Jun

15

My 'own' economic theory starts with the observation that man, unlike other [social] species, has invented an alternative to plunder/defense from plunder: *explicit* exchanges. While ants/bees/wolves/lions/etc know division of labor, all their exchanges are implicit, within 'economic units'; theirs is a subsistence 'economy.'

(At this junction, I would offer replacing Mises's "man acts" with "man exchanges.")

This observation prompts defining *production* as the result of that [human] activity which is performed with an explicit exchange in mind, i.e. above and beyond subsistence economy. More formally, the value of one's production is the [perceived] improvement in one's utility as the result of exchanges, over what could be accomplished by autonomous activity.

Since [perceived] improvements in individual utilities are hardly additive, it seems hopeless to speak of the total value (volume) of production in an economy. However, changes in utilities may manifest themselves in exchanges, especially when—as is typically the case in a modern economy—common media of exchange are involved.

From these definition and observation, one can prove the following 'theorem': if a coercive transfer of resources increases the total volume of production, then such a reallocation can also be achieved voluntarily, via mutually-beneficial exchanges. I.e., laissez-faire capitalism is the most efficient system of production.

An equivalent theorem is the claim that laissez-faire capitalism fulfills J.S.Mill's (or, rather, Bentham's) greatest-happiness principle: if a coercive transfer of resources can increase the total utility in a society, then this increase can also be achieved voluntarily, via mutually-beneficial exchanges.

To summarize, what can be established is that voluntary exchanges are the most efficient way to grow society's prosperity. As a word of caution, what is *not* established is that coercion is unnecessary. This is because an exchange is only a good alternative to plunder when the price of plunder is too high. Therefore, private property must be secured. I view this condition as primary to free market's existence; this puts me at odds with anarcho-capitalists.

Second part of 'my' theory is the theory of money. I view 'money' as an adjective rather than a noun, meaning that many things can have quality of common media of exchange, and to a varying degree at that. Gold, silver, and other commodities may have quality of money, but so do financial instruments, such as banknotes (IOUs)/etc. I strongly feel that it is a mistake to call bank IOUs fraudulent documents, as Rothbard does. Else, everything which involves uncertainty—e.g., insurance—is a fraud. In a free market (e.g, with no FDIC) banks would develop mechanisms such as redemption gates to guard against runs, and thus attract customer deposits. Needless to say, if one is to be prescriptive, gov't must be completely divorced from regulating money; in particular, there should be no national currency (unless free market [temporarily] comes up with one)—and, certainly, no fiat money.

By recognizing IOUs and other financial documents as having quality of money, one understands a mechanism for natural inflation/deflation cycles. One view is that banks, by issuing credit, de facto anticipate the rate of economic expansion over the life of the loan. When they are, on the average, too optimistic, inflation ensues, followed by a corrective deflation; when they are too pessimistic, vice versa. E.g., currently we should be experiencing a significant deflation—but are hardly, because the Fed is printing money, trading it for the gov't IOUs. So: a [permanent] gov't inflation (caused by fiat-money printing) concealed by the simultaneous deflation (caused by credit contraction). This is [one of the] bad news. (Aside from creating a permanent inflation, the Fed is blowing and bursting bubbles by resp. lowering and raising interest rates (this is well understood by the Austrian school, via Hayekian triangle)—then 'cures' them with more of the same!)

Finally, consumer spending is detrimental to production. (This thought is far from being original; I am only including it here because the opposite opinion seems prevailing.) Production is in anticipation of a *future* consumption; the *current* consumption destroys resources (capital) which could instead be used (invested) in production. Postponed gratification hence allows for a future consumption that is larger in absolute terms, but smaller as a percentage of the economy. Thus, if one is to tax anything, it'd better be consumption. However, tax it too heavily, and you have encouraged subsistence economy (i.e., zero production, by my definition)—a bad move.

Rocky Humbert writes: 

Welcome Andrei. Thank you for sharing your thoughts. I am the self-appointed SpecList curmudgeon, liberal and insomniac, so please take my words with good humor (and a shot of vodka).

You write: "This observation prompts defining *production* as the result of that [human] activity which is performed with an explicit exchange in mind, i.e. above and beyond subsistence economy. " If you want to redefine words, that's your prerogative. However, as a mathematician, you understand that a correct definition is critical to a meaningful theorem and proof. And one can't just change definitions willy-nilly. So when you define "production…is the result of human activity which is performed with an explicit exchange in mind," you have re-defined the word production — hence you can no longer use that term "production" in any other generally accepted economic manner. If I pick up a shovel and dig a black rock out of the ground in my backyard (which just happens to be a nugget of coal), that is an act of production — and the utility of that nugget of coal (specifically the calories of energy) are the same whether my act of digging was motivated by the coal stove in my kitchen or the steel mill up the road. The successful act of production produces utility (nugget of coal). Because the MOTIVATION for the act of production (the steel mill or the kitchen stove) is independent from the UTILITY of the act of production,the motivation is irrelevant. So your definition seemingly fails. You write: "if a coercive transfer of resources increases the total volume of production, then such a> reallocation can also be achieved voluntarily, via mutually-beneficial exchanges. I.e., laissez-faire capitalism is the most efficient system of production." Here again you are playing fast and loose with the rules of logic and accounting. You seemingly are confusing mixing the income statement(volume of production) with the balance sheet (total wealth). It is basic economic theory that the coercive transfer of resources (i.e. a tax) can never increase the total volume of production (except in the unusual cases of war or exceptional circumstance.) I challenge you to find any normal example where the coercive transfer of resources increases GDP! (The only exception I can find is slavery … where the resource coercively being transferred is labor!)


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