Mixed economy, also known as “Planned” or “Regulated” economy is the middle vice between freedom and totalitarian slavery. The mainstream economists supporting Interventionism often exhorts that they do not intend to enforce totalitarian slavery against freedom; rather they are regulating the freedom. However, it is not the intentions but the end results, which decide the success or failure of an organized system.

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.¹ 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.² 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

It is a fact that the only way to reduce poverty is to increase the productivity of individuals.³ However, the interventionists’ suggests that government can raise the standard of living of the common man partly at the expense of entrepreneurs and capitalist, and partly at expense of common citizens. They suggests restrictions on profits and equalization of incomes and fortunes by reservations,⁴ confiscatory taxations,⁵ lowering of interest rates by fiat money policy and credit expansion and raising the standards of living of workers by the enforcement of minimum wage rates.
As subsidies and taxation decreases the productivity of workers and the system, the results of interventions comes out exactly opposite to what government intends to achieve so. Fiat currency brings upon cycles of inflation and the arbitrary lowering of interest rates, credit expansion results in depression, and the random minimum wage rates restrictions than creates mass unemployment.
In a free market system, the wage rates are fixed by the interaction of demand and supply, at a level at which all those willing to work can finally find a job, and thus the unemployment remains temporary only as there remains a continuous tendency of the free market to remove the unemployment. However, with government interventions in form of fixed minimum wage rates, things changes. When the government fixes wage rates above the normal rate that could have been fixed by the free market, the potential of market to provide employment decreases that causes unemployment. Furthermore, as the wage rates are fixed in general, those, who looses their job because of fixed minimum wage rates, fails to find another job and their unemployment is prolonged. Thus at one hand, government intervention may increase the income of some workers, at other hand, it forces some other workers to suffer unemployment and hence no income. Also, because of minimum wage rate laws and thus produced unemployment, productivity of enterprises reduces to great extent causing further poverty and unemployment.

Price Control and decrease in productivity

Interventionists further support lavish spending on behalf of government; they support arbitrary low prices for consumers’ goods and high prices for agricultural products. The lavish public spending by government further excruciates the situations. If the government provides funds required by taxing the citizens or by borrowing from the public, it abolishes on one hand as many jobs as it creates on the other, most of the times such jobs created prove to be unproductive and hence are similar to malinvestment and wastage of resources. If commercial banks finance the government spending, it means credit expansion and inflation, further causing grounds to depression, loss of productivity, malinvestment, unemployment and poverty.
Price control is another asset of interventionists through which they actually intend to help the common man but ends in hurting the common man to much extent. Government believes that the price of certain consumer commodity (say wheat) is too high; it wants all poor consumers to be able to have more wheat. Thus, it resorts to price fixing and fixes the price of wheat at a lower rate than that prevailing in the free market. As a result, the marginal producers and dealers of wheat, now incurs loss. As no individual farmer, producer or businessperson can keep producing at a loss, these marginal producers stop producing wheat, the dealers and sellers stop selling wheat in the market. They start using their resources to produce commodities not controlled by arbitrary price fixing (say soya been, or onion). As a result, the quantity of available wheat in market reduces significantly, and hence now, not only poor but also everyone suffers the lack of supply of wheat. The government thus is forced to borrow money from public to buy wheat from other producing countries. On the other hand, the extra supply of other commodities reduces demand and causes further resource mismanagement and wastage. If, in order to keep price of wheat fixed, yet not let the producers to suffer losses, government decides to control the prices of commodities necessary in production of wheat, the same story repeats itself, and ultimately, the end result of price fixing comes out to be deficiency of all productive units, producers, wastage of resources and means of production and overall deficiency of products causing poverty and starvation.

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).⁶ 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.⁷

1. Refference::Planned Chaos, Ludwig Von Mises [↩]
2. Burden of debt and loss, Reason for Liberty [↩]
3. Population, Poverty and production, Reason for Liberty [↩]
4. Such Interventions creates Forced Economic Inequalities, 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, Freedom Versus Egalitarianism [↩]
5. What really are Taxes, Reason for Liberty [↩]
6. Laissez-Fairre Free market capitalism is right, communism, socialism, collectivism is wrong, and the Mixed Economy system is Evil., The Middle Vice! [↩]
7. Refference::Planned Chaos, Ludwig Von Mises [↩]

People get enmeshed into a trap when they try thinking about the value of money¹. That is, why is a paper bill worth so many(tens, hundreds etc.) rupees, dollars or any other monetary unit. How exactly does the mint get about printing these numbers?

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 money²

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.

1. Mystery of money [↩]
2. Story of Money: An alternate story of evolution of money [↩]

We, by nature are not equal, we are not similar, we, each of us individuals, represents a distinct personality. We not only differ in shapes, sizes, looks and other physical aspects, we also differ in the abilities. Not everyone is equally talented, ambitious, hardworking or prudent and so on. Obviously, the more intelligent and prudent person with higher ambitions, better talent “if is free” to work as hard, honest and devotedly as he can, will surely gain more success in producing, earning and accumulating more wealth than a person with lesser intelligence, ambition and will to do honest hard work.

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.¹
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 freedom² 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

There can be exceptional cases of individuals able to achieve significant results in the improvement of whole society. A great scientist, innovator or businessperson can increase the production and incur the development so greatly that whole country, in fact whole world can perceive the benefits of his success. Yet, such exceptions do not provide any possibility for the practicability of egalitarianism. The scientist achieves the intellectual satisfaction of making his discoveries and that is the highest achievement for him, but inventors do require the prospects of sufficient material gains in absence of which, they will not devote the time and effort and would not go through the expenses necessary for making an invention, discovery or innovation possible. Often entrepreneurs actually implement the works of scientists and innovators to actually cause the benefit of masses. Businessmen invokes scientists and inventors to work and invent by investing in the research works and promising incentives, they search out and perfect the inventions.
Entrepreneurs will not be investing in any research if there will not be incentives to make a fortune on behalf of their work and investment, furthermore, if the businesspersons were not allowed to accumulate wealth, they would hardly be able to invest anything for researches, development and inventions. Thus, the basic of great minds actually being able to work and produce any significant amount of development in common persons life is very much dependent on the presence of economic inequality, in absence of which, that is in an egalitarian society, the innovations and inventions would be extremely difficult or rare.

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.

1. An explanation of this phenomenal truth is here “The story of Socialism, Public Welfare, and Brain Drain” [↩]
2. Meaning of Freedom [↩]

In a free-society with individuals having complete self-ownership, (Capitalist society) the production of wealth vitally depends on division of labor, a system of production in which all the labor required is broken down into separate, distinct occupations. Obviously, each individual is free and self-responsible enough to decide at his own to what occupation suits him well and serves his self-interests in most proficient way. A society of free self-governing individuals essentially depends on each individual’s self-interest and his ability to exploit his own talent and efforts for fulfilling his needs, desires and self-interests and that makes rational-selfishness as the virtue of the free individual. Division of labor increases the amount of knowledge used in production in ratio to the number of specializations and sub-specializations involved in the process of production. Auto producers have different body of knowledge than that of petroleum, refinery producers, wheat producers have different set of knowledge from both of the previous, and further they have different set of knowledge than the farmers engaged in producing other foodstuffs, vegetable growers, or dairy farmers.
In a non-division of labour system like that of socialist system or the collectivist systems, self-sufficiency becomes the central motive of individuals as they acts as collectivist and self-interest is forgotten. The total capacity of society to incur and further develop knowledge decreases abruptly as all individuals engage in acquiring self-sufficiency by means of adopting and following the common set of wealth production.

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.
In a free society with division of labor, geniuses are able to devote their time to science, invention, organization and direction of productive activity of others and thus instead of being lost in obscurity, they becomes Einsteins, Darwins, Brails and Fords. In a free society not only the genius but everyone is enabled to concentrate on the kind of work he is best suited and that promotes his self-interest based on his intellectual capacity and body endowments. Hence, such a society helps the individuals with rare talents in music, arts, sports, medicines, engineering, etc. In absence of division of labour, along with productive geniuses, such people with specific talents to be athletes, or painters, writers, philosophers, actors, sculptors, musicians, surgeons, engineers etc often lacks enough opportunities and are forced either to forget about their specific interests and talents, or to pursue their talents and suffer poverty and scarcity of opportunities. Since division of labour provides enough opportunities and complete freedom for the innovators, inventors, developers and directors of labour, such a free society necessarily provides enough space for machinery usage and modernization of process of production, also, it provides complete freedom for the genius and common producers to use the resources with utmost efficiencies hence increase the wealth production manifolds. 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. In a free society with individual sovereignty, individual may remain unemployed only because of his own choice; otherwise, market provides enough opportunities for the individual to engage in any productive process or service to earn self-dependency. Such few, who by nature lacks any potential to attain self-dependence (naturally disabled or victims of accidents etc) can easily attain benevolent support from the free individuals of the society in attaining self-dependency. As a free-society essentially represents most beneficial conditions for wealth production under division of labour, individuals in such society prospers with ease and further their life in the pursuit of their happiness.

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.
A libertarian society provides property rights in order to provide peaceful, justified, conflict-free and productive usage of resources. Unlike human body, external bodies and natural resources are not directly controlled by one’s will and initially they are unowned. In order to provide a rational, conflict-free rule of assignment of property rights, a libertarian society prefers the Lockean law of homestead that provides the relevant objective link of appropriation that is the transformation and using of the previously unowned resource. This approach provides the relevant objective motive of justice as the first user of a previously unowned resource naturally have a better claim than the second or consequent users. This is pertinent with independence of Individuals as the first owner of the resource can definitely let others to possess the resource for production at some rent or dealing for a period, or he may completely sell-off his property rights to other. The relevant question in such situations is not that who possess the resource; rather it is who the owner of the resource is. As explained earlier, a natural resource is not wealth until a man uses his talent and labour to make the resource productive and useful for the men, as the first user transformed that unowned resource into wealth making it possible to be used for the benefits of men, he naturally is the reasonable owner of the resource and deserves complete property rights over it. Obviously all the consequent wealth produced by the help of that resource is also inadvertently the rightful property (in fact, the results of his labour and intellect) and he holds complete right over it. In case, he suffers lack of talent to use the resource to maximum beneficial extent, he obviously gains the chance to sell-off his property right freely to other individual interested and able in using that resource proficiently. Such a system essentially provides justice and peace as it avoids any specific conflict, it is based on reason as the first user of the resource definitely posses a far important link with the resource than the later users. Once the first comer sells his property right to others, he naturally abolishes any objective link with that resource, wealth or property. Self-ownership and property rights essentially provide complete freedom for individuals to possess and accumulate wealth and further produce it freely and hence abolishes the common norms of partially slavery under government in the form of compulsory taxation, fiat currency, licensing system, censors, bans and criminalization of acts that in no way involves any aggression of a man by other.

I have dealt with this question already in one of my previous posts.¹ But judging by the comments I got for that particular article, I found myself guilty of being too complicated. So, I decided to write a detailed article which can explain profits and losses to the layman. A few basic economic concepts to start with.

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

The condition of ‘Static equilibrium’ is an imaginary construct which can help us in economic study. It hypothesizes a world where the goods of the economy have been perfectly allocated in such a way that the most urgent bidders have got what they wanted. This ‘static equilibrium’ is what mainstream economics texts are usually obsessed with, and as a result mainstream models of the market miss one important element, namely the entrepreneur.

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!

1. On Overproduction [↩]

One of the most important theories to make the rounds in 20th century world politics was the ‘exploitation theory’ proposed by the German Political theorist Karl Marx. Leftists all over the world have found it to their political convenience to blindly accept this theory, and to convince themselves of the morality of the workers’ hours of toil.

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.

It has been a long accusation of the feminists that women are paid less compared to men for doing the same job because of sexism. Most of the men out there know it for a fact that we don’t have a secret pact amongst us men to pay women less wages, nor we actively discriminate against women in that regard. Yet statistically speaking women are paid less than men in many aspects.

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 Block¹ makes an amazing explanation for why the wages of men and women differ.

1. Walter Block, Loyala University, New Orleans [↩]