Friday, June 02, 2006

Economics on One Lesson

There is only one rational method to produce and distribute goods, in such a fashion as to satisfied the most urgently felt desires of the producers and consumers involved, and that is by means of a trade voluntary on both sides, one thing of value, a good or a service, for another thing of value.Gold is also of value where it stands for some value in goods or labor; currency is of value when it is redeemable by gold.The only other option, aside from voluntary trade, is through rationing. Rationing occurs when some state authority by fiat takes the value of the good or service from the productive man and gives it to another man. The rationing is always justified in the name of reducing the scarcity of the rationed good. Rationing produces the very scarcity it is attempting to avoid. It is always counter-productive.


All market interventions are a type of rationing, including regulations of money circulation, credit rates, working conditions, banking regulations, safety regulations. In each case, the state takes a certain goods or service and forces a transfer, or abolishes a transfer.

The wars and controversies of the Twentieth Century revolved around economic issues: socialism or liberalism. In Europe, Socialism took two forms: National Socialism, or Nazism, and International Socialism, or Communism. Italian fascism was a type of National Socialism, but one where the landowners and factory owners kept title to their property in name only, while all manufacturing and farming was done by command of the state bureaucracy. Liberalism had so thoroughly discredited the aristocratic order of the previous eras, the ancient regime of throne and altar, crown and miter, of guilds and protectionism, that no philosophy of political economics could gain wide acceptance, unless it adopted the names and outward appearances of the liberal order. Hence, in Western Europe and America, Socialism took on itself the name Liberalism. Karl Marx affixed the name "Capitalism" onto the economic arrangements of the liberal order, under the risible slander that the free market only operates to benefit people in the investor roles in the economy, and no other roles.

Marx errs in his analysis by assuming that people are their economic roles: a man (let us say his is a cobbler by trade) who runs a family-owned shop, but also does piecework or picks fruit on weekends for a wage given him by a local farmer, buys consumer goods with his wages, buys stocks and bonds with his profits, and invests part of his earnings, is at once, a proletarian, a bourgeoisie, a consumer, and a capitalist. If the family-owned shop turns second-order goods (half finished goods) into goods ready for consumption (such as a cobbler who buys leather to make into shoes), the man is furthermore a factory-owner, as well as the exploited factory worker that figures so prominently in Marxist mythology.

Marx's analysis assumes that economies of scale would drive all businesses into the hands of fewer and fewer owners, till all manufacturing was controlled by monopolies, and that an iron law of wages would reduce all wages to a mere subsistence level. He predicts an inevitable progress of ever-increasing misery for the great mass of people, as all productions are increasingly driven into monopolies, and all wage-earners reduced to bare subsistance.

Applying this analysis to the cobbler, one reaches the conclusion that, in his role as wage-earner, the iron law of wages means he must pay himself just enough to feed himself, and no more; but in his role as consumer, he must have enough money in excess of his grocery bill to buy goods; and in his role as investor, he must have sufficient return on investment to buy stock or half-finished goods to keep the shoe shop going; and in his role as shop-owner, he must price his goods high enough to make a profit, which is, of course, a price higher than the cost of the half-finished goods and the labor cost. But since the labor cost is controlled by the "iron law of wages", he has to price his shoes above what other laborers also receive in wages, which, since it is only enough to keep them alive, requires that the economy produce food and no other products, since no one can afford shoes. Since this is true for our cobbler as well, one wonders where he is getting the money to replenish his stock and invest in the business ventures of others. <>

Marx also concludes that the value of a good is the labor put into it, no more, no less, and that no operations concerning organizing the efficiency of production, finding markets to sell the goods, or persuading buyers to buy or persuading investors to invest, lends any value to the good. A man who spend one hundred hours to dig a well in the desert to slake the thirst of gold-miners standing nearby, and a man who spends one hundred hours to construct a monumental statue of a dead dog in the desert where no art-lovers are to be found, according to Marx, have performed labor of the same value and merit. The man who provides the well-driller with the money needed to buy the drill, or who organizes an inefficient work-gang into an efficient team of diggers, or who goes and finds some wealthy art-lover ready, willing and able to pay to view the monumental statue of a dead dog, according to Marx, add nothing of value to the operation, even though, obviously, neither wells could be dug nor statues sculpted, in their absence.

To cure the progressive immiseration of the masses, Marx proposes the solution of abolishing all wages and prices, abolishing the institution of private property, and to have all manufacturing and farming done by quota, all property seized by the state, and distributed by quota.

The leftists who now call themselves liberals or progressives adopt some of the Marxist analysis. Their arguments fall into two categories (1) blaming the free market for some evil, real or imagined, that would be present under socialism, or (2) blaming the free market for some evil, real or imagined, that would be aggravated under socialism. No longer willing to propose an entire abolition of the price mechanism, they merely wish to jury rig the mechanism to give false information; no longer willing to have the state set quotas for production of factories and farms, and distribute the goods by ration, they merely wish to have some goods and services set by quota, or some goods and services distributed by rationing.

A single example will suffice to show the self-defeating character of rationing schemes, since the same logic applies to any example. Let there be some good, such as milk, which the Authority wishes to make more available to the customers, either on humanitarian grounds or some other grounds. Currently milk is bought and sold for some price, x. The Authority must either raise or lower the price, or enact some other regulation which has the same effect as raising or lowering the price.

Raising the price artificially, perhaps from a desire to protect dairy farmers, will forbid buyers ready and able to buy from being able to buy, by pricing them out of the market. Naturally, rich buyers will be able, by restricting their purchases elsewhere, to meet the higher price, but marginal buyers will simply stop buying the good. In the first case, the Authority has merely transferred the rich buyer’s money from the vendors of whatever goods the rich buyer would have otherwise bought to the dairy farmer; in the second, the authority has diminished rather than increased the custom of the dairy farmer.

Lowering the price artificially, perhaps from a desire to see to it that poorer buyers get milk, will forbid sellers ready and able to sell from being able to sell, by forbidding them the profit they need to stay in the market. Naturally a wealthier dairy farmer can make up the loss by raising prices on some other commodity he sells, such as butter, but the marginal dairy farmer will simply be forced out of this line of work. As before, in the first case, the Authority has transferred funds from the butter-buyers to the milk-buyers; in the second case, the Authority has diminished the supply of milk. Note that in the first case, the Authority must either admit the failure of his regulatory scheme, or else introduce additional regulations on the price of butter, lest the dairy farmers, reacting rationally to the regulation, turn away from milk production and use their cows for butter production instead. This regulation will lead to the need for another one, and so on.

In effect, rationing takes away goods from people who want and need them most, and distributes them to people who want and need them not so much. This was why, for example, during the gas shortage under the Carter Administration, certain areas of the country, willing and able to buy gas, had dry pumps and long gas lines, and other areas of the country were given the scarce commodity in amounts more than they wanted or needed, and were using fuel to heat their swimming pools, while their neighboring states did not have enough fuel to run the trucks used to ship fuel.

There may be perfectly valid reasons that serve the public weal to take goods from one person and give them to another, or restrict production or buying of certain goods, ro ration certain materials. Governments routinely regulate the sale of pharmaceuticals, for example, or weapons, or alcohol. These things are done for non-economic reasons. They are meant to improve the health, safety or morals of the people, and the cost to the economy is regarded as something like a tax: a necessary cost of civilized life.

But there is no rational ground on which to make the argument that an economic purpose is served by rationing.



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