Political Economy Economic Liberty and Political Liberty Are Inseparable Free People, Free Markets The Vanguard School Colorado Springs, CO July 14, 2009 Paul T. Prentice, Ph.D. email@example.com ----------------------------------------- Left Right Socialism Capitalism Collective Individual We Me Us I Ours Mine "What is common to many is least taken care of, for all men have greater regard for what is their own than for what they possess in common with others." - Aristotle ----------------------------------------- Left Right Group rights Individual rights Public property Private property Equal outcomes Equal opportunity G’vt gives rights G’vt secures rights ----------------------------------------- Left Right The individual The government exists to serve exists to serve the government the individual Their right to Your right to your property your property ----------------------------------------- Left Right Individual must Government must be limited be limited The people used to rule the government (right); now it rules us (left). America is split about 50-50 between these polar opposite philosophies. It is not a sustainable society. Economic Principles (1) Human Action – Ludwig Von Mises In any given situation, people take purposeful action to maximize their values (“utility” in econ-speak). Values are subjective and individualistic (mine are not necessarily yours, and vice-versa). Values are situational (subject to change, dependent on time, space, and circumstance). (1) Human Action (cont’) In a given situation, people rank-order their values from highest to lowest. Subject to their resource constraint, people maximize their values at the margin (MB>MC). Each choice implies a different choice not made (trade-off) The cost of Choice A is the foregone benefit of Choice B (opportunity cost). (2) People Respond To Incentives “Price” is an incentive. A high price is an incentive for consumers to purchase less. But a high price is an incentive for producers to supply more. A low price is an incentive for consumers to purchase more. But a low price is an incentive for producers to supply less. (3) Law Of Supply And Demand Free markets solve this apparent contradiction through supply and demand. If the price is too high to clear the market, there is a surplus. Producers will lower price until consumer demand equals producer supply. If the price is too low to clear the market, there is a shortage. Producers will raise the price until consumer demand equals producer supply. Prices are relative: $3/gal. milk only has meaning in the context of $2/gal. gas, or in the context of $10/hr. wage. (3) Law Of Supply And Demand (cont’.): Markets Clear Over time, markets clear: there is no sustainable tendency to have either surplus or shortage. Prices are neither “good” nor “bad”. They are an objective reality. The “right” price is the market price: the price at which the quantity supplied equals the quantity demanded. Free people exercising their property rights, seeking their values in a moral framework, achieve the greatest value for the greatest number of people (A. Smith’s “invisible hand”). The chances that a central planner could accurately determine the “right” price and quantity are virtually zero. (4) Standard Of Living Depends On The Ability To Produce Production must necessarily precede consumption. Income is earned from production. Factor payments exhaust the product (Say’s Law: Supply creates its own Demand). In the aggregate, income equals production. Therefore, to stimulate income you must stimulate production (supply-side economics). (5) Trade Makes People Better Off Misean Praxeology: People engage in free and voluntary trade because it maximizes their values. Both parties are better off due to trade (the double “thank you”) If this were not so, people would not trade. Therefore, restricted trade makes people worse off. Geographic or political boundaries between trading partners do not change this objective economic reality. (6) Gross Domestic Product: Bogus Measure GDP = C + I + G + NX According to this formula, when government hires people to dig holes, then hires more people to fill them it, GDP has increased. According to this formula, when government hires someone to sit at home and produce nothing, GDP has increased. “Beware of accountants disguised as economists.”- Paul Prentice (7) Government Has No Money Before government can spend $1 dollar, it must first: Tax it (take economic activity from one area and give to another). Borrow it (take economic activity from the future). Print it (devaluing all money). Santa Claus; Easter Bunny; Tooth Fairy. (8) Prices Rise When Government Prints Too Much Money Inflation is not caused by higher prices. Higher prices are a symptom, not a cause, of inflation. “Inflation is too much money chasing too few goods.” – Milton Friedman Therefore only government is responsible for inflation. (9) Monetary Theory Money is a medium of exchange (facilitates trade as the most liquid of all assets). Accepted by all for legal payment of debt. Money is a unit of account allowing people to make economic calculation (compare MB to MC of a given action). Money is a store of value. The Link Between a Degenerating Currency and a Degenerating Culture Austrian Scholars Conference 2009 Ludwig von Mises Institute Auburn, AL March 14, 2009 Paul T. Prentice, Ph.D. firstname.lastname@example.org Axiom: Man Acts Postulate: Human action involves moral choices. Man can act morally (voluntarily) or immorally (coercively). In a natural state of liberty, government is by definition limited to securing man’s natural rights to life, liberty, and property. Free societies choose moral voluntary behavior. Immoral coercive behavior is by and large shunned. "The Principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. – Thomas Jefferson From America’s founding until WWI, total government commandeered 5-10% of the economy. This means that 90-95% of human economic action was voluntary (moral). There was little net accumulation of government debt. Deficits in one time period were by and large offset by surpluses in a later time period. The moral basis of American society started to change in 1913 The 16th Amendment was the beginning of the end of formal property rights (the right to the fruit of one’s labor). The simultaneous founding of the Federal Reserve System was the beginning of the end to another right – the right to a hard currency. "Sound money was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights." - Ludwig von Mises Theorem: A degenerating currency contributes to a degenerating society. With a fractional-reserve fiat currency, government no longer needed to tax or borrow in order to spend. Now it could just print and spend. The true tax rate is the percentage of resources commandeered by government. Measured by calculating government spending as a percent of total spending. Commandeering of resources could now be accomplished through the printing press. Even Keynes acknowledged this. Within one generation of the creation of the Fed, the Great Depression ensued and the Welfare State became institutionalized -- the New Deal. Constitutional restraints were gradually eroded. No longer restrained by the necessity to tax before it can spend, government is set free to engage in unlimited “free lunch” promises. These promises have misled a mal-educated body public into substituting the philosophy of individual responsibility with a philosophy of state “security”. A cultural-political-economic death spiral begins Society then demands more free lunches, leading to more fiat currency, etc. The State crowds-out the moral behavior of the individual. The State becomes both The Parent and The Spouse Eventually, young women and men begin to have children without the means to support them. Out-of-wedlock births skyrocket. The family degenerates. Behaviors are disconnected from consequences The social safety net grows along with the government printing presses. People are empowered to internalize benefits but externalize costs. Moral hazard becomes the norm for society. A nation birthed in liberty slowly transforms into a fascist state. Generation after generation becomes increasingly corrupted. Business is not immune, as can be seen in the current financial meltdown and bailout. Fiat currency allows profit to be privatized while losses are socialized. “The spread of collectivist ideas in the business world” – Murray Rothbard (America’s Great Depression, Ch. 10) The “Swope Plan” to compulsively cartelize American business. (General Electric). Endorsed by the U.S. Chamber of Commerce. More and more businessmen become “political entrepreneurs” rather than “market entrepreneurs”. (Thomas DiLorenzo, How Capitalism Saved America) Liberty is lost, since political liberty cannot be disconnected from economic liberty “Power over a man’s subsistence is power over his will.” – Alexander Hamilton "To be controlled in our economic pursuits means to be controlled in everything." – F.A. Hayek “The ultimate sanction of a planned economy is the hangman.” – F.A. Hayek Even Atheists Can Be Prophets (Today’s headlines written in 1957) "When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed." - Ayn Rand. Source: Atlas Shrugged, Francisco's "Money Speech" In God We Trust Becomes: In Gov We Trust But when it comes to money, it should be: In Gold We Trust Theorem: A degenerating currency contributes to a degenerating society. QED "Paper (money) is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account that is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, "Account Overdrawn." - Ayn Rand Are we still free? "The American people will never knowingly adopt Socialism. But under the name of 'liberalism' they will adopt every fragment of the Socialist program, until one day America will be a Socialist nation, without knowing how it happened." -- Norman Thomas. Six-time U.S. Presidential candidate for the Socialist Party of America Norman Thomas and Gus Hall, the U.S. Communist Party Candidate, both quit American politics, agreeing that the Republican and Democratic parties by 1970 had adopted every plank of the Socialist Party and they no longer had an alternate party platform on which to run. Interest The Most Important Economic Price "The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." -- Ludwig von Mises Final Thought -- Friedrich Nietzsche "The state is the coldest of all cold monsters. Coldly it lies, too; and this lie creeps from its mouth: `I, the state, am the people.'... Everything about it is false; it bites with stolen teeth. "