Some of the words you're going to be reading.
It is not embarrassing to find that you do not know a thing. It is true that the manner and number of things I do not know exceeds my ability to either know, or to number. What I am attempting to share with you, is a manner of speaking about things that either you or I face in our day-to-day travail. To allow you to question the precepts that have been adopted by the elite amongst those we refer to as "economists," and to allow you to question the priors that are, and have been, expressed here. Knowledge and understanding exist hip to thigh. You cannot know that which you've never questioned, and you cannot understand that which you do not know. I am attempting to put into layman's terms questions and concepts of economic theory which have heretofore been only available within texts that tend to suppose a certain level of math, language and training. I wish that at any point, with any question, you hit the comments tab and ask. No question is too dumb. The Elite that are attempting to dominate the political discussion offer you promises that no sane or rational man would ever utter. Finding the voice with which to criticize this elite is the responsibility of every man jack of us. Finding the rationale with which to attack the arrogance and stupidity of these jackals is incumbent upon the caring, thinking citizen. The rhetoric of the attack on individual liberty is, at times, difficult and convoluted. It is my task to introduce you to both the theories and rhetoric of the Elite. And to point out how easy it can be to poke holes into the balloons of their fanciful ideas and beliefs. If you have a question, to not ask is your fault. I will answer to the tenth degree, if necessary.
Discussions of economic policy tend to adhere to a rigid form; what is the expected outcome?
When we were talking about Bill and his scheme to pay his bills through the sale of marijuana, the expected outcome of Bill was to pay his bills. The concerns of an individual economic player, firms, businesses, are referred to as micro-economic concerns, that is, the roles played by individual or individual firms when faced with market forces. At every step of economic analysis is the condition that the activities of individuals, or groups, are facing the forces that are created by the production, sale and consumption of goods and services. Free markets, or capitalist markets, are determined by the choices made independently of others as to whether or not buy or sell any particular good or service. That is, again, a decision that is made by independent individuals, without the exercise of any outside influence on the decisions being made.
Command economies, as the name infers, are based upon a different set of conditions; what is allowed.
It is true that I am a Capitalist, since I believe that you and I are the best people to rely upon for information that decides our actions in the market for goods and services. I am best able to determine that which I choose to produce to enable my existence, just as I am the best able to determine which goods and services I will buy to effect the continuance of that existence. In a Command Economy, these choices are secondary. What is best, in terms of what I produce or consume is determined from an outside authority.
This is the critical moment between liberty and slavery. The free man cannot be made to do what he wouldn't do if given the choice for himself. The slave receives that which his master allows. I'm not going to spend any time talking about the form that master takes; it is sufficient for my purpose to assert that any choice I make that is limited by the coercive authority of another is a limit on my individual liberty. And the alternative to liberty is slavery. Ask yourself, if you are not free to choose, are you free or not?
This distinction, between choice and mandate is an important one. Markets have an existence, whether or not the State wishes them to exist or not. That is, while there are those that would wish to impose obedience in markets through the controls of state functions, whether they are regulatory or police agencies, markets tend to find equilibrium, even when production is determined through centralized state agencies. Take, again the instance of Bill and his sales of marijuana.
Marijuana is an item of contraband. That is, it is illegal to possess marijuana. For decades, the possession or sale of marijuana has been outlawed by our states' and by our national governments. And yet, the market for marijuana has persisted. How has this occurred? Simple. And it is the first step toward understanding one of the contradictory evidences of economic theory; Gresham's Law.
Gresham's Law is fairly simple in its formulation; bad money drives good money out.
My first practical experience of Gresham's Law came after my first trip to the Former Soviet Union. Remember, we're going to explode the myth that graduate degrees depend upon a renewed examination of price theory. Price theory is easy. People pay the price they think is fair. Price theory is the simplest of all theories. What did Jack pay for his Magic Beans? One cow. Was that a fair price for Magic Beans? Jack thought so, and so did every reader of "Jack and the Beanstalk."
But, given Gresham's Law, would bad beans drive good beans out?
Looking at markets, constituted of both buyers and sellers, if I came onto the market with beans, what would the market require of my beans before the sale of a few beans were to equal the value of a cow?
Bill had that problem when trying to decide the price of his marijuana. His really good stuff was twice as good as the commercially available stuff. His pricing problem was based upon an external. Not the value of the good or service itself, qua marijuana; but the production cost of the really good stuff compared to the production cost of the commercially available marijuana. Irrational mandates need not be applied externally, they can be adopted mandates, as well. Selling marijuana, trafficking in juvenile prostitutes, hiring out as an hit-man are all possible examples where mandates are imposed on the actions of the individual that can either be imposed externally or internally. Moral and ethical values in transactions are imposed every day, upon trillions of transactions. Or not. Sometimes moral values overwhelm the true transaction value, as in the case of deciding to not engage in trafficking in juvenile prostitution. While trafficking in underage prostitution may not have the moral proscription in some countries as it has here--in the main--it is difficult to countenance the trafficking of underage prostitution, while prostitution in general may not only be accepted as a suitable profession, but legal under the current statutes of some states.
So, it is possible to come up with encumbrances upon price that exist externally to the value of a thing. That, in and of itself does not repudiate my assertion that price theory, while a large part of the body of economic study, is simply an idiocy of the science. Buyers determine price. Under all states and all conditions. Unless that purchase of that item is mandated externally. Then, all bets are off.
Bill was operating under the external constraints of pricing theory that depended upon his acceptance of the Labour Theory of Value. Accepting the external constraint of a moral authority which would determine price outside of the values determined through the willingness of the consumer to pay more is an economic leakage. The value of Bill's really good stuff would allow for a higher level of income for Bill, if Bill's activities weren't limited by his moral beliefs. Worse yet, for the consumer, was the action of Bill's supplier, Miguel, who confiscated all of Bill's really good stuff, under the mandate that Bill only sell Miguel's commercially available stuff. Miguel mandated the level of quality that the market would be able to consume, while taking the more commercially viable "good shit" off the market. In exchange for Bill continuing to breathe. External mandates, which limit the flow and supply of goods and services coming to market also represent an economic leakage.
Leakages occur when forces that are external to markets limit either the abilities of the suppliers of a good or service, or the purchasers of a good or service, to maximize the value of their transaction. Leakages are the unrealized values of markets that tend to create inefficiencies in markets. Efficient markets are simple to understand; buyers and sellers come together for the simple purpose to buy and sell products. If buyers offer too little for goods, goods remain unsold. When buyers offer enough, or, more than enough for goods, goods are sold. If sellers price their goods at too high a price, their products remain unsold. When sellers price their goods at, or below, the selling price, the market will clear. That is, all products offered for sale will be sold. The market clears. The market achieves equilibrium. A market in equilibrium doesn't have leakages, since the definition of price and clearing depends on some simple agreements: prices that occur without externalities are those prices that producers willingly offer for sale their products; prices that occur without externalities are those prices that buyers willing offer for the purchase of goods and services.
The moment that Mikey stepped in and demanded that Billy purchase and sell his weed, was a major moment in the imposition of externalities. And Billy's reticence to price his good shit is a laughable concern, since the internally imposed restrictions were also costs faced by his potential customers. Gresham's Law is probably better understood in the light of these internally and externally imposed costs.
Cost. According to my 1934 Merriam and Webster:
cost: n.(as., fr. ON. kostr condition, chance, choice; akin to E. CHOOSE.) 1. Manner; way; means. Obs. 2. Characteristic; disposition; quality; value.
cost: n. 1. The amount or equivalent paid, or given, or charged, or engaged to be paid or given for anything bought or taken in barter or for service rendered; charge; price; hence, whatever, as labor, self-denial, suffering, etc., is requisite to secure benefit.
This explains, in many ways, why there are so many papers written about the theory of price, when the actual discussion should be placed on an understanding of cost. Somewhere along the way, economists decided to place the question of cost on the supply side, while abjuring the question of price on the demand side. But cost is the price the purchaser is willing to pay; that is, we are all participants in the process of supply. Every consumer is a willing participant in the supply process. The product of this process remains in too many cases either undefined, or undefinable. How to define the value of a process that results in the imposition of moral forces that wreck the balance between buyer and seller? By defining price as different than cost. And yet, linguistically, we find that cost and price are equivalent. My advice to the Academy is that someone turn on the lights.
Cost is price. The advantage to the neophyte in recognizing the equivalency of price and cost, is that the concept of opportunity cost is a lot more understandable. Economists, like most cliques of the elite, are more than willing to employ language that is in the main, indecipherable. Look at the economic terms that have been introduced in this simple essay:
Have a nice night. Thanks for your time. Remember, asking a question isn't a bad thing, it's the path to enlightenment.