The Economy is Organic!

In this blog I intend to go over the basics of how an economy works, and how some of the interventions from the state affect it.  To begin with, I will write a brief analysis of all the market actors (Consumers, Laborers, Capitalists, and Entrepreneurs). It should be noted that a single person does not have to be limited to just one of these functions.

Consumers-  For example, all people are consumers.  Consumption merely means enjoying the product of the other three functions, Labor, Capital investment, and economic development.  Everyone starts out as a consumer, and it is for the consumer that all market activity is directed.  This may seem trivial, but there are schools of thought that teach what is called the Labor theory of Value, which indicates that a thing has value simply because work was put in to it (and not because consumers choose to purchase it).  It is the labor theory of value that have lead people like John Maynard Keynes to suggest paying people to dig holes as a policy for economic recovery.  It has also lead some to fail to understand how a person could have gotten rich selling pet rocks.  If the labor theory of value were accurate, there would be no such thing as a bankruptcy.  Consumers would not ask what the use value of an item is at the store, but they would ask things like "how hard did the person who made this work?" or "how long did it take to make?"  Clearly, this is absurd.  Nobody is buying the hole I dig just because I spend time and energy doing it.  

Labor- The function of labor is quite easily understood.  The Capitalist and Entrepreneur are the ones who have the resources to open up a production line, and they employ labor to get that production line going.  But labor doesn't always mean some sort of construction.  It can be much easier things; for example, football players and other athletes are considered laborers.  

Capitalists- This function is somewhat ignored within the general public when it comes to the economy today, but it certainly is not unimportant.  In order to apply resources in the production of consumer goods, one must come up with capital (that is, one always must be a consumer, and in order to spend time producing rather than consuming, it is necessary to save and forgo consumption).  For example, suppose you were stranded on an island in the middle of the ocean.  If you wish to consume as fast as humanly possible, you would try to catch a fish with your bare hands and hope you catch one quickly.  If you hold off your plans to consume, you can try to find a pointy stick first, or still farther, you could spend time making a net.  The reason for production is clear; you will catch fish faster and easier with the stick or the net.  In this example, the stick and the net are called capital goods (tools that increase the production ability of the laborer, you)

Entrepreneurs- This is the function of economic calculation.  The business owner who decides what is to be made, at what quantity, sold at such and such price, etc.  As stated in the "Consumers" section, all economic activity is directed at consumption.  What entrepreneurs do is try to figure out a product people would buy, and determine if it could be produced at a lower price than it could sell for.  If the entrepreneur is correct in his calculations, he will make profits (which means the capitalists will as well, and the laborers will continue to have work), if he is wrong, the business will go bankrupt.

It should be pretty clear that all these functions are interrelated.  The entrepreneur makes a forecast; the capitalist decides to give a loan to the entrepreneur for a percentage back in return; Laborers are then hired to carry out the production process; but it is ultimately the consumers who decide if the line of production is worthy of existence (not to mention how much money labor will make and exactly how profitable it will be for the capitalists and entrepreneurs)  and the entire thing can be looked at as the workings of time preference.   

Time preference refers to how long a person is willing to wait to consume.  If you are the type of person who says "I must spend all my money now because I like to, I need to", whatever the reason, your time preference is high.  And the more you are willing to wait and save rather than consume now, the lower your time preference is.  (This should also show that investment cannot go up while consumption remains the same in an economy.  This fact was one of they key elements that lead the Austrian economists in realizing housing was indeed in a bubble almost a decade before it hit mainstream.)  So, if investment leads to more capital goods, which makes it easier and more profitable to make consumer goods, the clear way to grow an economy is to adopt a lower time preference.

Time preference also determines interest rates and profits in equilibrium.  This is quite obvious when you think about it.  It is quite natural to want to consume all the money one makes... so if I am going to forgo consumption now in order to make interest/profits later, then the money I expect in return must be enough to rank higher on my demand schedule to be worth more than spending now.  Why would anyone go through the trouble of entrepreneurial risk and forgoing consumption, if only to break even?  It's simple, they wouldn't. 

The role money plays in all this is obvious.  Money flows where actors want it to, indicating their wishes.  If consumption is wanted, with a very high time preference, money will flow into consumption goods, and only to those goods consumers want.  If there are consumers with a lower time preference, projects will be invested in and the calculation process will be undertaken by an entrepreneur.  How much money exactly will determine the length of the process, the wages for laborers, etc.  Without money communicating time preference and demands, the entire process would be reduced a primitive situation where people trade goods directly (a fish net for a lighter or something, rather than determining how many fish nets should be made, and sold at what price, and then mass producing them)

So what happens when the state intervenes and say lowers interest rates?  A facade of investment and lower time preference is created.  And entrepreneurs go through the process of calculation and hiring labor to take on new projects, based on false signals.  True preferences will prevail in the end, when nobody is purchasing the final product these new projects were aimed at creating.  This went on in the housing sector for almost 2 decades.  It happens because consumers/labor/entrepreneurs/and capitalists do not communicate by talking to each other.  The capitalists do not find the consumers and ask them what they want, nor the entrepreneurs and any other group.  Money and interest rates are the means of communication.  When the government and the federal reserve interrupt that conversation, they throw off the entire thing. To clarify, suppose you are the parent of a ten year old boy.  You send him to the store one day to pick up some bread and milk, but the boy instead spends the money you gave him on a candy bar and a yoohoo.  You said bread and milk, but the boy told the clerk candy bar and yoohoo.  The market was saying "we want to consume now" (because these days Americans do not save and invest much, so we have a high time preference) and the banks took that message, and under the direction of the government and the central bank, said "uh ya, they're investing and want to hold off on consumption."

There are really only 3 ways this situation can work itself out. 1) Everyone could become aware of what has happened and change their preferences to match the bad message sent by the fed, so a lot of people don't lose their jobs and wealth.  This situation is absolutely unlikely to happen.  2)  The bad investments will be liquidated and the production process will go back to reflecting what people ACTUALLY prefer, which is a completely necessary step for any bubble, since the preferences are not real, but falsified by poor communication.  3) When the liquidation of the bad investments begins, the government and the fed will step in and keep throwing money at those same bad investments.  This is the most dangerous situation because since those investments are not ACTUALLY preferred, the amount of money that can be spent on keeping those production lines going is literally endless.  It is dangerous because when the government spends money, they spend tax-payer money... that is, they spend your money.  Bush and Obama, and any others, are not spending all this money out of their own pockets.  When the fed spends money, they do 1 of 2 things.  They either simply type a number into a computer screen, or order new money to be printed from the treasury dept.  Either way, the money they spend gets its value from all existing money, and lowers the value thereof (making prices raise.  essentially, a more sophisticated way of taxing).  If it is the fed creating new money to make up the losses, and they never stop doing it, the end result is the destruction of the currency through a hyper-inflation, which brings the value of all money to zero.  This is how a loaf of bread in the Weimar republic came to cost billions...

Again, this is a very simplex example of how an economy is organic, and a brief analysis of what happens when the government and its central bank interferes with just 1 aspect of that process.  The process gets infinitely complex when you consider that everyone is a consumer, but laborers can be capitalists and entrepreneurs as well, capitalists are usually entrepreneurs... 1 person may perform all 3 functions...  and then you must consider how many lines of production there must be, how long they take, etc.  Indeed, the complexity of the situation is the very reason no one person could ever run it all by himself...  This is obvious even before we consider that demand cannot be measured in any way.  Are you thirsty right now?  How badly do you want something to drink?  Shall I get out my tape measure to see how badly you want a glass of water?  These questions are pretty bizarre to ask.  Yet, when we assume the government can intervene and run the economy by performing mathematical functions (ironically, functions for which no constants exist, for you will not always want that glass of water), we do so under the pretense that politicians can possibly know these things for every single line of production in existence, as well as every single demand (which, demands are themselves endless).  In essence, we must assume politicians to be gods if we believe they have the knowledge necessary to pass laws and force everyone to do what politicians claim to know they want to do.  Bizarre indeed.

Open letter to Occupy Wall Street

To start out, I would like first to say congratulations. You have the world's eyes on you and you also have made it known that people in the United States are getting fed up with the ridiculous system under which we live. Kudos. However, as one of the people who would surely fit in your 99% category, I must decline the idea that any of you represent me. For one thing, to claim that you are able to represent a person is to claim that you know absolutely everything about them and precisely what they would or would not do in every situation. Even the most detail oriented statisticians in the world would not be able to do this for anyone simply because human existence is qualitative, not quantitative. That is to say, our desires, wants, satisfactions, sense of justice, humanity, ability to reason... none of these things can be measured, let alone imitated by one person to another (especially when the imitator does not know the person at all, as is the case with most politicians, even though they claim to represent x number of people at any given time).

Perhaps the biggest reason I take issue with the idea that any of you speak for me is this ludicrous list of demands that you claim 99% are in favor of. From what I can gather, you simply want the state to solve all your problems. A living wage... a trillion dollars for this or that, debt forgiveness, free college, extended union rights, rights based on gender or race... you know the list. The only thing you do propose that I am in agreement with is your proposal for open borders.

If you truly want living standards to raise in this country, then from my point of view, you should want more investment in capital goods. If you want wage rates to raise, again, more investment, since investment capital is used to pay for wages during the production process prior to the consumer good hitting the market. The only way for an economy to grow is through savings and investment; that is the reality of living in a world of scarcity. Forgoing consumption in the present in order to invest in tools (capital goods) that make production of consumer demands quicker and easier. All this government manipulation of the market place will only make us all impoverished in the long run. Hence, if you really want the end to fossil fuels, you should be investing in alternatives and refusing to use fossil fuels. I wonder how many people out there who hate oil have actually refused to use it? I wonder how many people out there who think cars are causing global warming or climate change, and constantly complain about their existence, have stopped using cars themselves?

Why? because everything the government does is through force. Any proposal for a "living wage" neglects the very purpose of the pricing system to begin with. Housing, cars, healthcare, and every other good out there, does not come out of thin air. Labor, mixed with land and capital, is needed for it all. This is because we live in a world of scarcity. The affect of a living wage would simply be widespread unemployment and a situation in which big business has even more of a strangle hold on everyone else, since they would be the only ones capable of paying this living wage, and after all, not everyone can work for big business.

Rather than going through your complete list of demands, and how most of it would go a long way towards wrecking our economy and making everyone poor, I will finish off by a discussion of justice. I wanted to be a police officer once, but then I realized that all the government is is a monopoly of force in a given geographic area, marked by political borders. It's not that the government wants to end injustice, it wants a monopoly on injustice. Their theft is called taxation, their murders are called wars, their blackmail is called regulation, you get the picture. Why would anyone want to work for an entity that survives by stealing money from people who have done no wrong? This is what the mafia does... yet when the state does it, it is just. Taxes are supposed to be just a part of life, getting licenses to do anything you want to do is just another part i suppose... but my question is, where is the justice in having government in the form of a state? (state meaning a monopoly of force) What would you say if the people stopping you from driving too fast did not wear a uniform and have a badge on their chest? If the tax collector did not work for the state, what would separate that person from any other extortionist? If I cannot go to my neighbor's house and demand at gun point that he pay for my college debt, or to my boss and demand that he pay me my arbitrary estimate of a living wage, why should a person claiming to be a member of the state be able to do it??

If you can't tell by now, I am an anarchist. I do not believe the state is capable of providing justice since it thrives on committing injustices. And here you are, claiming to represent me and my voice, asking the state to inflict society with whatever injustices needed to get you what you want. Unfortunately for all of you who support the OWS list of demands, natural law cannot be repealed. Justice will be served. If, like a robber in the night, you wish to survive by inflicting injustices on everyone in society, whether it's to force them to pay for your debts or to extort money from your bosses, etc., the result will be more impoverishment. If force is your tool, in my point of view you do not deserve to attain your goals, and basic economics proves that you will not. Socialism doesn't work because the state in reality is not god. It has no possible way of turning the qualitative reality of human existence into quantitative measurements, let alone implementing a plan to keep up with the constant changes in human demands. That is to say nothing about building higher productivity through savings and investment. A society, like ours, that spends all its money on consumer goods, cannot possibly hope to develop the necessary capital goods required for the expansion of an economy. Socialism is by definition the elimination of such capital.

So please, don't claim to represent me. I am but a security guard, barely making enough money to attain subsistence. But I don't support your goals, because I find them to be evil in nature, acts of gross injustice, and quite frankly, a contradiction in their own terms. Using state power to obtain better living standards is akin to burning your home in order to maintain shelter.

***I realize not everyone in the OWS movement agrees with the list of demands, indeed there are those in the movement who are anarchists like myself... this is directed towards those who want the government to step in and control everything for them. Please do everyone a favor and at least read Human Action by Ludwig von Mises before claiming to represent 99% and thinking the state can solve all your problems***