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Economics is the philosophy of human life and action
Posted on: July 23, 2018 at 15:21:26 CT
pickle MU
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and concerns everybody and everything. It is the pith of civilization and of man’s human existence…All present-day political issues concern problems commonly called economic. All arguments advanced in contemporary discussion of social and public affairs deal with fundamental matters of…economics. Everybody’s mind is preoccupied with economic doctrines…Everybody thinks of economics whether he is aware of it or not. In joining a political party and in casting his ballot, the citizen implicitly takes a stand upon essential economic theories…As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake…all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty. Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.
Ludwig von Mises
With this in mind we discuss two things every adult should understand. Concepts which could have saved millions of lives lost to wars and relative economic misery and are the simple keys to mankind’s prosperity. They are the inevitable misery that Socialism must always bring and the vital role that freedom plays in creating and growing the social order.
Social orders (individuals or companies) are in cycles of production, trade, and consumption. If you are a freelancer you produce a product/service and trade it directly with society (customers) for money, and then trade the money back with society for the wealth you consume. If you work for a company, you produce your labor and trade it for money with your “employer” who combines it with the labor of others to produce a product/service which is then traded with society for the money from which your paycheck comes. Whether you are a freelancer, employee, or company, what is commonly referred to as sales revenue (your paycheck), is an estimate of the total amount of wealth produced. Costs, like employee wages which will be used by them to consume wealth(food, energy, housing, etc.), are an estimate of how much wealth is consumed from the economic pie. And profits, which are the difference between sales revenue (production) and costs (consumption) are an estimate of by how much additional wealth the economic pie has grown. A profitable order is an order (person/company) that produces more than it consumes and is therefore self-sustaining/alive. The global economy or ‘Social Organism’ is really a vast collection of orders that are constantly trading with each other, each trade taking each participant/order from an inferior to a superior state of well-being from its perspective, otherwise the trade would not occur. Each trade can be seen as nourishing each order with what it needs from its own perspective. When Carl trades a dollar for a hamburger he values the hamburger more than the dollar and the restaurant values the dollar more than the hamburger so the action of trading takes place, which like all action which is not coerced, takes each participant from an inferior to superior state of well-being.
In the social order new/superior knowledge arises in the minds of people/entrepreneurs/companies/orders and spreads via economic competition. For example, power windows, and rear view cameras, were all good ideas/information/knowledge that originally emerged in the minds of a few individuals/companies/orders. THE FREEDOM of the public to choose among competing auto-manufacturers motivated, and inevitably forced, other auto-manufacturers (competitors) to copy the new ideas/knowledge, and it is for this reason, thanks to economic competition, that all auto-manufacturers provide them and use the latest and greatest production techniques. As cost-cutting ideas emerge leading prices to continuously fall, new profitable ideas arise and once again spread via competition in an endless cycle of knowledge generation/innovation. For example, computers were once very expensive, but once the price of making them came down enough, people easily realized that every home could have them, which gave birth to our computerized world and the Internet and all the great things that flow from it. So we can see how the “freedom to choose” is what “turns on” economic competition, which is what motivates the creation and spread of superior knowledge/information and subsequent social order.
Each entrepreneur/businessman/order is like a computer that is constantly using prices to acquire wealth or ‘factors of production’ and calculating how to reorder/transform them in the most profitable/wealth-increasing way. For example, a restaurant owner in Miami Beach(MB) on Nov. 13th 2016 sells a traditional Cuban dish called Picadillo consisting of ground beef, rice, plantains and black beans for $8. The very existence of this business/order and the $8/meal price gives us a tremendous amount of information. We know that the costs per meal, in other words, the total amount of consumption of wealth needed to produce each meal has to be at most $8/meal, otherwise the business would be losing money and eventually cease to exist. Some of the $8/meal, perhaps $1, might be profit, and $7 will be spent on costs or ‘factors of production’ like labor(and everything employees will consume at home), real estate, equipment, energy, food, etc. We also know that there are enough customers nearby willing to trade with and thus sustain the restaurant at the $8/meal price. If the businessman sets prices too high, customers will choose other competing options/restaurants, if prices are set too low, they might not cover costs and cause the business to consume more than it produces and thus go out of business. We can see how every businessman is like a computer looking for ways to reorder a small (or large) section of the world in a more profitable/wealth-increasing way.
Let’s assume there is another restaurant that sells a similar Picadillo dish in Corpus Christi, Texas for $6.50 and also makes a $1/meal profit. How could this be? The most likely reason is due to the crucial fact that costs are highly time and place specific, and in this particular scenario such costs in Corpus Christi are lower than in MB. Perhaps the proximity with Mexico means that many Mexican immigrants who might be willing to work for less, and thus consume less, can be employed. Rent/real estate is also cheaper in Corpus Christi than in trendy MB. Texas also has many oil refineries and the price/cost of energy might be lower than in MB where gasoline has to be transported hundreds of miles by truckers whose consumption must be taken into account. The bottom line is that it is vitally important to realize that the knowledge and costs associated with creating a profitable order, things like real estate, labor, energy, trust relationships and countless other factors, are highly time and place specific, and only those minds managing their respective businesses/orders in their corner of the world at a particular time are in a position to acquire such knowledge and properly set prices that will lead to a profitable order. Would it make sense to copy the $6.50/meal price that can sustain the business in Corpus Christy and make it the price of meals in MB? Of course not. We already know that given the abilities and knowledge of the businessman in MB, his costs were $7/meal, so setting the price to $6.50 would simply lead to loses, in other words, more wealth consumption than production to the tune of 50 cents per meal sold. This unavoidable time and place specificity of knowledge, and the fact that only the businessmen running their respective enterprises are in a position to acquire such knowledge is one of the main reasons why economic planning MUST BE DECENTRALIZED, thus rendering central planning ideologies like Socialism/Communism completely unworkable. No central planning bureaucracy could possibly acquire all the time and place specific knowledge needed to properly organize a business/order and set prices which properly account for local costs and customer desires and lead to a profitable and thus sustainable order. Nikita Khrushchev, who followed Stalin as head of the centrally planned (Socialist/Communist) Soviet Union, is credited with saying “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything”. The same point was made by the great economist Murray N. Rothbard in a talk where he mentioned that “A noted British economist visited Poland in the 1950s …and the Polish communist economist admitted that they refer to the world market [for prices]” And according to Murray the British mentioned to the Pole “If socialism takes over the whole world which you are presumably in favor of, what would you do then? [to look for prices]” and the Pole replies “We’ll have to cross that bridge when we come to it” Unfortunately for Khrushchev and the billions who suffered economic chaos and an inevitable decline in production under Socialist/Communist regimes all over the world, prices in Switzerland (or anywhere else) embody information about the costs of those particular places at specific times and are no good elsewhere. This would be like setting the MB price of Picadillo dishes be the Corpus Christy price. Governments can always attempt to tax more or redistribute wealth to keep unprofitable enterprises/orders going, but this only leads to a continued shrinking of the economic pie and lower standards of living for all which is the inevitable hallmark of all centrally planned Socialist/Communist economies.
Socialist/Communist countries and government in general also face an ‘incentive problem’. In free societies or the private sector in general, each mind/entrepreneur is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers/society. Public sector bureaucracies, and especially Communist/Socialist countries which attempt to outlaw all private sector orders, ARE MONOPOLIES which are immune from competition’s knowledge creating and spreading incentives so that too is a main factor for their stagnation/decline. So 1) the impossibility of economic calculation under Socialism/Communism, coupled with 2) the unproductive/wasteful incentives in such regimes/government and 3) the monopolistic nature of government should help one understand why Socialist/Communist regimes were/are always in socioeconomic chaos. The image below is one of our most powerful memes for explaining the difference between Socialist/Monopolistic orders (North Korea) and free/competitive/Capitalisticones (South Korea)
https://medium.com/@hayekian/why-socialism-must-fail-and-the-necessity-of-privatization-e94ba751c303
Ludwig von Mises
With this in mind we discuss two things every adult should understand. Concepts which could have saved millions of lives lost to wars and relative economic misery and are the simple keys to mankind’s prosperity. They are the inevitable misery that Socialism must always bring and the vital role that freedom plays in creating and growing the social order.
Social orders (individuals or companies) are in cycles of production, trade, and consumption. If you are a freelancer you produce a product/service and trade it directly with society (customers) for money, and then trade the money back with society for the wealth you consume. If you work for a company, you produce your labor and trade it for money with your “employer” who combines it with the labor of others to produce a product/service which is then traded with society for the money from which your paycheck comes. Whether you are a freelancer, employee, or company, what is commonly referred to as sales revenue (your paycheck), is an estimate of the total amount of wealth produced. Costs, like employee wages which will be used by them to consume wealth(food, energy, housing, etc.), are an estimate of how much wealth is consumed from the economic pie. And profits, which are the difference between sales revenue (production) and costs (consumption) are an estimate of by how much additional wealth the economic pie has grown. A profitable order is an order (person/company) that produces more than it consumes and is therefore self-sustaining/alive. The global economy or ‘Social Organism’ is really a vast collection of orders that are constantly trading with each other, each trade taking each participant/order from an inferior to a superior state of well-being from its perspective, otherwise the trade would not occur. Each trade can be seen as nourishing each order with what it needs from its own perspective. When Carl trades a dollar for a hamburger he values the hamburger more than the dollar and the restaurant values the dollar more than the hamburger so the action of trading takes place, which like all action which is not coerced, takes each participant from an inferior to superior state of well-being.
In the social order new/superior knowledge arises in the minds of people/entrepreneurs/companies/orders and spreads via economic competition. For example, power windows, and rear view cameras, were all good ideas/information/knowledge that originally emerged in the minds of a few individuals/companies/orders. THE FREEDOM of the public to choose among competing auto-manufacturers motivated, and inevitably forced, other auto-manufacturers (competitors) to copy the new ideas/knowledge, and it is for this reason, thanks to economic competition, that all auto-manufacturers provide them and use the latest and greatest production techniques. As cost-cutting ideas emerge leading prices to continuously fall, new profitable ideas arise and once again spread via competition in an endless cycle of knowledge generation/innovation. For example, computers were once very expensive, but once the price of making them came down enough, people easily realized that every home could have them, which gave birth to our computerized world and the Internet and all the great things that flow from it. So we can see how the “freedom to choose” is what “turns on” economic competition, which is what motivates the creation and spread of superior knowledge/information and subsequent social order.
Each entrepreneur/businessman/order is like a computer that is constantly using prices to acquire wealth or ‘factors of production’ and calculating how to reorder/transform them in the most profitable/wealth-increasing way. For example, a restaurant owner in Miami Beach(MB) on Nov. 13th 2016 sells a traditional Cuban dish called Picadillo consisting of ground beef, rice, plantains and black beans for $8. The very existence of this business/order and the $8/meal price gives us a tremendous amount of information. We know that the costs per meal, in other words, the total amount of consumption of wealth needed to produce each meal has to be at most $8/meal, otherwise the business would be losing money and eventually cease to exist. Some of the $8/meal, perhaps $1, might be profit, and $7 will be spent on costs or ‘factors of production’ like labor(and everything employees will consume at home), real estate, equipment, energy, food, etc. We also know that there are enough customers nearby willing to trade with and thus sustain the restaurant at the $8/meal price. If the businessman sets prices too high, customers will choose other competing options/restaurants, if prices are set too low, they might not cover costs and cause the business to consume more than it produces and thus go out of business. We can see how every businessman is like a computer looking for ways to reorder a small (or large) section of the world in a more profitable/wealth-increasing way.
Let’s assume there is another restaurant that sells a similar Picadillo dish in Corpus Christi, Texas for $6.50 and also makes a $1/meal profit. How could this be? The most likely reason is due to the crucial fact that costs are highly time and place specific, and in this particular scenario such costs in Corpus Christi are lower than in MB. Perhaps the proximity with Mexico means that many Mexican immigrants who might be willing to work for less, and thus consume less, can be employed. Rent/real estate is also cheaper in Corpus Christi than in trendy MB. Texas also has many oil refineries and the price/cost of energy might be lower than in MB where gasoline has to be transported hundreds of miles by truckers whose consumption must be taken into account. The bottom line is that it is vitally important to realize that the knowledge and costs associated with creating a profitable order, things like real estate, labor, energy, trust relationships and countless other factors, are highly time and place specific, and only those minds managing their respective businesses/orders in their corner of the world at a particular time are in a position to acquire such knowledge and properly set prices that will lead to a profitable order. Would it make sense to copy the $6.50/meal price that can sustain the business in Corpus Christy and make it the price of meals in MB? Of course not. We already know that given the abilities and knowledge of the businessman in MB, his costs were $7/meal, so setting the price to $6.50 would simply lead to loses, in other words, more wealth consumption than production to the tune of 50 cents per meal sold. This unavoidable time and place specificity of knowledge, and the fact that only the businessmen running their respective enterprises are in a position to acquire such knowledge is one of the main reasons why economic planning MUST BE DECENTRALIZED, thus rendering central planning ideologies like Socialism/Communism completely unworkable. No central planning bureaucracy could possibly acquire all the time and place specific knowledge needed to properly organize a business/order and set prices which properly account for local costs and customer desires and lead to a profitable and thus sustainable order. Nikita Khrushchev, who followed Stalin as head of the centrally planned (Socialist/Communist) Soviet Union, is credited with saying “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything”. The same point was made by the great economist Murray N. Rothbard in a talk where he mentioned that “A noted British economist visited Poland in the 1950s …and the Polish communist economist admitted that they refer to the world market [for prices]” And according to Murray the British mentioned to the Pole “If socialism takes over the whole world which you are presumably in favor of, what would you do then? [to look for prices]” and the Pole replies “We’ll have to cross that bridge when we come to it” Unfortunately for Khrushchev and the billions who suffered economic chaos and an inevitable decline in production under Socialist/Communist regimes all over the world, prices in Switzerland (or anywhere else) embody information about the costs of those particular places at specific times and are no good elsewhere. This would be like setting the MB price of Picadillo dishes be the Corpus Christy price. Governments can always attempt to tax more or redistribute wealth to keep unprofitable enterprises/orders going, but this only leads to a continued shrinking of the economic pie and lower standards of living for all which is the inevitable hallmark of all centrally planned Socialist/Communist economies.
Socialist/Communist countries and government in general also face an ‘incentive problem’. In free societies or the private sector in general, each mind/entrepreneur is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers/society. Public sector bureaucracies, and especially Communist/Socialist countries which attempt to outlaw all private sector orders, ARE MONOPOLIES which are immune from competition’s knowledge creating and spreading incentives so that too is a main factor for their stagnation/decline. So 1) the impossibility of economic calculation under Socialism/Communism, coupled with 2) the unproductive/wasteful incentives in such regimes/government and 3) the monopolistic nature of government should help one understand why Socialist/Communist regimes were/are always in socioeconomic chaos. The image below is one of our most powerful memes for explaining the difference between Socialist/Monopolistic orders (North Korea) and free/competitive/Capitalisticones (South Korea)
https://medium.com/@hayekian/why-socialism-must-fail-and-the-necessity-of-privatization-e94ba751c303
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Economics is the philosophy of human life and action - pickle MU - 7/23 15:21:26