Capitalist is a deferred consumptionist

This explanation of capital as ‘deferred consumption’ opens up a plethora of new insights to things. For example, if capital is deferred consumption then capitalist must be the guy who defers his present consumption. This clearly explains to any individual who fails to see what a capitalist’s work actually involves, or why does he deserve profits from any venture.
Warren Buffet is technically the largest deferred consumptionist in US. This means he could consume so many things in present(billions and billions of dollars worth of goods) but he choses to not consume them, and instead he defers it for later consumption(which he probably will never do).

Utility of deferring your present consumption

You may now ask what utility does anyone delaying their present consumption may offer to the society as a whole, because this clearly sounds like a very selfish thing to do. The answer is really simple, almost no human action which does not directly satisfies the end we are looking for requires delaying our present consumption. For example, if you are hungry and you want to eat a pizza then the action of eating that pizza directly satisfies your want, therefore it is not deferred consumption because its an act of consumption itself.
On the other hand if you now have to make that pizza, now the series of actions to satisfy your desire are:
a) You bake the pizza
b) You eat the pizza
The first action involves deferring(albeit a really less amount considering it will take you only 20 mins to do it) your present consumption of raw pizza, or any other food, for later more satisfying consumption of cooked pizza.
You may ask now, that just because in this example I had to wait for 20 mins for pizza to be cooked doesn’t mean that I always have to defer my consumption, for example I could drive to a pizza shop and just buy the pizza without waiting for it to be cooked. My point is simple, someone at that point has already done the job of deferring the present consumption for the future consumption, someone has waited 20 minutes for you so that you can get it immediately and in return you have rewarded them with money(which is their larger future consumption). Of course lets also not forget that making a pizza requires flour, vegetables, cheese, chicken etc. So the total time taken to delay consumption for full making a pizza would be time required to grow wheat, make flour, grow vegetables, make cheese out of a cow you raised, and raising chickens. That means if you were living on an island with no civilization then to make a pizza you will require growing wheat, and vegetables for months, and capturing and raising cow and chicken for months before you are in position to make that pizza. Thankfully in any modern society someone has already done the job of deferring the present consumption so that you now can simply walk into a supermarket and buy all those things, or take even more shorter route and buy the cooked pizza from the pizzaria.
As you realize now that our society and civilization would be impossible if not for deferred consumption or capital. Essentially a capitalist society is a society where production of large operations is planned through deferred consumption of private individuals. This begs the next question.

Who defers their present consumption in Socialism?

This is now the most important question any socialist must answer. If you have read the article till now, you realize that its impossible to get rid of the capital from any society. The only capital-less society would be a highly primitive society where almost every action is aimed at direct consumption, this means the primitive men who created tools to help in hunting, actually ended up creating the first capitalist society of the world. In fact only animals do not perform indirect actions to achieve their ends. The only real world example in this case is a monkey recently in a zoo who planned to throw stones at visitors by collecting them in advance. Coming to think of it, even dogs hide bones for a later date.
The point here is that it is really impossible to eliminate capital from a society, so any claims made by the socialists of creating a new man who is not capitalist are ridiculously wrong. This generally eliminates that last claim and results in socialists making a more smarter claim, that in a socialist society, only the indirectly deferred consumption will not be allowed. For example, any individual can sow his bag of wheat to create 7 bags out of them 3 months later, but no individual is allowed to give his bag of wheat to another and hope to receive 7 bags three months later. This will completely stop a capitalist from ‘exploiting’ workers.
If a socialist makes this claim then it means he at least acknowledges why a capitalist deserves his profits. If in a shoe manufacturing factory, workers from start(homesteading the land, making bricks, concrete, sand, constructing the building, raising animals for leather), to the end(manufacturing the shoes, packaging them bringing them to the market), then they truly deserve the profits proportional to their role in the manufacturing process, but the fact is that this kind of action would be highly inefficient and ardous, and it would be much better of these workers defer their consumption in other ways(like saving money), or allow somenoe else who has delayed a lot of present consumption over time(capitalist) to invest in their venture and allow him to make profits.

This is why even the most hardworking socialist society is poor

The fact is that even in a socialist society someone must defer their present consumption, any socialist who claims that he envisions a society with no capital does not know what is he talking about. A smarter socialist might say that in his system the state will do the job of reallocating the deferring of present consumption equally among people, but that still leaves the big question about a socialist society and that is, if my deferring of present consumption does not lead in increased larger future consumption, then why should I delay my present consumption?
You may reward your workers proportional to what they have worked that day, sure people will work 18 hours a day to catch fish with their hands, but nobody will eat less fish of what they caught that day, just so that they can save enough fish to eventually build a net and be able to catch 10 times more fish than they can with merely using hands, and for a society to become prosperous deferred consumption is the single most important requirement.
If you are a socialist and you have thought of a socialist paradise, to be realistic you must not envision an advanced society, a truly realistic socialist society would be a society of primitive men who hunt animals and gather berries without using any kinds of tools.
Of course this brings us to a whole another set of issues with the so-called modern ‘capitalist’ societies such as US and UK, where the state depletes the deferred consumption of a society with the help of fiat currency, fractional reserve banking, central banks, and taxation. Not to mention the so called ‘free market magicians’, such as Milton Friedman and Chicago school who supports a Capitalist society, yet fails miserably in understanding what is really happening when a market crashes or how capital plans production, but that’s for another article.

Conclusion

My conclusion is simple, if you consider yourself as a Socialist(or any other leftist ideology where you are going to get rid of economic calculation and private ownership of wealth), you must explain me who in your system would be the deferred consumptionist. Who will reduce his present consumption for the future larger consumption. Sure socialists do talk about larger future consumption to be distributed equally among all its people, but what they fail to explain is who will be the person who will SAVE enough for the future date when nobody can work to do something else.

Is USA is under recession?

Right since January 2008, a liquidity crunch was experienced by the non-financial companies and individuals and that resulted in job cuts. The average job loss of USA for the eight months was 81,900 job cuts per month by September 2008, during the last four months, it was 483,500 per month. Unemployment rate caused consumer spending to fell by 3.8% in the three quarters of 2008 and in fourth quarter it fell by 36% below the final quarter of 2007.Hence, the National Bureau of Economic Research’s Business Cycle Dating Committee declared that the US economy is in recession since January 2008 .

The mainstream economists and media pundits suggest that the cause of a recession is the tight money policies and raised interest rates by the Central government that results in liquidity crunch and causes job cuts, declining consumer spending and hence a recession . They thus support that stimulating the economy with easy money, governmental loans, huge stimulus packages and lowering interest rates may help the economy in bringing the boom again. The idea suggests that the Market cycles of Boom and Burst originates from the central bank action of expanding the money flow in the market and contracting it. They suggest that proper stimulus packages and government spending over the common welfare programs can easily sooth the situation by allowing more currency to float in the market. Plus, they suggest that such common welfare spending also help in improving the life of standards of common populace.

Failure of Obama’s Stimulus Packages

The idea of mainstream economists is absolutely flawed and this can be easily seen with the failure of the economic stimulus given by the Bush government and supported by the new government of Obama.

It should be clear that a Burst or a recession occurs because there was a boom in market. A boom obviously is the period when an economic sector is unnecessarily provided easy loans, higher profits and more support by the authorities and central government to cause high rise in prices that creates a false demand in the market and causes inflation. That is, the downturn, or the depression or the recession is exactly because of the Central bank, not because it started tightening the financial sources, rather it is because of malinvestment initiated by previously created credit resulting from central bank . Mainstream economists also suggest that the market will recover and the prices will inflate again if further easy money is provided through government spending, ridiculously huge stimulus packages and other similar tactics. They believe that by doing so, the stock market will again start rising high. Yet, with all economic stimulus provided, stocks as a broad group are down since last ten years . That is, economic stimulus and credit policies of Central bank failed since last 10 years.

It is also important to understand the reason of liquidity crunch. A liquidity crunch occurs only when the present amount of money in the market, which is nothing but a means of exchange, is malinvested in those sectors that are facing false demand or boom. Since the money was malinvested in supplying the false demand, it gets trapped. Lenders don’t get their loan back and they suffer liquidity crunch. Thus, the reason of a recession is the easy credit policies by the government and central bank that causes Boom in the market. When the wrong policies of the government and central bank fail, the market suffers recession.

Recession is not the problem, it is the cure of the problems of Malinvestment

Thus, recession can be defined as a cure to the ill-policies of government and central bank that caused boom in certain sectors such as housing market. Because of that boom, easy credit policies, subsidies, easy lending and many other government and central bank caused factors, the prices soars to extreme high and causes inflation and money gets trapped in malinvestment. As the recession acts as a cure to this situation of extreme falsehood, it starts decreasing the extent of false demand and tries to bring the market to its actual true situation. The prices start declining and the economy starts recuperating from the illness of false heights.

Since recession itself is the cure of problems of malinvestment that were caused by the government and central bank’s ill easy money and credit policies, it cannot be cured by further stimulus. The stimulus will only sustain the recession for longer periods until all the malinvestment is not neutralised and the economy comes in a situation to achieve sustainable growth . The idea can also be substantiated with the expectations of Housing economists who expect that over the next 10 or 20 years, the prices in realty sector may start rising again on an average, but that rise won’t be as much as the average rise was during the past decade . Obviously, because of easy money and mislead credit policies caused a boom in housing market and created a false demand that consequently resulted in unsustainable boom. As a neutralising phenomenon, the market forces caused liquidity crunch to cure the malinvestment. Until the malinvestment will not neutralise, market will not gain sustainable growth. Stimulus package can only delay the time for achieving the sustainable growth. The stimulus also failed to provide any help in improving the job market, the unemployment rate is still 9.7% in the month of May 2010 , while it was 6.9% in 2008 .
Now with the problems of liquidity crunch still persisting, even the retirees are looking forward to find jobs . The situation shows that expensive stimulus may also push US towards the same fate that the Greece government and public are suffering right now.

Robert Lucas supported the idea of Ben Bernanke to reduce the interest rates . Every sane minded person will support the idea. In fact, the government or the central bank should not have the power to decide or dictate the interest rates. Interest rates should be decided by the free market proponents freely as per the time requires and permits. Yet, till how long will the central bank and government let the market enjoy the falsehood of stability on the basis of stimulus, what will happen when the central bank and Obama administration will look forward to take the stimulus back? Only then the market will again step forward towards curing the malinvestment caused by bad credit policies and only after that cure the market will be in a position to attain a sustainable growth.

The Machinery of Freedom: A Guide to Radical Capitalism: David Friedman

David Friedman, the freer son of Mr. Milton Friedman wrote this excellent work in 1973. Milton Friedman himself is known as one of the premier economist with Libertarian and anti-Keynesian approach. Yet, David Friedman is way apart from his father. One may feel that David Friedman learnt Economics not from his father, but from the Genius Ludwig Von Mises himself(UPDATE: Just to clarify, he did not). Machinery of Freedom contains a range 48 excellent essays that will not only entertain and provoke your mind to think rationally, but provide you a lot more to think and explore by your own. The essays are short and ranges from defence of property rights and private property to strictest modes of anarchocapitalism. He discusses the exploration of private law enforcement in a free society to great extent and provides a good look on the issue. You will certainly have a better understanding of a model of Free Society after reading the book. The wonderful thing is David Friedman seems to be hugely influenced by Ayn Rand. His assumption, that mostly people are rational and if someone is irrational, he will loose in the free society and the loss will be the teacher to achieve rational behaviour.

The Two Treaties of Government: John Locke

The founding father of classical liberalism or Libertarianism, John Locke still remains the most influential philosopher and thinker of all times. Although, his first treaty seems to be obsolete now, because the first treaty was the direct and vehement opposition to the irrational and obnoxious support of Robert Filmer to Monarchy who claimed that, men are naturally slaves and hence monarchy is the only justifiable government. The Second treaty of the book makes it a grand work. One can find the most systematic and logical defence of Individual Liberty in that book in such an inspiring way that will make you say that John Locke is way better than Aristotle.
The book was written in 1680, yet it is not obsolete. Even now, most of the governments throughout the world keep harassing individual liberty on the name of democracy. The book makes one learn the true nature of proper Miniarchy.

Atlas Shrugged: Ayn Rand

One can find no better book on Individual Liberty, Rationality and clarity of conscious other than this great Magnum Opus of Ayn Rand. Fountainhead lays the foundation of libertarianism and Atlas Shrugged stands on it as the basic structure of Free Society. The book is still one of the largest selling books throughout the world even after 53 years of its publication. The book is timeless, it will never die, it will never loose its shine and ability to make minds sharper, better, proper and rational. The book clarifies most of the dilemmas of a common reader living in a world where totalitarian governments are harping on controlling the masses, where the individual is faceless and individuality is curse. Atlas Shrugged shows you who is exploiter and who is being exploited and leaves you to decide whether you want to be the exploiter, or will you accept being exploited. The book prompts you to strike against the exploiters. The book fills you up with the energy and idea of liberty for your own self. Fountainhead and Atlas Shrugged are the best books one can ever read. Ohh by the way, have a reality check, feminists cannot accept these books. Ayn Rand has mocked feminism, just like all other form of collectivism, and being a woman, I am grateful to her for doing that.

Economics in One Lesson: Henry Hazlitt

Nothing can be better than this marvel by Henry Hazlitt, the American Philosopher and economist. The book has the potential to make you learn the actual economics of practical life and practical world in most easy way. The book makes you love economics. Hazlitt, through his immense simplicity explains how Free Market promotes efficiency and how government interference in market ruins the system and creates chaos. Time will Run Back and Economics in One Lesson are the two books that will not only answer all your questions regarding inflation, price control, minimum wages, unions and every other thing that influence your daily life, but will also provide you an assurance that the things can be better. The book leads you to start thinking and striving for Liberty to make world better.

Human Action: Ludwig Von Mises

Ludwig Von Mises is undisputable founding father of Austrian Economics. He along with Ayn Rand is the founding father of modern libertarian approach too. Human Action is the book that will clarify all the illusions about the stories of communism, socialism and collective welfarism. His explanation of Industrial revolution and 2nd world war and the economic effects of the situation are revolutionary. There are many who keep giving excuses for Capitalism and Individual Freedom, the frontier fighter for the sake of Individual Liberty and Human moral rights was Ludwig Von Mises.
He was undoubtedly the best philosopher of 20th century along with Ayn Rand.
In Human Action, he introduces Praxeology as the major foundation of social sciences and economic laws. He further ascertains that economic laws can only be arrived at by means of methodological individualism. He was vehement opponent of positivism, or materialism as a foundation of social sciences and morality. He was one of the truest Individualist, Rationalist and Objectivist. The major theme of all his books is inflation and monetary economics and the rational comparison between Free Society and Government controlled society. Once he said

Efforts to realize Socialism lead only to the destruction of society. Factories, mines, and railways will come to a standstill.

The failure of USSR makes him the sage who knew the future. His work on theoretical Business Cycles explains all the causes of repeatable Depressions.

The Wealth of Nations: Adam Smith

Everybody knows a little or more about this famous book by Adam Smith. He was the first to explain the importance of social distribution. His example of story of pin-making is used every now and then. People write a lot about the “Invisible Hand” and murk up the essence of the book. The book clearly states that government is redundant and it should let the market free.

The Animal Farm: George Orwell

George Orwell was one of the best Dystopian. His book 1984 is world famous along with Aldous Huxley’s “A Brave New World”. One can easily see how both of these writers used and criticized the Pavlovian learning and conditioning, and how they showed the world that the way it is going through will lead to certain destruction. Orwell used to say that 1984 was written to change the view of the people about the society they should try to create. The book is a masterpiece undoubtedly, but The Animal Farm is much better book on my scale. The Animal Farm is direct attack on the egalitarianism and collectivism. The Animal Farm, along with 1984 and Aldous Huxley’s “A Brave New World” should be read to understand why government is evil, and why people should not sacrifice individualism for the illusionist welfarism.

The Law: Bastiat

Frederick Bastiat was one of the most prominent economists of 19th century who proposed and supported Laissez-Faire system and Individualism strongly. Amongst his all great works, The Law is one of the best. The book suggests the proper nature of Law and the role of legal bodies in a Free Society. The book was published in 1849, the same year when Frederick Bastiat passed away. The book suggest that the proper role of the law is the protection of Individual right, Liberty, defence of life and property. Bastiat and John Locke are the founding teachers of Property rights and Individualism; they are major inspiration behind all forms of Libertarianism.

Free to Choose: Milton Friedman

We started the list with the book of David Freidman on radical libertarianism; we will end with a book by his Father Milton Friedman. The Nobel Laureate, prominent libertarian and opponent of Keynesian economics discusses the Government sponsored education in this book along with many other issues. With his easy logic, he explains how and why big governments are a curse, a big problem. Obviously, he accepts that small governments are smaller “problem”. He shows that government-sponsored education is not improving and they cannot improve. The book is a classical approach for the defence of human freedom against the state.

There are many other books that excellently explain individual liberty and the reason to defend it; I might have missed a few of them. The mentioned above are those that I consider the best ones at the moment.

How the Private coinage will work?

The private coinage will work just like any other commodity (say mobile phones, or jewellery or wrist watches). Minters will produce coins of different shapes, sizes and weight according to the desires and demand of his customers. The free competition of the market will set the price of the coins of the minter. Second issue is about the trouble that the coins may create when weighed or evaluated at every deal or bargain. It is true that it would be difficult to evaluate the purity of gold coins every time a transaction would be made. To solve that issue, the minters will stamp the coins and guaranty the weight and purity of the coin. Private minters can guarantee the coins just like the government do. The profit will be, when government mints, there is no competition for government to be truthful, alert and honest, it is monopoly of government over minting coins, but when the private minters will guarantee their coins, their guarantee will weigh more because if the private minter will cheat, he will loose his market and consumers to other honest minter. Just like a government paper currency or coin holds the governmental promise to pay the bearer of that note an amount equal to the price of that paper currency or coin, the coin of private minters will also hold the promise from the minter that he would pay an amount of gold equal to be mentioned on the gold coin of his brand.
People against the idea of private currency will say that it would increase the chances of frauds. Same people never object to the miserable record of the governmental frauds, swindles and mismanagement. Every time the government issues stimulus to a particular industry, or forgives the loans of some conglomerate by explaining that it is working for social profits, the government actually is committing a fraud against the general public. Every time a person faces the devaluation of his savings in governmental currency because of extreme price rise and inflation, it is the example of regular fraudulent and untrustworthy behavior of the government regarding paper currency issuance and minting coinage. In case of private minters of gold coins, the chances of inflation and abrupt price hikes will lessen to minimum. More over, the free market competition for consumer satisfaction, the various minters will compete to be more honest and better customer service providers. The more a particular private coinage minting agency will be honest and better product and service provider, the more will be its consumer base and profits. Thus, in free market private coinage system, the competition for profits would be competition for honesty and consumer satisfaction. In addition, the problem of fake currency will also be eliminated because each private coinage agency would try to defend their brands by their own and the government also will be able to devote all its energy to safeguard the private minters against duplication and fake currency. In case of private coinage, one can trust that the government will prevent and punish frauds. The integrity of private open market operators cannot be discarded in favor of government monopoly, because in case of monopoly, there is no need for the government to be honest, but in case of private free market operators, to be honest is prerequisite for gaining any profit and healthy share of consumers.
Furthermore, whole market works on guarantee of standards. A medicine store sells a tablet of aspirin of mentioned weight and dosage, a butter seller sells packed butter slices of mentioned grams of butter. The buyer trusts these guarantees, and they prove to be true. In a case when a person buys a product with a certain warranty and guarantee and somehow the product fails to prove the standard mentioned, than in most cases, he gets a replacement for the ill-manufactured product. That is, even if by mistake a product of a company fails to fulfill the standards demanded by the customer and provided by the manufacturer, then either it pays back the money of the customer or replaces the product with new and better one. Market of mobile sets, or laptops or packed meat, butter or cheese, or other things does not fail even though government does not hold a monopoly on any of the products. Thus, we can trust that the customers of a private minter will be safe against any possible fraud because of the presence of other competitors of the minter in market. The minter’s customers themselves will be keenly alert about the weight and fineness of the coins just as they remain while buying and using other commodities.

The problem of wear and tear of currency

The current government regulated currency, paper notes and coins holds no worth in themselves apart from the governor’s pledge to pay the bearer of the note or coin, a definite amount of money. The value of money obviously keeps going low and lower because of inflation and price rise. Along with this, the paper currency issued by government often suffers wear and tear causing further loss of money. Most of the governmental coins are eroded or torn out and government keeps forcing the usage of same old notes and coins. The old rag-tagged coins and paper notes are to be considered of the same value as of a fresh note or coin. By doing so, the government actually forces a certain type of price control over the old paper notes and coins and provide them the equal price as that of newer notes and coins. Because of this, the older coins and notes are overvalued, while the new notes and coins suffer undervaluation. All this amounts to nothing but mal-investment. Everybody loves to circulate the older worn out coins and paper currency while they have a tendency to keep newer notes and coins safe.
Consider the case of free market where minting of coins is not a monopoly of government. Assume that there are gold coins of 10grams well circulated in market. After a few years of constant usage, the coins may suffer wear and tear and lets say that they weigh only 9 grams of gold after 10 years (assume). In a free market, a coin that has been reduced from 10 grams of gold to 9 grams will not be overvalued and it will gain only the price of 9 grams. Obviously, nobody would like to use the 9 grams coins at the price of 10 grams of gold, hence the worn out coins will be driven out of the market, or they may be used at reduced price. Thus, nobody would be deceived by the forced insistence of overvaluation to the older coins. This will avoid malinvestment. To solve out the problem of wear-tear of the coins, the private coin minters can either set a time limit on their stamped guarantees of weight or agree to provide a new coin in exchange of every old coin with reduced weight. Thus, there will not be any compulsory standardization of currency, which is a feature of monopoly of government.
Conclusion:
Since long governments have tried to control the currency circulation in market so that they can restrict and control the progress and prosperity of citizens. Yet, from time to time, private bankers have issued their own minted coins (Know more about Private Coinage and Good Money)) . The gold standard with privatization of issuing currency and minting coins will not only end the monopoly of government over currency, which is the major reason of acute price rise and inflation, but also it will avoid any chance of fraud as the free market will tend the virtue of more honest and better services for gaining more consumer base and high profits. In addition, if coin minting is privatized, the government can also try to serve the public by ensuring security against any sort of fraud. In any case, privatization of currency would be a much better option than the monopoly of government over currency.

Do we want better technology, superior products and services that are more effective?

Human desires are infinite and so is his potential. We want better medical services, information technology, better telecommunication services, better heating and cooling devices in our homes and office rooms. We desire better toothpastes, toothbrushes, better hair oils and shampoos, better and more verities of food, wine, better cleaning products, better cell phone, better ipods, better televisions, better laptops, better internet, we all want better and improved.
It is our want that drives the market to innovate and provide new technologies, services and products.
We want better and faster vehicles, satellite phones, and internet access. We need clean and filtered water, we need lifts and elevators, we need homes, we need security we need better services, we want more options.

Consumerism makes it possible. We are receiving everything we wish for and the market is providing them. Free market is nothing but a group of billions of people working together with free will, innovating and inventing further for the improvement, free market is also a system that joins billions of people together, yet provide full freedom for each individual to live for himself, at his own conditions with his own efforts. Nobody is pulling legs of other to rise higher. Market competition is nothing but a constant try of innovators and entrepreneurs to learn and satisfy the hearts and minds of consumers. Consumers are undoubtedly the kings of free market.
It is all consumerism, to desire better and to have full freedom to make one’s dream come true.
The socialists call it devilish, they say people do not need improvement, they say materialistic quest for making life better is futile. They say all this improvement in standards of life is waste. They ignore the real effect of all these changes. While blaming consumerism and crying anti-consumerism songs, they just hide away the evidences of improvement in human conditions.

Since the start of civilization, wise people are trying to search a self-sustaining system that may serve the common person rather than just the aristocrats and the rulers.
Free market is the quest for that riddle. Free market provide the system through which, the billions of unplanned desires and wants, billions of unorganized and independent economic choices succeeds in creating a self-sustaining system of production and provision to satisfy and serve everyone.
Now socialists, anti-consumerists decries against this system, they say consumerism provides too much for too many, they say it is not necessary and it is wastage. They say people does not need these things, they are mere senseless materialistic wants.
The question is, are the consumers buying those things that are not required? Who dictates the difference between a need and a want? Some religious guru, or some socialist dictator?

One’s desperate need is fulfilled by Other’s want for Leisure

The fact, which makes the free market sustainable, is “the need of a person is fulfilled as a resulting effect of fulfilment of other’s want. That is, wants and needs are interlinked in a free market.

Shiksha India CII

“Support Shiksha, lead a child to the path of education, Buy large packs of Tide, Ariel, Pantene, H&S, Rejoice, Vicks VapoRub, Whisper, Gillette Mach 3 Turbo, or Pampers, & lead a child to the path of education.”

The advertisement simply suggests that the more you consume, the more poor kids get proper education.

Consider another example, a person’s child is badly sick, he is trying to get her to a doctor. The urgent clinic is open until late night; the neighboring drug store is also open. The desperate father goes out; get the proper medicine and gets in, to save his daughter. There is nothing phony demand in this entire act of saving a child’s life.
However, the urgent clinic can remain open late because its office is situated in a dense mall with low rents and higher access. The medicine store is open late night because cosmetic store, bakery, bear bar, sports shop, a swimming pool, a hotel facilitating late night parties and discotheque also share the area where the medicine store is situated. All of these stores are selling superfluous things. They pay rent too. The owner of the mall would not have made that place if those less desperate needs were not to be sold there. That is, the want of leisure and pleasure of other people became the reason for the prompt and urgent health-care of that child. Some of the Indian cities are experiencing development, socialists call it redundant, Indian villages does not have such superfluous stores, they do not have proper schools and hospitals too.

The demand of public for the non-essential wants became the background of hospital facilities for the needful.
The same is the case of luxury goods such as mobile phone. Mobiles were meant to be available for the rich alone. It was not an essential demand it was a luxury good. Only the rich could use them. The innovators created cheaper versions; the capitalists increased the production and made it affordable even by the middle class and lower middle class person, now even the poorest of Indians is likely to have his mobile phone.

Quality of life improved even for the poorest person. He is more resourceful now and able to earn more.
Some people believe that quality of life does not matter, for them; equality of life is better idea. The question for such people is, why not the poorest should get easy access to vast grocery stores, medical stores, better food, technology, and other not-so-essential luxuries? Consumerism helps the facilities, better services, and technological comfort to reach to the poorest strata of society. Consumerism actually reduces poverty. In addition, the better quality of life provided by consumerism has its own importance. It is natural right of the people to have freedom to choose and buy market products, as they want. Free market provides this freedom to the consumer, the people. Free market keeps providing better technology and products at cheaper rates, and this ability of free market is driven by the motive of consumerism.

Better quality of life has improved the average life of people too. The average life of women and men in 1900 were 48 and 46 years respectively. Now, the average life of women and men consumers is 80 and 77 years respectively. Obviously, consumerism is serving consumers. Infancy death rates dropped hugely because consumerism brought better medical help and vaccines. Death toll due to epidemics reduced to great extent. Overall consumerism is serving humanity to lead human for better, more comfortable and more satisfactory quality of life.

Conclusion:
Either those who oppose and criticize consumerism are misled or they have some evil motives against the developing humanity.

Socialism Trickle up Poverty

“I worry that in resolving this financial crisis perhaps we are sowing the seeds of the next crisis…next crisis could be a currency or a fiscal crisis,” Subbarao said.

India is no new to the threat of extreme debt and bankruptcy. India faced the similar situation in 1990 when Indian government was forced to accept liberalization. Obviously, nobody would like to have a repeat of 1990 fiscal crisis. Yet, it is a possibility. To reduce that risk, Indian government strictly needs to control its expenditure and reduce the burden of welfare state, that is, government need to disinvest further.

The Fiscal Crisis of Euro Zone

The evidential repercussions of governmental expenditures and debt burden on the Euro zone countries are a matter of thought for financial world. The crisis began in Greece and is expanding to Spain and Portugal. It would be foolhardy to believe that the crisis will constrain itself to the weaker economies of Europe alone.
In 2008, when Pakistan faced bankruptcy due to its fiscal debt, economist warned that Ukraine, Kazakhstan, and Argentina could also slide into a downward spiral towards bankruptcy, and to that list, now we have added Greece, Spain and Portugal. Ex-IMF chief economist Simon Johnson openly stated that the UK should also be considered in the category of nations at the verge of bankruptcy because of huge governmental fiscal deficits. There is no reason to doubt the ex-Chief economist of IMF because of the fact that the euro-zone governments are predominantly welfare states with extreme high fiscal deficits year by year. The budget situation in all European countries is extremely weak with no hope for a manageable budget any soon. The government obviously provides huge welfare benefits for the citizens in shapes of free-education, Universal Health Care systems and other socialistic patterns that obviously increase huge collective wastage of resources produced by citizens.
Simon Jones said, “They seem to show no awareness at all that much of Europe is facing a serious crisis and it’s not limited to Spain, Greece and Portugal, it’s also going to include Ireland. I think Italy is also very much in the line of fire. There’s a very serious crisis inside the Euro zone.”
The only way for these economies to avoid the situation of bankruptcy is to reduce their fiscal deficit to minimal and that is possible only by reducing the governmental expenditures, i.e. by restricting government to very limited or no power to interfere with market.
During the Global Meltdown, when the government of major countries were announcing “economic stimulus” for the market, socialists were claiming how the Market is unable to be free and needs governmental help. I mentioned how the Economical Stimulus are not a Cure it is Venom . The current situation throughout the world is evidential proof for that opinion.
The world is still to learn a simple fact that there is no such thing as a Keynesian free lunch, that government does not produce anything, and whenever it robs individuals of their wealth for the purpose of welfare of society or nation, such crisis evolves to brutalize every individual.

US, the most powerful Borrower

Larry Summer once asked in US Congress “How long can the world’s biggest borrower remain the world’s biggest power?”
The question signified its strength when Moody’s Investors Service cautioned that the triple A credit rating of the US could not be taken for granted.

President Obama has also dreams of Universal Health-care and Free Education for US citizens.

The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

Such huge national debt increases the fears of default and currency depreciation, and an immediate hyperinflation that push up real interest rates. The higher interest rates drag down the growth further while the private sector also suffers the burden of debt. In addition, to pay back and avoid bankruptcy, government tries to increase revenues by confiscating private property, increasing taxes that in turn dilapidate the private sector completely causing extreme unemployment, poverty, food crisis, riots and complete chaos.
According to International Monetary Fund, the developed countries need to manage their fiscal deficit within a decade in order to avoid defaults. Worst condition of nations under debt is of Japan and UK, than Ireland, Spain, Greece and at sixth place, is US.
Conclusion: The economic stimulus proved out to be venom; the western countries are now in a deep fiscal crisis while India and China are facing the huge inflation problems. The collective welfare statist ideology is wrong at its base and the world need to understand that the only cure for the Market is Freedom from any sort of Governmental interference.
With such huge debt burdens, the governments now need to heed the libertarian urge for free market. Governments need to restrict their welfare programs. There should be no government interference in market. Governments now need to work for reduction of expenditures and reduction of debts.

So what can help to eradicate the poverty?

As per World Bank’s estimates, 60% of Indian population was living in poverty in 1981, during the socialistic regime of Indian government.
Since 1991, India enjoyed the streams of economic liberalization and stepped towards the making of a free society. As a result, the current estimates of World Bank suggests that 42% of the total Indian population now live under the global poverty line of $1.25 per day (PPP). That is quite a big sweep.
Similarly, in China, since the far changing economic reforms and liberalization were made in the late 1970s, the growth fuelled a noteworthy decline in the poverty rate from 64% at the beginning of reform to 10% in 2004.
Obviously, the data suggests that economic reforms and liberalization is the key to the eradication of poverty. Before 1991, the government controlled almost all industries and production sectors of India but after that, step by step liberalization of industries from public sector to private sector took place and the OECD states the result in following words

Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently, a rate of growth that will double average income in a decade. […] In service sectors where government regulation has been eased significantly or is less burdensome – such as communications, insurance, asset management and information technology – output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. – OECD

Similarly, China confronted economic reforms and liberalization in 1978 and now, as of 2005, 70% of China’s GDP is in the private sector. The relatively small public sector is dominated by about 200 large state enterprises concentrating mostly in utilities, heavy industries, and energy resources.

Free Market Entrepreneurship is the Key to riddle of Poverty

happy eating rice

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests. – India Report, Astaire Research

Another example of entrepreneurs helping the cause of eradicating poverty is the success of entrepreneurs like Vikram Akula or Irfan Alam.
Irfan Alam an MBA from prestigious IIM-Alhmedabad is the founder and chairman of the SAMMAAN Foundation. His enterprise innovated for the help of the millions of Rickshaw pullers across the country. Most of them are illiterate and poor. Over 90% of them are farm workers who migrate to cities for want of employment at home. They hire rickshaws for which they pay owners Rs 30 to Rs 40 per day and end up with a pittance for themselves.

Highway to Prosperity Highway to Free Market

A panel of “experts” appointed by the Government has recommended raising fuel prices.  The panel, headed by Kirit Parikh,  recommended a hike in domestic LPG by Rs 100 a cylinder and PDS Kerosene by Rs 6 a litre. It is not certain that what the panel called for will be implemented. Rangarajan Committee and the Chaturvedi Committee reports in the past went unimplemented.  Many newspapers reported that the panel is for deregulating fuel prices. It is not at all evident that a Government orchestrated hike in prices would be a genuine deregulation. If these goods are underpriced, certainly, the hike would be a welcome move. A hike in prices will certainly reduce fuel subsidy burden.

The findings of the panel, it is said, will be unpalatable to the government battling inflation. An increase in fuel prices, however, can’t cause a general rise in prices. Only an increase in money supply would lead to “price inflation”. If fuel prices rise, people will cut down consumption of fuel or other goods. There will not be an increase in aggregate demand. There will be no “cascading effect on food prices”. When subsidies to maintain low fuel prices are removed, the prices of other goods might come down. It will also reduce the fiscal deficit. (A subsidy of over Rs 71,000 crores was given in 2008-2009, at the expense of the innocent, long-suffering tax payer.) Price controls, needless to mention, are not a solution to price rise. Government enforced price controls to deal with price rise, as several economists have noted, is like “trying to hold down expanding pressure in a boiler by manipulating the needle in the boiler’s pressure gauge”.

Unfortunately, in India, the prices of fuels and fertilizers are administered by the Government. It should be obvious that no bureaucrat has the necessary information to set the prices of these goods. Lacking profit-loss signals, the prices set by the government would only be arbitrary. It is true that sometimes the market sets the price higher or lower than necessary to clear the market, but no one has the wisdom to correct these discrepancies. The market, left to itself will set this right. If fuel prices are higher than justified, it will send out the signal that it is profitable to produce fuel. More people will enter the market. The supply of fuel will rise. This will bring down the prices. If fuel is priced lower, producers will get the signal that it is not profitable to produce it. Some producers will leave the market. Soon prices will move towards a level which will clear the market. The market is self regulating.

It is important to recognize how the profit mechanism coordinates the market if we are to understand the harmful effects of price controls. Usually, price controls are thought of as a way to curb excess profits. But, in the market there is a tendency towards equalization of profits in all sectors. No sector can be more profitable than any other in the long run. If a sector is more profitable, there will be excess investment in two forms. One, more people will invest I the sector. At the same time, people already involved in the sector will plough back the “excessive” profits.

Government price fixing has harmful, unintended consequences. If the government sets the prices below the market level, there will be chronic shortage. Such a policy fails to take in account why prices are higher. Prices can be high only when there is an increase in money supply or a decrease in supply of goods. Price controls do nothing to cure inflation, which is purely a monetary phenomenon. When prices are set low, less people will produce the goods and the shortage becomes more problematic. The product disappears from the market, and there will be immense pressure on the Government to raise prices, if it is to cure the shortage. If the Government sets the price above the market level, it would lead to unsaleable surplus.

It is true that if the Government gets out of the price fixing business, there would be a sudden rise in prices. It might be painful to most people. But such short term pain is much better than the chaos price controls create. Shortages and unsaleable surpluses are just two such consequence of price fixing. There are several other consequences. Price controls create black markets. Customers become a menace to sellers. The quality of service comes down tremendously. People will have to resort to means of production which are expensive. There will be hoarding and delays in production. People will waste time standing in queues and searching for products. Price controls lead to further controls, and may ultimately lead to socialism, which will entirely wreck the economy. In short, Government price fixing creates chaos.

Read more on it “Reason of Price Rise and Consequences of Price Control”

While conventional mainstream economists do not falter till now, they’ve seldom recognized the scarcity of another important factor in human action — time. It should be obvious to anybody that time is not an abundant source available to human beings. Human beings contemplate the fact that time is scarce, and conform all their actions to harmonize with the limited time available. Thus arises the concept of ‘time preference’.

The ‘price’ of time

The thought of tagging a ‘price’ for time can sound weird first, but an example can make things clear. Lets take the case of a prosperous farmer wanting to acquire new land to increase production. How much would the farmer be willing to pay for the new land? According to mainstream productivity theory, the farmer will be happy to pay the amount of value that he expects the new land to add to his returns in the future. Suppose the farmer anticipates the land to boost his returns by $1000 per year, he would be ready to pay any price below $1000 for the first year(Let us, for a moment, assume that there is no well-developed financial system established which could offer interest returns on deposits).

So, if $1000 is the return from the new piece of land for a single year, and further since land is productive for centuries together, should the land be priced at infinity? It would have to be, if the world works merely as what the productivity theory claims. Unlike mainstream economists, the Austrian school recognizes the importance of time as an economic factor. The most important idea to keep in mind, with respect to our farmer example, is the fact that the farmer doesn’t live forever; or that he wouldn’t value returns from his land when he is bound to his bed in his twilight days(assuming the farmer has no heir). This solves the problem of the valuation of land. Land, like all other economic goods, has a finite price.

The valuation of land being one important lesson this example teaches us, that’s not all about it. The example also shows us how the infinite value of land is ‘discounted’ to a finite value(price) based on the amount of time elapsed. So how does the price of time express itself in the market place? The most basic expression of time discounting being expressed in the valuation of durable economic goods land, the other important market for time is, the loanable funds market.

The loanable funds market

The loanable funds market or the financial market is the most explicit expression of the time market in the economic world. This market witnesses suppliers and borrowers of present capital carrying out the same bidding procedure that is characteristic of any free market. Like the market for other commodities, the borrowers of capital in the loan market bid for present goods, and suppliers of present capital supply their capital to those borrowers who promise the highest amount of future goods. The interest rate thus expresses the premium or discount that is placed on present and future goods respectively.

Ill-effects of the lack of time accounting

While almost all mainstream economists consider land, labor and capital as the factors of production, Austrian economists have for long contended the possibility of the other factor of production — time. Over here looms a wide scope of disastrous implications that could be framed against various mainstream theories, that is, based on their failure to account for time as a factor of human action.

The major effect could be seen in policy recommendations of mainstream economists vying for the government to possess a monetary policy — that is, a set of guidelines to tamper with the time(loanable funds) market. The advent of fiat currency has helped governments to ‘fine-tune’ the economy with monetary tinkering of the time market.

Any sound theorist of the Austrian should feel aghast at the kind of ignorance that conventional economists lie under when they recommend tampering with key signals(i.e. interest rates) of the time market as one of the ways to ‘stabilize’ the economy. Inflation, currency debasement, business cycles, the doomsday event that follows any policy based on debasing the currency — hyperinflation, and many other side effects of intervention in the time market, are taken to be normal policy prescriptions in today’s economics mainstream — all because of the failure to recognize the role time plays in human action.

Who Decides the Prices?

The price of a commodity depends on its demand and its supply. Demand and supply being the amount of commodity the buyers are prepared to buy and sellers are prepared to sell, at all prices.

If supply is constant, The higher the price of a commodity, the lesser is its demand, the lower the price of a commodity, the higher is its demand.

As the speculators and sellers reduce the price of their commodity, the demand of that commodity increases. People obviously are willing to buy more shirts at Rs20/- per shirt and they will buy lesser shirts at price of Rs40/- per shirt. Since the lower price increases consumers, speculators and sellers tend to decrease the price to the minimal possible value so that they can outcompete the other speculators and sellers. Most of the consumers will opt to buy from that seller who is asking the least prices and hence, that seller will make maximum profits. Obviously, a speculator cannot decide price for his stored commodity any less than the actual cost of that commodity plus cost of its storing and his share of profit.
Thus, it should be clear that speculators could not decide the price variation of a commodity as price is directly proportional to the demand of consumers. A speculator or a seller may merely speculate the increasing or decreasing trends of the demand of a commodity and adjust the supply of commodity by either storing it or flooding the stored quantity of the commodity in market in accordance with their share of profit.

Can Government decide and control the prices?

Speculators cannot decide and control prices because they cannot force anybody, they cannot use violence against anybody. So, if a speculator decides to sell stored commodity at higher prices, he will loose his consumers, as they will have choice to go for that speculator and seller that provides the commodity at lower prices.
Yet, government can decide and control the prices because government do not need to look for the supply of a commodity, on the other hand, government works under the pressure of vote banks. In order to obtain maximum of the vote bank, government can actually decide the prices of various commodities lower than the cost of production and storage of those commodities. That is why, just in order to gain maximum vote bank, government can promise to sell wheat or rice at a price of Rs2/- per kg, or even at free of price. This is absolute corruption and fraud because the cost of production of any commodity or service is always higher than the price dictated by the government and hence government always works at loss that ultimately burdens the poor consumers, voters. Government can control the prices too because it has monopoly on violence, government can force all speculators and sellers to sell the product at the dictated prices; it can illegalize speculating and selling and may control selling services completely by collectivizing the market. Government can jail speculators, sellers and dealers if they do anything against the monopoly of government, government can kill them too by means of police force.
Obviously, government has no responsibility or need to look for the quantity, quality and supply of the commodities of which it dictates the prices because the basic means of government income is confiscatory, compulsory taxation. Yet, when supply of a product reaches too much lower and the demand increases too much higher, government succumbs under the pressure of demand and supply and resorts to increase the prices, that again creates havoc for the consumers.

Reason of Price Rise and Consequences of Price Control

In order to hide its irresponsibility and fraud, government often suggests that the reason of price rise is population explosion and scarcity of products. Yet, it is again a myth. It is true that Indian population increased almost 4 times since 1947, yet the thing to be noted is, Indian production increased 100 times (or more). So comparably, production is too much more in relation with present population than what it was in 1947 in relation with the population of 1947.
Price rise is direct consequence of Inflation . As government has monopoly on printing fiat currency out of thin air, it keeps increasing the fiat currency. As a result, the purchasing power of citizens increases. Since the purchasing power of consumers’ increases, their demand also increases and it exceeds the quantity of available supply.
Whenever the quantity of demand of consumers’ increases than the quantity of supply the producers and sellers can provide, the situation of shortage occurs where the consumers are willing to buy, but the sellers and suppliers cannot provide, they have nothing to sell.
Such situations creates tensions within the society and may erupt in violence as every consumers suddenly comes to realize that although they have fiat currency, they have no wealth, they have been robbed and they are poorer than what they were years before. To avoid such situation, government feels forced to increase prices of commodities because price rise actually solves out the problem of shortage. At higher prices, demand of consumers decreases and tends to come closer to the quantity of supply available in market. Yet again, government may loose vote bank because of price rise, hence it resorts to price control again.
Price control is again a fraud and creates chaos in market. Due to lower dictated prices, demand of consumers remains high irrespective of the supply and that increases wastage of scarce products causing shortage. As production and supply never meets the demand of consumers in such scenario, the consumers suffers.

Solution of Price rise and Shortage

Gold Currency

Solving the Shortage of Grains

To understand this, let us take the case of an unexpected flood or drought in an Indian region (say Bihar, or Andhra Pradesh). Because of drought, the production of wheat will be reduced (let us say it reduces by 1/12th of the average wheat production in an year). Obviously, because of the shortage in production, the price of wheat is expected to rise after say, 6 months. The enterprisers looking for making higher profits will speculate this expected price rise and will start storing the wheat at the current lower prices to save it to make higher profits in future by selling the stored wheat at higher prices.
Their speculative storing of wheat will result in a raise of current price of wheat, as there will be lesser wheat available to be sold to consumers, and the enlarged quantity of wheat for future will reduce the future prices of the wheat.
Because of current higher prices, the consumers will also start accommodating themselves to the shortage of wheat by reducing the consumption of wheat and checking the wastage. This thriftiness on behalf of consumers will allow them to sustain the time of absolute scarcity of wheat and that will further reduce the expected future price of wheat. Thus, at one hand, speculators will increase the current prices of wheat by storing it for future sales at higher prices, on the other hand, the increased available quantity of wheat for future and the thriftiness of consumers at present will reduce the expected prices of wheat in future. As a result, the maximum possible increase in price of wheat at the period of most scarcity will also be not very much more than the current price of wheat plus the storing and preserving charges of the wheat by speculators.
In absence of speculators, as most of governments illegalizes speculation for price control, the consumers will never realize the actual shortage of wheat because there will be no sign of scarcity by means of price rise and will continue consuming wheat as normal. On the other hand, although the stored wheat will satisfy the demand of consumers for first 11 months, there will be no wheat left for the next 12th month of year as the total wheat produced is already less by 1/12th of the average required for an year. Such a situation will not only make people suffer starvation but will also fail to reduce wastage when it could have been. In addition, it will provide further chances of bureaucratic governmental corruption.
The profit motive will also alleviate the situation of famine and scarcity by means of another natural force of free market that tends to equalize the price of a commodity at all places. At a time when Andhra Pradesh or Bihar is suffering famine and food shortage, the dealers at other parts (say Uttar Pradesh, Punjab or Tamil Nadu) will seek higher profit rates by selling their stored wheat to the consumers in Bihar or Andhra Pradesh. This will result in a slight increase in price of wheat at the local markets while the increase quantity of wheat available for Bihar or Andhra Pradesh consumers will reduce the unexpected rise in price of wheat at markets there. Thus, the shortage of wheat at a region will be spread to whole India and hence will reduce its effect to minimal, all will share the increase in price of wheat, and that will reduce any extra burden on the consumers of famine suffering area to negligible.
The speculators cannot store the wheat for more than a period of 12 months as by that time, the new crop of wheat will arrive in the market and that will reduce the price of wheat to normal.

Issue of Oil Shortage because of Corrupt Oil Barons

The same principles of free market will also tackle any unwanted situation in the market of crude oil and petroleum or any storable commodity.
In the previous post, while discussing the Market Anarchy , one of my friends raised the issue of Oil Barons, asking what will happen to free market if the Arab Oil Barons tries to control the market because of their influence on oil production.
Let us assume that all Oil Barons of Arab makes a union and tries to control the free market by imposing an artificial scarcity of crude oil (although this is impossible because reducing supply of oil will reduce all income of those oil barons as they have no other means of profitable production).
The speculators of free market will certainly foresee the future shortage of oil and will maintain their oil storage to make higher profits. That will obviously increase the current prices of available oil and hence will introduce the thriftiness in consumers, making them more able to sustain the period of oil shortage. Consequently, it will reduce the chances of unexpected increase in price of oil at extreme periods too.
On the other hand, Indian free market will also tend to increase its oil production to make higher profits. In addition, profit motive will tend the oil producers of other nations (like USA or Russia etc) to sell their oil to the Indian market. That will obviously tend to spread the scarcity of oil through out the world and hence will assuage the problems of Indian market. Hence, although the economy of India and actually whole world, will suffer a comparable loss but that would not be of any considerable degrees. On the other hand, Oil Barons depend only on oil production, their loss at not selling the oil will be huge and directly pointed towards them, and that will break their union.
Conclusion: A free market inadvertently safeguards itself against any sort of scarcity of any commodity by means of the profit motivated market forces. As speculators guard the market and hence the well-being of consumers as true and honest soldiers (as their vested profits and interests are strictly attached with the consumers), the free market necessarily remains free of any discrepancy in the prices of any commodity.
Even the administrators of mixed economy have realizes the power of forces of free market that is why Indian government issued allowance of speculations over wheat few months ago. Certainly, it is a positive step towards the Free Market.

Uniformity of Profit

Naturally, every body works to gain profits, everybody lives to sustain and comfort his life, profit is the only motive for a free individual to put up his endeavours in production and prosperity. Yet, the laws of natural anarchy also ride profits and that is the Uniformity of Profit principle. The principle suggests the natural tendency of a free-society towards establishing a uniform rate of profit on capital invested in all the different branches of production, be it steel production, grains production, oil industry, the shoe business or whatever. Profit, obviously is the difference between the sales revenues and cost of production.

The reason for such tendency of natural uniformity is the profit seeking nature of the free-individual. Investors prefer to earn higher rates of profits on their investment rather than the lower rates. That is natural, rational behaviour of man to seek maximum possible profits. Thus, other things being equal, wherever the rates of profits are higher, investors tends to invest their additional wealth, and wherever the profits are lower, they tend to withdraw their previously invested capital from those production sectors. The additional investment that thus reaches to any high profits providing production sector tends to reduce the rate of profits in that sector.

The natural, rational behaviour of man is to seek maximum possible profits

Benefits of Natural Anarchy

In a free-society, as the profit rates tend to be uniform, every sector gains enough investors. As every investor is driven by his profit seeking nature, he remains alert about consumers demand and that reduces the chances of malinvestment and hence over-production or under-production. The natural anarchy thus provides a balance between the production of all the essential products for our life and progress. Anarchy not only prevents but also remedies the mistakes of over-production or under-production if committed. If at the threshold of a high profit-rates providing sector, investors commits mistake of over-investment, it tends to over-production that decreases the rates of profit and hence further investment reduces resulting in lesser production and hence providing the necessary cure to the mistake.
Because of individual freedom and uniformity of rates of profit, each sector not only gains enough investors, it also gains enough human resources in form of workers, specialists, managers, entrepreneurs and inventors and that leads to over-all increase in rate of production leading to reduce poverty and scarcity at all fronts.

Free Society brings the environment of natural freedom for each individual being free to use his talents and endeavour to pursue happiness by earning it honestly and freely

Ills of Interventionism and Central Planning

The government by means of central planning or interventionism often dislocates the harmony of free-market and hence breaks the chain of progress bringing chaos to the society. In presence of government interventions in forms of subsidies, taxation, prohibitions, licensing etc, the profit motive looses its essence, and instead of learning and leading the way of natural profit seeking tendency, investors are forced to invest based on government’s dictatorial interventions. This dependence reduces the investors’ incentive to invest and hence causes lack of investment. In absence of profit motive, neither the government, nor the investors by themselves get any chance to check the threshold of investment and production and that causes loss by means of malinvestment resulting in over-production in some sectors and under-production in different. Also, by means of subsidies, stimulus packages and forced production, government creates bubbles of boom that tends to burst ultimately causing malinvestment that results in loss of production, lack of investment, depression, scarcity, wastage of resources, corruption and unemployment. As the government interventions destroy the division of labour, society suffers lack of freedom, extreme differences between classes, casteism, discriminations and overall underproduction that bring in problems of poverty.
Conclusion: In a free-society, market follows the laws of natural anarchy and that provides freedom, progress, prosperity and increase in the productivity and profits of the free-individuals tending to solve out the social ills if present along with preventing and curing the economical mistakes by means of profit motive that works as a thermostat or the invisible hand to guide the society towards cumulative production and provide the individuals means to pursue their happiness honestly and freely. Government interventions prove to be fatal, destroying the profit motive that is the only possible means of checking the malinvestment, over-production and under-production. This results in economic chaos, making the birth bed for various social-ills by destroying the division of labour.

Burden on Consumers

In an economic system as long as only certain means of productions are controlled by the government or municipalities, the nature of market economy determining economic activities remains unchanged. The Government owned sectors and ventures must fit into the market mechanism of market economics while buying raw material, equipments, labour, and as sellers of goods and services. They are subject to laws of market, as they need to attempt for profits, at least to avoid losses. When government intervenes to eliminate this dependence on market by covering the losses of such enterprises with subsidies or bailouts out of public funds the losses shifts to somewhere else and subsidies are raised by collecting confiscatory taxes. However, the burden of the taxes affects the citizens, not the government collecting the tax.
In a free market, where the market laws either purges out the failed enterprises incurring losses and replace them with other enterprisers to provide better products and services, or force those enterprises to improve their working, production and management, the problem solves out by itself as the malinvestment in enterprises incurring losses gets a reality check. Yet, because of government interventions in mixed economy, such check is impossible as the government keeps promoting the failure by punishing the citizens, burdening them with superfluous taxes and wasting thus collected wealth in failed or meant to be failed enterprises and services in the form of bailouts and subsidies. In absence of check, these enterprises, instead of improving and curing themselves, keep fomenting further and causes further burden. The government interventions at one hand, supports malinvestment in the failed or mismanaged enterprises, on the other hand, government punishes the profitable private enterprises by further cutting out their profits by means of corporate taxes. As the profits of private enterprises reduces, their rate of progress and production also decreases, causing retardation in progress of citizens.

Poverty and Unemployment

Free Market, The only way to reduce poverty is to increase the productivity of individuals.

Price Control and decrease in productivity

Poverty-Government interventions reduces production and causes further poverty

The Only Possible Solution

Irrespective of their supposedly good intentions, interventionists through their planning of mixed economy results in chaos and exact opposite results to their interventions. The middle path between the good (capitalism) and bad (socialism) proves to be an ugly vice (mixed economy). There is no alternative to totalitarianism than liberty, there is no possible profitable planning for freedom and common welfare than to let the market system work freely, There is no other means to attain full employment, rising real wage rates and an always improving standard of living of the common man than private initiative and free market.

Was paper so acceptable?

To start off, lets ask ourselves some questions. Why did the vendor accept a 50 rupees note from me, in exchange for a kilo of sugar? The obvious answer many people give is, money(paper money to be precise) is a commonly accepted medium of exchange in today’s economies.

But lets board the time plank, to regress back in time. How did the first issuer of paper money(lets say he was Mr. Spaulding) ascertain any monetary value(like 10 rupees, 100 rupees etc.) to the paper money that he made?

Did he print just arbitrary numbers on the green papers that he printed? If so, what made our predecessors to accept paper pieces with arbitrary numbers(we will later see they weren’t really arbitrary numbers printed on the green paper bits) printed on them in exchange for real goods and services?

Lets trust the intellect of our ancestors for a moment(and for lack of real evidence to support that Mr. Spaulding actually got his way through with the trick), to assume that the first men who started using money did not exchange real, valuable goods and services for mere paper pieces printed with numbers.

Evolution of Commodity money

The first money(ies) used by mankind were real commodities, and not paper pieces, which had specific use value attached to them. To get the crux of the idea, lets take a seemingly simple economy of three people.

Lets say Jon has a couple of apples, Jim a couple of oranges and Jame has an ounce of gold. All three guys don’t actually make it to the place of transaction at the same time. Lets say Jon and James meet each other, with their goods(apples and an ounce of gold) in hand. But now, it turns out to that James wants apples(from Jon), but Jon isn’t actually interested in the ounce of gold James has.

Now this sounds like a trade exchange between Jon and James ain’t gonna happen, no?

Surprisingly, the exchange does happen with James exchanging an ounce of gold for apples from Jon. What possibly made Jon to accept the ounce of gold from James in exchange for the apples although he had no real personal use to satisfy with the ounce of gold? The answer is, although Jon does not value the ounce of gold for the personal use-value that it could provide him with, it does help him as a ‘marketable’ medium of exchange. Jon accepts an ounce of gold from James only because he believes that it can be exchanged with Jim for the oranges.

In short, gold is accepted as a common medium of exchange because it is easily marketable, or in other words, it can be exchanged readily for real goods and services. The principle is quite the same even in complex economies; people trade with a common media of exchange because it is easily marketable(that is everybody accepts it in exchange for real goods and services).

What is money?

We can, by now, actually figure out a few crucial points.

1) Money is just another commodity, but readily marketable than other commodities for certain reasons.

2) Money was a product of the free market, with people engaging in voluntary trading. There is no evidence of people accepting paper money as a valuable common medium of exchange which they could trade for real goods and services.

The bastardized history of paper currency

While this sounds to be a sound case for the evolution of commodity money(like gold, silver, sugar etc.), it does not satisfactorily answer the evolution of paper money. Rightly so, paper money has had a kind of bastardized birth history to it.

What made(or tricked) men of the past to accept paper pieces(of no real worth) as money?

The answer lies partially in the fact that paper money was introduced as a veiled representative of real commodity money. That is, paper money initially only served as a money instrument(representing money) backed by real commodity money(most often gold and silver).

The warehouses in which men deposited commodity money were the first to introduce paper money. Capitalizing on the trust that the depositors thrust on the money instruments of these warehouses, these warehouses started to create fake money instruments which were not backed by real commodity money. But the trust that the customers of the warehouses had on these warehouses prevented them from asking for redeeming their money instruments for the real commodity money that backed them. This made it easy for these warehouses(predecessors of banks) to expand credit, and increase the supply of money.

Imagining today’s paper money as the remnants of these warehouse receipts, which were not backed by real commodity money helps us deal with our initial question of the value of money; that is about how Spaulding actually managed to print numbers to green papers he printed. All that he could have done was printing warehouse receipts which bore claims to definite weights of the commodity money which supposedly backed the receipt. This is further confirmed by the fact that today’s monetary units like the dollars, francs, pounds etc. were units of weight measurement of commodities like gold and silver of the previous centuries.

Conclusion

Paper money can have a fixed face value only when looked at as a measure of unit weight of commodity money backing the paper money. and not if it were to denote it’s purchasing power.

The fixed face value of paper money can only represent claims to real commodity money backing it. But, whether, warehouses(or today’s banks) can actually in real redeem commodity money for today’s paper money is another question to explore.

Egalitarianism against Causality

Causality is the very base of success or failure thus, in a free society; economic equality emerges as the outcome of different individuals performing different degrees of economic causation. Opposition and abolition of economic inequality thus, is obviously against all connections between an individual’s hard work and the result of his efforts, it is abolition of causality in incurring of income by the individual.
In a group of ten people determined to share equally all the income earned by them if one of the person works harder or innovates a way to increase total earning by X amount, his increase in personal earning will merely be 1-tenth of X. If the group consists of 100 people, his increase will be 1-hundreth of X, and if the group is as big as 1 billion, his total increase in earning will be 1 billionth of X. Obviously, it would be such an insignificant amount that he would never get any incentive of all his hard work. It is also to be noted that in such egalitarian society, no significant connection can exist between what an individual produce and what he or any other particular individual receives. That is, even though the total amount of group would be increased by X amount, the overall increase in each individual’s income would be insignificant. Thus, egalitarianism destroys ability of many individuals to achieve progress and development that are of any significance to anyone.

Egalitarianism against Progress

Any compulsion on an individual to improve his own family’s life only insofar as he improves the life and standard of everyone else in the society or country make all of the society or country impoverished. Egalitarianism would certainly provide incentives to not to do any work or improvement as after doing all hard work, an individual will get a meagre increase of 1 billionth in his personal income, if he won’t do any work, his meagre reduction in personal income would be 1 billionth, again an insignificant figure. Thus, increasing one’s production would not be of any significant benefit for anyone and decreasing the work would not be of any significant loss to anyone. Hence, everyone would have an incentive to do nothing.
Equality of income obviously is against freedom as it is “forced labour” because it eliminates the earning of increment in income as an incentive. If people are to work without the incentives of profits, the only way to make them work is using force. Other than income or profits, there are positive incentives for work, such as the enjoyment of the work itself. Yet, as a matter of fact, most of the jobs are such where the incentive of enjoyment of doing work is closely related with the incentive of income. No one makes bricks, sweeps streets, clears drainage system, makes shoes, mines coal or even work as a CEO of a company for the enjoyment of work without considering the significance of income. Even in artistic works like painting, singing or writing, the pleasure of doing work only would not be sufficient to induce amount and quality of work that can be induced in free-society providing income incentives for doing work.

Egalitarianism against Innovations and entrepreneurship

Free society or equal society, these women are always going to be there, its just in a free society they earn much more.

Egalitarianism resulting in Forced Economic Inequality

Often as the failure of bringing egalitarian ideal in practice, socialist regimes results in bringing forced economic inequalities within the society, which is obviously inimical to progress and economic production. Such inequalities results in because of governmental actions such as taxation, subsidies, licensing system, special privileges, quotas and reservations etc. Government’s establishment of such inequalities results in depriving the producers of a significant part of their incentives to work and produce, furthermore, actions like quotas, reservations and licensing system obviously violates the freedom of individuals to produce, hence reduces the production significantly bringing in poverty and chaos. Other governmental acts like corporate taxes etc. appropriates the income of producers and thereby decreases their capacity to invest in production and developments. Such arbitrary economic inequality produced thus deprives the producers of possibility to produce anything by means of monopolistic restrictions against their entry in various streams of production. On the other hand, by giving special privileges, licenses, quotas and reservations to others, government rewards non-producers or less-efficient producers. All of this results in economic chaos. Same things happen in feudalistic systems. The forced economic inequality based on government coercion results in economic destruction.

Free Economic Inequality versus Forced Economic Inequality

Economic inequality based on freedom of individuals to exploit their own intelligence and talent is significantly less visible than the economic inequality that results because of forced planning or government coercion. This is because of the fact that economic inequality based on economic freedom serves to raise the standard of living of all, As a result, in a free society, even the poorest individuals enjoys and consumes substantially increasing quantity of wealth. On the other hand, in feudalistic or socialist regimes, as the very basic power of production and development is reduced to significant degrees, the width of economic inequality becomes too much visible with the poorest suffering starvations and penury while the officials, bureaucrats and politicians enjoying material wealth.
Before 1991, when India accepted the path of liberalization, Indian society was suffering with extreme forced economic inequalities where the standard of living of common man was substantially low graded. With the induction of liberalization movement, not only the production and development of Indian society increased, but also the standard of living of common man also improved significantly. This exactly was the result of loosening the force economic inequality trends and letting the inequalities develop freely, which obviously are less visible.
In further freer societies such as United States, an economic inequality that is based on economic freedom and capitalism are further less visible. The fact is greater freedom results in greater prosperity of whole society and less extreme width of economic inequalities.

Division of Labour and Benefits of Talent

A division of labour system provides enough space and incentive for the individuals occupied in different sets of knowledge of specialization and sub-specializations to devote all their human intellect and efforts to not only use the current knowledge but also to discover, invent and innovate new ways and knowledge to increase production. Division of labour enables a society to use the benefits of geniuses to the maximum extent, while it provides maximum incentive for the genius to use his intellect in development, innovations and entrepreneurship. In a collectivist society, this is not possible, as the genius in such societies, along with other common individuals, must devote most of his time in attaining self-sufficiency first. In India, some decades ago and even at present, division of labour is not definitely present; most of the young students devote their time to achieve degrees from governmental education system in order to gain some or any sort of job in government or private service sector. Hardly anyone devotes his intellect and abilities to any set of specialization of knowledge based on his interest and abilities. Hardly anyone think of devoting his time in research works and furthering knowledge, hence, Indian society lacks innovators. That doesn’t mean that Indian society is or was incompetent of innovations and inventions in present or past, the lack of it only represents the partial slavery imposed by the collectivist system and socialist government under which, the genius amongst the collective is wasted upon. Even if some genius struggle such situation and still manages to radiate his intellect, he never gains the full essence of his own efforts and hence is lost due to the lack of incentives.

Division of labour increases the efficiency of learning process in connection with production by making education and communication and all activities concerned with transmission, storage and development of knowledge into specializations.

Division of labour and consistency with freedom

Private ownership of the means of wealth production is the fundamental pre-condition of the pursuit of self-interest. Division of labour essentially depends on private ownership of means of production, which is based on the nature of gains of free division of labour. The most important ones are the multiplication and transmission of knowledge and benefits of the talented. The rational idea of private property ownership comes out from the fact that individuals possess unique independent minds, which permits and necessitates them to have separate independent knowledge and to make independent judgements, decision, and act on them with his separate independent calibre. In a free society every individual gains from the fact that other people possess knowledge that he does not and an intelligence separate and often much greater than his own. To maintain maximum benefits, it is necessary that others be able to acquire and apply their knowledge in production on their own initiative with perfect decision making freedom, without having his approval, orders, permissions or license, as he would be certainly unable to give in any rational way as he necessary lacks the knowledge and intelligence that would be required to make such decisions. To act, work and produce, people must possess material means of actions and production, In order for them to act independently from one another, they must possess wealth independently from one another that is there must be private property, including private ownership of natural resources and other means of production. Private property rights are essential condition for proficient production, prosperity and more importantly individual freedom as it provides maximum space for efficient usage of resources in virtue of producing wealth hence eradicating poverty of masses.

Private property rights are essential condition for proficient production, prosperity and more importantly individual freedom as it provides maximum space for efficient usage of resources in virtue of producing wealth hence eradicating poverty of masses.

Scarcity

Human beings essentially live in a world of scarcity. All of us cannot have everything we want indefinitely. Whatever be the sophistication of human civilization, the scarcity of goods refuses to disappear. Hence, goods which are not available in abundance and need to be rationed among different uses of men can be called ‘economic goods’.

Goods which are abundant and virtually inexhaustible, like air, are ‘free goods’, and they do not make a part of economic study.

The Role of prices

As we live in a world of scarcity, and not everybody can have everything they want at any point of time, the available amounts of economic goods must be rationed towards the various uses of men.

A centrally planned socialist economy which does not use the price system employs bureaucrats to carry out the rationing of goods. For various reasons such an allocation process tends to be inefficient. We need not bother about it at this point of time.

The market economy on the other hand uses the ingenuous price system to ration goods. Prices, as most of us know, arise out of competitive bidding by buyers for economic goods. At the end of the auction, a single price is arrived at, which clears all goods from the market(unless the sellers decide to hoard for future).

The Market as a Democracy

The essential character of the market is the price system, with voluntary buyers and sellers engaging in the trading process. Money plays an important role in the market process. It plays the same role in the market, what ‘votes’ play in democratic elections. Money notes(to keep the example really simple we assume the buyers have ready cash in hand) are ‘votes’ which various buyers cast in favor of different goods. The highest bidder usually gets the goods on payment of the bid price.

The difference between a market and real democracy is that the market allows the casting of multiple votes by a single buyer. Many skeptics have complaints against this, but, they hardly recognize the fact it gives a chance for the various buyers to express the intensity of their wants through money ‘votes’. Under a single vote system it would be an impossible task to figure out whose needs are the most urgent. The market process is the best tool available to mankind.

People make choices!

You might have seen your parents deciding on the month’s budget, on what to buy and what to cut, probably so that your family can spend the saved money on something else. You might have also heard of people in the ice-clad polar regions deciding on the amount of wood they might need during the worst times. You might have heard of increasing number of people opting for fuel-efficient cars.

What these decisions have in common is that all involve allocation of various resources(like time, energy etc.) towards various means to attain particular goals which they value at different degrees.

A Robinson Crusoe who lives in an isolated island too would have had to make these decisions, probably on how many logs of wood to cut, how many fishes to catch etc. He would have had to allocate his time, energy and other resources towards these ends he aims to achieve.

What the pricing system does?

What differentiates a complex economy from the simple Crusoe economy is not the decisions we make (after all decisions are always to be made in a world of scarcity). The vital difference is that modern economy conducts this process of allocation of resources towards various ends through the price system, like how Robinson Crusoe allocates his time, tools and energy towards particular ends. But, unlike the simple Crusoe economy where a single individual makes all decisions to himself (since he is both the producer and the consumer of the goods), the complex economy with sophisticated division of labor, involves millions of consumers convey their plans to the producers through the price system.

Hence, basically, what the market does is, it allocates resources in the economy according to the most urgent demands of the consumers.

‘Static’ vs. ‘Dynamic’ conditions

Silver dollar-the real currency to mark the profits

Since Jon expresses his urgency with a higher bid, he gets the apple while Kate does not. This is just one of the many decisions happening in the market, where goods are allocated to the most urgent needs through the price system. If the world were to freeze after this simple allocation in a two-member economy, we would have a ‘static equilibrium’ condition.

Now, lets assume that the world is in a state of ‘static equilibrium’ with the best possible allocation of resources (that is resources are allocated to the most urgent uses they are required for). There is the first-ever Christmas season coming up, in just a couple of weeks, and there happens to be great demand for cakes. The flour that was, until then, used to make bread (which was indeed the most urgent use of flour until Christmas came by), has new competition from cakes. Hence, here happens to be a ‘disequilibrium’ in the allocation of resources, since bread is not the most urgent use of the consumers coming out of the use of flour. Change in consumer taste has caused a ‘disequilibrium’ in the allocation of the resources.

From this state of ‘disequilibrium’, the market tends to move towards the static state as cakes start being made and sold to the consumers.

Role of the Entrepreneur

This movement towards the equilibrium state, which envisions the best allocation of available resources for the most urgent uses, does not happen automatically. The driving force behind the market which actually makes it happen is the spirit of entrepreneurship. The entrepreneur who sense this ‘disequilibrium’ in the allocation of the available resources can buy these resources at cheaper rates from places where it has not been put to the most urgent use to places in the economy where they can offer more urgent uses.

I am reminded of a famous retail chain in my city which transported laborers from villages where these workers were paid very low wages, and got them to work in the chain’s stores in the city where their work was much more valuable. The workers got increased wages since they were serving the most urgent needs of the market unlike when they were working for low wages in the villages. The middle-men who made this transfer of labor possible were able to gain profits, not because they exploited workers, but because they put them to the most valuable use. Anybody who thinks otherwise should understand the role of entrepreneurship in the market economy better!

Karl Marx shouted that the source of the profits gained by the Capitalists is the exploitation of labor’s productive effort. He accused scornfully, the capitalists of looting the workers of their rightful share of the returns of their productive labor. So according to Marx, profits are nothing but the ‘surplus value’ that the capitalist with-holds from the laborer.

Much of this proposition could be dismissed as emotional outburst of an unstable individual, unless there was a ‘scientific’ discourse from the man himself, in his famous work ‘Das Kapital’ published in 1867.

Marx’s theory of value

Marx, like other Classical economists, recognized the two kinds of values of any commodity: use value and exchange value. Use value being the personal utility that the commodity used as a consumer good yields to the consumer; while exchange value being the value that the commodity commands in a trade exchange in the market.

Marx in his preconceived mindset to arrive at an ‘objective’ theory of value, tried to find similarities in the properties of commodities that traded at the same exchange value at some particular point of time. He finally concluded that commodities with the same exchange value had the same amount(hours) of labor involved in producing them, and hence exchanged on equal terms. Thus was born Marx’s version of the Labor Theory of Value.

The fallacy in Marx’s theory of value

Marx believed that if two commodities were exchanged for each other, they had something in common and Marx propounded that to be the amount of labor hours required to produce the commodities. Thus Marx proposed that people exchange commodities which had equal number of labor hours spent in producing them.

The basic fallacy here with Marx’s perception of trade relations lies with the conditions of trade, and the source of value of any commodity. The question to be considered with respect to trade is: why would people exchange commodities of equal value?

If Alice and Bob have eggs and apples respectively, and both value the commodity that the other person has the same as the commodity he/she has, why would either of the two want to trade with each other? The only way trade could happen in this case is only when Alice values apples more than eggs; and Bob values eggs more than apples. Marx’s theory falls into a pit!

The other even more basic question on which Marx’s theory turns out to be nothing short of absurdity is: why would people consider the amount of labor hours involved in producing a commodity while valuing it? The only consideration of a buyer is to consider the commodity’s personal use value to him, which is based purely on his subjective preference scale.

In addition to that there are many questions which Marx’s ideology does not want to answer. For example if there are only 10 eggs in the market, and there are 15 buyers(they all want 15 eggs in total) then which 10 buyers will have their demand fulfilled. In the market the prices of the eggs will go up, which will result in the top most 10 buyers who value the eggs highest will get the eggs. But under Marx’s theory of value since the eggs had some specific hours of labor involved in it, therefore they cannot have some arbitrary higher values. Marxians do not bother themselves with the fact that there are not sufficient eggs to fulfill the needs of every individual.

What Austrian economics offers?

Austrian economic theory, unlike Marxism, offers two important points for anybody to remember:

1) People exchange commodities with each other because they expect to benefit from the exchange. The only condition is that, the parties involved must value the commodity that they buy from the other person more than the commodity that they give up(or sell).

2) The value of commodity is based on the subjective valuation of the buyer. Commodities have no ‘objective’ value.

In our previous example where there aren’t enough eggs in the market, the prices of eggs will go up and only the 10 most highest payers of eggs will get those eggs. This helps in the production of more eggs. Because the prices of eggs went up, there is no more profit incentive to the egg producer to produce eggs, and next time bring 15 eggs in the market. But under Marxian theory of exploitation since only rich people are able to buy the eggs for higher prices, the whole economy looks like a conspiracy against the poor people.

2005 US Census Statistics show males 25 and older had higher yearly income than females 25 and older among all races.

As you can see above that women above 25 earn about 70-80% of the salaries of their male counterparts. Why do women earn lesser than men for supposedly doing the same job?

Before going into the reasons for that, let me explain you this logic. Lets say pawn broker had two slabs of gold for trade in front of you(as shown in the illustration below). According to the pawnbroker both the slabs weigh 100 oz(consider price of gold in market to be $1000/oz).
The slab 1 which is covered with a black sheet can be purchased for $100,000, and the slab 2 which is covered with a white sheet can be purchased for $85,000.

If I ask you which slab would you wanna buy, what will you say?

Clearly any profit seeking individual would perform the calculation and realize that if they buy the white slab, and if it really contains 100 oz it will sell it in the market and make $15,000 profit on it.
But then, if the slab covered with white cloth did have 100 oz of gold in it then it would also be sold for $100,000. This means that either the white slab did not have 100 oz, and had only 85 oz, or else there is an amazing business opportunity for anyone who buys the white slab.

Now lets say all the people who come to buy those slabs have an aversion towards the white color. They hate white color, so they keep on buying the black slab. Any individual who now buys the white slab will make $15,000 over every transaction, so soon he will be able to drive the discriminatory people out of the business.

Soon there will be so much demand for White color slab, that the prices will soon drive up to $100,000 per slab. This means that if women and men are doing the exact same job, and somehow women can be hired for less than men, then every profit-seeking individual will end up hiring women, and soon the wages will come up and both the wages will be equal. If the market was discriminatory against women and had some sort of conspiracy to pay women less because of their prejudices due to sexism, and was paying them less for the same work then soon the profit seeking non-discriminators would have ended up making more profit than sexist employers and kicked them out of business.

But since we know it for a fact that women are not paid as much as men are, what does that mean? In our black slab-white slab example, the white slab is continuously bought for $85,000, and the black leather covered slab is bought for $100,000, this means that the white cloth covered slab is actually having less gold than the black leather covered slab.

This means that the pawnbroker’s claim that both the slabs have same amount of gold is not true, the white cloth slab actually does have lesser gold than the black leather cover.

Similarly, if in the market women are paid less than men for the same job, then everybody would wanna hire women and make more profit off them than to hire men. The only logical explanation which makes sense on why women are continuously paid less than men is that they must provide lesser labor than men. The women do not work the same as men, and that explains the lesser wages.

Now I understand if someone told me that Indian men are paid lesser wages because they work less than White men, then I would get offended too. But there is nothing to be offended here for women, because there are perfectly valid reasons on why women work less than men.

First of all let me make it clear, women under 25 years of age are paid the same(or even more) wages than men. Similarly, never married women also are paid almost the same wages as never married men. But suddenly the difference between the wages of married women and married men is very high. Why is it that merely a change in status from never married to married causes such a big difference in wages(and henceforth their labor).

The answer lies in the concept of relative specialization. Michael Jordan(the Basketball Star), is not a very good pianist, because he is a basket ball player and he spent most of his time playing and specializing basketball. Now he could be very well a piano enthusiast, and may practice playing Piano in his free time as much as he can, yet his Piano skills will not come nowhere near to even a high school music teacher. In simple words Michael Jordan has to sacrifice Piano skills in order to achieve mastery in Basket Ball.

Similarly, women have to sacrifice the work output in order to be able to fulfill their marital and biological duties. Even in a marital setup where a guy takes care of the same amount of duties as his wife, he simply cannot bear the baby for 9 months, nor he can breast feed his kids. Biologically the women have to take more duties than men, and because of this they have to sacrifice their work output.

If women feel like the society has been setup to keep women at home and men into the work field, then there is a pretty good evolutionary reason for that too. Take for example during World War 2, Germany and Russia decimated each other’s population. There were almost no men left in Russia between the age of 15 to 65. Yet only after one generation the population ratio came back to normal. There were same amount of kids born as in a generation before. Reason is simple, you only require one male to impregnate thousands and thousands of females among mammals. Just like a farmer keep only one bull for 100s of cows, because that’s all he need. Consider if we sent women on a war front, side by side with men, or on all the hazardous work conditions as much as men. Our society would have been reduced and even extinct by now while hunting one Mammoth.

Professor Walter Block makes an amazing explanation for why the wages of men and women differ.

I strongly believe most people with an anti-Capitalistic-mentality, are so, only because they don’t understand how the economy actually works. For instance, they don’t really understand why entrepreneurs don’t produce unless they gain profits. Otherwise, I believe, many people are usually sympathetic towards the efforts of the entrepreneurs in growing sustainable business models.

First up, lets analyze how economic calculation originated. We have usually heard of the merits of money, as a media of exchange which solves the trouble of ‘double coincidence of wants’, a store of value, divisibility, etc. But one more very important economic tool money has equipped us with has been the tool of economic calculation. Times of barter witnessed people exchanging goods and services through direct exchange without any common medium exchange called money.

Lets, for instance, take a person named Bob who lived in a barter economy. Bob produces wheat, corn and paper and he exchanges them for wine and squash. So, how would Bob’s book to keep track of his business accounts look like? As you must be able to guess, it would just have an array of goods bought and sold without any monetary values to any of the goods, whether bought or sold. Hence, Bob has no way to economically calculate whether he is economically better-off in an objective manner.

(Notice that Profit and Loss helps in objective measurement of economic value of goods. The subjective satisfaction that people gain when they exchange goods can’t be measured by any means, for obvious reasons)

The evolution of money necessarily revolutionized the way economic transactions happened on earth. There was now a common medium available towards the service of everybody, including Bob, to help them reduce details of their economic exchanges to a common denominator. That is Bob could now ascertain price figures to objects he bought and sold, and thereby enabling him to make economic calculations of profit and loss, and know if he is economically better-off or not. That is if he is richer or poorer at the end of an exchange.

Much has economic calculation helped people to have a hold of their economic situation, thereby directing their efforts towards production of goods that are economically valuable. For instance, Bob could now understand if his net personal wealth has increased or decreased. He now has a objective scale which could guide his production activities towards production of economically valuable goods which he could exchange with others.

Not to be ignored, the advent of the division-of-labor society where people are no longer self-sufficient, but specialize in specific production activities, has further directed our activities towards the production of goods for satisfaction of others.

An important contribution of economic calculation has been the Price system. Money is similar to ‘votes’ that you cast at the ballot every election, only that different people have different number of votes. Consumers vote everyday for products which they want, and refuse to vote for products they don’t like, giving rise to prices. Thus, the market reflects a democracy in action where voting takes place every day.

How, and where, does contempt and disdain against profits figure out in what we’ve been talking about till now?

So how, and where, does contempt and disdain against profits figure out in what we’ve been talking about till now?

What we notice until now, in our discussion about economic calculation and the Price system, has been the way the market directed by the spending patterns of the consumers guides producers to produce certain products and stop producing certain other goods. Even in the previous example, in which we talked about the movement of prices according to the preferences of the consumers what we see is it is the consumers who decide how much to pay, or in other words, how many votes to cast in favor of a product.

Another aspect of the problem can also be explained with a critical example. Lets take the case of distilled water. As one must be knowing, distilled water is used for various purposes. For the purpose of convenience, lets assume distilled water of limited stock in a particular town, can be used for two purposes: for filling car radiators, and to treat patients at a local hospital. Lets also assume, the people of the city decide to coerce the supplier of distilled water not to raise his prices, and sell at prices that cover just his cost of production alone. Lets also assume all car owners in the city are getting ready to make their holiday travel, so their demand for distilled water will increase. There is one critical thing that will certainly happen, which is, too many distilled water bottles would get diverted towards usage for cooling car radiators. People who have their dear ones at the hospital will run out off distilled water, unless they were the first in the queue to get distilled water. The problem here is, people who want distilled water for their medical requirements have to lose out, because they were disallowed to bid up prices and compete with car owners for the limited stock of distilled water. This is just a very simple example of how rational allocation is impossible without the price system in place. Now suppose the city managers get to know of the situation and they remove the price controls on the supplier of distilled water, and as expected, people who need the supplies for their medical needs bid higher prices for the distilled water, and the supplier will make huge profits.

The entrepreneur makes profits, only because he is able to satisfy the most urgent needs of the consumers. He neither plunders nor coerces consumers. It is the consumers who order all actions of the producers.

The entrepreneur failed to understand that distilled water was already selling at very high prices. That is, it was already very scarce. People had no intention to buy jellies from him because their more important needs, like to fill their car radiators, were yet to be realized. The entrepreneur made a very bad mistake which wasted the already scarce supplies. So, he was punished for causing loss to the society.

So, profit or loss of a particular venture is not determined by the entrepreneur who runs the business. It is the market, where consumers vote everyday welcoming and rejecting products, that determines if an entrepreneur makes profits or goes broke. The entrepreneur makes profits, only because he is able to satisfy the most urgent needs of the consumers. He neither plunders nor coerces consumers. It is the consumers who order all actions of the producers.

I understand that not all Libertarians reject IP rights, but this article is not another debate about the rationality and morality of copyrights and patents because we have had those debates in past (For copyrights, and Against copyrights arguments).

Speaking for myself I do not stand for the Intellectual Property rights, because I believe that acquiring the so called “intellectual property” does not devoid a person of his labor. The only thing that person is devoid of is opportunity to earn the money he could have made using the government awarded artificial monopoly on the information. Information should be free to share and without any kind of physical coercion or threat of coercion. This is why Open Source movement represents an important front of Libertarianism. Why would companies like Microsoft, RIAA, MPAA, Penguin Publishers, Barnes and Nobles support an Libertarian society when their business is clearly enabled by the Government’s coercion. Currently software, music, and books piracy is the most successful civil disobedience movement against the government’s aggression on your property rights. It has nothing against the creators of the content which is shared against it, but it is a very successful backlash from the market to demonstrate that copyright as a model is a complete failure.

Open Source

Coming to the issue of Open Source, it is a way by which market can actually demonstrate that these information related services can be provided to the people without requiring the institutionalized aggression of the government. The seeming success of Open Source software movements which have pushed the successful Operating Systems such as Linux, Web Browsers and Email clients such as Firefox and Thunderbird, and a Web blogging platform like WordPress on which this website currently runs is a clear demonstration of success of Open Source movement.

Skip to ‘The Linux Paradox’ if you know what Open Source means
Open Source is a belief that a software should be first of all be free(as in freedom and not as in free beer) to be modified upon, to be rebuilt upon, and to be distributed. Open Source in fact literally is a very restrictive term applicable to softwares because they have a source code from which a binary code can be generated which can be distributed to the end user, and opening the source code means providing the source code of the software too, to the end user and giving him full freedom to modify it in any way, rebuilt his own software and distribute it freely without any restrictions. But over the time Open Source movement also comprises attempts to allow a book/music/song/lyrics/images/movies to be distributed freely and modified upon. Technically this branch of open source movement is called “Creative Commons” movement, under which anything is free to be modified, edited, used for commercial purposes or non commercial purposes(or a combination of these things).

To make any software into open source currently you must claim a copyright on the source code and then release it under many of the numerous open source compatible licenses(most famous being GPL), and distribute its source code with the binaries of the software.

The Linux Paradox

Ubuntu

When Amazon had to develop an OS for their ebook reading device Amazon Kindle, they did not have to write an OS from scratch purely for that purpose, rather they just used Linux kernel 2.6 and build their own features around it or modifying into it. Similarly when Adobe had to launch an IDE(Integrated Development Environment), a programming editor for their new Flex technology they didn’t have to develop something from scratch rather they just made a plugin for an already famous open source IDE called Eclipse(although its a shame that they made Adobe Flex Builder closed source).

It becomes difficult to beat Open Source software when it has the same starting point as any other proprietary softwares, but when it comes beating an already established industry accepted software like Microsoft Windows, its penetration into desktops is about 1%. Most of the people who despite of having the technical caliber to deal with any issues arising with desktop Linux, or who might benefit more by using Linux do not use Linux because of many applications or device supports they might need which they can only get from Windows.

Since the market acceptance of Linux is really less, most application developers and device manufacturers do not bother supporting Linux, and since they don’t support Linux, the users don’t use Linux thereby market acceptance never rises.

This is my friends a paradox. The paradox is not only there for Linux but for any Libertarian movement where you wanna remove the government’s aggression. The paradox being, that a Libertarian movement which an actually benefit more number of people, just does not get acceptance because the general public is currently being benefited from the government’s aggression.

Even if you start your own private police force tomorrow serving only the people who want to take your services voluntarily, you will not be able to get many clients, because since most of the people still go to the state police, even the most avid supporters will have to go the state police. One very good example of “Linux Paradox” will be the Free State Project in the coming time.

The Communists

In this issue I don’t really have much against the communists, except that they have hijacked the Open Source movement and turned it into a non-profit-non-monetary movement. By communists I don’t really mean the believers of worker’s paradise as proposed by Karl Marx, but it represents the people who believe that Open Source software movement means there should not be any demand or requirement of money from the part of the programmer. In simple words that if any programmer who works on an Open Source movement talks about money, he is immediately shunned. It is a common practice in the Open Source world that the only way you can actually contribute to an open source software is by actually coding the software(or provide bug reports, usage statistics etc etc). Anyone who donates money must do is if they are using the software for commercial purposes and making money off it.
Because of this culture, most of the non-programmers out there feel like they cannot do anything to actually contribute to the Open Source software. If they really like a software, they must learn to program, then understand the code and then contribute to it.
If you like linux you can jump in and program on it. If you cannot spare the time to program(or do not have the required programming skills) you can take part in reporting the bugs, providing support to other users etc etc. If you cannot even do that, then you can just stand by and just use the software and promote it as much as possible. Because of this most large commercial software companies don’t even look at Linux because they know that there belongs the group of the people who are least inclined to pay for the software.

The Libertarians

Laws for a civilized society

The Libertarian concept of Open Source software is division of labor. That is, not everybody is a programmer to work on the every software they actually use, just like not everyone is a farmer, barber, baker, yet they wanna use the services of a farmer, barber, and a baker. If you like a piece of software, its true that you can use it without paying anyone anything, but if you wanna contribute your labor into the software, you can do that by donating money(or in other words by buying the labor of the core programmer on that Open Source software).

Take for example if you like a piece of open source software, and you wanna work on it, or contribute to it, but since you are not a programmer yourself, what you can do is donate the amount of money you make in the number of hours you wanted to donate. For example if you are a wheat farmer and you earn $25 per hour, and you wanna contribute 5 hours worth of labor to that software then you can give $125 to the open source software, and it will be used to buy the labor of a more apt programmer.

The best pieces of Open source software are managed by an individual or a limited group of people working full time, than a 1000 people working 2 hours a week. On the top of that if this Open Source development is done by hiring programmers to work full time from a country which has a cheaper labor costs like India or Philippines then your labor can be even more usefully converted in programming man hours.

The best example of this is an Open Source Software called Ardour (a digital audio workstation) which is an amazing piece of software for working on creating sounds and music. There is a full time programmer working on it, and his salary is about $54K per year($4500 per month), and although you can take part in the programming, the whole project is best dealt by that individual, so he invites donations from the users on a monthly basis. About 267 people have already committed to give about $2150 on a monthly basis and as of today(30th of May) he has met 95% of his monthly goal which is pretty good.

If this model can actually be copied by other Open Source softwares this could be really a great boost to non-properietary software models.

Solution

Take for example if you wanna give 2 hours every week working on your favorite open source software application. Then you should put down that time(say the last two hours of friday, i.e. your last weekday), and you put on a button like this:
Working for Open Source(click on it to buy it, the proceeds go towards the running of this website),
and you work your same job, except the amount of hours you put in your job wearing that badge you give earnings from that time to the lead programmer of the open source project you wanted to work on.

If you are an insurance salesman, it cannot be expected that you program for the Operating System you use, but at the same time the proprietary software developers make you pay for the software using coercion irrespectively. Because of that the proprietary software will always have an edge on its competing open source software. But by a clear understanding of division of labor the Open Source movement can benefit a lot.

Those who do not wanna watch it, its an investigative report on Chennai private colleges where Taliban-style rules were enforced on the students. There is so much segregation among guys and girls in those colleges that Americans are going to be reminded of the Jim Crow laws era when blacks and whites were made to attend school separately.

This did not come to me as news, I had friends from those universities who told me about these things years ago. I went to a much more liberal private college so all those things came as a big shock to me. I was told that if a guy was found talking to a girl, he was fined(not always through money, but through social service etc etc).

Contrary to the natural reaction(which would be appalling at the horror of these policies), my topic is different. Considering the fact that all the colleges covered were Deemed Universities(they don’t receive any funding from the government, but only have accreditation from the government regarding their course work), that is they are private colleges, it begs the question, would free market serve Taliban and enforce Talibani rules if its participants demanded things that way? Would salons refuse to cut beards? Would private roads refuse to allow cars with female drivers in them? Would a private pond owner refuse to allow Buddhists to drink water from their pond?

The answer to all these questions is a shocking YES. The truth is, for all theoretical purposes, it is clearly possible that the Market would serve those things. There can be salons which refuse to shave men, private roads where women are not allowed to drive, and ponds which do not serve Buddhists, blacks, or the lower caste people. Just like in Chennai Deemed universities do not allow their boys and girls to mix socially.

But to understand why it is so, we must first ask the question, are any of these an act of aggression against anybody’s private property rights? Second question is, if it is not an act of aggression against private property rights of any individual, is it any kind of moral violation of an individual’s right to equality(if not right against his liberty). The answer to the first question is clear, when a salon refuses to employ its employees and its property to be used in a manner they don’t deem fit, when a private road does not deem fit to allow a certain type of individuals to use their property, when a pond owner does not allow the people of a certain religion, race or caste to use his property, none of these actions are a violation of anybody’s private property rights. In fact the whole point of “property” is to restrict non-owners from using the object against the wishes of the owner.

If I can prevent you from entering my house without actually violating your rights in any manner, how come by not allowing you(a black guy) in my saloon a violation of your rights of any kind.

Colleges have full rights to fail such a student or kick him out from the college for violation of their rules, but it cannot physically harm the students.

In addition to that, the college cannot beat the students, or physically punish the student in any form for any kind of non-aggressive violation, because the body of the student is his property, irrespective of where it is located. Colleges have full rights to fail such a student or kick him out from the college for violation of their rules.

Second question which I asked earlier whether it is some sort of moralistic violation of an individual’s right to equality, well the answer is, that there is no such thing as universal “right to equality”. I might be a barber who promises right to equality to all my customers, but that does not mean everybody must be obliged to do the same in a free society. A white supremacist should be equally free to serve only white customers.

In a liberal(and free) society there will be standardized label adopted by the companies, claiming to be “equal treatment business establishment”(that is they serve all customers equally), and liberal minded customers would flock to businesses bearing such labels. Just like there will be “Whites Only” labeled restaurants who would shoot in their foot by not serving all the non-white customers, and white liberal customers.

What is the Market’s nature against such discriminatory institutions?

Market forces clearly work against the discriminatory institutions. The road owner refusing to allow women to drive through his road is directing all that traffic to other road owners. Since private roads will operate on subscription basis, families with women drivers will have even their male drivers using the non-discriminatory road networks, clearly damaging the male-drivers only road owner.

Similarly a college institution which pops into Chennai which puts no such Talibani restrictions on their students will attract all sorts of liberal students. The conservative schools must find other ways to actually attract the market. For example in America private catholic schools are more desirable even among the non-Catholics because of their performances. Also if you are a liberal, there is no more liberal school than the public schools in America. So all the Market demand for a Liberal school is crunched in by the public schools, therefore most of the good private schools in America are run by conservative Catholics.

Conclusion

If a newspaper editor refuses to publish your opinions, it is not a violation of your constitutional “freedom of speech” or “first amendment” rights. There is no right to equality on private property, because guaranteeing a right to equality means violating the right to liberty. Only one of these can be upheld at a time.

The market serves its participants. If there are enough number of irrational individuals who wanna follow their own irrational way of life, the market will serve them without prejudice. It may be an issue of rationality vs irrationality, but it is not an issue of Libertarianism.

About the above mentioned Chennai colleges, they will have more to worry about in the coming years when they will realize that Gay and Lesbian rights movement get huge support from their colleges.

If the supply is going to go down considerably(say because in Southern India its going to rain a bit too much thus destroying the wheat crop), the wheat farmers will be geared up to produce more wheat that season to compensate for the fall in supply thereby fulfilling the demand of the market. Thereby benefitting both the consumer and the farmer.

Similarly if its going to rain pretty well and it will result in sufficient harvest, the farmers will produce less, put less money on the crop and it will create a bountiful harvest.

Wouldn’t this foresight into the future going to help the poor farmers. Unfortunately we face two problems in realization of this scenario.

1. You don’t have such a psychic ability.
2. You cannot just convince the farmers out there that what you are telling them is true

That is, there is no such psychic ability possessed by anyone who can predict the future demand and supply with accuracy. The closest to such a prediction you can come to, is to study weather, study the crop cycles, study the soil, and then make an educated prediction. Even when you are able to make such a prediction you face the problem of convincing the farmers. Why should farmers believe you who says that there will be a shortage of Wheat coming harvest season, or believe me who says that there will be an abundance of wheat this harvest season. There must be a solution to this problem.

I bet the way most Indians are educated to think will think of a centralized government solution of this problem. One possible solution which was given to me by someone really smart went something like this:

Govt should organize a national level exam(on the scale of IAS-Indian Administrative Services exam), to find out the most intelligent soil, agriculture, wheat scientists and form a group which will then issue advisories on how much wheat the farmers must produce. This committee must be kept away from the political pressures, and must be paid very highly so that we are able to attract the most intelligent IITians-Agro scientists etc etc.

The problem with the above solution is, that it simply is the worst possible solution of the problem, it is so bad that its just going to worsen the problem. As long as the “National Advisory Committee” gives good recommendations its good, but when they will screw up which will happen more often than not, its going to create disaster. Plus it is actually no different than the Central Planning we have followed from Independence till 1990s, I am sure that gave us some amazing results. Also it basically excludes 99.99% of other people who could have been right.

So what’s an alternate more efficient solution? Wouldn’t it be better if every individual can take part in this process of prediction the wheat prices in future? Not only anyone wishing to take part must be able to take part, it should work more efficiently than handing out the power to a few individuals. It must penalize the participant if their prediction turns out to be wrong, and must give more weight to the prediction of an accurate individual.

The system would basically allow the farmers to sell wheat at a fixed price on a future date. That is if a farmer is producing wheat for the harvesting of June 09, and currently it is Jan 09, then he must not worry about the uncertainty of the wheat prices in future. Someone must assure him the price he is going to get.

Ladies and Gentlemen, presenting Commodity Futures.

Let me first explain you the concept of Futures contract. In finance a futures contract is a standardized contract to buy and sell a standardized quantity of commodity at a future date at a market determined price. The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.

In simple words, if I am a wheat farmer, and you are a wheat price speculator, buy the wheat from me now, which will be delivered to you on a future date when the harvest occurs. If you think in the future the wheat price is going to be $700 per quintal, then lets sign a contract where you pay me $700 per quintal, and I will deliver to you wheat on that future date. If on that future date, the price of wheat is $700 or more, you make profit, if its less than $700 then you make loss. In either case the headache from my head of worrying about the future wheat demand is gone. My work as a farmer is now to simply grow wheat, and not worrying about the trading of the wheat.

This is a much better way to discover the future prices of any commodity compared to putting the burden on the poor farmers, or to give the task to one elite intelligent group of Oxford graduates. In this way anyone in the market can take part in the price discovery of the commodities. The risk of wheat prices plummeting has been taken off from the farmer, and is handed to the guys who are more focused on the task of predicting the future prices. If they succeed they make the profit, and they will trade even more futures and become larger contributor in the price discovery. If they fail they will be penalized for making the wrong prediction.

Futures trading is not new to the world. In fact from wikipedia entry on Futures:

The origins of futures contract can be traced to Ancient Greece, in Aristotle’s writings. He tells the story of Thales, a poor philosopher from Miletus who developed a “financial device, which involves a principle of universal application.” Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and many presses were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a large quantity of money.

In the modern times, Futures trading has been around in America for over two centuries. In 1848, the Chicago Board of Trade (CBOT – the world’s first modern futures exchange) was formed. In India the futures trading has been going on with some big government support since 2002. In terms of trading volume Mumbai Stock Exchange is world’s largest stocks and futures trading exchange.

Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and many presses were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a large quantity of money.

1. National Commodities and Derivatives Exchange(NCDEX) - Wiki - A regulated online commodity exchange based in Mumbai.
2. Multi Commodity Exchange of India Ltd(MCX) - Wiki - An independent commodity exchange based in Mumbai with 84% of Market Share in 2008.

Lets take an example of what a Wheat futures contract specifications in India consists of.

http://www.ncdex.com/product/Agro_product.aspx?comm=WHE

Name of commodity - Wheat
Ticker Symbol - WHTSMQDELI
Unit of Trading - 10 Metric Tonnes (That is one contract deals with 10 metric tonnes of wheat)
Quotation Price - Rs per Quintal (This means that if you read the price of Wheat contract Rs 830, it means that on the delivery date market thinks the price is going to be Rs 830 per quintal).

Tick Size - 20 paisa (that means the price of Futures contract can go up and down by 20 paisa or more.

Delivery center - Delhi (once the Futures contract expires you can take the delivery of the contracts from Delhi delivery center)

There are many other things involved with trading commodities, the details of which are out of scope of this article. The conclusion I wanna put in is that Grain futures trading can be a very powerful way to actually serve the people, to help the poor farmers by taking the risk off their hands, as well as make a living while doing that. There are tremendous risks involved with futures trading and you might lose all your capital in it. So instead of trying to become all out commodity trader, try to hedge your wealth with a real job.

Before you become any kind of trader I would suggest you to read this book by Nicholas Taub:
 http://en.wikipedia.org/wiki/The_Black_Swan:_The_Impact_of_the_Highly_Improbable

The fallacious argument of these economists can be busted by looking into a basic fact of production in a capitalist economy. And that is, the cost of production of goods and services can never be more than the purchasing power of the workers (who are also the consumers).

Lets assume a very simple economy of 100 persons all involved in cultivating apples, and consumers (who are also the workers) are content eating apples that they don’t try producing any other good. All that the consumers want is 100 apples, nothing more and nothing less. As a note of caution: do not be concerned about the unrealistic example, this will help us catch the crux of the issue. So, for instance, the land-owner produces 100 apples at labor cost of $100, and hence he wouldn’t be happy with a price below $1 dollar per apple. Note that the farmers have $1 dollar each as wage. So, the farmers now are in a state of affairs in which they are capable of spending at least $1 for an apple, which will certainly cover the production costs of the land-owner. So, there is no question of a lack of purchasing power as such.

The cost of any product is embedded in the wages paid to the laborers, either in a single stage of production or spread through a chain of round-about production stages. So, this automatically implies that wages in the economy will equal (or cover) the production costs in the economy, and hence no question of lack of purchasing power. It’s a self-evident proposition.

One could argue against the example I have provided as non-expressive of various market phenomenon. The most probable opposition to the example I have proposed would be the absence of profits and losses in this hypothetical economy. That’s actually not a problem. The hypothetical economy I have used is an economy in equilibrium with perfectly satisfied consumers. Profits and losses occur whenever this equilibrium is disturbed, that is, when a ‘disequilibrium’ sets in.

Economy of only Apples

The money that was unspent on any further puchase of apples was rather spent on oranges, and the efficient entrepreneur who was able to anticipate future demands in the best way was able to rake in profits. The change in consumer preference lead to a ‘disequilibrium’ phenomena which leads to losses to those who stick to production of goods which have lost consumer preference; and high profits to those entrepreneurs who forecasted consumer demand in the best possible way. These initial profits of course cease to exist as new producers enter the market sensing high profits and profits are brought down by the bidding up of wages, and increased production which leads to lowering of prices.

The study of a more realistic ‘disequilibrium’ market does not change the basic fact that cost of production of goods and services can never be more than the purchasing power of the workers. The losses that happen in particular sectors, for various reasons, is not because workers (or consumers) lack the monetary purchasing power to buy the products at above production costs, but because they don’t prefer any more of that particular product.

So, although production costs equal the purchasing power of the consumers profits and losses are made possible (and thus not causing a contradiction with real life market happenings) whenever there is a ‘disequilibrium’ in the market caused mostly by change in consumer preference, or even entrepreneurial errors in properly judging consumer demand could lead to relative overproduction of particular goods at the cost of relative underproduction of other goods.

One should be careful here not to assume that profits in an economy will always equal losses. This is possible only in a stationary economy where no improvement in capital occurs. In such an economy the profits of a particular entrepreneur occur causing equal losses to other entrepreneurs. If the capital per head in an economy increases, profits (owing to lowered production costs) will be more than losses. The exact opposite happens in a retrogressing economy with a diminshing capital per head.