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AlexMerced
03-28-2010, 08:24 AM
http://www.lulu.com/product/paperback/economics-and-liberty-a-pocket-guide-for-beginners/6483439

If you can't buy the book, read the excerpt below, go to the link and give it a good rating a review so that way the chances of random people finding the book increase getting people in the fold.


Chapter 2 – Money, Prices, and Marginal Utility

Up until now as we've examined the exchanges that happen between our actors we've seen that it's all being done in a barter system. A barter system is where goods and services are traded directly without some medium of exchange, also known as money.

So what is money and where does it come from? No one understood money better than the great economist, Ludwig Von Mises. Mises understood that money came from existing capital, and to demonstrate this let's look at what has happened to our actors from the last chapter.

While the community has developed due to free exchange, goods and services became more diverse and it became harder to trade. The capital I had may have not as been in such demand by those who had the capital I demanded. For example the person who had the coconut that I wanted would not accept the string that I had and I did not want the ax the person who wanted my string had. This creates a slow down in the creation of value which can inhibit the future growth of the community. Later on looking for tradeable resources I had later come across precious metal in the ground. The jeweler would definitely be interested in this metal, or maybe the blacksmith would be able to smith it.

This metal as it began to circulate in the community began to have several uses such as jewelry, decorative statues and conducting energy. So now when anyone had this metal anyone would take it for trade, because they knew they could later trade it to someone who'd use it for production. I can now use my metal to trade for that coconut. The coconut man has no use for the metal personally, but he's sure he can eventually trade it since it's easy to carry and doesn't spoil he took the trade.

Eventually, due to these characteristics of this metal, everyone began using it to trade for the goods they wanted and money was born. Instead of trading goods directly, this “money” is used to facilitate the exchange. This money was born out of a good with its own demand and subjective value, and any other good could have just as easily became the money, so why did the metal become money?

Due to the convenience of being able to melt and shape the metal it was easier to create standard measures. The fact that it doesn't spoil like food also doesn't hurt. Now that we have money, people with capital will begin asking for different amounts of this money for that capital, and now prices are born. Prices are just the amount of money needed to accept the exchange, this allows an easy way to communicate value.

So let's say this metal has been forged into coin for easier carry, and are called “Vat”. How much Vats would I need to get the goods I want?

I go to the coconut man and ask him how many Vats he wants for his coconut and he tells me 10 Vats. Now I begin to subjectively value the coconut versus other goods, services and capital I can exchange for the same 10 Vats because these alternatives would be my opportunity cost or the possible value I'd forgo to enter this exchange.


If I end up valuing the coconut more than my alternatives then I'll enter the exchange, and if not I'll forgo the exchange. This is fine, because then the person who will eventually exchange 10 Vats for the coconut would have valued the coconut more than I have. In this case the coconut will have gone to the person who valued it more, creating more value. Although, what if no one else valued the coconut enough to exchange 10 vats? Then the coconut would spoil and the coconut man will lose his tangible capital for overvaluing it, but once again gain the knowledge to produce better prices with his future tangible capital.

So allowing both parties to take risk will help adjust prices to meet a point where both parties walk away with value, or neither party will enter the exchange. Although since things are priced subjectively we have to go back to economist Carl Menger and the economic theory developed since him and explore marginal utility. This is the idea where every unit I consume of the same good doesn't have the same value which will effect my willingness to enter exchanges.


Let's use the popular analogy of pizza slices. As I eat the first slice of the pizza it satisfies my hunger so I will get a great amount of value from it, including the enjoyment of the taste. When I eat a second slice my hunger has already been satiated, so now the only value I get is the enjoyment. After so many slices of pizza I no longer desire or value to eat another. This diminishing return is based on its marginal utility or value that I get for every unit consumed after the first.

So even if the coconut man sets his price at 10 Vats, I may have been willing to pay 15 Vats for that first coconut. In this case, I may decide to buy more but subjectively I don't place the same 15 Vat value on the second coconut but it's still more valuable than 10 Vats to me. I may continue to buy coconuts until this is not the case or until I find some alternative that gives me more value than purchasing the next coconut would give me.

So as goods become more diverse eventually certain goods will show a higher ability to trade, also known as liquidity and one of these goods may eventually become money. As money begins to get used, capitalists will begin attaching money prices to their goods which allows a better way to compare different alternatives of exchanges they can enter with their money. Although my ability to assess which prices I'm willing to pay will change with the marginal change in value that occurs in every exchange.



Chapter 3 – Banking, Interest, and Inflation

With success in trade and exchanges I've accumulated a lot of Vats which are metal coins I can use for trade. Carrying around these metal coins can become somewhat cumbersome but the risk of leaving them at home where they can be stolen is also an issue.

Someone in town has had the blacksmith forge a safe, and this person is now willing to warehouse Vats for people for a small fee. Now I can keep my Vats safe and withdraw them when I need them. This is the original essence of a bank.

Eventually this bank may want to develop a money substitute, which is a certificate or receipt that represents a portion of the capital you have deposited at this bank. So instead of bringing 10 Vat coins, I can bring one certificate that is redeemable at the bank for my 10 coins for the coconut. The coconut man can go redeem this and get 10 vats; since he trusts that the bank will honor his certificate he can just use the certificate itself in trade and save himself the trip to the bank.

Since people trust that the bank will hold their coins until redemption they just use the money substitute for exchange and most of the coins stay in the bank. With this being the case, the bank begins to worry less about all the money substitutes being redeemed and they begin to create more money substitutes than actual Vat coins exist in the safe. This practice is known as fractional reserve banking. The money in the safe or in reserves, is fractional to the money substitutes in existence.

The bank may initially have set ratio of reserves to money substitutes at some moderate level. For example, for every 1 Vat coin deposited in the safe 2 Vats worth of money substitutes will be created. So essentially since these money substitutes can be traded and used as money, the circulating money supply has just doubled. When the money supply increases it's called inflation, and when it decreased it's called deflation.

So what is the effect of this? At the moment these substitutes are created, nothing really changes. The bank may decide to lend out all these newly printed money substitutes. Currently, the subjective value to the bank is minimal since they currently have a whole lot of these money substitutes printed. The subjective value to people who want to borrow them is currently higher because of the current ability to use these money substitutes for trade. The ability to use these for trade is called purchasing power.

The bank subjectively values these money substitutes minimally when created, how can they accordingly price these? It will use something called interest. The money substitutes represent someone's ability to consume or trade goods, so to borrow them would be showing a preference to consume now versus later. I must sacrifice later consumption for present consumption and this is the interest or the price to borrow or lend money. For example if I wanted to borrow 10 Vats at 10% interest so I can buy a coconut today, at some point in the future I must forgo consumption to return the 10 Vats to the bank plus 10% for a total of 11 Vats. In this case I've spent 11 Vats of future consumption for 10 Vats of consumption today.

As interest rates falls, current consumption becomes cheap so I'll borrow more than I will when interest rates are higher. Now with the extra ability to consume coconuts I'll buy 3 or 4 instead of 2 or 3 as I usually would have. The coconut man has only so many coconuts, or so much supply and he has an increase in the amount of them demanded by me and other people. From borrowing money, the subjective values of coconut versus the money substitutes has now changed and he may increase the price and sell as many coconuts as he would have previously. If he does not, he will sell too many coconuts and have none to sell later which is known as a shortage. This shows how prices help regulate consumption against the supply of goods and services, and how inflation decreases the subjective purchasing power of money and money substitutes.

As people continue to borrow from the bank, the supply of these money substitutes at the bank begin to fall and eventually it will have no more to lend out. In this case it has two choices:

It can change its reserve ratio so it can print more money substitutes which will mean more inflation. This will also put the bank at more risk, the smaller the reserves versus redeemable money substitutes the bigger the chance enough of these money substitutes may be redeemed at one time and may cause the bank to fail.

The bank's second option is it can give interest to those who deposit at the bank to encourage more people to deposit coins at the bank which will allow them to lend within their current reserve ratio. Although, if they begin to give interest to depositors, they must demand even more interest from borrowers to cover the cost and then some. This would cause a rise in interest rates meaning the value of current consumption has increased. People may begin to forgo current consumption for future consumption and save their money at the bank to collect interest on their deposits.

Once again we see how the pricing function helps regulate demand to supply if prices are allowed to move freely with the subjective value of capital.



Chapter 4 – The Entrepreneur

Let's introduce a new player into our economic environment, the entrepreneur. The entrepreneur will put capital to use to produce goods and services and assumes the risk for doing so. An entrepreneur is someone with an idea and to get the capital to put his idea into action he may borrow money from a bank.

The entrepreneur uses this money to hire people and buy resources he can use to put his idea into action. Once the good is produced he must price it like anything else and begin to sell his good or service. If his idea is valued by people the way he expected, he will succeed and have more capital in which to hire more workers and create more value. If he doesn't then he will have closed his enterprise and labor to pay his debts to the bank, a risk he agreed to when he borrowed money.



This is why a free market with freely determined prices are important to an entrepreneur since it is these prices which help indicate the values of consumers. By having an understanding of what others value, it is easier to determine if the idea is worth the risk, and if so how much capital is worth investing in the venture.

Another price that is important to entrepreneurs is interest rates. These indicate the cost of capital to start the enterprise and also the environment the entrepreneur will begin the business in.

If rates are low it is a signal to the entrepreneur that capital is plentiful to start new enterprise. It also indicates consumers have access to funds to consume the goods or services of this enterprise. This environment is ripe for new enterprise because people have been saving and are now ready spend some of their savings.

If rates are high it is a signal to the entrepreneur that capital is not readily available and consumers will prefer to save money so they will be less receptive to new goods or services. This signals to the entrepreneur that the risk is high and that unless they feel they can produce significant value that it might be more prudent to wait a little longer.

While many economists from different schools of economic thought encourage keeping rates low artificially to encourage enterprise, this is a trap for entrepreneurs. If rates are artificially made low or high they do not reflect the true economic environment and can cause budding entrepreneurs to borrow too much when they shouldn't or invest too little when they can invest more.

Once again we see how prices freely roaming are all indicators of economic behavior and people's preferences and values. This is all vital because all these prices will help signal the parts of the economy we'll see entrepreneurs produce the most important thing of all, innovation.



Chapter 5 – Innovation and Competition

Nothing can produce an enduring value as innovation. Innovation is a new idea that changes or revolutionizes how something is done or thought about. Innovations make our day to day life easier by making tasks that would take large amounts of time take only a fraction of that time. This additional time allows for other pursuits. Innovation in thought allows us to look at the world in different ways that can allow for peace as we further understand the world around us. Most of all innovations reduce the capital needed to do certain tasks, and increase the quality of them, meaning the purchasing power of money and money substitutes increase.

Innovation takes time and investment which means there is a level of risk in developing any innovation. Once again, interest rates being the price of capital and consumption are an important indicator to innovators on how much to invest in a particular innovation.


The prices of everything else also serves as indicators of where consumers value an innovation the most. While it's not obligatory for an innovator to innovate where he sees the highest prices, these sectors would probably facilitate larger investment than others without taking on more risk.

Prices are not the only elements of the market that breed innovation. Many innovators happen to be entrepreneurs as well, or many entrepreneurs like to hire innovators. The reason for this is because these innovations in goods and services mean more success for their businesses because of the value added to the consumer.

It is never just one entrepreneur who makes the same good or service. If a new person started selling coconuts next to the coconut man he may lose some of his consumers and this creates competition. The coconut man can do a few things to get back his consumers, he can lower the price although he can't lower the price below where he subjectively values the coconut himself or there will be a loss of value in the exchange. His other option is to innovate his good or service in order to add value over his competitor. This innovation has made it easier and cheaper to buy coconuts, so everyone has won except the competitor who will begin working on his own innovations in response.

This process will continue until one party can't innovate promptly enough to win back consumers. At this point there is only the coconut man. Since the coconut man is the only person selling coconuts he has become a monopoly, an entity many economists fear.

Typically it is feared that the monopoly without competition has no reason to innovate and can raise his prices as high as he wants beyond where consumers subjectively value their good or service.

This is false, the coconut man does have an incentive to innovate out of fear of future competition. If the coconut man does not continue to produce value for the consumers, they will demand an alternative and sure enough someone will eventually fill that role as long as there is no barriers to entry beyond the costs of production.

In terms of pricing, if the price were to raise beyond the subjective value of the consumers once again they would demand an alternative. In the coconut man's case it doesn't mean an alternative is necessarily another coconut vendor, but maybe a pineapple or orange vendor.

The bottom line is that natural market monopolies only occur after one party has been shown to produce value better than any other. This party will keep this monopoly status as long as they continue to produce this value.

No matter how big or small the market is, innovation is always demanded in the market when left to its own devices. Innovation just like anything else works at its best when prices are accurate to subjective values of all those participating in trade.



Chapter 6 – Liberty, Property and The State

At the core of the free market is liberty, a free market can only exist if people retain their liberty. Liberty is the right of an individual to their property. An individual's property is their life, their body, their labor, and anything else they may come into ownership of.

First we must understand how one comes into ownership of property, basically by having a prior claim to anyone else. There are two ways to accomplish this:

The first way is if the property in question was never previously owned by another individual. One would claim ownership by transforming the unowned property and creating borders to define where his ownership ends and begins. This is best seen in unowned land; the first person to transform and border the land has a prior claim to anyone else who comes afterward.

What if the property was owned by someone else previously? I cannot claim ownership because my claim is not prior to theirs, but they may relinquish ownership to me voluntarily. This can occur in the will of an individual who has passed away or in an exchange for other property or capital.

What I can't do is use violence to coerce someone to give me their property, this is a violation of their liberty. Violations of one's liberty do not create value and begin to diminish all the benefits of a free market such as the pricing system, enterprise, and innovation.

Our liberty is a natural state like a tree is in its natural state, but there is nothing stopping someone from grabbing an ax and chopping down that tree. The tree's natural state is only as good as its ability to protect it, and so is our liberty.

Eventually in order to protect our liberty and the free market the people will endow a monopoly over violence to one entity. This one entity will be known as the state. The state is created to protect the individual liberties of its creators, the people.

In order for the state to serve this function it will need capital, so the people will relinquish ownership of some capital to serve this basic function of defending their liberties. The state itself is merely an institution run by other individuals in charge.

With this monopoly over violence, the state can use it to punish those who violate the liberty of its creators. As the state does its job defending liberty, people begin to feel more safe each day which makes them worry less about threats of violence from others. They will worry less about who and how the state is being run and this is when trouble begins.

It is when apathy begins to set in that individuals get into positions of power in the state to use it for their own means and ambitions. If the state does not have the power to serve these means, they will seek the power to do so. While with no state our liberty was at constant threat by others, now with the state our liberty is at constant threat from the state.



Chapter 7 – The State and Taxes

When the state was first formed, the people who created the state may have decided to pay a fee or some sort of compensation for the service of protecting their liberty. In its creation it is meant to protect our ownership of our property.

This always comes to an end as individuals begin to use the state to their own means. As the state begins to operate outside the bounds of protecting liberty it will begin to need resources for these operations. Since the state has a monopoly on violence it can coerce the people it was made to protect for their property; this is called taxation. A state can tax the productivity of its people through an income tax. It can also tax the consumption of its people by a sales tax. The state can tax anything because it can always threaten violence if the taxes are not paid, thus we begin to lose the benefits of voluntary exchange as taxation increases.


Whenever there is taxation of anything, this will reduce the amount of activity in that area. If you tax consumption there will be less consumption, and if you tax productivity there will be less productivity. Taxation destroys value creation anywhere it exists.

Eventually the state will use this to its advantage to push the values of individuals currently running the state. There are two ways they can do this; first by increasing spending in areas the individuals in charge value. This may not be as valued as the people whose property they used to spend on these projects.

For example, while I may have had enough capital to buy coconuts and pineapples, because of taxation I now only have enough to buy one. Instead, the capital that I was forced to relinquish is used to build a building far away which I receive no value for. Meanwhile either the coconut man or the pineapple man has less consumers.

The second method is by giving tax benefits for certain types of consumption such as a tax exemption or deduction. This usually seems like an ethical move on behalf of the state because the property they seem to be forgoing is really the property of someone else. They are not forgoing the threat of violence but giving it a nuance. By giving special tax treatment to certain goods or services you increase the subjective value of that good and decrease the subjective value of others. This perverts the pricing system of voluntary exchange.

A more philosophical problem with taxation is that it presupposes that the state has ownership of its people and their property; not that people have ownership of the state which can lead to very dangerous outcomes.

While a state may seem necessary to protect liberty, the free markets ability to function begins to diminish as taxation increases. Taxation will reduce the amount of capital to express the values or preferences of the people and manipulate subjective values of goods and services typically to push some ideological end.



Chapter 8 – The State and Money

Up until now money substitutes have been managed by competing banks. If the reserve ratio of the bank began to get too high I would withdraw my coins from the bank and deposit them in another bank. This mechanism keeps the banks from causing too much inflation or increasing the money supply.

Leaving this function of storing money and creating money substitutes to private banks is important in keeping trade from sudden stops. This free market constraint on money can really inhibit the ability for the state to expand its operations to push the values of those running the state.

The state can only increase taxation by so much in order to increase their resources. With the threat of violence, they may create a monopoly of money and money substitutes. Typically this monopoly is given to a central bank who will serve as the bank of all the private banks, or the bankers' bank. When banks take on too much risk they can just borrow money from the bankers' bank or central bank. This makes banks willing to take on more risk and leaves no alternative for consumers since all banks are tied to one central bank.

How does this help the state fund its operations? If the state can't raise enough tax revenues to pay for all its operations it will have to borrow money. When a state or enterprise needs to borrow large sums of money they issue bonds which are sold and then later repaid. Like anyone else borrowing money the state must pay interest and if they borrow a lot of money it will cause interest rates to rise since there will be a lot less capital to go around.

In order to avoid paying higher interest the central bank can print more money substitutes and give them to the banks in exchange for the states bonds. This creates demand for the state's debt since they can be traded for these newly printed money substitutes. This increases the perceived amount of capital allowing the state to borrow money at lower interest rates.


This will cause several problems including the inflation problems we addressed earlier. The artificial demand for the state's bonds means less demand for the bonds or debt of enterprises, which allows for less investment into innovation. Interest rates are being pushed down even though capital is becoming more sparse; it sends the wrong signal to entrepreneurs thus causing over investment. This all happens because the state wants to expand its operations.

As this central bank warehouses coins, it can only raise its reserve ratio versus its Vat coin reserves so much. Eventually the state will cut the ties to the underlying money. It will declare that by the decree and the threat of violence that the money substitutes is money and is the only money. Now only this paper or fiat money printed by the central bank can be used in exchange. This allows the central bank to increase the money supply unrestrained by its reserves of the previous money.

This facilitates for unrestrained growth of the state to tax and borrow as much as it wants. Now people's wealth is entirely dependent on the central bank's ability to restrain the money supply from growing too rapidly. The incentives for the central bank are generally the opposite of this. What eventually happens is that the bank will grow the money supply so much that the paper money becomes worthless. Now the people have nothing to trade in its place and no way to prepare for such an event since there is no alternative allowed.

As the state begins getting more and more involved in the money supply the more it will try to take control. By taking control of the money supply we destroy the wealth of the people who the state is supposed to serve. This also creates the wrong signals to entrepreneurs of value and available capital. The state's increasing involvement in money, even indirectly through a central bank can only spell out poverty in the long term.

AlexMerced
03-29-2010, 05:13 AM
Anyones thoughts on the except?

AlexMerced
04-20-2010, 04:25 AM
bump