps to insure that would never happen again. (The government loves me, yes I know; for Paul Samuelson tells me so.) My father did not share my faith, so I let the subject drop&emdash;after all, it was his farm. . . . In the end, however, guess who proved to be right?

Inflation is very tricky. It is easy to believe we are better off because we are holding more dollars or more rubles or whatever. However, the best way to measure our well-being is in terms of how many hours work we have to do for a certain good or service compared to what we did earlier. "In 1946, a student who had a part-time job at sixty cents an hour, could take a date out to a drive-in food stand for a coke, sandwich and ice-cream and later a movie for a total cost of $1.20 for both of them. This represented two hours of his work, at sixty cents an hour. Today, the same date costs $12.00, which take almost 4 hours of work at the government-regulated minimum wage rate of $3.35 an hour&emdash;if his skill is such that he can find a part-time job that will pay him the wage."²¹

Land, houses and capital do not go up in value unless their utility has somehow been improved. For instance, an acre of corn will only support so much human life. Its life sustaining value remains the same whether it takes one dollar or a million dollars to buy it. If the use of the property has not changed, and yet it takes more dollars to purchase it, we can say it has only increased in price.

Money not only represents goods and services in the marketplace. It also represents faith&emdash;faith that in the future, someone will produce goods and services and be willing to exchange them for the money one has been hanging onto. If one were stranded on a desert island and discovered a treasure chest of currency, or even gold and jewels, it would do nothing to lessen the necessity of wrestling with the elements for survival. Nature does not accept money in exchange for goods and services&emdash;only people do.

Macro-Economics: The Government's Role

In Influencing Economic Activity

For over 5,000 years, people have accepted the idea that minute aspects of their daily lives should be controlled by society's primary agents of coercion. Hence, governments have used the science of statistics for a long time with the hope that by manipulating levers here and there, abundance will be assured. "Statistics, . . . are the eyes and ears of the interventionists: of the intellectual reformer, the politician, and the government bureaucrat."²² Ultimately, for government planning to be successful, it must at least find a way to mimic the market.

When discussing regulation, we are covering as wide a topic as is human action itself. In this section, we will start by considering the government regulation of money because it is a natural continuation from where we left off. Later we will consider some of the other popular forms of regulation.

Monetary Manipulation and Price Information

Political leaders generally have two reasons for dictating economic and monetary policy. The first reason is the desire to increase their personal wealth by controlling the "rule space." The second reason is to correct perceived inequities in the way people distribute goods and resources among themselves when there is no higher authority intervening. Many of these schemes call for freeing the economy from the "tyranny of prices." This, of course, is a popular policy because everyone would like to sell what they have to offer for more, and also to be able to pay less for what they buy.

The curse of prices hides within it a benefit, if only we will look closer. With a single scale against which to measure the relative value of all the different goods, services and resources in the marketplace, better decisions can be made. If a product is in high demand, the high prices it commands tells other producers to get busy producing more. If the cost of a certain raw material goes up, a shortage is indicated, and either more will be found, or a substitute will be developed. Naturally, low prices indicate the reverse. (Apart from ethical issues, command economies have problems with resource allocation because resources and goods are distributed by political fiat rather than by price and availability.)

If money is to be a useful expediter of exchange, people must have confidence in it. When money starts losing value rapidly, economies falter because people can no longer do long-term planning. In the early stages of inflation, people start to make decisions that they would not make if the extra money did not encourage a false sense of prosperity.

John Maynard Keynes is credited with the "discovery" that printing some money and putting it into the economy can generate more economic activity. However, Benjamin Franklin noted the stimulating power of printed money some two-hundred years earlier:

I was on the side of an addition, being persuaded that the first small sum struck in 1723 had done much good by increasing the trade, employment, and number of inhabitants in the province, since I now saw all the old houses inhabited, and many new ones building: whereas I remembered well, that when I first walk'd about the streets of Philadelphia, eating my roll, I saw most of the houses in Walnut Street, between Second and Front streets, with bills on their doors, "To be let"; and many likewise in Chestnut street and other streets, which made me think the inhabitants of the city were deserting it one after another.
The utility of this currency became by time and experience so evident as never afterwards to be much disputed; so that it grew soon to fifty-five thousand pounds, and in 1739 to eighty thousand pounds, since which it arose during war to upwards of three hundred and fifty thousand pounds, trade, building, and inhabitants all the while increasing, tho' I now think there are limits beyond which the quantity may be hurtful.²³

In the long run, excessive increases in the money supply, which was due in large part to financing the Revolutionary War, did cause problems. "On February 3, 1787, Washington wrote to Henry Knox: 'If any person had told me that there would have been such formidable rebellion as exists, I would have thought him fit for a madhouse.'"²⁴ The Continental (currency) ultimately became a synonym for worthless. The new Constitution, at least partially in response to this experience, was written to include the requirement that only Congress would have the power to coin money.

When the inflationary spiral reaches extreme proportions, people dump their money as quickly as possible before it loses any more of its value. In Germany of 1923, people would demand to be paid in the middle of the day so they could shop before the currency lost even more value by evening. At the same time, "150 printing firms had 2,000 presses running day and night to print the Reichsbank notes."²⁵ Before the whole event was over, all but those who were first in line for the new money and those who had learned "the trick of inflation" were wiped out. "Those who quickly converted to gold were able to survive the inflation with their resources reasonably intact."²⁶

Large increases in the supply of money play an important role in general inflation. However, there comes a time when, like any good speculator, most people start to estimate what the value of money will be by the time they can spend it, and assign it that value in the present. This is where the psychological component of inflation kicks in. In this case, peoples' expectations of the currency's loss of value can outpace even hyperactive printing presses. Maybe this is why we call this condition hyper-inflation&emdash;hyperactive printing presses motivate hyperactive people to bid up prices hyperactively in order to unload the currency as quickly as possible.

Psychological Stability and Monetary Stability

The final benefit of having a stable and honest currency is a psychological one. It has already been noted that token economies have decreased behavioral problems in mental hospitals. That being true, it would stand to reason that destroying a real economy would tend to increase behavioral problems in everyday people. To explore this thesis, let's start with the least subtle effects of inflation and work our way toward the more subtle dynamics.

In war-time, inflating the enemy's currency is a major psychological warfare strategy. "Bold black propaganda can often embarrass the enemy. The dropping of a few hundred tons of well counterfeited currency would tend to foul up any fiscal system."²⁷ A war machine can only run so long as there is a productive economy behind it. Therefore, anything that can confuse and disorient the enemy's economy should not be ignored. And indeed, "Chronic inflation confuses and disorients people," making them want "to punish someone for their misery."²⁸

By now it should be easy to see how drastic currency devaluation is a good strategy for a government to use against its enemies. However, is it possible governments could use this strategy against their own people? According to Leo Margolin, inflation can be used as an internal strategy to inspire hate, much the same as it can be used to inspire fear and confusion in an enemy. "The organized inflation prompted Karl Helferich to say: 'Let them (the German people) suffer a little longer. When they feel the full brunt of inflation, they will start hating. And we shall see to it that their hatred is concentrated on the Republic, on the Jews, and on foreigners.'"²⁹ Once again, "Chronic inflation confuses and disorients people," making them want "to punish someone for their misery."³⁰

The last two paragraphs considered the extremes of inflation's impact on the mental health of people. However, it is also useful to consider what inflation means to people when it is moderate. How do people modify their behavior in order to make the best use of inflationary policies?

One of the first things inflation does is place debtors at an advantage over creditors. In the 1970s, many Americans became successful speculators by using credit that was cheap because the rate of inflation virtually canceled out the interest being paid on the loan. Some of the fast-buck artists who got in and got back out did very well. Many other investors/speculators who stayed with their properties into the 1980s found themselves losing everything when the inflation subsided and money tightened back up. This was especially true for farmers who followed former President Jimmy Carter's advice to buy new equipment on credit against the "increased value" of their land. With land prices dropping, some banks started demanding large cash payments to secure their position on their loans. In at least one case, the bank initiated foreclosure procedures against a farmer even though he had never missed a payment.

Over all, inflation rewards the debtor and punishes the creditor. This means that, under inflationary conditions, those who live for the moment are acting more rationally than those who work hard and plan for the future.

Of course, people do not change instantly. Training handed down through generations of people with a strong work ethic does not die overnight. Rather, an ever-growing percentage of people in each successive generation begins to comprehend the foolishness of working, so they change their behavior in order to reap the rewards of an inflationary system.

It has been said that the rich plan for future generations while the poor only plan for the next Saturday night. In the context where this declaration was made, the author apparently assumed that the rich planned for future generations because they had sufficient money to do so, while the poor only planned for the coming Saturday night because that was all they could afford. However, when I read that statement, my immediate interpretation was the opposite, and it occurred to me only afterward that I had misread the author's intent.

In Chapter 2, we took a look at the process of wealth creation. There it was noted that ideas and labor must come first, and only then can goods, services and the tools of production be made. When we get this process reversed, we end up having a seed corn festival instead of planning for a better future. Consequently, long-term inflation, if it "persists for a sufficient period, shortens time horizons, as customs, values, and opinions begin to catch up with the growth of the money supply."³¹

Fortunately, once we know where our problems come from, we have the possibility of remedying them. Germany, after World War II was a less-than-pleasant place to live. However, Ludwig Erhard, the father of the little-known "German Economic Miracle," succeeded in lifting controls on the economy and in instituting a hard currency&emdash;the Deutschmark. Soon after these policies were implemented, people moved back into the cities and went back to work. By 1960 Germany enjoyed a better standard of living than England did even though England was not as devastated by World War II.

The same thing happened in America after the ratification of the constitution in 1787. Four years later, George Washington wrote to Catherine Macaulay Graham saying, "Tranquillity reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been considered a species of madness to have foretold."³²

While I wouldn't go as far as some authors who suggest that stopping inflation will solve all social problems, having a stable monetary unit will certainly facilitate peaceful exchange. We think nothing of demanding stability for our measurements of length and weight, knowing the havoc a flexible medium for measuring length or weight would have on the economy. Why should a "flexible medium of exchange" be any different?

Exchange by "Other Means"

The chapter on ethics emphasized the concept that humans have only two options for relating with one another. People can make voluntary exchanges for mutual benefit, or they can use coercion in an attempt to get more from a relationship than they put into it. Another way of saying it is that we have two arenas of competition to choose from: the arena of production, or the arena of coercion. Many philosophers who are horrified by the rigors of competition in a free market seem to believe that competition in a coercive market will somehow enable us to return to the Garden.

It has been said that people generally feel ripped-off if they are not paid more than they deserve. Many people, regardless of the type of labor they perform, find themselves unhappy with "market outcomes." Consequently, they petition government for "non-market controls."

While there are many forms of non-market controls. In this chapter we will take a brief look at six types: regulation, subsidies, tariffs, labor unions, taxation and inflation. Each is justified with the noblest of reasons, but, for good or ill, each is also a form of coercion.

Regulation

Although America was founded on the principle of minimum government interference in the economy, it didn't take long for that ideal to erode. By 1820, Thomas Jefferson was appalled at how much our nation had changed and how influential people were already co-opting the coercive power of government to support their personal agendas. "The offending railroads of the Nineteenth Century were built with government subsidies, and they operated under law (both federal and state) which gave them special privileges."³³ Of course, eliminating these special privileges was never considered. Instead, they allowed those laws to remain "a fertile source for further evils . . . invit[ing] reprisals."³⁴

By the time of the Civil War and the development of the railroads, numerous ways of using public protection for private gain had been developed. And of course, there were the masses who were politically disenfranchised. "If there were many young men who died expressing such plain, old-fashioned sentiments as 'Tell my mother I did my duty,' or 'Tell father I died for my country,' there were other more practical youths who lived for the mammoth plunder in ventures which ranged from profiteering war contracts to the Congressional bribery necessary to gaining railroad rights-of-way."³⁵

Thanks to this obvious government favoritism, the specter of monopoly raised its head. The proposed solution to the "monopoly problem," however, did not seek to undermine the use of government coercion that bred those conditions in the first place. Instead, it only sought to put the government gun into the hands of other people. According to Richard O. Boyer and Herbert M. Morias, the conditions of the 1870s and the 1880s helped make popular "the Socialist concept . . . that the people should own and operate the means of production for the benefit of themselves rather than for private profit."³⁶ In other words, instead of government power being used on behalf of those offering capital-labor services, labor leaders decided it should instead be used to the advantage of those offering physical-labor services.

Another example is the use of regulation to control business. The environmental movement, for instance, has unintentionally helped the very same "big" businesses they hate gain a larger market share by putting smaller competitors out of business. While it is a common notion that regulatory agencies are bound to be captured by the industries being regulated because those regulating business share the same profession, William Tucker points out that capture is not necessary. "It is not, as often charged, necessary for the regulated industries to 'capture' the regulatory agencies. The regulations do the job themselves. Even when they are not explicit in their exclusions, regulations do what economists call 'raising the barriers of entry' by making it more expensive to do business."³⁷

Political interests who are rabidly hostile to big business often unwittingly work to its advantage. "A few years ago, when one large Midwest foundry was required to spend nearly $1 million for new equipment and design changes imposed by OSHA, the owner was delighted. He explained: 'That million dollars turned out to be a tremendous investment for us. Not because our safety record has improved or because our products are any better. What happened is that a number of our competitors could not afford these same demands from OSHA and are now out of business. We're booming!'"³⁸

To the category of regulation we can add laws such as occupational licensing, which is supposedly done in the interests of the consumer, but generally favors the producer at the expense of the consumer. Very often these laws have the opposite effect. Researchers have found that, for instance, places where electricians were licensed (enabling them to charge higher prices,) were "significantly associated with a rise in the rate of death from accidental electrocutions."³⁹ Higher prices are bound to force more people to try to perform their own repairs, so the conclusions of those researchers should not come as a surprise.

In our quest for a perfect world that is free from risk, millions of dollars of costs are being mandated by a plethora of "alphabet soup" agencies. The FDA, for one, keeps new drugs off the market for years and makes research on problems affecting smaller population groups economically unfeasible. It is estimated that 100,000 people died during the ten years beta blockers were kept off the market even though they were being used successfully in Europe. Billions of dollars are being spent annually at the demand of numerous government agencies in order to keep the population safe and healthy. What has been overlooked is that poverty is also a health hazard.

When governments mandate additional costs on industry, many places of employment must close, forcing more people into poverty. The Office of Management and Budget has estimated that there is one additional premature death for every $1.8 to $7.25 million of addition regulatory costs imposed on the economy. Consequently, imposing extreme costs on the economy to fight risks can easily backfire. As Representative Dick Armey (R-TX) observed in the Congressional Joint Economic Committee 1992 Annual Report, "Though regulation may reduce risk to the public, the cost of this reduction varies wildly and in many cases borders on the absurd. At one extreme, the hazardous waste listing for wood preservatives is estimated to cost $5.7 trillion per premature death averted." Fortunately, wood preservatives represent a very small portion of the overall economy, because, using the OMB's figures, we are talking about somewhere between 786,207 to 3,166,667 premature deaths due to increased poverty in exchange for each life saved from toxins in wood preservatives. Apparently, our great leaders are going to keep us safe, even if it kills us.

Subsidies

In general, we can divide government subsidies into two categories: subsidies for those who work, but don't believe they get paid enough for their work; and subsidies for those who don't work. Generally, there is more resentment against the latter because their subsidies make headlines almost daily.

Many subsidies are popular and accepted as normal business practice. Among the most popular is farm subsidies&emdash;anyone challenging them will find even their love of mother and country open to question. Supposedly, farm subsidies are designed to preserve an endangered specie&emdash;the family farm. "Farm programs in reality provide most of the benefits to large farmers. The USDA (U.S. Department of Agriculture) concedes that two-thirds of government payments go to the wealthiest 15 percent of U.S. farmers and that the average income of commercial farmers is 25 percent higher than of the average U.S. family."⁴⁰

When business interests enjoy subsidies, it doesn't take long for labor interests to demand their "fair share." Woodrow Wilson once observed that "Big business is not dangerous because it is big, but because its bigness is an unwholesome inflation created by privileges and exemptions which it ought not to enjoy."⁴¹ In an earlier chapter, it was mentioned that over a century ago the labor movement elected to compete with business for controlling the "government gun," instead of wresting it out of the hands of business so the best of labor would be able to compete with existing business interests. This has in turn led to an adversarial relationship between management and labor, with a great deal of energy going toward competing for control of the "rule space" instead of competing in the marketplace.

And of course, if business and labor are to enjoy subsidies, there is certainly an argument to be made in favor of subsidizing the poor as well. Frederick Bastiat, in his typically prophetic manner describes this development as follows:

The excluded classes will furiously demand their right to vote&emdash;and will overthrow society rather than not to obtain it. Even beggars and vagabonds will then prove to you that they also have an incontestable title to vote. They will say to you: "We cannot buy wine, tobacco, or salt without paying the tax. And a part of the tax that we pay is given by law&emdash;in privileges and subsidies&emdash;to men who are richer than we are. Others use the law to raise the prices of bread, meat, iron, or cloth. Thus, since everyone else uses the law for his own profit, we also would like to use the law for our own profit. We demand from the law the right to relief, which is the poor man's plunder. To obtain this right, we also should be voters and legislators in order that we may organize Beggary on a grand scale for our own class, as you have organized Protection on a grand scale for your class. Now don't tell us beggars that you will act for us, and then toss us, as Mr. Mimerel proposes, 600,000 francs to keep us quiet, like throwing us a bone to gnaw. We have other claims. And anyway, we wish to bargain for ourselves as other classes have bargained for themselves!"⁴²

In the end, all of this jockeying for privileges tends to be self-canceling, with the majority of political income gains being offset by the higher prices charged due to subsidies earned by others through the political process. What is most pronounced is the loss of economic well-being that must be accepted by those who have failed to be effective in controlling the rule space.

Tariffs

Tariffs are interesting creatures. They are heralded as offering economic salvation by keeping jobs from being exported to other countries. Somehow, by forcing domestic consumers to pay more for what they buy, leaving less money for making other purchases, the wealth of the nation is supposed to be improved. In reality, they simply redirect labor and resources away from more efficient enterprises to less efficient enterprises. Consequently, aggregate wealth declines even though a few politically-connected people enjoy a comparative advantage. This might be why Ambrose Bierce defined a tariff as a "tax on imports designed to protect the domestic producer against the greed of his consumer."

Of course, the tariff has its comical aspect (in a tragic sort of way). Referring once again to Frederick Bastiat, we find this cogent observation: "I wonder how we could have ever thought of doing anything so fantastic as to pay many millions of francs for the purpose of removing the natural obstacles that stand between France and other countries, and at the same time pay many other millions for the purpose of substituting artificial obstacles that have exactly the same effect; so that the obstacle created and the obstacle removed neutralize each other and leave things quite as they were before, the only difference being the double expense of the whole operation."⁴³ Today, we spend billions of dollars to improve transportation, and then we turn right around and create large bureaucracies designed to nullify such investments.

What are the costs of using political power so favored industries can avoid retooling and so their robot-like employees can avoid the mental strain of retraining? It is estimated that, for instance, while a "tariff or quota might save 20,000 jobs in the auto industry, it also destroys 30,000 or 40,000 jobs in other industries, or prevents them from coming into existence. Some studies show that the job loss/gain ratio is more than three-to-one, which means that for every 10,000 jobs that are saved because of some protectionist policy, more than 30,000 jobs are lost or never created."⁴⁴

In addition to the damage protectionism does to domestic economies, it wreaks havoc on foreign trade and foreign relations as well. "Rising trade barriers in rich countries are one cause of declining export prices for poor lands. The European Economic Community, for example, levies a tariff four times as high against cloth imported from poor, heavily indebted nations as from rich ones. All told, World Bank figures suggest that each year industrial country trade barriers cost developing countries $50-100 billion in lost sales and depressed prices."⁴⁵

It is indeed a curious policy to extend aid with one hand, and throw up trade-barriers with the other. Ultimately, open markets will do more to lift the undeveloped world out of poverty than dependency-breeding hand-outs can ever hope to achieve.

Of course, we cannot end this section without calling attention directly to the wealth-redistributing nature of the tariff: "If a businessman pulls a gun on a customer and demands 20 percent more for a product, that is robbery. If a politician intervenes to the same effect, it is fair trade."⁴⁶

Labor Unions

Now we are back for a closer look at labor unions. Earlier it was mentioned that instead of taking the government-gun out of the hands of business in order to return to a freer market, labor elected to compete with business for control of the government-gun. The success of labor unions in gaining political power was "not so much a revolution as the turning of the worm. The state power had changed sides in the wage bargain, and non-market control now supported the rights of labor against those of real property."⁴⁷

This, of course, is nothing new. Over a century ago, Frederick Bastiat observed, "As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. (This objective would demand more enlightenment than they possess.) Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests."⁴⁸ Such a bold statement does require some defense. Labor interests do make some high-sounding claims in order to support the righteousness of their cause.

One of America's first labor leaders, Samuel Gompers, once declared, "The labor of a human being is not a commodity or article of commerce. You can't weigh the soul of a man with a bar of pig-iron."⁴⁹ While Mr. Gompers' pronouncement sounds noble, we need to remember that we are unique only in God's eyes. From the viewpoint of our fellow man, we are quite replaceable. Besides, it is not our souls that are on the auction block, it is our labor. Labor is, in fact, an item of commerce. A friend of mine who conducts seminars on job hunting sums it up this way: "The amount of pay you make is determined by how easy it is to replace you."⁵⁰

Although business and labor are enemies on a number of issues, they share common interests as well. When President Reagan pushed for deregulation, he was faced with opposition from organized labor as well as from established businesses who benefited from less competition in the marketplace. Ultimately, if labor is to enjoy high wages, the firms they work for must also be protected domestically by regulation and internationally by tariffs. (Which is why union truck drivers, for instance, harangue about deregulation ruining the trucking industry.)

Labor unions offer one service&emdash;using the force of law to gain wage and benefit concessions from employers. "[U]nions play politics because it is politics that assures their special privileges. The basic federal labor law is the National Labor Relations Act of 1935. It was amended by the Taft-Hartley Act of 1947, and by the Landrum-Griffin Act of 1959."⁵¹ When unions first started, they were the first to be charged under the Sherman Antitrust Act. Thanks to the before-mentioned laws, however, "[t]he courts would come to define activities as illegal under the Sherman Act if they were engaged by business, but legitimate if performed by combinations of workers."⁵²

Of course, the game is not over. America now has a newly elected Republican House and Senate. This may portend yet another turning of the worm.

Taxation

The subject of taxes is a difficult one. As long as we recognize the need for government&emdash;or an agency like government&emdash;to control predators so productive people can live, some form of taxation will be necessary. Generally, people are willing to pay a substantial portion of their incomes to any organization that promises them freedom from anarchy or invasion.

Because of the need to pay taxes, people have a hard time understanding that "taxation is confiscation by force." Such a proclamation seems to them cynical, and they counter by saying that if one pays taxes willingly, taxation is persuasion&emdash;taxation only becomes coercion when you, for whatever reason, fail to pay. (The same argument is often made regarding law in general.)

Ultimately, taxation is a form of non-market control&emdash;sometimes with unexpected results. As taxation consumes larger percentages of income, the cost of leisure is reduced for both the person paying the taxes and for the person benefiting from them. The result, of course, is that both parties become less motivated to participate in the wealth-creation process.

Colbert once said that "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."⁵³ To listen to the media, one would think that humans were created for no other reason than to fill the treasuries. It is amazing how many planning schemes are justified on the basis that they will enlarge, or broaden, the tax base.

When a business hires a security company to protect its property more effectively than the police can, it looks for the best price/quality ratio possible. People who run businesses know that protection is simply another expense that must ultimately be added to the cost of goods and services.

Larger societies would do well to approaching hiring their primary agency for predator control the same way. Over-investing in predator control services can be as damaging to the larger economy as under-investing can be.

Unintended Consequences of Non-Market Controls

Applying government force to solve "market" problems often has unintended consequences. It often creates outcomes different than hoped for because people change their behavior in an attempt to avoid penalties or to enjoy subsidies. One example of unintended consequences is a frequent outcome of raising taxes: often people either end up working less, have less capital to work with, go bankrupt or retreat to the underground economy.

Government fraud has unintended consequences too. Once a nation adopts a "flexible medium of exchange," opportunities abound for those shrewd enough to be first in line for the new money, or to understand how to invest so as to profit from price fluctuations caused by changes in monetary policy. While governments routinely "practice monetary excess to acquire public command over resources in the economy,"⁵⁴ the result in the private world is that those who are furthest from the actual process of production gain a disproportionately large share of the wealth. Also, those who are last in line for the new money only see price increases&emdash;not income increases.

Finally, there is the most subtle strategy&emdash;guilt. It is common for our great leaders, both in government and business, to exhort the common people to repair to high standards of ethics that they themselves do not observe. Recently, I went to an ethics discussion where someone from a large corporation (whose only customer is government) demonstrated a game that illustrated "ethical principles." The game offered up various hypothetical circumstances and asked for people's responses about how they would handle the situation. In virtually every case, the answer that merited the highest score was also the most risky and confrontational. To faithfully follow their ethical prescription, one would have to have an independent income and be working simply for fun.

What seems to be overlooked is that common people are operating within a larger social context engineered by social and political leaders. If those leaders have imposed policies on a nation or a culture that limit opportunity and choice, the common person must make defensive maneuvers to keep from being thrown out into the cold completely. In a world of predators, "A man who wishes to make a profession of goodness in everything must necessarily come to grief among so many who are not good."⁵⁵

Free to Choose: Production or Coercion

Ultimately, it is up to us to choose which arena of competition we prefer: production or coercion. Each offers risks, and each offers opportunity. In this sense, we always have a "free market".

A Call for Refreshing Honesty

In most cases, debates would be more fruitful if opposing interests would openly and honestly declare, "I advocate coercing the general population in such and such a manner because, 1. I do not believe the people are capable of making wise decisions without coercion (except, of course, during that brief moment in which they vote me into absolute power) and 2. your brand of coercion could not possibly be as beneficent as my brand&emdash;especially as far as I am concerned!" The other party in the debate could then respond, "No, you're wrong! Coercion should be applied so the people will be forced to follow my prescription&emdash;not yours!" Of course, if we stripped our debates of all the popular euphemisms, their outcomes would likely be different than leaders on either would side hope for.

In the market-place of coercion, there are three basic strategies that can be used: force, fraud, and guilt. Force is to be found in taxation and regulation. Fraud is to be found in inflationary policies and the newly defined policies of disinformation. And guilt is to be found in the propaganda that calls for common people to repair to a higher standard than the leadership aspires to.

Summary

As individuals we must make choices. First, we must choose from among alternatives that exist in the world in which we find ourselves. Second, when we make one choice, we also choose to forego the other possibilities. (A friend of mine once had trouble ordering meals in restaurants because she knew she was also choosing all the items on the menu she would not be eating.)

The world in which we find ourselves can be shaped largely by voluntary association or coercion. People make different choices in restricted cultures than they make in freer cultures. In general, people work to maximize their benefits and to minimize their costs no matter what the nature of their vision might be.

In the short-run, the ruling elite fares better in regulated economies while the common people fare worse. In the long-run, elites suffer too. Were society freer when Hero experimented with his steam engine in 100 A.D., it would not have taken 1500 years for technology to develop, and, 1500 years of elites have lived without many luxuries that are common today.

When we make choices, it is wise to consider the unseen as well as the seen. A good economist will anticipate both because, when one course of action is forced on a society, many other possibilities are prevented from coming into being. If leaders are truly interested in the well-being of the masses, they will be very careful about the ways they use "non-market" incentives to make sure the people do the "right" thing. To do otherwise is to betray an assumption that says, people with guns always make better decisions than people with tools.

This, of course, leads us right into the next chapter: The Role of Government in Society.