Friday, December 2, 2016

This Blog Has Moved to

This blog has now officially moved to Please join me there! I'm throwing a big party over there (metaphorically speaking) and you're invited!

Tuesday, June 7, 2016

GOLD Thought #3

There are two types of libertarians--the right-wing libertarians, who like capitalism because they think it's good for the rich, and the liberal-tarians and left-libertarians, who like capitalism because they think it is good for the people, in other words, for the majority of humans, the working class and poor and lower middle class. Most libertarians, the Objectivist-influenced ones and the Rothbardian Austrians, are the former, while some notable university professors are the latter. I confess to being the latter. I do not care one way or the other about the rich--they are doing fine and don't need our help. It is the poor who suffer and, in the spirit of human sympathy and compassion, the people need a better system than what we have now.
It seems counter-intuitive to say that radically free, deregulated, tax-cutting laissez faire capitalism helps the poor, yet this is what I believe--that what the people need is libertarian radicals, not leftist radicals. I have written, in Liberty Magazine, in 2009 (which now seems ages ago), an article why this is so, but, in looking back, the arguments I made, while true, were quite simplistic--employers reward good employees, the poor have the opportunity to climb the social ladder, a strong government can become a dictatorship and oppress the poor even worse, etc. Recently I have come to more sophisticated explanations, using my GOLD theory of economics that I put forward in my ebook Golden Rule Libertarianism, and in recent blog posts.
To summarize, the two alternatives, as I see them, are supply side economics, in other words libertarian economics, which is focused on the creation of wealth, in other words, on creating the supply of goods and services, vs. leftist demand side economics, which is focused on consumption, as if allocation of goods and services to consumers, i.e. the needy, is what matters most. Supply side economics is the policy that lets the productive, the creators, be free to create new wealth. When you get government out of the way, when you leave wealth in the hands of businesses that create wealth instead of taxing it away, when you cut the regulations that block trades in the marketplace from being made, and when you motivate the geniuses of the economy with the potential for vast self-made wealth for the rich who succeed in business, then the productive people, geniuses, hard workers, etc., add to the pool of wealth, creating new wealth that wasn't there before. It's that simple as to why capitalism creates more wealth, while socialism, where there is no reward for productivity, instead it is punished by higher taxes and the wealth you create is taken away from you, does not create added wealth--human psychology is that simple, and humans are motivated by pleasure and reward, not by abstract disembodies ideas of brotherly love that are mere rhetoric and can't be eaten with a knife and fork.
Here is it useful to look at what is, and is not, a zero-sum game. The difference between supply side economics vs. demand side leftist economics, is that according to supply side, wealth is dynamic, the amount of wealth can go up, or down, when new wealth is created or destroyed. You do not take any wealth for granted, and you know you must create all wealth, down to the last dollar, before you can consume it. Contrast leftist Marxist Keynesian economics, where they think the pool of wealth in an economy is static, wealth is automatic (as a result of post-industrial historical forces, according to Marx), the factories and goods and services are just sitting there waiting to be distributed, and if you leave a dollar in the hands of the rich, it must have been taken from the poor, because wealth is a zero sum game, since wealth is not created or destroyed, it is a static pool waiting to be consumed.
GOLD believes that production is dynamic, whereas consumption is a zero-sum game: the amount of wealth changes with more or less creation, but, after having been created, there is a finite amount of wealth to consume, so that, for one person to consume what he did not produce, another person must produce wealth without consuming it. The leftists, in other words, have it backwards.
Now, why does this matter? If wealth is dynamic, then new wealth can be created. According to GOLD, for every unit of new wealth that gets created, which otherwise would not have been creating under a leftist economy, that new wealth benefits the poor, even if the rich created it and own it initially. Why? Here I break ranks with my right-wing libertarian fellows. It does not "trickle down." What benefits the rich does not benefit the poor, there is no reason why it would. I do not care about the rich, nor to help them, nor their interests. They, in general, are doing fine, they don't need our help, and most of them are conservatives who hate libertarianism. No, the new wealth does not "trickle down". Instead, when new wealth is created, the supply of (that type of) wealth goes up. When supply goes up, price goes down, relative to everything else which that wealth can be traded for, in other words, relative to the rest of the economy--including the dollars owned by the working class. So, when new wealth is created, everything becomes that much cheaper--a benefit felt very powerfully by the poor, and which doesn't really help the rich very much at all. When food, clothing, housing, education, become very cheap, with a lot of new wealth created by a libertarian utopia, then the standard of living for all poor people will rise up to lower middle class levels--only libertarianism can win the War on Poverty. Of course, one needs to fully grasp my GOLD theory, the ratio of dollars to wealth in the economy, my theory of the triangle of trade, and the pool of value, etc., and my vision of supply and demand, to understand this fully.
That is why I am a libertarian: because if you let the productive economic forces, which, for good or bad, are often the highly educated rich with access to capital, be free to create, be free of taxes and regulations that get in their way, then when they create new wealth, even motivated as they are by their selfish greed (the true genius of the invisible hand: the more wealth you create, the more money you make, the richer you become, so selfish greed benefits humanity because it is a motivation for productivity, the great motivator, the one that really works), this newly created wealth does, in fact, help the poor, and doesn't even really help the rich very much more than the vast wealth which they had already. If wealth is not just waiting there to be distributed, if wealth is dynamic and cannot be taken for granted and must be created--and is quite difficult to create--then we need a government with policies designed to let people be free to create and trade, instead of a policy focused on consuming the wealth already created, which turns a blind (or malevolent) eye upon the production and trades that made all the goods and services for people to produce.
If this makes me a liberal-tarian, then so be it, although I think that this is true libertarianism, and the right-wing libertarians are the abberation, they are really so-called "conservatarians", or merely conservatives trying to steal the cool hip chic aura of libertarian principles and convictions. Note that, as I observed, most of the rich in the USA and around the world are not libertarians, perhaps because they astutely observe that their own interests lie with the conservatives, who favor government interventions that help the rich, while screaming bloody murder when any government action even slightly helps the suffering miserable poor. I am, I think, a libertarian--one with a well-thought-out theory, and principles and ethical convictions, which is the hallmark of the true libertarian.

Friday, May 27, 2016


Every libertarian is familiar with the term TANSTAAFL, the abbreviation of the sentence "There ain't no such thing as a free lunch," from the bestselling science fiction novel The Moon is a Harsh Mistress, where a group of libertarian radicals overthrow the government of a lunar colony. This idea, that free stuff is an illusion and doesn't really exist, and that when someone tells you they are going to give you something for free it is a scam, is common among libertarians.
Here I will not present the idea as such, but, taking this idea for granted, I will show its justification in GOLD economics. GOLD posits that an economy is merely a group of individual humans, each of whom produces wealth, trades this wealth to other individuals in return for wealth they wish to consume, and consumes this purchased wealth.
The economy, even in a highly advanced country, is fundamentally a barter economy where goods and services are traded for goods and services, but money has developed as a mechanism to make large trades among many different people possible. For example, if I make eyeglasses and you make pizzas, and I want to buy a slice of pizza, you might not need or want my eyeglasses, but there might be a pair of shoes that you want. So, instead of trading you eyeglasses for pizza, I trade you money for pizza, with the guarantee that this money is backed up by a pair of eyeglasses. You might then buy shoes from a shoemaker whose daughter is nearsighted. The shoemaker then buys eyeglasses from me for the money, and money facilitated a trade between three people, each of whom produced, traded, and consumed goods and services--but the money just as easily could have facilitated a trade among 300,000 people instead of just 3, and in today's economy, this describes what happens.
When I make the pair of eyeglasses, I "make money", which means that I create the wealth which is represented and symbolized by the money that I gave you to pay for the slice of pizza. You accepted that money because you can use it to buy any product from any seller for that amount of money, and the sellers will all accept it because it is backed by my eyeglasses that they can be buy with it, and by all wealth in the pool of wealth in the economy that can be purchased by money.
As I argued in an earlier blog post entitled Introduction to Hasanian Economics, theft is actually an inaccurate trade: a thief takes money without producing anything and uses the stolen money to buy something, and the seller mistakenly is forced to believe that he is trading that product he sells to the actual producer of the wealth which justifies this money, and not to a thief, because it is assumed that a person who owns money owns it rightfully. Because each dollar bill is not clearly labeled with the identify of the producer who made that money, i.e. the person who created the wealth that backs that money, it is possible to take money by theft instead of by trade, and to spend it to then get goods and services that rightfully belong to the person who made that money. I will argue that, in some instances, free stuff is like theft, while in other instances, it is like a trade where one person produces wealth but a different person consumes the wealth obtained from trading it.
So, according to GOLD, wealth is created, traded, and consumed. What happens when something is given away for free instead of being traded for something else? There are three possibilities:
1. Someone created wealth and gave it to someone else who consumed it without trading any wealth back to the producer. In this case, it truly is free, in a sense, from the point of view of the consumer, but only because the producer paid for it, and so it was not free for the producer. A gift fits this description, as does charity. In this case, the producer really pays for the wealth that someone else consumes, because the person who made the money decided to give that wealth, in the form they wished to consume it in, to a different person other than themselves.
2. Someone says that something is free, when in reality it has hidden costs that pay for it. For example, when a business provides a free lunch buffet at a presentation of their sales pitch, the lunch is actually being paid for by the money they will make from sales off the people who are drawn in to eat it. If it wasn't ultimately profitable, to pay for the lunch, the sales pitch, and all other costs, the business would not do it. So the "free" lunch is actually paid for by some of the people who eat it, namely, by the ones who are hooked by the sale pitch at the luncheon and buy the product. For the business to say it is free is a lie, and it is a scam and a con game. For another example, on the web there are dozens of dating sites that claim to be "free", and 99% of them are scams where you join for free and then have to pay to fully utilize the site. Generally, if someone offers you something for free, it is too good to be true.
3. It was produced by someone, but has been taken by force and given to someone else to consume. This is like theft, in that the existence of a money economy is used to con and scam the people into not seeing who has created the wealth that is being consumed. When a government says that it is giving something to the people for free, this is inevitably what it means: that someone created wealth, and the government is taking that wealth by force and giving it to someone else for free.
4. There is a more limited category, where people say that something is free, but only because it is paid for in kind with goods and services, not with printed money. For example, in computer programming there is famously a "free software" movement, where software engineers make software and give it away for free to other software engineers. But here, there is actually an invisible trade happening behind the scenes: the computer programmers give free software to the coding community, and at the same time these same coders take other people's free software and use it without paying for it, in a continuous give and take. There is no exact balance where what one gives equals what one takes, but the principle of trade is there. A trade is a trade and what you receive is paid for by what you give, whether it is paid for in money or in some other form of value. For another example, a social club might let members join for free, like a book club or Meetup, but in that case each member pays for his membership through showing up and participating and being social. In some limited situations, things must be paid for in values other than dollars, and people tend to call such things "free", when in fact they are paid for by non-money wealth.
From this analysis, several principles emerge, most of which I detailed in my book Golden Rule Libertarianism.
First, you cannot consume something that has not been produced, unless someone else produces something and then does not consume it. Wealth, at a given point in time, is finite, although along a line into the future it can grow or shrink. At any point in time, in an economy, a pool of wealth is created, and it is consumed (and, in this sense, being invested is like being consumed in the future). Each unit of wealth was produced by an individual producer in the economy, and is consumed by one. In this finite map of wealth, if one unit of wealth is consumed and there is no creation of wealth to compensate, the pool of wealth is minus one unit, so someone must go without--and this can be either evenly distributed (the taxpayers pay) or the producer can be robbed of the unit of wealth he produced. The government likes to pretend that when it gives things away for free that it created this wealth, as if it grew on trees, but this is obviously impossible. Someone had to create the wealth for people to consume, but, as in theft, people only see the money that pays for what they consume, they don't see the producer who "made" that money by creating wealth, since the producer behind the money is hidden in a money-based complex economy, since no individual can easily be attributed to any particular dollar in a trade with thousands of participants.
Second, if the government gives out enough free stuff, it bankrupts the economy. Each free thing that is given away is actually paid for by the wealth that was created by the people who make money. As we have seen, the created pool of wealth is finite. If more wealth that that amount is given away--and fuzzy accounting, and a divorce between production and consumption, could easily lead a government to try to give wealth away without paying attention to how much wealth is actually there to give--then the economy tries to consume more wealth than was created. If it trues to do this, it consumes all the wealth, there is no more left to consume, and this is how we define bankruptcy. This danger can be hidden early on by consuming the investment capital that the future is relying on, so we consume the wealth that belongs to future generations while leaving our own wealth alone--Social Security debts for future generations, and the massive amount of money the United States federal government has borrowed from the Federal Reserve, essentially borrowing against its own future--is an example. This can hide the threat until it is too late to reverse.
Third, in conclusion, there is no such thing as a free lunch, there is no such thing as stuff that is truly free, because there is no such thing as wealth that was not created by someone--it is a scam to get you to buy stuff, or to vote for someone, or, if it is a sincere genuine gift, it was free for you because the person who gave it to you has paid for it, and it wasn't free for them. People don't see the connections between money and the wealth that backs it, so, in today's capitalist economy, many people, and the government, and even some of the rich, throw money around without really worrying about the value that underlies it. GOLD illustrated the hidden connections between money and value behind the scenes to enable you to see what is really going on.

Friday, May 13, 2016

Hooey and History

I have tried to argue, to libertarians, that a truly libertarian federal government in the United States could actually end poverty, completely, if libertarian policies were enacted and a libertarian utopia was created. Not overnight, obviously, but after about 30 to 60 years, which is how long it usually takes for a political sea change to take effect.
The federal budget is about $3 trillion annually, and it seems clear to me that if that budget were cut to $1 trillion/year for military spending and the federal courts only, and $2 trillion worth of value were kept in the economy in the hands of the productive private sector instead of going towards government spending, under the magnification of wealth that comes from increased production (see my recent blog posts about the Upward Spiral Theory), this increased productivity from $2 trillion of capital per year that gets invested into business and otherwise would not have existed but instead would have been spent by the government in waste, might lead to $10 trillion/year of additional wealth in the American economy created over 30 years.
This idea is supported by the common economic theory known as the Time Value of Money Theory: for example (and this has been proven true by economic analysis) if you had invested $1 in the stock market in 1900, your investment could have been worth $1 million in 2000, 100 years later, because invested capital grows exponentially in a typical capitalist economy, so that the monetary value of time is far greater than what common sense would assume. So it is quite plausible and realistic to think that an additional investment of $2 trillion per year today could generate a net surplus of $10 trillion per year in 30 to 60 years, without me even needing to rely on a prediction of technological breakthroughs funded by that investment to lead to vastly increased efficiency to end poverty, such as genetically modified foods that make it much cheaper to feed the hungry, although that too is a plausible argument.
Assume that in 30 years there would otherwise have been 400 million Americans, of whom 200 million would have lived in poverty. This could put an additional $50,000/year in the pocket of every poor person in the country, effectively abolishing poverty. My numbers are estimates, not exact, but you get the general idea.
I have said this and been sharply criticized, insulted, and rebuked, not by liberals and socialists, but by libertarians! The main argument against me is that my theory is "hooey"-- simply naive and unbelievable. So let me reply to the skeptics with a lesson about human history.
Let us posit a simple thought experiment. Suppose you took a European person from the year 950 C.E., back when feudal kings ruled their serfs with horses and iron swords. You tell him that, in the future, there will be no kings nor peasants, but something called democracy, and the people will have televisions and refrigerators and washing machines and cars and vaccines, and that humans will set foot on the Moon. He would either not even understand what you were saying, lacking the concepts of cars and vaccines etc. with which to know the meanings of your words, or he would say that this is unrealistic and improbable to such an extreme extent as to be impossible--in other words, he would accuse you of spouting "hooey", and then he would return to tilling his field for his lord or eating his bowl of gruel.
Do you see the point? Ending poverty seems impossible. But what we have today would have looked impossible to someone even 200 years ago, let along 1000 years ago. The internet and smartphones would have been inconceivable to someone 60 years ago, in 1955. So this idea that I am being naive is itself ignorant of the capacity for historical human progress.
Having established that no reasonable person can rule out the possibility of ending poverty, it simply remains, then, to determine which political policy would achieve it--libertarianism, or socialism? I would have hoped that among we libertarians, the answer to that question would be obvious. If, sadly, it is not, see my recent posts about the Upward Spiral Theory, which explain why libertarian policies are capable of achieving literally exponential economic growth. Once a certain amount of new wealth is created, there will be so much wealth that even those who have little will still have a standard of living that to us we would call middle class, just as the American middle class right now has a standard of living that to European peasants in 950 C.E. would have seemed like literally Heaven on Earth.

The Upward Spiral #2

I would like to elaborate upon my theory of the Upward Spiral, which I presented in a recent blog post. My previous description was flowery and illustrative, whereas here I will be more academic, clear, and concise.
According to GOLD economic theory, the paradigm of economics a trade where Mr. X creates goods or services Y, Mr. A creates goods or services B, and X trades Y to A in return for A trading B to X, and X then consumes B while A consumes Y. This trade, of one to one bartering of goods for goods, is the foundation upon which the system of money and prices is added to enable trades between three or more different people: A trades B to C for money, A buys Y from X for that same money, X then buys D from C using the money from A, etc. So, in a GOLD analysis of economics, you always follow the values and the trades, you do not "follow the money", in fact you ignore the money and you instead look at what was created, traded, and consumed.
Now let us consider each additional marginal unit of Y that can be created by X. Assume that A wants to use 3 Ys, and A owns 3 Bs. Assume that X has only produced 2 Ys. Now, consider the theoretical possibility that X could produce one more additional Y--a marginal unit of production. Obviously this one additional Y will enable one more trade, or one more unit of trading, to happen--one more Y can be traded for one more B. If X creates the one more Y, up to the limit of A's demand for Y, then one additional unit of trade happens. The result of one additional unit of trade is that A now has one more Y to consume. Assuming that A consumes goods and services to live his life and also consumes goods and services as raw materials to produce the value, the B, that it is A's job to create, this one additional consumable Y for A then contains one additional marginal unit of productive capacity to create B. That one marginal unit of Y that X decided to create then creates a marginal unit of additional B that A will create.
That B, which, for example, C and X want to consume, then creates a chain reaction within the pool of value, within the economy, with more production leading to still more production, which leads to even more production, in an upward spiral that can keep growing and growing. X's choice to invest the blood, sweat and tears to make one more Y, enables A to make one more B, because A consumes Y to make B, and A's new B might be consumed by C and enable C to make one more D, and so on, and so on.
According to GOLD XYAB theory, demand actually consists of the supply on the other side of the trade, in other words, the demand for the supply of Y is the supply of B, so increased supply will increase demand. The additional Y enables A to make more Bs, so more Bs will be created, hence more trades will happen of Y for B, and each marginal additional trade then gives X more B and A more Y, which increases X's capacity to make more Ys and likewise increases A's capacity to make more B's. Having one more Y enables A to make one more B to trade to X for X to make another Y tomorrow, because, in GOLD terms, the Y that A consumes is the means by which A creates B: part of the consumable value, part of the Y that A consumes, is necessarily the "seed stock" and raw materials and intermediate goods used to in the process of producing consumable end goods, in A's case, to make B, and any truly consumer value of Y that A consumes simply enables A to physically survive or to live a happy life, which then enables A as a worker to produce B.
In other words, part of Y is the means for A to make B, and A buys Y, so X's additional Y will lead to more B, which A will trade to X, who will use that additional B to make more Y, which he will sell to A, who will use it to make still more B, which will then be sold to X, who will make still more Y, and so on in an infinite upward spiral. Just one additional unit of newly created value, just one more Y made by Mr. X that otherwise would never have existed, can have an exponential growth effect in economics. Then, when you add Mr. C to the analysis, and everyone else who trades with X and A, and lots of different newly created values, and lots of trades of value for value, we can have an economic growth effect that is an exponent of exponents.
This is why every increased marginal unit of production, up to the limit of demand for that supply, increase the number of trades that can be made, which leads to economic growth, and makes the economy and everyone in it better off. Hence supply-side economics: maximize production, by libertarian policies that benefit the producers, which gives X the freedom to make more Y, and you maximize the amount of wealth in the economy. This summarizes Upward Spiral Theory, which I also call the principle of marginal productivity.

Saturday, May 7, 2016

Economic Efficiency and Outsourcing

I firmly believe that if a President were to enact protectionist laws to force American companies not to outsource jobs to Mexico or China, as seems to be the trend in the rhetoric from both the Republican and Democratic Presidential candidates, this would constitute theft of money from the Mexicans and the Chinese, and the American government does not have the right to engage is massive theft.
Let me explain why. I will present two examples to make my case. First, consider a scenario where there is a lot of coal that can be cheaply mined and burned for fuel to produce electricity, and it is also possible to build solar panel farms to harvest sunlight for electricity, but that would be much more expensive. Because the coal would be cheaper, the market, through the price system, is telling us that the coal would be more economically efficient than the solar, because the coal is cheaper relative to the solar. Now assume that the working class is forced, by law, to build the solar power plants, instead of mining for coal, to protect them. So, what has happened? If the coal would cost $5 million, and the solar would cost $20 million, the workers are now forced to do additional work to build the solar that they would not otherwise have had to do. What this really means is that $15 million worth of slave labor was forced onto them, in other words, $15 million worth of labor was stolen from them. $15 million is what the market valued the difference between coal and solar at, so this is the price of the amount of work that was needed additionally above what would have been needed for coal to get the solar, and that is the work that was done.
Aha! But, the liberal will say, the cost of medical care for coal miners with Black Lung, pollution harms from coal smoke poisoning the air and water, etc., made it worth it. But here we are toying with the thought experiment. In a libertarian utopia, a person has the right to sue to recover damages if violence is done to him, and poisoning is a type of violence--Rothbard conceded as much, at times. So the cost of medical lawsuits and pollution lawsuits, in a truly free market, would be factored into the $5 million that the marketplace priced the coal at. In other words, in a libertarian utopia all negative externalities are naturally internalized due to the functioning of the free market as well as a functional judicial system that enables legal recovery for harms.
So, no, there truly was $15 million of wealth that could have belonged to the people if they had been able to pay $5 million instead of $20 million for the same amount of electricity, and this was a loss to the people, felt most painfully by the working class and the poor, as the lack of money always is felt by them most poignantly. The law that forced people away from the economically efficient pattern of production that was based on the objectively existing set of available resources represents an amount of wealth stolen from the people who must pay a price over the efficient market price.
GOLD theory holds that money is an illusion and we must always look at the underlying value that the money represents, and ignore the money, to see what is going on. In the coal vs. solar example, there are really three things, coal, sunlight, and a bunch of resources, such as food and water to feed the workers who could mine coal or build solar panels. If the workers mine coal, it is more efficient--faster, for example--so a certain amount of food and water is consumed to do that. But if they build the solar power plant, it is more expensive--say, it takes more work and longer hours--so they must consume more food and water to build the solar power plant. That $15 million that is lost is actually $15 million worth of food and water that is consumed to build the solar plant and would not have been consumed to mine coal for the same amount of electricity as a result. It is this loss of wealth which is the result of economic inefficiency--the destruction of surplus, to use the economist's terminology.
By the way, the purpose of this example is not to debate coal vs. solar. They are hypothetical examples only. I could have said apples vs. oranges to make the same point.
Now, having established our theoretical framework, let’s look at outsourcing. Naturally, the American workers would compete with the Mexican workers and the Chinese workers, and the group who did the best work for the cheapest price would get the jobs. But, because of socialist economic policy, the American workers are not allowed to compete. Minimum wage laws prevent them from competing on price, and the various employment benefits that must be given to American workers makes it even more expensive. Factor in currency exchange rates, and the Mexicans and Chinese workers are far cheaper, perhaps charged $6/hour for work that, with all costs accounted for, American workers would demand $35/hour for. The American workers’ skill set is not worth an additional $29/hour.
These prices were not necessary, but because of bad laws they are forced into existence. The market, then, must deal with reality as it exists. So, after the bad laws take their effect, the pattern of resources available means that economic efficiency is for the Mexicans and Chinese to get the jobs. If, instead, more laws force the jobs to go to the Americans, then wealth is stolen from the Mexicans and Chinese, who had earned those jobs in fair competition against the Americans, and this wealth will then be stolen from the people who must buy more expensive products, as the sellers seek to recover their added expense relative to the added cost of paying their factory workers, by forcing the consumers to pay more for these products which were more expensive to manufacture. Again, the poor and working class are hit hardest by more expensive products, as well as the working class in China and Mexico, which lack the American welfare system to fall back on.
Obviously the solution to the plight of the American working class anger is to roll back the minimum wage and employment benefits laws, so they can compete in the global labor market and win, but the labor unions won’t hear of this, and the workers themselves are not educated enough about economics to see that it is in their long-term rational self-interest to take a lower wage in order to have jobs and avoid the total loss of all salary when their jobs are taken by foreign workers.
In this context, the Chinese and the Mexicans deserve those jobs, and any protectionism is theft, and will wreak havoc upon the delicate balancing act of economic efficiency in the interconnected and complex world of international trade. Of course, a trade war of embargoes and tariffs may result, and then access to cheaper resources in foreign countries is blocked, making things still more expensive, and so on. So, the poor, to buy something made in a factory, will pay $35 for something that should cost $6, so that the political parties can get the labor unions to line up votes. I’m sorry, but it’s true, and somebody had to say it, and I guess that someone just happens to be me.

The Upward Spiral

In order to explain an idea from GOLD economics that I refer to as the Upwards Spiral, let’s consider the example of a sculptor who finds some red clay in a field and molds and bakes it into a clay pot. I use this example a lot in the context of explaining the right to own private property, as it nicely encapsulated the reasons why the sculptor should own her clay pot, and why she deserves to own it even if she did not create the clay nor create the good luck of finding clay, because she made choices and decisions to shape the clay into the clay pot, using her labor to create something that wasn’t there before.
However, let’s consider it from a different angle here. What is the economic effect upon the economy as a whole of the creation of one new clay pot? In other words, what is the consequence of each additional marginal clay pot? If she hadn’t made the pot, then there would just be red clay beneath the dirt in a field. In the absence of the sculptor, there would be nothing. With the sculptor, there is now one additional clay pot. Evidently, she has created new wealth that did not exist before. What does this mean? There is now one new clay pot for someone, say a baker or a family that needs something to store flour in, to buy and use for their uses for a clay pot. They will purchase the clay pot. This then creates a new marginal unit of work for someone to do, say, to be paid by the purchaser to deliver the clay pot from the sculptor’s kiln to the house of the family that has bought it. That family then pays the deliveryman a fee for his work. None of these things--the purchase or the job it created or the salary for that job--would have existed in the absence of that one new clay pot. Then, in turn, perhaps the deliveryman takes his fee and buys a sandwich. This then gives a sandwich shop one new sandwich sale which it otherwise would not have had, it spends the money it made from selling that sandwich to buy a marginal additional amount of bread, the baker sells one more loaf and pays more to the farmer who sells him the flour, the farmer has marginally more money to buy seed and fertilizer for growing wheat, and so on.
In light of this example, we can see that each time a producer creates a new value, each time one new unit of wealth is created, it impacts the entire economy beneficially, creating new trades that would not have existed, and each new trade makes money that can pay for more opportunities to create more wealth. This is basically the Broken Window argument in reverse. The Fallacy of the Broken Window says that if you break a window, the money spent to repair it does not help the economy does not have a net benefit, because the net result is everything as it was before minus one window. The Upward Spiral theory says that if someone makes something, the entire economy benefits, in the traditional of Adam Smith, because everything is as it was before but there is now more wealth in the pool of value that is bought by everyone’s dollars.
Two conclusions result from this. First, that the key to economic growth is production. The Keynesians, who say that demand causes growth, as if consuming value is the engine of growth, are simply wrong. This should come as no surprise to most libertarians and Objectivists. The family’s need for a pot to store things in, their demand, would accomplish nothing if the sculptor did not actually make the clay pot from the clay. In contrast, supply side economics, which focuses on creating conditions favorable to production and the creation of wealth, is the best tool for economic growth. This is not Voodoo Economics, it is in fact basic logic, which sadly most leftists don’t care about, since they don’t think logically, they think in emotions, and not merely emotions, but negative emotions like envy and resentment. Note that creating more wealth benefits everyone, including the workers and the poor (see my other blog posts about the Great Recession for details), so supply side economics actually helps the poor. This is not a “trickle down” effect that I am asserting, I am instead asserting that economic growth increases prosperity and the standard of living, which helps lifts every tier of standard of living higher than it was before. Each marginal unit of new wealth created benefits the economy, so the more that is produced, the more trade creates additional opportunities to produce. Thus there is, obviously, the potential for--aptly named--an Upward Spiral.
Second, leftists who might agree with me about the lone female sculptor say that if a factory mass-produces clay pots, and is owned by a greedy capitalist owner, then all the created wealth is taken by the owner and does not benefit the people. Let’s consider this. First, the issue of scale. If one million clay pots are produced, then each one benefits the economy, for the same reason that one clay pot would--up to the point where there is unmet need for more clay pots, and once all need is sated, then supply meets demand and the additional creation of new pots is a waste of resources and does not create wealth. So, if a factory creates one million clay pots, they do good, but one million times more than one person could. The miracle of the Industrial Revolution, and the reason we don’t live in thatched-roof hovels in pig feces to die from Black Plague or work 18 hours a day for a bowl of gruel, like they did in medieval civilizations before capitalist economic progress and the Enlightenment that gave birth to that progress.
Second, if the factory creates the pots, the newly created wealth belongs to the people, in the sense that its benefit goes to the many people who buy them, the salary for the fleet of employees who now have jobs to deliver them, and to the sculptors, or factory machine workers, who make them, and get paid their salary. Maybe an owner takes a profit. Perhaps the majority of the revenue is the owner's profit, if a profit margin is high. But in the absence of the factory, one million clay pots could not be made, the jobs for delivering millions of clay pots, and salary for those jobs, would not exist, the salary for the factory workers to buy things would not exist, and the world would be the same except minus a vast amount of created wealth. So the owner takes what he deserves, and he gets the money that equals what the marketplace values his work in organizing a successful clay pots factory. You can either have thousands of working class factory workers making a low wage for unskilled fungible labor, or, in the absence of the capitalist owner, these thousands of people would have no job at all, no money, and they and their families would starve. (Of course, the leftists want to believe that the government could take wealth and give it to these people, but again, that wealth ultimately reduces to just a lot of clay pots, or created food, or created wealth, and someone must create it, and some factory must create it to make enough of it to make a difference--the government doesn’t create it.)

Friday, April 29, 2016

The Choice Theory of Value

GOLD economics posits the choice theory of value, in contrast to the labor theory of value, which is Marxist, and the subjective theory of value, which is Austrian. I am well aware that many, perhaps most, libertarians are Austrians or are fond of Austrian economics, so I am sure they will be angry for my taking on Austrian theory, and will try to discredit and attack me. I come from the Objectivist-influenced school of libertarianism, which is sharply contrary to the Rothbardian Austrian school, but I believe in one unified big tent libertarianism, and so I want to try to persuade the Austrians that there is some merit in what I have to say. Let me see if I can answer some of their objections, in anticipation. Two obvious objections that I anticipate are, first, that the choice theory of value will collapse into the labor theory of value, and second, that there are factual scenarios which disprove my theory.
The labor theory of value says that money should be equal to the amount of work done to make the sold goods, in other words, money should equal labor expended. The Austrian theory of value says that value is subjective, in other words, money should equal the subjective feelings of the consumer. The choice theory of value is, perhaps, in between the other two, or, perhaps, is in a different area altogether. The choice theory of value holds that profit is equal to the amount of value that the producer created and added to the raw materials on top of what was there already. Value refers here not only to physical items added to the raw materials, but of work done to improve the raw materials and turn them into a finished product, such work including both physical labor, intellectual work, and making decisions. Assuming that a person has free will, which the choice theory does assume, a person is responsible for their work and choices, hence created the value, hence is entitled to own the profits as their just reward. The choice theory of value, like the Austrian theory, also holds that value begins with the subjective tastes, feelings, and preferences of the consumer, but the point of sale converts this into an objective measurement, where the consumer made a choice to spend $X to buy something, and at this point the subjectivity is converted into an objective value, the mathematical value of $X of the price of the item, which is fundamentally an objective existing thing in reality, which can be measured and compared and quantitatively analyzed, and is not merely a subjective entity in the consumer’s mind.
The choice theory of value is so named because it is the choice to buy or sell at a given price which defines the objective value of the product as being objectively worth that price, so that only the freely made choices of consumers in the marketplace can objectively evaluate values. This implies that government bureaucrats could not know objective values in the absence of free market choices by buyers and sellers, so socialists cannot accurately assign productive resources in proportion to the value of the goods they need to produce. The choice theory of value is distinctly libertarian and anti-socialist. The only way to know what people would choose is to give them the freedom to choose and then see what it is that they actually choose. It is not something an economic planner can guess or predict, despite the fact that it is objective and not subjective, hence economic central planning is futile.
According to the labor theory of value, the value of something is defined by the amount of blood, sweat, and tears that went into producing goods and services, hence, obviously, the working class deserves to own everything. The Austrian will say that, if I say that the person who made the value deserves the money, then this collapses into the Marxist position, because doing the work would earn the profit. To which I reply, for an ethical defense of capitalism, we must be able to say that the people who own money deserve to own it, and earned it, otherwise capitalism has no ethical justification for the ownership of private property, and it would simply be random chance that the rich have money, a random chance that would seem unfair and could be fixed in the interests of fairness. Such a moral justification is utterly missing from the Austrian position, when one turns the magnifying glass of critical scrutiny upon the details of Austrian dogma.
The choice theory of value is not the labor theory of value, because the relevant measurement for my theory is the money price that is paid, not the amount of blood, sweat and tears expended to make the product. If a rich person makes a product that people pay a million dollars for, then he made that money, he earned it, and he deserves it and is ethically justified in owning it. My favorite example is the star Major League baseball player, who brings joy to millions of fans and deserves a $20 million/year salary because he brings joy to 20 million people and thereby creates the value to make that money, even though his job is fun and easy compared to the daily grind of a school janitor who makes $10/hour to clean up unpleasant filth. In the market there is a high supply of potential employees relative to a janitor’s work, and the janitor’s work is low-risk work that does not entail high stakes if he fails in his job, so the value he creates is actually worth $10/hour in the context of supply and demand and the importance of the job. A corporate CEO, of course, is like the baseball star, but more so: the CEO of a company that mass-produced products bought by millions of people creates millions of units of value, and he bears the risk of what happens if he fails at his job, which is bankruptcy and disaster for his company, so the value he creates is obviously enough to earn a million dollar a year salary. In a free market society, the people who make lots of money deserve to be rich, and the poorer people who don’t make as much value deserve less money, as a conclusion of deductive logic. Profit is not labor, it is value created, which does not perfectly correspond to labor, but the objective measure of value does correspond to money price paid, indeed, it is identical to it.
The Austrian position is anathema to any Objectivist-influenced libertarian, first because we don’t believe that subjective things really exist, second because we understand that capitalist economics needs a moral justification for people to believe in its justice or rightness, or it will die. Under the Austrian postulates, that money need not be earned, and that economics exists to prioritize scarce resources, the people with large amounts of unearned money would have their needs and wants held as a higher priority than people who did lots of hard work and created lots of value but have less money, which screams unfairness to any normal human being, although within the narrow, cloistered Austrian community the Austrians probably don’t come into contact with average people very often. In the Austrian model there could be people with lots of money who don’t ethically deserve to own their money, yet the entire economy would be organized to satisfy their every whim, and this is not fair. My theory solves the problem created by the Austrians: it rejects Marxism while proving that the people who created value have an ethical right to their profits, which includes the profits made by businesses in a capitalist economy.
The choice theory of value is not the labor theory of value, but doing hard work and making smart decisions generally does create value, so you will get what you deserve under GOLD, whereas the Austrian theory is, in the end, value free, and therefore not as good for capitalist politics. The choice theory of value can never collapse into the labor theory of value, because prices don’t perfectly correspond to labor, and A is not non-A, price is not labor, so they are two different theories. One won’t collapse into another with any greater probability than that Austrian theory will collapse into Marxism, or that Quantum Mechanics will collapse into Flat Earth Theory. If Austrian theory continues to insist that a person does not need to earn money to own money, then they are sabotaging the ethical justification for capitalism, and this may very well lead to Marxism, which, in a sense, means their theory will collapse into Marxism long before mine does.
There are three factual scenarios which will be asserted against me, so let me anticipate them. First, that a man buys a bottle of wine for $200 from someone who walks past him on the street, and in the very next moment he turns around and sells it to someone else who passes by for $400, but he did absolutely nothing to the bottle of wine, hence created no additional value, yet has a $200 profit. Second, that a man makes a grilled cheese sandwich and puts rare, precious caviar into it, but then sells it on a street corner for $5, so its objective worth was not the price that was objectively paid for it. Third, a worker deserves the money they are paid as salary, yet my theory of profit, that it is the value added on top of raw materials and valued objectively by the free market at the price paid for the product minus the cost of the raw materials to make the product, does not account for salary.
In the bottle of wine case, the value that is created is the value of the wine being in the hands of someone who values it for $400 instead of the person who valued it less at only $200. This is value, as the economic theory of arbitrage, well known to Wall Street traders, would understand. The man did the work to create this arbitrage, and the market valued it at $200 of profit. But what if this man did not work to arbitrage it, and found the buyer and the seller by accident? Then no value was created, it would merely good luck, yet a profit was made.
Well, to this I would reply: everything that exists has some degree, big or small, of luck and chance intertwined with it. From the position of the electrons in the atoms that form your cells, to the position of planet Earth relative to the Sun that makes life on Earth possible, to the fact that your ancestors 50,000 years ago lived to reach sexual maturity and procreated, to the prices and details of the things you can buy and sell, to the people you deal with every day, everything is influenced by luck and chance. Thus, when someone creates value, there is always some degree of luck and chance that created it, yet the creator still deserves to own his property as a result of creating it. In other words, luck is everywhere, hence it should not be considered as a controlling element in any specific case as separate from something that hovers around us everywhere and falls out of the analysis. Thus, the presence of luck and chance should not be an argument against a person having done work to deserve something or earn something, since there is some luck in all work that is done. In the bottle of wine case, perhaps 99% of the profit is luck of being there at the right place and time to find that seller and then that buyer, but 1% is making the decision merely to talk to them, buy it, sell it, and hold the bottle of wine without dropping it and spilling it, and we have already evaluated that luck is a non-factor, so this person did create a value that the market priced as being worth $200, therefore he earned $200. Of course, in the vast majority of cases, the numbers will be reversed: 80 to 90% of the profit will usually be value created intentionally, and about 10 to 20% of most value is attributable to good luck and chance favoring the productive creator, although in short-term fluctuations luck and chance can play a much greater role, as it does in the bottle of wine scenario, and good luck and bad luck tend to even out to reveal the effect of productive capacity only over a long enough period of time for probability to emerge from randomness.
The thought experiment posits that the man does absolutely nothing to get a $200 profit, but we have seen that this postulate collapses into an impossibility, because the man must have done something to make a sale at all, even if it was just being in the right place at the right time for one split second. The market has valued this minimal amount of work at a $200 profit, so objectively the tiny value he created is actually worth $200 in the evaluation of the market. If the man truly had literally done nothing, and someone handed him $400 and did not get a bottle of wine in return, then this would have been a gift, not a profit. Gifts are not the same as profits in terms of economics, and one does not earn gifts or deserve to own gifts on the basis of the recipient (rather, a gift is rightfully placed because the gift-giver deserved to have the right to give it to a person of their choosing) so the gift scenario would also not be an obstacle to my theory of profit.
Now, for the man who sells caviar in a sandwich for $5, we say that he sold it for less than what it was objectively worth, yet the choice theory of value would say that it must be objectively worth $5, since that it was the marketplace priced it at. Yet why do we say that it was objectively worth more? Because caviar is more expensive than $5. And why do we say that? Because there are people buying and selling jars of caviar for $1000 and $2000 elsewhere. The only reason we say it is objectively more expensive is because there are other trades happening elsewhere in the market where the same product is sold, in money prices, for other amounts. The choice theory of value would say that those other purchases and sales of caviar that price caviar at $2000 are defining the objective value of caviar, and it is on the basis of those objective prices that we can say the man undersold the sandwich relative to its objective value. In the choice theory of value, the objective value of something is priced by the purchases and sales in the market, and the market functions by each individual aggregating to find the price where one unit of a product won’t be bought by buyers for more $X and won’t be sold by sellers for less than $X because of the supply and demand for it, the price of its competitors, and the price of its raw materials.
In this way, the purchasing decisions of individuals come together to form the wisdom of the market and create an objective evaluation of the value of an item. The individuals decide the price, but Adam Smith’s invisible hand guides all individuals into a choreography wherein the sum of all purchases and sales ultimately finds the market price, so one individual who defies the market does not create the price, although the $5 sale does lower the price of caviar ever so slightly below the $2000 it was priced at elsewhere. This Adam Smith invisible hand process is what evaluates an objective value for the product, let us say $2000/jar for caviar. One purchase or sale may define an objective price relative to that one buyer or seller, but the evaluation of the market is what defines an objective price overall. So, yes, in fact, the sandwich was objectively worth more than $5, but it is only true because of those other sales for $2000. If the other jars of caviar were only selling for $5/jar in the caviar stores, then the sandwich might actually be worth the $5 objectively.
We can take the caviar principle and broaden its application. If someone objects that my choice theory of value is incorrect because the amount of profit that is made by selling a specific product is not actually equal to the objective value that the producer created in taking the raw materials and producing the finished product, we can say: why not? Why do you think it is worth more, or less? Often, it will be because elsewhere in the market there are sales which price comparable value differently, but the person who makes this objection is pretending to be blind to that data. If there are not other trades to value the profit, we can answer: no, the market has evaluated the worth of that created value, and has valued it as being worth this amount of money. The market has spoken, so that it the objective worth, and your feelings that it is really worth more, or less, are mere subjective feelings. Specifically, if you make something, and you put a lot of work into it, and you think it is great, but the marketplace rejects it and it sells for a tiny value, or doesn't sell at all and you take a loss, then your subjective valuation is irrelevant, and the product was objectively worth its price in the free market.
The salary objection is simple to answer. I think of work done by an employee as a product made by the employee and sold to his or her employer, from an economist's point of view. Indeed, work is probably the most common product that is ever sold. The raw materials are the factors of production: the employee's food, water, shelter, healthcare, and education. The salary, minus the cost of those factors of production, is the profit the employee makes on selling his labor to his employer. Indeed, in my triangle of trade theory, an employee sells his labor to his employer and gets the things that he buys as the corresponding value that he receives in return for giving his labor, from other traders who bought the end products produced by the employer, either directly, or, as in the pool of value theory, via an indirect path through many intermediate buyers and sellers. In this sense, it is quite necessary for us to characterize labor as a product sold by the worker to the employer, and my theory of profit and price does account for it.
That exhausts the refutation of these arguments, but I look forward to seeing what other critical arguments will be aimed at me in the future, in the interests of a healthy, open-minded debate and discussion of GOLD vs. Austrianism.

Friday, April 22, 2016

Windows and Doors Theory

Everyone has heard the saying “When God closes a door, He opens a window.” I summarize an important principle of libertarian political policy with my own spin on this, by saying: “When the government opens a window, it closes a door.” The funny thing about doors and windows is that, when you think about it, you can escape to freedom through a door, but not, usually, escape out a window. I call this principle, summarized by the above saying, as Windows and Doors Theory, and it really is central to my politics and economics.
What Windows and Doors Theory states is that, when you consider a political or economic policy, you should consider it as a complete package of every policy that flows from its underlying principle, and you take the bad with the good, and the good with the bad. Three basic principles exist (there may be more, but let’s not worry about that here): the libertarian principle, the conservative principle, and the liberal/socialist principle. What Windows and Doors theory really means is that if you have identified something good about one of these principles, your analysis is not complete until you also consider all the bad things about the principle, and, in the end, you should add up everything good and bad and see if there is a net benefit or net disadvantage to choosing that policy.
Let’s play with some examples. Assume that there is an epidemic of obesity and diabetes among the poor in the United States. Assume that a politician proposes a tax on soda (or “pop”, as they say in the West Coast--I am an East Coast guy, and we call it “soda”) and junk food like McDonalds and potato chips. Suppose that experiments are run in cities and towns which adopt this tax, and it is proven that it does, in fact, improve the public health. Is this a good policy?
Windows and Doors theory states that you must look at the underlying principle, and identify the policy as a whole, to evaluate it. This principle here is liberal regulations to manipulate the sale and consumption of food. Assume, in this example, that there is a Midwestern state--let’s call it “Iowa”, as a purely hypothetical example--which has a politically important role in Presidential primaries, and which has an economy based on the farming of a food product, corn. Let’s assume that corn, if paid with taxpayer dollars, can cheaply be processed into high fructose corn syrup, a substance which when added to food makes food extremely prone to cause obesity and diabetes. Let’s assume, in this example, that the government is providing vast farm subsidies to the Iowa corn farmers, which results in a huge supply of artificially cheap high fructose corn syrup.
Windows and Doors Theory simply states that you cannot consider the soda tax without also considering the corn subsidy, because they are, in fact, a package deal. In this example, you could have the soda tax and the corn subsidy, so you are helping and hurting obesity at the same time. Or, you could reject the principle, and thereby reject the package of policies that flows from it. In this example, this would look like voting no on the soda tax, voting to end corn subsidies, and then see whether the obesity epidemic is solved by the end of cheap high fructose corn syrup added to virtually every food in the stores. In fact, there is no such thing as the soda tax or the corn subsidy, there is instead one policy, liberal food regulation. But the liberal politicians want you to see only half the story, and see the soda tax while being blind to the corn subsidy, despite it being one and the same principle that underlies them both.
One can see hundreds of different areas where Windows and Doors Theory can be used for political analysis, but I will only go through one final example here, and then let you apply it to other areas yourself. Assume, in this next example, that a poor person is living in a slum. This poor person just recently lost their job, and has no money. Now, let us consider the liberal policy of giving this poor person free healthcare, and government-subsidized low income housing, and welfare money so they can buy food. Let us assume, for the sake of argument, that this poor person will literally die, would starve to death or get deathly sick, absent government welfare. The liberal politician will point to this as the triumph of liberalism, and accuse the libertarians (and conservatives) of issuing a death sentence to this victim, by proposing to cut taxes and slash welfare.
But Windows and Doors Theory says you must look at the fundamental principle and every detail that results from it, to evaluate a policy, and you take the good with the bad, and you take the bad with the good. Let us assume, in this example, that this poor person is fond of cutting hair, and is a talented hair stylist. Let us assume that in his or her state, in order to get a job as a hair dresser you need a hair-dresser’s license issued by a state occupational licensing board, which requires taking classes in hair styling, and this poor person is illiterate and can’t read and can’t afford the classes, and can’t even afford the filing fee to apply for the license. Assume that, in the absence of this occupational license regulation, this poor person can, and would, get a job at a hair salon cutting hair, would be very good at this job, would make an okay salary, and could pay for his or her own food, shelter, and medical treatment, without needing any help from the government. So, is welfare and liberal politics really helping this person, or hurting them?
The example can have further details added to this same example. Assume that, in addition to getting a job as a hair stylist, this person would be willing to work as a factory worker in manufacturing. But in this state there is a minimum wage law, and there are laws that mandate a slate of employee benefits that employers must give to employees. The liberals point to this law as a success, saying it helps the poor. But the law has made it so expensive to hire employees, that the companies in the state’s manufacturing industry have closed most of their plants in the state, and moved those plants, and those jobs, to Mexico and China, where the wage they must pay is lower, so that it is cheaper to hire employees overseas. Did the liberal policy really help this poor person, or, as a net result of adding up all the pluses and minuses, did it hurt them? In this example, we have conceded that this poor person, right now, will die if welfare benefits for them are cut. Does this mean that liberalism is a good policy for them?
Another interesting thing to consider is that, based on this, a libertarian could concede that abolishing the welfare state might cause great short-term harm to the poor masses dependent upon it, and that the poor might die without it, yet, as a matter of reason and logic, this might not mean that the net result for those poor masses would be bad. In fact, the libertarian could concede the death sentence argument as part of the story yet still argue that libertarianism is ultimately much better for the people than liberalism, because the supposed death sentence that will result from the end of welfare is not really a death sentence after all, since libertarianism will create new jobs so that the people won’t need to rely on welfare to survive any longer. Of course, it is the job of the economists to analyze whether the benefits to the people of job growth are greater or lesser than the loss to the people from welfare benefits ending.
Right here I am not going to go through all the hundreds of different policy details that flow from the three central principles of libertarianism, liberalism, and conservatism, and make arguments as to which of the three is actually best. You can probably guess what I would say, anyway. That is not the point. The point is to make you understand the Windows and Doors Theory, which states that, when analyzing a political policy, look first at the underlying principle, then identify every detail in practice which flows from it, and then, to decide whether it is good or bad, consider both the good it does and the harm it causes, and sum up the net result. Just because you can look out an open window, does not mean you should ignore the sound of a door slamming shut. This is a more wise and intelligent method of analysis than what politicians and pundits do right now, namely, looking at some details that are good and turning a blind eye to the associated bad, or blaming some things as bad and refusing to consider other good things that go hand in hand with them. Windows and Doors Theory is the principle of principles-based analysis.
In conclusion, sometimes in order to open a door you must close a window. And sometimes, when you close a window, then a door swings wide open, so that people can actually exit the room through the open door.
Footnote: Do not confuse Windows and Doors Theory with two other theories with similar names, the Fallacy of the Broken Window (in economics), and Broken Windows Theory (in police procedure). They all sound similar but are not related. Also note that Windows and Doors Theory is not precisely identical to the Principle of Unintended Consequences, which states that economists must consider both intended and unintended consequences of a policy. My theory argues that you should look at all policies that flow from a principle as one package and take the bad with the good, which is not quite what Unintended Consequences Theory says, and, also, some of the bad that flows from a principle may, in fact, be intended, as the policy’s advocates may not see some intentional consequences as a bad thing at all.

Tuesday, April 19, 2016

GOLD Thought #2

This post follows up on my last post, in which I explained the economic theory as to why increases in the supply of oil and natural gas due to new fracking technology ended the Great Recession in circa December 2014. A GOLD economic postulate is that the value of a dollar equals the total pool of value in the economy divided by the total number of dollars in the economy. Thus, with newly created wealth (namely, newly created oil and gas) (and by the way, when I say "wealth" I refer to value, not to money) the difference between the old amount of wealth and the new amount of wealth is like a gift given to all dollar owners who buy gas and oil and automotive gasoline. Their dollar now buys more relative to the previous equilibrium between supply and demand. This is why, from a policy point of view, the supply side policies that create new wealth are always better than the demand side policies of taxing and spending, which focuses on wealth redistribution instead of new wealth creation. When new wealth is created, it usually makes prices cheaper, which very obviously inures to the benefit of the poor and lower middle class, since it is in essence giving them a gift. In contrast, a policy that makes things more expensive while claiming to help the poor is almost always going to hurt people with scare dollar holdings who just can't afford it, and does not actually create any new wealth to give more to the people than what they had already--hence the naive and ironically self-defeating nature of many liberal platform planks.
Of course, gas won't stay cheap forever, nor would GOLD theory hold such. The decrease in the price of oil relative to other prices will redirect profit-seeking resources away from the production of oil. Thus, in turn, will decrease the supply of oil until oil finds a price where it clears the market, in other words, where its profit justifies the precise amount of resources spent to produce it. This then becomes a new equilibrium point, the price point where supply clears demand, which is the most efficient use of resources in the context of consumer decisions to buy it and the supply of and demand for that commodity, the resources used to create it, and everything else that competes with them. When people choose to buy more, price goes up, which draws in more resources to produce it until it reaches an efficient price, and when supply goes up, price goes down, which takes resources to produce it away until supply goes down to the price that clears the market. Price summarizes and results from an incredibly sophisticated machinery of the economy that measures everything relative to everything else and coordinates the economic behavior of all the disparate individuals in the world--the miracle of Adam Smith's Invisible Hand. This is not complicated, really, it is basic supply and demand from Economics 101, yet both the Keynesians and Austrians frequently just don't get it.
Lastly, while on the topic of the price of oil and supply and demand, this is a perfect opportunity to flay a pet peeve of mine, namely, the theory of marginal utility. The Austrians say that water is cheap despite being vital to humans survival because every unit of water is priced at the value of its lowest use, in other words, for washing your car or something even less important, not for drinking when dehydrated. I think there is no need to say this, since water is valued at the value of the use it is bought for, obviously. Instead, the theory of supply and demand explains it adequately. Water is cheap, despite being a vital necessity, because there is a high supply relative to demand. If there wasn't--and on the Moon and Mars, there won't be--it would be quite expensive. Oil is fundamentally like water, a vital essential commodity, and its recent collapse in price due to supply and demand supports my argument. Why does it matter? Well, why does it ever matter to believe a true theory instead of an incorrect theory? Because, if you apply it, and you are wrong, the results will be worse than applying a theory that is actually true.

Friday, April 8, 2016

Your GOLD Thought for the Day

Economists are constantly trying to analyze data to find principles. On that note, let us consider the Great Recession. We may debate what caused the Great Recession: Wall Street greed in reselling mortgage-backed securities of subprime mortgages, or government backing for these same subprime mortgages. The issue is debatable, and it all probably contributed. But it is undeniable that the Great Recession ended in December 2014, coinciding with a massive drop in the price of oil and automotive gasoline. The only difference between December 2014 and any other month in the preceding 5 years was the collapse of the price of oil, so we must conclude that this is what ended the Great Recession.
There is no more poignant argument for GOLD economics. What actually happens when the price of an inelastic commodity collapses? According to GOLD, price is the mechanism whereby consumers and producers compare one item relative to all other items, in the context of their supply and demand. American fracking technology released a massive amount of fossil fuels into the marketplace, which nobody had been expecting. At this point the supply of fossil fuels relative to their demand went way up, so the price went way down. When the price collapsed, Americans who would have had to spend $500 on gas for their cars were instead able to spend that $500 on other things, which stimulated the economy enough to end the Recession.
To understand this, let's consider XYAB. Say that X drives to work, and pays oil rigger A $20 for a tank of gas. A sells gas to X. X makes widgets, which X sells to C, also for $20. Now, A suddenly sells gas to X for $10 instead of $20. Next, the amount of money X must pay A for gas goes down, from $20 to $10. The price of gas is inelastic, meaning that its buyers must have it and will therefore pay whatever price is necessary to get it. So this puts an additional $10 in X's pocket. X can then spend an additional $10, or sell cheaper widgets to C, to compete better against the other widget makers. If X chooses to pay $10 to D for something else, this creates a job for D to make $10 worth of that item, or if X sells cheaper widgets to C, then X sells more widgets, and C then has more money, which he can spend to buy something from D or use to pass on a discount to his buyers, and so on. This continues until A reaches the new price that is the highest price he can charge in the context of the supply of oil.
One of the central principles of GOLD is that the use of money in economics can sometime cloud and obscure what actually happens, as is the case here. If we look at it in terms of trades, and not in actual dollar amounts, it is clear that the people who trade things to the makers of oil in return for oil end up trading less to the oil makers in return for the same amount of oil, at which point these people then have held more of their wealth, which they can then turn around and trade to other people. The increased amount of oil is an increase in the total amount of value in the economy, and, as GOLD theorizes, the value of a dollar is equal to the total value in the economy divided by the number of dollars, so this results in a massive deflation, but what has actually happened is a vast increase in the amount of economic wealth in the economy, and the amount of value that goes to the buyers of oil is equal to the amount of new wealth that increased, as this additional wealth is represented by the difference between the new price of oil and the old price of oil. This is literally the inverse of inflation: when more money is printed and the amount of wealth remains the same, the printing of money causes inflation, whereas, when the amount of money is relatively stable and more wealth is created, it results in deflation. A classic example of the GOLD theory that the value of a dollar equals the amount of wealth divided by the number of dollars, to explain inflation and deflation under the general GOLD theory that money represents value in trades.
So we can see several GOLD economic principles at work: first, that when supply or demand changes the market recalibrates to the new point of equilibrium where a buyer would not pay more to a seller for that product, and, second, and distinctly libertarian in nature, the more wealth people have, the more jobs and wealth it creates, because each new unit of wealth creates a job to buy or sell it or buy and sell what accompanies it, so economic efficiency creates an upward spiral, where having more money creates more jobs, which creates more things, which makes more money, and so on. Sadly, jobs were lost in the oil industry, but the net effect is a benefit to the economy, and, of course, to new jobs for displaced oil workers. This is why, also sadly, government taxes and regulations designed to help the poor actually hurt the poor, frequently, because every trade which might have happened but for government regulation would have created new wealth, and each unit of new wealth that is created also creates jobs to go with it, making it or buying it or selling it or making, buying and selling whatever accompanies it.
In this story we can also see a decisive refutation of socialist economics. The socialists would say that the price of gas is dictated by the exploitative greed of the oil makers, and that the surplus benefit of any increased efficiency in oil production would be kept by the oil makers as their profit, instead of being passed on to the consumers, and to the people generally. Certainly, if the oil makers could have kept the price of oil artificially high, they would have done so, as their profit would have grown by billions if not trillions. The fact that fracking increased the supply of fossil fuels which thereby sharply increased economic growth overall shows that the price was set by supply and demand, not by corporate greed, and that the benefits of economic growth naturally flowed out into the economy to be enjoyed by the people, and were not siphoned into exploitative profits by the rich. The facts simply do not support the socialist economic theories of the nature of profits and the setting of prices.

Saturday, November 8, 2014

An Introduction to Hasanian Economics: Making Money vs. Theft, Fraud, and Force: A GOLD Analysis

Making Money vs. Theft, Fraud, and Force: A GOLD Analysis

“He didn’t want to make money, only to get it.” --Ayn Rand, “Atlas Shrugged,” Part One, Chapter X, page 273 (Signet Edition).

In my opus of libertarian politics and economics, the nonfiction treatise “Golden Rule Libertarianism” by me (Russell Hasan), I present a bold new theory of economics, which I call GOLD. In the book, I explain the GOLD economics theories of how trade and the money price system are used to coordinate production and consumption in a division of labor economy, and why supply and demand interact with the price system to fine-tune economic efficiency in a capitalist economy. However, after I published the book, I realized that, while I had explained how things work in a good economy, I had not presented extensive detail on what goes wrong in a bad economy. This article will fill that gap.
To begin, I will summarize the GOLD theories of the triangle of trade and the pool of value, which is the core of the GOLD theory. Then I will discuss the difference between making money, which comes from producing a value and trading that value to someone else in return for a value to consume, vs. getting money, which happens when money enters your control without you having produced or traded values, and which is accomplished by theft, fraud, and force. I will proceed by analyzing, one by one, first theft, then fraud, then force. At the conclusion, as an added bonus for you, I will explain what the GOLD analysis tells us about how to make money and get rich.
1. The Triangle of Trade and the Pool of Value. Let us first assume two people, Mr. X and Mr. A. X creates Y, and A creates B. The details don’t matter and this is intended to be a broad theory which accordingly would be true if one plugs any set of details into the variables. X’s job is to make Y, and A’s job is to make B. In a primitive economy 5000 years ago, X and A would live in the same little village, and if X wants to consume B and A wants to consume Y, then they would trade in kind. For example, if X is a blacksmith who makes horseshoes, and A is a farmer who raises cattle, they might trade one cow for a set of horseshoes.
Now jump ahead 5000 years. A modern economy is a division of labor economy, where every person is tightly focused on one particular trade, i.e. his or her career. Assume that X and A live again, and, once again, X makes Y, and A makes B. In a modern economy, Y and B are any value that can be consumed, including a consumable good or service or something that can be used as a tool to make such, and they may or may not be entire products, e.g. they could be tiny parts of a product built by a company, such as a pencil eraser or a car tailpipe. For this example, let us say that X is an auto mechanic in Los Angeles who fixes cars, so Y is auto parts, and A is a baker in New York who bakes cupcakes, so B is baked goods. Let us assume that X wants to order a batch of A’s cupcakes over the internet in order to eat them and give some of them to his children. X wants B, and would trade Y for B. However, A does not want Y. Mr. A’s care works fine and does not need new parts. The money system is what solves this problem, because money is a common medium of exchange that represents all tradable consumable value. X repairs a car and is paid $40, and X then pays $40 over the internet to A in return for A shipping a batch of chocolate cupcakes to X. A is willing to trade cupcakes for money instead of for a car repair because X’s money can be spent by A to buy literally anything else for sale in the economy.
Why is A willing to accept X’s money? Here is where the triangle in the “triangle of trade” comes into play. Normally economists look only at the transaction whereby X buys B from A for $40. What they miss, and what nobody pays attention to, is that the trade is a circuit, and the circuit is completed by a tertiary trade, such that the true cycle of trade is a triangle, which includes X, A, and a previously invisible third party, whom I call Dr. C. Generally, X buys B from A for money, A buys D from C for money, and C buys Y from X for money. The money flows in one direction along the triangle and in kind goods and services flow in the other direction. This must be true, because the money has no intrinsic value, but the goods and services are what gets consumed, so ultimately goods and services are what must be traded. In this example, there is a doctor in San Francisco named Dr. C. The engine in his car dies and he buys some car parts for a new motor from X for $40. C also has invented a new medicine for facial acne, called D, and A in New York has purchased a bottle of medicine D from C (i.e. from C’s business than sells his medicine) for $40.
The only things that really happened are that X produced Y and consumed B, A produced B and consumed D, and C produced D and consumed Y. In other words, the real economy is a series of in kind trades of goods and services for goods and services, not trades of money, although the money facilitates the trades. The money hides the fact that the only real things in an economy are production, trade, and consumption, and the money merely makes trades possible as a common medium of exchange to represent good and services, without adding anything fundamental to the picture. Of course, in a division of labor economy with millions of economic actors, like the USA, the triangle of trade is more like a big circle of trade, with hundreds or thousands of people all trading value in one direction with money flowing back in the other direction.
I say that X’s Y “justifies” or “backs” the $40 that X pays to A because the real reason that A gives B to X is not X’s $40 that X pays to A. Instead, the real reason that A sells B to X is the D that C gives to A when A pays X’s $40 to C. And C gives D to A because X gave Y to C. So, when X makes Y, when X produces Y or does whatever work his job entails that creates Y, when Mr. X creates the consumable tradable value that is Y, X is literally “making” the $40 that he pays to A for B, because he is justifying and backing that money with the value that he produced. This is how the triangle of trade explains the phrase “making money.”
When an economy includes, not hundreds of people, nor thousands of people, but literally hundreds of millions of people and billions of trades, then it stops looking like a neat simple triangle or a circle, because there are more than three trades or 100 trades, and instead it looks like a big blob with a billion interconnected trades, which I call a “pool.” GOLD economics can be characterized using the pool of value theory, which analyzes this blob using the an extension of the triangle of trade theory. This theory states that when a person works a job, he creates value and puts it into the economy’s pool of value and gets money back, and when he buys something he takes value out of the pool and puts money back in. Under this theory, the total money supply must equal the total pool of value in the economy, because money represents value, so all the money must represent all the value. The pool contains all the goods and services in the economy, and people get money by adding to it, and then spend their money to subtract from it. Thus, to make the money that you get, you must place into the pool of value an amount of value to “back” the money you are taking, i.e. to make the money.
The pool of value theory explains why printing money causes inflation, because, for example, if there are only 200 dollars in the money supply and only 200 apples in the economy, and the money represents the pool of value, then the value of one apple will be 200/200, i.e. one apple will cost $1. But if 200 new dollars are printed and now 400 dollars corresponds to 200 apples, the value of one apple will be 400/200, so inflation will drive the price of apples from $1 up to $2. Observe that in this scenario, the government has stolen 100 apples, because it can use the newly printed $200 to buy 100 apples out of the economy without having created any value to “back” that newly minted 100 dollars, so the dollar-owning private economy loses 100 apples and those 100 apples are “redistributed”. Observe also the logical conclusion of this reasoning that inflation does not help the economy, contrary to Keynesian dogma, because printing money creates more money for people to “get” money, but it does not “make” any money because it adds nothing to the pool of value. By further extension, good economic policy focuses on growing the pool of value, not on growing the money supply, and free trade is the policy that accomplishes this real growth.
I also call the pool of value theory the “correspondence theory of money,” because it posits that money corresponds to the pool of value, in much the same way that words correspond to the objects in reality according to the correspondence theory of language. The word “apple” represents any real apple, and a dollar represents any real value that you can buy with it.
Most people do not make something and sell it themselves. Instead, they work as employees and do work for an employer. But, even in this situation, each employee creates a value, which the employer collects, aggregates, and sells to other buyers. The employee sells the value he creates, i.e. his work, to the employer, and the employer trades money, i.e. salary, to the employee in return for that value. The big picture is that the employees all add value to the finished product, and the employer then sells the finished product for money and takes the money and pays each employee a salary for what he contributed to the finished product. So, in reality, each person is trading produced value for money which he will then spend to buy value to consume. Even in the employee-employer model, each employee “justifies” his salary by the work that he does. To frame this using the pool of value theory, when you do work for your employer, you put the value that you create into the pool and get back your money salary, and when you buy things you give your money back and pull value out of the pool.
2. Making money vs. getting money. In her novel “Atlas Shrugged,” in Part One Chapter X, there is a sequence of scenes wherein the heroes discover an abandoned factory. For a complicated reason, they seek to learn as much about the factory as possible. They learn that once, the factory was productive and made motors that were sold, but the factory collapsed under owners who did not care about profit. The factory went bankrupt and was sold to a series of crooks who stripped it of its equipment, furniture, etc. The factory was sold to two different people, so its legal status collapsed, and nobody could claim that they owned it, at which point looters broke in and stole everything that was left. During this investigation, over and over again, the heroes talk to idiots who seem to believe that the only way to get money from the factory was to take the objects out of it, like the equipment and furniture, and sell them, or to sell the factory to a sucker. The idea of actually running the factory and making motors to sell, and making money from the factory by creating value and trading it in the economy, does not occur to any of them, although, by implication, it does occur to the heroes.
Rand uses this sequence to point out the difference between making money and getting money. My GOLD theory completes the analysis begun by Rand, by explaining exactly wherein lies the difference. If you seek to make money, then you seek to create a value to trade with others in order to add meaning to the money that you handle. For example, in the triangle of trade example, when X gives $40 to A for B, the value to back up that $40 is the Y that X created and traded to C. Under the pool of value theory, you make money by creating value and placing it into the pool of value to justify the money that you take out. In contrast, getting money without making money consists of pulling value out of the economy without adding any value into the pool of value. In the triangle of trade, getting money breaks the circuit by getting a consumable good or service from someone without having to create value and add it into the triangle through trade with others.
This is almost always accomplished by getting physical money without creating the value to back the money and add meaning to the money. No one is going to feel forced to just give value to someone in return for nothing, but if a thief gets his hands on money, then he can use that money to get value by trading it to other people who see only the money and don’t see whether it was made or stolen. The person who created the value consumed by the thief, i.e. the person who takes the thief’s money and gives value to the thief, will not know that the money was stolen, and will not be able to see through the complicated web of trades to know that the thief never created any value to deserve to consume what the producer created. The victim of theft, who was robbed, will have been entitled to consume the value that the thief consumes, but this person could be miles away from wherever the thief goes to spend the stolen money.
3. Theft, fraud, and force. Now, having laid our theoretical framework, we can see how theft, fraud, and force work. Theft, fraud and force all consist of getting money and then spending that money without having created anything.
In theft, a thief uses force, e.g. a bank robber with a gun, or deception, e.g. picking someone’s pocket, to take money from a person who rightfully owned that money. The thief then spends the money to consume the value that rightfully should have gone to the money’s true owner. One of the core teachings of GOLD economics is that the total amount of value that is consumed cannot exceed the total amount of value that is produced, so when someone consumes a value without producing anything, there is necessarily one or more other people who are forced to produce value without consuming the corresponding value they could have traded for. It is in this sense that theft makes the producers into the slaves of the thieves.
Consider again my example of X, A, and C. Now suppose that, after X repairs C’s car and gets $40 of payment from C, and thief named Z breaks into X’s home and steals $40. Z then buys $40 worth of baked goods from A, and eats them. The production is still the same. Y, B and D get produced. But the consumption is different, because X must now go hungry despite deserving cupcakes, and Z gets to eat when he did not do any productive work. If we could see the network of trades of in kind goods for in kind goods, then A would ship his baked goods to X instead of Z, because he would see the trade of Y to C, which justifies A’s sending the cupcakes due to the D that C traded to A. But, because the system of trades is so complex, we only see the money that gets traded. A sees Z’s money and A must assume that it is legitimate because he can’t see where Z’s money came from, so A sends the baked goods to Z, when they should have gone to C. In essence, Z forces X to be Z’s slave and work for Z by creating the value for C that makes A give value to Z.
Under the pool of value theory, a thief puts money into the pool and takes out value, but he never put value into the pool to get that money, instead getting the money through evil acts. If replicated on a large scale, this would result in massive consumptions of value with no corresponding productivity or creation of value. Under this scenario, either producers will become slaves, and produce value for the thieves without getting anything in return, or else the producers will stop producing, and the pool of value will shrink.
Now let us consider fraud. Fraud could mean that a person who makes a trade is deceived about what he received on his end of the trade, but I define it more broadly to mean that a person did not get what he wanted. The analysis is similar to the analysis of theft. A sends B to X in return for X’s $40, but in reality, it is really in return for C’s D that A buys for $40. Now assume that the medicine D does not work, or is not what A wanted, or C lied to A about what D does. Perhaps D makes A’s hair turn blue, and does nothing to cure his acne. A created a value worth $40, but A has not gotten to consume the value corresponding to what he produced and traded away. This, again, makes A into a slave, producing value for others to consume while getting nothing in return. C, who defrauded A, gets his $40, and uses it to buy car parts from X. The villain gets money without creating value to justify that money, but in this case, he gets money by fraud instead of by violence as with a thief. According to my theory, if A created $40 worth of value and A does not receive exactly what he chose to buy for $40 in return then A was defrauded by C. In normal situations, this will be identical to A failing to receive the $40 worth of happiness that he paid for (normal meaning that a person chooses to buy the things that will make them happy). This is why, in “Golden Rule Libertarianism,” I include a section in the discussion of contract law which focuses on returns policies, because a person should generally be able to void a trade if they did not get what they wanted or did not get what they thought they were getting.
Here let’s consider force. As distinct from theft or fraud, which can be done by private individuals, I define force as the systematic distortion of trades in an economy executed by a government using the power of the guns of the police and army to enforce its economic distortions, i.e. the government acts by force. There are two types of force: taxation and regulation. In taxation, the government takes money from private individuals who have earned it, and gives to other people or, as more frequently happens in reality, wastes it on government spending programs that destroy the money without giving anyone what they actually want. As I explain in my book, in a free market economy a trade only happens if two people freely choose it, so the free market economy is what people have chosen. By definition, the economy created by force is different from the free market economy, therefore it follows as a logical necessity that the economy created by force is not what people would have freely chosen, and therefore it is not what people want. By definition, the difference between the economy of force and the free market economy is what the people would not have chosen but which the government chooses for them. This touches upon the basic GOLD theory, which is that, according to the Golden Rule (“treat other people the way you want them to treat you”) you should give freedom of choice to everyone else so that everyone else will let you be free to make your own choices. When GOLD is violated, the result is force, because force was used to override the result that would have resulted from freedom.
We can see that taxation is basically the same as theft, in practice. The government takes money from the productive and then spends it. When X creates $40 worth of Y and trades it and (to simplify the example) on that trade $40 is taxes away as income tax and sales tax, then this makes X into a slave, and steals the value that X created. Using the pool of value theory, X puts value into the pool but gets nothing out of it, while the government takes value out of the pool and places nothing into it. In fact, the government is actually taking Y from X and giving nothing to X in return. This fact is obscured by the role that money plays in what happens. The voters see the government taking tax money from X, and this looks less evil and scary than what is really happening, which is that X is a slave of the government, and X works for the government, to the extent that X makes the value that backs the money taken from him as taxes. True communism, where the people work openly for the government as economic slaves, scares mainstream American voters, but the liberal tax and spend politicians use money to hide what is really happening in a tax-based system, which is a degree of communism to the extent that the worker’s created value is taken by the government by means of taking as taxes the money backed by that worker’s created value.
We can also see that regulation is fundamentally akin to fraud because people don’t get what they want and what they paid for. In a free market economy, the trade of Y for B, or of Y for B for D, would naturally happen. A regulation by definition blocks a trade that would have freely happened or directs that one value be traded for something else other than what the traders would have freely chosen. It must be true that regulation by definition distorts the trades that would have been freely chosen because if all freely chosen trades were to happen then the regulations would have no need to exist. Returning to our triangle of trade example, let us say that, in the interests of food safety, a regulator enacts a regulation that bakers in the eastern USA may not ship boxes of cupcakes to buyers in the western USA, lest they go stale while being shipped over a long distance. We have already seen that, in a free market economy, X would buy cupcakes from A. This is the free trade that would complete the circuit of triangle trade, if it were allowed to happen. A has baked the cupcakes, and X would choose to buy them.
But because of this regulation the trade is forbidden to happen. Now, instead, X must keep his $40, and the cupcakes sit idly on the shelf in A’s bakery, unsold, until they go stale. In one sense, A’s cupcakes have been stolen from X and $40 has been stolen from A, but in another sense, B has been taken from A, to be disposed of as the regulators see fit. The trade is exploded and X and A do not trade value for value, similarly to a fraud, except that with fraud, a sham trade happens, and with regulation, no trade happens at all.
In a trade-based capitalist economy, trade is what connects producers to consumers in a circuit, and it is the prospect of trading to get what you want to consume which motivates the producers to produce. The more regulations and taxes, the fewer the trades that would otherwise have been freely chosen. Thus, regulation and taxation will directly correlate to a decrease in wealth in a free market economy. For example, if $40 of tax money is taken from X, then he is not allowed to take the value out of the pool that he put in, which will kill his motivation to work. Specific to the example of regulation, the trade of B to X for $40 was a key part of the triangle of trades between X, A, and C. Because of the regulation, A doesn’t have the $40 to buy medicine from C, so C won’t have the $40 to buy car parts from X. The regulation breaks the circuit in the circle of trade and wreaks havoc on the delicate money mechanism that coordinates purchases and sales in a capitalist economy.
Three important differences exist between government force on the one hand and theft and fraud by private criminals on the other hand. First, a person can legally protect himself from criminals, but there is no legal protection from taxation and regulation. Second, when a private thief steals money, he spends it on what he wants to make himself happy. In contrast, when the government spends taxpayer money to help the poor, or for whatever other bizarre reasons are politically in vogue, the money buys things that were not freely chosen by the poor people or other interested parties for whose benefit the money want spent, nor were the purchases chosen by the taxpayers. Instead, the money funds projects chosen by the broken, failing system of bureaucracy and crony politics. So, more often than not, nobody gets anything they wanted while billions of dollars are wasted and everyone ends up poorer.
Third, in a normal capitalist society, theft and fraud will be the exception. On the other hand, in a liberal/socialist society, force will be the norm and free productive trade will be exception. Because force, like theft and fraud, essentially transforms the productive into the slaves of the looters, either productive people will produce as slaves with nothing in return and the value that is produced will be consumed by people who trade nothing to the producers who made it, or, as will more likely happen, the productive people will lose their motive to produce, they will stop producing, and the pool of value will get smaller. Then, with a smaller pool of value, everyone will be poorer, which will prompt the government to stage further inventions (such as printing more money, which will lack any new value to back it), making things worse (e.g. massive inflation), and the economy will collapse into a downward spiral. This is precisely the nightmare scenario fully explored in Rand’s economic novel “Atlas Shrugged,” and, especially in dark times like the Great Recession, we have the possibility that our fact will mirror her fiction.
Also note that, as the dark times come, people will lose the understanding of the meaning of money, that money represents value and money is made by creating value to trade, because the government will have severed the connection between money and value. Lacking such understanding, more and more people will seek only getting money instead of making money, and the entire populace will fall into a mindset of force, theft, and fraud.
4. How to get rich. It stands to reason, based on the above, that there are two ways to try to get rich: either try to get a lot of money, as by massive Ponzi scheme frauds, or try to make a lot of money, as by being extremely productive and doing a ton of work to create value that other people will really want to buy. The government has a monopoly on legalized “getting” of money, so, unless you have political connections, it is pointless to seek that path to easy money. Some people use quasi-legal ways to “get” money, like cutting corners on quality to save money, charging an expensive price for a low-quality product, giving bad service to the poor while giving better service to the rich, saving money by doing unsafe dangerous things or selling unsafe products that were cheap to make, high pressure sales tactics or deceptive advertising that gets people to buy into deals that they don’t want or don’t understand, etc. Plenty of people try to get rich by getting money instead of making money, and some of them succeed. But, under the GOLD theory of economics, such a strategy of “getting” money is contrary to the teachings of economics. Instead, the path to riches that is most practical, and also the most noble and ethical, is to try to get rich by making a huge amount of value, and then trading this abundance of value for a lot of money. “Making” money requires making your customers happy, which comes from selling a great product at a reasonable price and giving good customer service. Happy customers mean that you earned your profit, i.e. you made your money.
So, the practical wisdom that flows from this is, if you want to get rich, don’t look at the money or think about the money. Instead, think about the work you are doing and the value you are creating. Work as hard as possible, and, even more importantly, maximize the value you create that other people will want to buy. When you create as much value as you can, and then trade as much as possible, then the end result will be the maximum possible amount of money ending up in your hands from selling what you created to other people. This results in having a lot of money, which means that you can buy a lot of consumable goods and enjoy life.
The Randian approach taken by the heroes of “Atlas Shrugged” makes sense here also: come up with a brilliant idea for a product that people will want to buy, like Rearden Metal, or develop a great skill that people will need to pay you for, like managing a railroad track with hundreds of moving parts and dozens of trains every hour without any train crashes. Do this, and you will put yourself in a position to create a vast amount of value, which you can then trade to others for great wealth to get rich.
But, to make money, it’s never about the money. It is always only about the value you create and produce, which you profit from when you trade that value to others for them to consume. In other words, you make money by making other people happy. You create value and trade it to others, those other people consume the value you created and it makes them happy, and this “justifies” and “backs” the money your customers pay you, which makes you happy. Making money is a win-win situation, whereas theft, fraud, and force are deadly for their ability to destroy an economy so that everyone loses.
One final note: There is some debate among economists (and humans at large) about whether greed is good or evil. Greed, in the evil sense, is the desire to get money and spend money without having made anything, as I described above. Greed, in the good, noble, Randian sense, is the desire to make money. I believe that the text of Atlas Shrugged shows that Rand herself understood this distinction, and she would not have thought of getting money as a good ethical action unless the money was made by production and trade. James Taggart is rich and gets plenty of money, but he is not a hero. Rand’s followers, sadly, take a less intelligent, less subtle and nuanced understanding than what Rand herself exhibited. Plenty of stupid Objectivists espouse the dogmatic belief that the rich, in general, are noble heroes and the poor, in general, are looters, without any grasp that some rich people make money and other rich people get money, and many rich aristocrats are looters of a different sort. We can debate whether the correct term for a person who desires to make money is “greed,” which Rand used for shock value as much as for accuracy, or “rational self-interest,” which is the more accurate but less polarizing or radical name. I personally prefer the name “rational self-interest,” although I am not opposed to the term “greed” provided that it is properly explained so as not to be misunderstood.