The Scope of Moral Enquiry Part One – Necessary Preconditions for a Moral Order

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There are several important considerations that are deeply lacking in discourse on moral philosophy. In particular, sharper focus on the reasons why moral questions arise in the first place, the scope of both their enquiry plus the latter’s consequential resolution would aid clearer thought when considering important questions. Part one of this set of three essays will elaborate the conditions or circumstances that are necessary for moral rules to arise; part two will focus on the ethics of violence and part three on the same within the sphere of non-violence. All of the essays will concentrate on moral rules that arise between individual beings (that is moral obligations that are owed to others rather than what is simply “good” for oneself). While an exhaustive treatment of the entire subject would require one or many book-length works the concepts that are outlined here will in particular seek to overcome the notion that anything that is morally “good” should be promoted by the Government and/or that anything that is morally “bad” should be restricted or prevented by the Government.

Morality in the Universe

The matter in the universe finds itself in an array of different conditions, or states of being. We may call each condition in which matter can be arranged an end. In order for an end to be brought into being it requires an action. For an example, an end may be a state of quenched thirst. The action would be drinking a glass of water. (One might also say that the condition of the status quo is brought about by the action of abstaining from interference). All such ends brought about by actions must be done so through means, in this case, the glass, the tap, the water and my labour.

Morality is the discipline that seeks to advocate norms that govern these conditions. Moral rules are prescriptive, seeking to determine which ends should be brought about. Why then does morality arise or, more precisely, what elements must be present in order for ends through actions with means to be regulated?

The Morally Discriminating Being

If ends in the universe are to be regulated by a set of moral norms then it follows that there must some being that will do this – some being must be able to categorise the various conditions as morally good or morally bad (or as any shade of grey in between). What type of being is this?

If matter is dead or unconscious then it is obvious that not even the thought processes necessary for moral determination are present. If the universe consisted solely of such matter then there would be no being in existence that would have the ability to even raise the moral questions let alone ponder their resolution. A universe populated by unconscious matter would consist neither of moral ends nor immoral ends but simply of uncategorised events. However large or small, nothing would be good or bad, pleasurable or painful, inspiring or depressing, virtuous or repugnant. Moral determination therefore requires the conscious ability to discriminate between the ends of actions – to decide which ends are good or bad. In short, they need to be valued. Indeed the very essence of morality is determining which ends should be valued higher than others (or not at all).

However, having the ability to evaluate ends is insufficient – there must also be the impetus to do so. Why would a being have the desire to rank some ends as valuable and others as not? Why does the conflict between what are good ends are what are bad ends exist?

In the first place we could suggest that it is because the universe is one of logical contradiction where one cannot enjoy end A and end not-A at the same time – for example, one cannot be simultaneously thirsty and quenched, hot and cold, inside and outside, in lightness and darkness. Combinations of ends can interfere with each other to render the other ends impossible or seriously impaired. One of the great fields of moral philosophy, that of pain, is easily understood – it is very difficult for other ends to co-exist with a situation of pain. Strictly, therefore, by “good” and “bad” ends we simply mean more or less desirable. Such desire would not exist if all ends could be enjoyed contemporaneously, for there could be no such thing as good or bad. Each end could be enjoyed to its fullest and would have no interference with any other end. There is therefore a conflict between ends. The conflict forces the being to make a choice and by virtue of having to make a choice we can say that the being lives in a world of scarcity1.

But this is not enough however. For as we have already stated, ends must be brought about through actions which require means. By stating that we cannot bring apparently conflicting ends into being are we not in fact saying that we lack the means to do so? The means are the physical tools used by an action to bring an end into being. If there are no means there can be no action and with no action there is no end. Ergo, no means and no end. This also applies to apparently contradictory means, as isn’t it at least conceivable that one day the means might exist to create what today appear to be inconceivable ends?

However the scarcity of means goes much further than the inability to produce apparently contradictory ends. For means are scarce because they can only be directed towards a finite number of ends. Indeed the quality of ends may be non-contradictory and could exist harmoniously with each other but the means to fulfil them all may not be present. The valuing, desiring, and determining being, the moral discriminator, therefore allocates means to the most valued end first, then to the second etc., with ends being unfulfilled at the point where means are extinguished.

We start to see, therefore, that morality arises because of conflicts caused by the scarcity of means. Indeed, moral rules solely aim at what should be done with means. A wide array of possible moral norms – you should not steal, you should not have promiscuous sex, a parent should take care of his/her child, and so on – are stated either in the form “X action should not occur” or “Y end should not be brought about”. But such prescriptions are not aiming at the end as such they are aiming at the means. All of these rules seek to prohibit or restrict ends because they are the not the most appropriate use of the means available. In short, that there are “better” or more highly valued ends towards which the scarce means should be directed.

In sum, a morally discriminating being is one that ranks ends in order to resolve conflicts arising from scarcity of means. By virtue of this ability to rank ends we might also say that the morally discriminating being is the one to whom moral obligations are owed, or, more precisely they are the recipients of the moral benefit. If morality seeks to regulate conditions then the results of this will be what these beings experience.

It is not necessary for the morally discriminating being to be able to control actions that bring about conditions in the universe, that is they needn’t be able to use means to act to bring about ends. A totally paralysed individual, for example, may express discriminating thoughts and values without an ability to bring them into being. Nevertheless these will just be mere thoughts and judgments in the absence of anything further. For one may ponder all day the way one wants conditions to be but if no being has the ability to bring them about through controlling actions then these thoughts are mere mind games – it will be impossible for them to be elevated to the category of norms. For this, we need the morally responsible being to arise.

Moral Responsibility

It should be obvious again that unconscious matter cannot be deemed to have moral responsibility. If morality is to resolve conflicts over competing ends then the being itself must be able to be the initiator of the actions that bring about these ends, i.e. the actions must be chosen. Matter must be able to decide whether to act in a certain way or not but the action of unconscious matter is determined wholly by nature and is regular, predictable and quantifiable. A norm stating that it is immoral for water, when tipped out of a glass, to fall to the ground would be nonsensical as the water has neither the desire to choose nor the ability to do otherwise. It simply behaves according to the laws of physics. Unconscious matter cannot, therefore, be regulated by moral norms.

The actions of conscious matter, however, are determined by that very same consciousness – the action of a human being, for instance is the result of its thinking2. If I move an object from one side of the room to another it is because my mind has chosen that this action should be performed rather than an alternative action. I could equally have chosen not to do so. Conscious actions are therefore not dependent upon external stimuli nor are they reducible to a set of concrete or quantifiable scientific laws – they originate wholly within the mind of the acting being.

We may illustrate further the differences between unconscious matter and conscious matter. The former always behaves in the same way under the same set of circumstances on different occasions. Water will always boil at 100 degrees Celsius at normal atmospheric pressure; it cannot choose to remain un-boiled. The same conscious being however might choose to behave the same or behave differently under the same set of circumstances on different occasions. For example if a robber marches in to a crowded shopping mall and shoots a gun I might dash under a table. If it happens on a second occasion I might choose to do the same thing or I might choose to confront the robber, perhaps buoyed up by my experience of the previous occasion.

Unconscious matter will also behave in the same way under the same set of circumstances on the same occasion as that of other matter of the same ilk. One litre of water will behave in the same way as another litre of water when they are together under the same conditions. However, one conscious being will not always act in the same way as another at the same time. If we take the robber example again I and others might dash under the table but further people present may confront the robber, some may go to seek external help, some will rush to protect children, etc. Precisely what is done and by whom, the content of the action of each, cannot be reduced to a set of scientific laws but is instead dependent on the individual’s own desires and choices.

The morally responsible being therefore must be one that controls its actions, the actions resulting in one of a choice of ends, the choice being made necessary because of the fact of scarcity of means. Indeed the whole purpose of morality is to govern which actions should be chosen. It is this choice leading to control over means that are used in actions to create ends that begat moral responsibility.

Finally we must say that the morally responsible being is the one that owes moral obligations or bears the moral burden. It is its actions that bring about conditions that morality seeks to regulate and are, in turn, experienced by those beings with moral discrimination.

Combinations of Moral Discrimination and Moral Responsibility

As moral responsibility is ascribed to the same fact as moral discrimination – that of choice between ends governing actions through means – it follows that a morally responsible being will also always be a morally discriminating one. The reverse, however, need not be true. It is quite possible for a morally discriminating being – one to whom moral obligations are owed – to be devoid of moral responsibility. Physically paralysed persons again, for example, may possess a mind capable of desire, value and choice but lack the ability to bring about these values. Nevertheless we may still regard them as being holders of moral rights3. How precisely these rights and obligations come to be owed and held and by whom and between whom is what we shall turn to next.

Moral Rules and Society

Let us imagine several hypothetical types of universe in which moral rules – the norms that resolve conflicts arising from scarcity of means – might be determined. All of these universes are fictitious but they will help us to isolate and understand the elements of the universe as it is that are necessary for morality to come about.

As we have already outlined a universe consisting entirely of unconscious matter would yield no moral rules. With no morally discriminating being the reason for morality arising in the first place – the problem of scarcity – is non-existent. Matter may collide in attempts to occupy the same space but all conflicts will be resolved purely by the laws of physics and nobody will be there to say whether the resulting conditions are better or worse. With no such discrimination between conflicting ends there will be no moral rules.

Similarly a universe containing only one or more morally discriminating beings but no morally responsible beings would yield nothing; in such a universe we now have beings that may feel the conflict of scarcity in their minds. But their values, whatever they may be, are unable to express themselves through action that results in changed ends. There is, therefore, no scope for any morality to be put into practice. Any musing on the ends that should be brought about would simply be an intellectual game rather than a blueprint for regulating the condition of the universe.

Next, let us consider a universe of a single, lone, morally responsible being (who is, as we stated above, also a morally discriminating one). No matter at all exists apart from this being, indeed we might even say that he is the universe. We therefore now have a being who both feels the conflict of scarcity and has the ability to resolve these conflicts by choosing ends through action but he is the only thing out there. How will morality arise here, if at all?

Such loneliness for the conscious being entails that there is no other matter existing outside of itself. All ends and means concern only and are of only itself. All conflicts arising from scarcity can concern only itself, or are made with reference to itself – indeed they will all arise because the being needs to decide what to do with itself. Further any truth or realisation that it could perceive would concern solely itself as there is no other matter on which such a perception could be formed. Although the being would be subject to physical laws there would, on the other hand, be nothing approaching a sphere of morality that could be divorced from the being’s own desires, evaluations and choices. The entire universe of the being would revolve only around these elements; there are no other considerations that would either prevent or promote these elements in determining how the being should resolve conflicts of scarcity. Furthermore any resolution of the conflict that the being takes through action will only affect itself for there is no other matter that can be changed as the result of one of the these actions. In this type of universe, therefore, morality, in seeking to resolve the being’s conflicts of scarcity, will relate entirely to the being’s preferences, choices and actions that can and only will ever affect conditions concerning itself and conditions arising from itself. Every conflict originates from the being’s own matter, every choice will be made by him, every action will be made by him also, all means will consist of him and, finally, every end will affect only him. Whether we can sensibly conceive of morality that is divorced from what the being actually does prefer, choose and act upon as opposed to that which it should is a puzzle the reader might like to consider. But for the purposes of this essay we shall conclude that morality seeks to solve conflicts that arise between various beings or between various “collections” of matter. Questions of morality are therefore social questions and moral rules are social rules.

Let us therefore turn to the universe where there is still one morally responsible being (the “moral agent”) present but there now exists matter that is external to the being. In such a universe there is now a frame of reference outside of the matter of the being so that there is something other than considerations concerning the being’s own self that will affect and afflict its choices concerning the resolution of conflicts arising from scarcity. How does a moral agent come to know the content of these moral rules?

Where all external matter is unconscious neither moral discrimination nor moral responsibility can be ascribed to such matter as we have stated. It follows that this matter cares not which conditions prevail in the universe nor does it have the ability to change them. Conflicts regarding scarcity will arise slightly differently, however. For the state of the external matter is itself a condition of the universe that the moral agent will form values concerning and hence the status of the external matter itself then is a source of conflict. For example, a rock may occupy the space that the moral agent wishes to occupy or a piece of fruit may be hanging from a tree. If the moral agent desires to occupy the rock’s space or eat the fruit the rock must be moved and the fruit must be plucked from the tree and consumed. Owing to the scarcity of means external matter cannot be in both of its stated conditions simultaneously – the rock cannot be into two places and the fruit cannot be both hanging from the tree and consumed. Or, there may be another delicious fruit hanging from a different tree but the moral agent has the means to pick only one of them and has to choose which. However, these conflicts, the choice between alternatives, exist solely in the mind of the moral agent, not in the external matter. Possessing no desires and choices of its own this matter is simply there; the original condition that it is in upon the entry to the scene of the moral agent is governed by physics and will remain so absent any intervention by the moral agent. Where a conflict forms in the mind of the moral agent, therefore, where he would prefer the condition of external matter to be different, there is still no external frame of reference to establish precisely why he should prefer this (or not). Conflicts in this universe will only be solved, therefore, by the agent allocating means to his most highly valued ends first and bringing these about through action4.

Our final fictitious universe is one where there is a single morally responsible being and one or many morally discriminating beings. Here, for the first time, we have a being who can choose means, ends and actions in the universe the results of which will be valued by other beings. Here we have the first glimmer of morality being able to arise in this universe, for conflicts now do not solely arise as autistic problems in the mind of a single being but exist vis-à-vis separate beings. Indeed, a greater degree of scarcity exists in this universe as each may wish to have the same means devoted to different ends. A universe of many morally discriminating beings therefore suffers from interpersonal scarcity.

However we have to conclude that morality simply will not arise in this universe. For how is the morally responsible being supposed to be able to distinguish between unconscious matter and matter that is discriminating but unable to control its actions? A characteristic of beings that value but can bear no moral responsibility is that their actions are determined entirely by the laws of physics. their behaviour and responses to stimuli will be exactly the same as unconscious matter. There is no way therefore that the moral agent can know whether he is supposed to proceed with a certain action with moral responsibility or whether he can solely reflect on his own values and choices as they actually are. The situation is akin to rocks secretly being able to value – do we owe moral obligations to rocks simply because of this? An answer in the affirmative would be an absurdity. No moral agent would ever be able to act in relation to other matter at all on the grounds that it “might” be able to think and, faced, with this quandary, would quickly perish.

Our final scenario, and the one that really exists, is where there is more than one morally responsible being in existence. But even here special conditions must exist. It should be obvious that the existence alone of other beings is insufficient; in order to be accounted for the being must be aware of this existence. As we said before, morality is prompted by conflict. Totally independent existence from all other beings would still yield nothing that was outside of and separate from the moral agent’s own existence and conflicts arising from scarcity will remain within this sphere. The same could be true where there is a mutual awareness between morally responsible beings yet this awareness is innocuous – as long as no conflict arises in the minds of the moral agents the scope of morality will still be that of the agent and its actions that will concern only itself.

The next step, therefore, is for conflicts arising from scarcity to arise between moral agents – that is that they each independently desire, value, choose and act, but that one agent’s actions can’t co-exist with another’s because of the fact of scarcity of means. Morality is therefore necessarily dependent upon the existence of multiple moral agents who engage in conflicts resulting from scarcity. It seeks to answer these conflicts by determining in whose favour the conflict should be determined. The “winner” will have a moral right that he can enforce against the “loser” who in turn bears the moral obligation. The result is formulated in typical discourse as the “winner” should be able to do X whereas the loser should not be able to do X; or the “loser” should do Y for the “winner”, etc.5 However, as we elaborated above, the conflict arises because of means. The moral prescription therefore takes effect as awarding a moral right to one party over means, whereas the other has a moral obligation not to interfere with these means.

Conclusion

We have, therefore, fully elaborated the necessary preconditions for morality to arise in the universe. In short, the universe must be populated by two or more beings who devote scarce means through actions towards ends. Conflicts arising because of the scarcity of means between individuals begat moral norms.

In the next two parts we shall look at specific conflicts that will arise between moral agents. Part two will concentrate on the moral norms that are violently enforceable and part three on those are not. In each case, what will be suggested is that a rationally derived body of ethics exists to govern human interaction.

Go to part two – The Ethics of Violence.

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1The problem of pain is one that illustrates the logical quagmire in which one might end up by trying to too hard to conceive of a universe without scarcity. We might say that pain itself is a product of scarcity – that it is a physiological warning system that alerts the “sufferer” to the fact that he is proceeding on a course of action that will extinguish his ability to pursue ends, i.e. he is in the process of damaging and perhaps killing his body. It is possible to suggest, therefore, that in a non-scarce world pain would not exist. But if pain doesn’t exist then it too becomes scarce and so the non-scarce universe does not come about.

2By this we mean the content of actions as opposed to their form which are subject to the laws of praxeology.

3The precise classification of existing beings is beyond the scope of this essay; the difficult question of children or of those adults with impaired mental or physical capabilities, not to mention the distinction between certain types of animals – mere single cell organisms and the higher primates, for example – will not be dealt with here. Our aim is to determine the prerequisites of moral beings, not to analyse who or what actually possesses them.

4It might be asserted that conflicts arising from scarcity will be resolved by “technical considerations” only, i.e. by what can be done as opposed to what should be done. For example, if a moral agent wishes to stand where a rock is then the matter will be decided by whether the moral agent can, in fact, move the rock. However the reason why technical considerations arise at all is because means are scarce, i.e. the means to move the rock are lacking. To suggest, therefore, that technical considerations will resolve conflicts arising from scarcity is to argue that scarcity will resolve scarcity. The entire problem is precisely which out of a whole myriad of technical possibilities can means be best devoted? Resolution of this can only fall back on the agent’s own values and choices in this type of universe.

5The terms “winner” and “loser” are used here with extreme caution. He who holds the moral right does not necessarily command any greater virtue, talent or supremacy compared to he who holds the moral obligation. Rather as we shall see in a later essay there is at least a category of moral rights and moral obligations that are universal, applying to all situations at all times. Everyone therefore has the potential to be a “winner” or “loser” depending upon the facts of the specific instance. Furthermore, the term “enforced” is also used with the want for a better term – one of the biggest problems that will be clarified in the next part is where it is morally permissible for violence to arise between individuals. Not all moral rights can be violently enforced.

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Free Choices or Coerced Choices?

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The Academy of Medical Royal Colleges, which apparently is a “united front” of the medical profession, says its doctors are seeing the consequences of unhealthy diets every day and that it has never come together on such an issue before. Needless to say a whole raft of interventionist measures are recommended to curb this apparent problem:

  • A ban on advertising foods high in saturated fat, sugar and salt before 9pm;
  • Further taxes on sugary drinks to increase prices by at least 20%;
  • A reduction in fast food outlets near schools and leisure centres;
  • A £100m budget for interventions such as weight-loss surgery;
  • No junk food or vending machines in hospitals, where all food must meet the same nutritional standards as in schools;
  • Food labels to include calorie information for children.

We will set aside for the moment the issue of whether it can be said that there are “right” choices for people to make when it comes to what they want to do with their own bodies (why, for example, should people prefer a longer life to the enjoyment provided by a burger and fries washed down with a pint of coca-cola?). Instead, the problem here is rather more grievous which is that, whenever members of the public make choices about how they want to live their lives there is the ever present assumption that, as these choices are made with apparent freedom, that it is the free market that has failed in preventing the emergence of the “undesired” outcome. What is never discussed or even raised is the possibility that people’s choices are already constrained or influenced by existing Government interference to the extent that, not only is it impossible to say that the choices made would be the same as those that would be made on a genuine free market, but that Government intervention is itself causing the undesirable choices to be made. And, lo and behold, blinded by such ignorance, the call is always for more Government intervention to augment that which we already have to put up with.

The present author has examined in detail why socialising healthcare will lead to greater ill health. There is little need to repeat all of this here except to say that people prefer doing that which comes at a lower cost, all else being equal. So that if you lower or remove the cost of becoming ill then, relatively, you will have more people who lead lifestyles that will result in ill health.

But the same fallacy is advanced in all cases where the proximate cause of a problem is people’s apparent free choices. Let’s examine some of the most popular:

“There is not enough food in the world! If the free market has brought such widespread hunger then Governments much intervene!”

The allegation here is usually some variant of the rich world refusing to share its wealth with the poor world. Leaving aside the fallacious belief that one person having means that another must not have, just why is it that we have widespread poverty in the age of the iPad? The plight of poor nations has nothing to do with being unable to understand technological development, nor are they in anyway lacking a rich diversity of raw materials. Rather it stems from the lack of capital investment per head of the population compared to the West. In the West, we have more machines and better tools that can churn out more and better goods per person than they can in poor nations. So yes, investors and capitalists have not invested in poor countries. The free market has not reached these nations, it must have failed! But the precise reason why the West has benefited from the free market is that it has long cherished institutions that have allowed to the free market to flourish, in particular strong legal rights to private property and relative political freedom. These are precisely the conditions that are lacking in poor nations, conditions that cause entrepreneurs to seek other havens for their investments. At the back of their minds, no doubt, is also the mass expropriation of foreign investment in the post-colonial era. Why should anyone bother investing in a poor nation if their wealth will just be pinched by the Government? To make matters worse, poorer nations began to model themselves on their Western role models just at the point when the latter started to turn away from a social order based on private property towards interventionism and social democracy with the result that the wrong lessons are being learnt. A product of this tide has been that Western governments now heavily interfere in world food markets, whether it be through such wicked and wasteful outfits as the Common Agricultural Policy, subsidies for farmers to devote farmland to ethanol production, or the vast regulatory network that impedes food production at the behest of a few powerful lobbyists. The recent scandal of horse meat appearing in processed beef products sold in UK supermarkets should be viewed in this context.

Poverty and hunger are therefore a failure of Government, not of the free market.

“The forests are disappearing! The free market, seeking ever greater profits, is decimating our natural resources! The Government must stop it”

Let’s go even further: add to the list fish stocks, elephants, whales, and any other of the countless number of “endangered” species that you like. Yes, there is a great problem, and yes, looking at the issue at face value, it appears that capitalists are running down these resources.

But this raises the question of why has the free market not produced similar shortages of other things? The dairy industry, for instance, exploits cows for profit but we never hear of a shortage of cows. Nor do we seem to be in short supply of chickens to supply us with eggs on our breakfast plates. So why is it only some resources that seem to be in danger of depletion? What is the difference between the endangered group and all the others?

The reason is that people are not permitted to own the capital value of forests, parts of the sea, elephants, tigers, etc. If one is able to own the capital value of the resource then exploiting it for present revenue has to be balanced against the loss of capital value in doing so (a full explanation of this is available here). But if one does not own the capital value then the only concern is for present revenue – there is no cost to exploiting resources to their fullest now. In fact the only cost is that someone will get there before you. So instead of all the myriad of Government restrictions and regulations concerning these depleted resources in order to “cure” the alleged free market ravaging all that is needed is to extend full private property rights to these resources and they will be conserved. Once again the problem is not too much free choice but the fact that people have been prevented by the strong arm of the Government from having a reason to make the “right” choices.

And let us conclude with the most pertinent of all alleged market failures, the phenomenon of “boom and bust”:

“Free market greed has caused capitalists to invest in wasteful projects! Clearly they need the Government to give them speed limits!”

Once again, looking at only the proximate causes of boom and bust will reveal that entrepreneurs invested too heavily in a particular sector, inflating a bubble that eventually pops, causing widespread misery and unemployment. In the 2007-8 financial crisis, the effects of which are lingering with the current malaise, a summary of the charge is that greedy bankers had lent money to people who could not afford to pay it back. End of story. But what is not told by peddlers of this narrative such as Paul Krugman is the moral hazard created by the so-called “Greenspan put” which had the effect of financial institutions expecting their profits to be retained and their losses to be borne by an influx of monetary liquidity during any risk of collapsing asset prices (i.e. in short paid for by inflation). If one can keep one’s profits and socialise one’s losses is it any wonder that people took wild risks? If there is only ever an upside then wouldn’t you? This is before we consider the fact that credit expansion is the cause of the business cycle in the first place that will always lead, by falsifying the societal time preference rate, to the expansion of unsustainable investment projects that must be rendered wasteful as soon as the inflation stops.

Therefore, next time you read that the “free market” has caused this, that, or the other, stop and think as to precisely what the options of the free market participants were. More often than not you will trace the source of the bad decision to some kind of Government interference.

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Leave me out of it!

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Debates between libertarians and those who advocate any kind of statist intervention, whether it be relatively minarchist or all the way up to full blown socialism, frequently take the form of “X should not happen vs X should happen”. For example a budding libertarian might argue “the post office should be privatised” whereas his opponent would concentrate on saying “the post office should be state owned.” Lost in these kinds of exchanges are the fact that libertarianism, and all political philosophy in general, is a set of norms concerning the application of violence and nothing more (or more specifically, all political philosophies are theories concerning where, when and by whom the violent enforcement of rights over property is permissible). Libertarians are not, therefore, against any kind of organisation such as Government per se, or even against socialisation or communism. Their strenuous objection is to the fact that these institutions use violence to enforce their ideals in ways that contravene the libertarian prescriptions. There is nothing wrong with anything the Government does, merely the fact that people are forced to obey it and pay for it through their taxes.

With this in mind then, let us suggest some novel retorts in debates that may cause one’s opponent, whether they are part of the statist intellectual bodyguard or merely the average Joe expressing an opinion, to sharpen his/her mind towards consideration of the fact that what they are really asking for is unilateral, violent enforcement by the State.

1. Healthcare.

Statist: “All healthcare should be run by the Government. It should be free. The NHS is a great thing”.

Libertarian: “I have no problem whatsoever with you paying into something called the “National Health Service” if you want to alleviate the burden of you falling ill. But why do you want to force me to do it as well when I don’t want it?”

2. Roads

Statist: “Of course we need Government to build the roads!!!”

Libertarian: “If you want to pay the Government to build your roads then go ahead and do so. I, however, would like to patronise privately built roads and I won’t go anywhere near the roads that you are paying for. Why do you want to force me to pay for the roads that you want when I don’t want to force you to pay for the ones that I want?”

3. Railways

Statist: [Ignoring the fact that Britain’s railways are emphatically not privatised]: “Bring back British Rail! The railways should be Government owned!”

Libertarian: “I’m perfectly happy for you to choose to pay this organisation that you call “Government” to run railways you want to travel on. But I don’t want to travel by train. Why must I be forced to support them?”

4. Police

Statist: “Of course you need Government! What would happen to crime if there wasn’t the police!”

Libertarian: “If you wish to make contributions to the Government’s policing so that they will protect you from crime then go right ahead. I really don’t want to stop you at all, it’s your money. But I would rather pay someone else to protect me from crime. Why do you want to force me to pay for your preferred provider and not mine?”

5. Taxes

Statist: “Taxes should be raised to provide vital funding for important Government functions”.

Libertarian: “If you want to write a cheque to the Treasury then go right ahead, the freedom is all yours. But why are you forcing me to pay for an organisation that I despise and want to have nothing to do with? I’m perfectly happy to let you spend your money just the way you want it, but when I want to spend my money just the way I want it you’re saying I should be thrown in jail! Why?!”

6. Industry

Statist: “All industries should be nationalised and run for the people, not for greedy profit-seeking shareholders”.

Libertarian: “It’s perfectly fine for you to pool all your money and your possessions and set up socialised industry with like-minded people. There is absolutely nothing wrong with mutual organisations, co-operatives, or even communes if that’s what you want to do with yourself. But I want to invest my money in profit-making industry and earn a return on my investment. I’m more than willing to leave you alone to do what you want with your money, just leave me alone to do what I want with mine.”

No doubt many other examples could be imagined by the reader, but in short your reply to all of them is “just leave me out of it!” The key effect is to cause your opponents to realise that, whereas you, the libertarian, are advocating peaceful co-existence and have absolutely no problem with organisations that they may advocate, they, on the other hand, are arguing for the violent imposition of what they want on you. Probably not many who argue in favour of statist intervention understand that they are, in fact, proposing a solution of violence to society’s alleged ills and that they are, therefore, thoroughly violent people. So next time you, as a libertarian, are stuck in such a debate, see how kindly your opponent takes to the realisation that, when laid bare and shorn of any fanciful rhetoric, their arguments are advocating nothing more than for society to be run by guns pointed at the many by the few.

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Money, Inflation and Business Cycles – The Pricing, Profit and Loss System Explained

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Against all of the fallacious forms of “under-consumption” theories of boom and bust Say’s law stands as a charming and simple rebuttal. Wrongly and ignorantly described as “supply creates its own demand”, a better and accurate formulation is “goods are paid for with other goods”. In short, while recognising that money is emphatically not neutral and is itself a good, goods are supplied by an individual (demand) in return for money, the latter of which is then used to buy other goods (supply).

This essay will use Say’s Law to illustrate that what is meant by “under-consumption” is, in fact, not a dissatisfaction with consumption (or rather purchasing) per se, but rather that the precise structure of production is not in harmony with the valuations of consumers; the distortion of this structure at the height of the boom proceeding to a bust is only the most extreme of this type of instance.

Say’s Law

While emphasising again that money is not neutral and its status as a good in its own right does have an effect on the structure of production, money does not in and of itself constitute demand. Rather, your demand is the goods that you have to offer for sale in the first place as it is these real goods that sustain the supplier in producing what you buy from him in turn. How productive you are determines the effectiveness of your demand as revealed in the precise exchange ratio – if the goods with which you demand are highly valued they will be able to buy more; if they are valued lower they will buy less. In reality this exchange ratio takes place not directly but through the money mechanism. For example:

1 apple          sells for         20p

20p              buys             1 orange

The mere possession of money in this scenario does not constitute demand. For in order to gain money to demand oranges a person must first have supplied apples and the amount of money he receives will be determined by his productivity in producing apples – the more productive he is the more money he gets which in turn allows him to demand more oranges. His demand is linked firmly to his original ability to produce and supply apples. It is not therefore that 20p, the money, is the demand for either one apple or one orange. It is, rather, that one apple will demand a supply of one orange1. In other words, the price of a single apple is one orange and the price of a single orange is one apple.

It follows, then, that if changes in the relative valuation occur between goods then this will be reflected in the exchange ratio between these goods. If, for example, oranges decline in value relative to money yet apples maintain their value relative to money a future exchange rate might be as follows:

1 apples        sells for         20p

20p              buys             2 oranges

In other words, whereas before one apple could buy only one orange, the value of oranges has declined so that now one apple can buy two oranges. Any change in valuation of a commodity therefore necessarily takes effect as a change in the exchange ratio between goods.

Supply, Demand and Prices

In the first place we must be somewhat suspicious of any theory that tells us that there is any under-consumption, i.e. that there is a general glut of everything. For it is suggesting that we suddenly find ourselves in the position of having too much stuff. But this is nonsensical even without any analysis for it implies that humans have suddenly stopped desiring; but human wants are insatiable and we are always striving for more. So engrained in our own experience is this fact that it seems pointless to try and prove it – an abundance of goods, all else being equal, is a cause for celebration rather than for alarm.

If we dig deeper what is really meant when there is a “general glut” is that the costs of producing goods cannot be recouped by their selling revenue, in other words that all goods are experiencing losses. But this is nonsensical because the very existence of a cost means that there is an alternative use for the capital goods that produced the final good – if a loss is experienced then it means that some other good was more highly valued than the good that was in fact produced. It is therefore impossible for there to be a general glut of all goods as the very reason for the glut – the existence of costs – presupposes that there is a demand for some other good. But if capital was misdirected and should have been used to produce another good then it follows that there is not a glut of this latter good at all but a relative shortage.

Let us take a hypothetical economy where all the only goods are fruit. Let’s say that there are twenty apples, twenty oranges, twenty bananas and twenty pears. Let us also say that it takes the use of one unit of a piece of fruit to produce a single unit of another piece of fruit and so that, in equilibrium, the exchange ratio of the different fruits will be as follows:

20 apples:20 oranges:20 bananas:20 pears

I.e., that there is a final exchange ratio of 1:1:1:1. When one fruit trades for a single fruit, there are no profits and no losses. If the apple producer, for example, trades ten of his apples for ten oranges, he can use them in production for ten more apples – in short, the cost of ten apples has yielded a revenue of ten apples. The same is true of the orange producer – he has bought ten apples with oranges which he used to produce ten more oranges, a cost of ten oranges netted against a revenue of ten oranges. Total profit and loss is zero and the economy is in a state of equilibrium.

What happens if the above numbers are multiplied – i.e. if there are forty, sixty, one hundred, one thousand or one million of each fruit? Does it make any difference? Not at all as one fruit will still trade for one other fruit which can be used to produce another piece of fruit. No fruit will be able to sell at a loss (or at a profit) and nothing will remain unsold. More of each fruit in the same ratio simply indicates a more prosperous economy than one where there are fewer pieces of each fruit.

What about, however, where the ratio of fruits is altered? Let’s say that, instead of there being twenty of each fruit there are, in fact, 10 apples, 10 oranges, 30 bananas and 30 pears. It still takes one of each fruit to produce one other fruit (i.e. the demand curve has not shifted). So what has happened to our exchange rate? It will be as follows:

10 apples:10 oranges:30 bananas:30 pears

In other words, 1:1:3:3. So now, one apple will still trade for one orange, but for three bananas or three pears. But as the production of one piece of fruit still requires only one piece of another fruit there will now be relative profits and relative losses. The apple producer, for example, can now use one apple to buy three bananas with which he will make three apples – a cost of one apple versus a revenue of three apples. The same is true of the orange producer. The poor banana producer, however, suffers. He has to spend three bananas to purchase one apple with which he can only produce one banana – a cost of three bananas versus a revenue of one banana. The same is true of the pear producer. We therefore have an instance of there being two fruits – bananas and pears – that are unable to sell for enough in order to cover their costs. But this is not a general glut, for we also have two fruits whose revenue more than covers their costs. Resources will flow out of banana and pear production and into apple and orange production, increasing the number of apples and oranges while decreasing the number of bananas and pears. The result of this is that the purchasing power of apples and oranges will fall again and that of bananas and pears will rise again, reducing the profitability of the first two industries and the losses of the latter two. This will continue until an equilibrium is restored with an exchange ratio of 1:1:1:1 and no industry is either profitable or loss making.

The result then is that there can never be a general glut of all goods, but rather specific gluts of particular goods that were not preferred mirrored by specific shortages of other goods. And as we know from our analysis of Say’s Law above these costs are ultimately expressed in terms of other goods relative to each other, i.e. the exchange ratio will widen as their values diverge.

How does this happen on the real market? Obviously gluts and shortages don’t just appear as they did in our example above; but rather, they result from the ever-shifting demand curves of consumers which have to be foreseen by entrepreneurs. For example, if entrepreneurs invest heavily in apples when in fact the public wants oranges, the capital that would have produced oranges is diverted to apples. The resulting glut of apples and relative shortage of oranges may mean that it takes five, ten or twenty apples in order to demand a single orange. If this low selling price for apples is insufficient to pay the costs of production while the high selling price for oranges results in a bumper profit for the foresighted entrepreneurs who stuck to producing oranges, then it follows that resources will flow out of apple production and into orange production until an equilibrium is restored where both apples and oranges will exchange at a ratio where they are both able to cover their costs of production.

However, as the valuations of consumers are always changing the hypothetical state of equilibrium will never be reached and there will always be relative gluts of some goods that have been overproduced and relative shortages of goods that have been under-produced.

Nothing about any of this is a cause for alarm – it is the task of entrepreneurs to adjust the structure of production to the tastes of consumers and in the normal run of the mill, so to speak, nothing about this will cause any great or dire need for concern. What we shall see, however, is when there is monetary intervention in the forms of inflation and credit expansion, very wide dislocations between the goods that are demanded and those are supplied occur, leading to extreme gluts and shortages. The analysis of these instances is no different from simple dislocations, but what will be revealed is that any attempt to “boost demand” merely ends up perpetuating the production structure that is failing to meet the ends of consumers in the favour of those producers who are selling loss-making goods.

Simple Inflation

At any one snapshot of time there is a fixed stock goods in the economy. Let us return to our hypothetical fruit economy with the same stock of goods and the same exchange ratios so that

20 apples will buy 20 oranges, or 20 bananas, or 20 pears.

In other words there is once again exchange ratio of 1:1:1:1. In the economy where money has to be earned, no one can spend without first producing real goods. So if a melon producer now produces sixteen melons and (once again, assume that one melon exchanges for one piece of any other fruit) and decides to purchase with them sixteen apples, the stock of goods in the economy will now be four apples, sixteen melons, twenty oranges, twenty pears and twenty bananas. The exchange ratios will be thus:

4 apples:16 melons:20 oranges:20 bananas:20 pears

While apples have now become more expensive relative to any other fruit (a whole five oranges, for example, is now needed to purchase one apple whereas before only one was needed), melons have become cheaper relative to any other good. Overall, therefore, what has been lost in apples has been gained in melons.

The additional purchasing power of apples caused by the demand of the melon producer spurs the apple producer into producing more. What can he do? As he has sixteen real melons he can use these in the production of sixteen more apples, thus restoring the total stock of goods to twenty apples, twenty oranges, twenty bananas and twenty pears. There has therefore been a productive exchange on the market. What was demanded by the melon producer in apples was supplied by him in melons, permitting the apple producer to fund his subsequent production of more apples. Crucially, however, as the purchasing power of other fruits was not diminished the profitability of these industries did not decline and they could carry on as before.

The fact that all of the exchanges take place in the real economy through the medium of money is of no consequence to this analysis. For in reality, the melon producer would have sold his melons to a third party, X, for money and then used the money to purchase the apples. X might have used the melons to produce pomegranates and then the apple producer uses his money received from the melon producer to buy pomegranates, the latter being used by him to produce more apples. The important point is that goods are trading for other goods and that the production of new goods must be funded by other goods.

What happens, then, when new money is printed? Is it possible for economic prosperity to be delivered by the printing and spending of new money? Let us return to our original array of goods – twenty apples, twenty oranges, twenty bananas and twenty pears. If the Government prints more money it has to spend it on these existing goods. Let’s say that, with the new money, it decides to buy sixteen apples. Does this new money in the pockets of apple producers entice it to spend more, which in turn causes their suppliers to spend more and so on until we reach ever dizzying heights of prosperity? No. For the problem is that no new real good has been supplied by the Government in return for its purchase and consumption of apples. Whereas the melon producer compensated for his consumption of apples by producing melons, all that has happened when the Government has printed more money to spend on apples is that the total of stock of all goods has declined by sixteen apples. As the stock of apples has declined relative to other goods the purchasing power of apples has risen accordingly. Instead of twenty fruits now trading for twenty others we now have:

4 apples:20 oranges:20 bananas:20 pears

What is the result of this? As the purchasing power of apples has now risen it means that this industry has become extremely profitable – with a single apple can be purchased five of any other fruit which can be used in production of five more apples, i.e. a cost of one fruit producing a revenue of five. All of the other industries, however, have now suffered relatively rising costs and lower revenues as they will each have to spend five fruits to gain one apple which will in turn produce only one of their particular fruit. What happens, once again, therefore is that resources will shift out of the orange, banana and pear industries and into the apple industry, reducing the relative surplus of the first three fruits and relieving the relative scarcity of apples. This process will stop when none of the industries can make either a profit or a loss, i.e. when one fruit again exchanges for one fruit. The shortest way for this to occur is for the apple producer to purchase four oranges, four bananas and four pears and to use them in the production of a total of twelve apples. The resulting array of goods will now be as follows:

16 apples:16 oranges:16 bananas:16 pears

What therefore is the result of the inflation? It is simply a reduction of the total number of goods available in the economy. Whereas before there were twenty pieces of each fruit now there are only sixteen. The Government, in failing to compensate for its consumption of apples with a supply of real goods in return, has simply reduced the total stock of goods by sixteen fruits. The earliest receivers of the new money, therefore, have received a benefit – the Government by being able to buy apples it hasn’t paid for in other goods and the apple producer by being the favoured receiver of the Government’s new money is ensured continuous profitability as its selling prices rise before its buying prices do. For everyone else, however, who receives the new money later, buying prices have risen faster than selling prices. They experience losses and a relative degree of impoverishment. Finally when the effects of inflation have worked themselves through the economy the result is a net loss for the economy as a whole.

This would be the effect of a one-shot inflation – the structure of production being left relatively intact but at a lower level. Things are much worse, however, when the inflation is continuous. For now, the Government keeps on buying apples with its newly printed money and not refunding this consumption with any real goods. What will happen, therefore, is that apples will be in continuous short supply relative to other goods and resources will continuously shift out of the production of other fruits and into apple production. The fruits furthest away in the supply chain from apples will suffer the most and eventually go out of business as their fruits remain permanently in high supply relative to the artificially created shortage of apples. There will be a permanent change in the structure of production in favour of the Government and its preferred suppliers at the expense of everybody else, resulting in an overall loss and reduction of total goods.

The Business Cycle

Whereas in our example of simple inflation the dislocation to the structure of production took place between different consumer goods, when it comes to the business cycle the disharmony caused is that between the demand of two classes of goods – consumer goods and capital (producer) goods. The artificial credit expansion fuelled by monetary inflation deludes entrepreneurs into thinking that more resources should be channelled into producing capital goods and fewer resources should be devoted to producing consumer goods, against the real wishes of consumers. Resources flow out of consumer goods and into capital goods. The end of the monetary inflation reveals the illusion – consumers did not have a rate of time preference and consequent rate of saving that makes the investment in capital goods profitable. The resources devoted to the production of capital goods should have been directed towards the production of consumer goods. There is, therefore, a specific glut of capital goods and a specific shortage of consumer goods. From Say’s law what this means is that consumer goods will command a high selling price in terms of capital goods and capital goods will command a low selling price in terms of consumer goods. Resources need to flow out of capital good production and into consumer good production until an equilibrium is restored where both are meeting their costs.

Indeed, economic crises are always crises of capital and not of consumer goods. This fact is often masked by the nominal price inflation of the boom accompanied and the subsequent deflation of the bust as the supply expands and contracts respectively. During the boom it is true that all prices, those of capital and consumer goods, rise and so there is a tendency to think that there is an all round prosperity. But what is really happening is that the prices of capital goods rise faster than those of consumer goods, so that there is a shift in the real price relationship (expressed in terms of goods) between consumer goods and capital goods. Once the bust happens, there is a corresponding deflation of all prices leading to the apparent view that the entire economy is suffering. But the reality is that the prices of capital goods decline faster than those of consumer goods so that, in real terms, the prices of consumer goods rise and those of capital goods fall as resources move out of the latter and into the former.

Indeed it is ironic that under-consumptionists view the alleged “problem” of the bust as a lack of consumption causing economic stagnation. For the reality is that there is no problem with consumption at all and it is in fact the desire for consumption that has been frustrated during the boom. If anything there needs to be less consumption and more saving so that the relative shift of goods out of the capital goods industry is less severe and at least some of the projects that were embarked upon in the boom may have a chance of achieving profitability (hence Government deficit spending – rampant consumption – only makes the bust even more painful). But unless that is desired by consumers it is futile to go on inflating and pumping in more credit as the structure of production that is so out of kilter with the desires of consumers is simply perpetuated as a lifeless zombie.

The Demand for Money

Up until now we have been considering cases where the relative gluts and shortages in the economy are between real goods with money serving only as an intermediary between goods. However money, or more accurately, the desire to hold money is itself a good that serves an end in its own right. Money is the most marketable of all goods and holding it provides a degree of reassurance that holding other goods does not. The desire to hold a larger cash balance, all else being equal, therefore reveals a degree of uncertainty on the part of its owner, an uncertainty that is hedged by the ability to quickly use cash to exchange for whatever goods and services are needed in the period of uncertainty. Holding money therefore in and of itself providers a satisfaction in much the same way as a real good does. So what happens, then, when the relative gluts and shortages involve not surpluses of goods against shortages of other goods, but surpluses of goods against shortages of money? In other words, when the demand to hold cash rises? Surely now our under-consumptionists can hold validly that everything will remain unsold as everyone scrambles to soak up more cash and the whole economy will collapse into a depressing slump?

The simple, and orthodox, “Austrian” answer to this apparent problem is that if the demand for cash suddenly rises then everyone must sell goods. The sudden influx of goods onto the market increases their supply resulting in a reduced price of each good in terms of money. But in terms of the ratio of goods to goods there needn’t be any change at all. For example, if the following exchange ratios existed before the demand for cash rises:

1 apple          sells for         20p

20p              buys             1 orange

The ratio of the apple to the orange is 1:1. But if the demand for cash suddenly rises such that the money prices of all goods declines then the following exchange ratio may result:

1 apple          sells for         10p

10p              buys             1 orange

Whereas the exchange ratio between goods and money is now lower, the exchange ratio between goods is the same. Exactly the same real trade in terms will therefore take place, just at lower money prices.

Indeed it is for this reason that deflation is not a problem for the running of business. For what matters for businesses is neither rising nor falling prices but the differential between their revenues and their costs. If both their revenues and their costs are falling then it is still possible to make a profit and to expand business. Indeed, the period between the dawn of the Industrial Revolution and the eve of the New Deal era was generally one of a long, secular deflation and this was the most productive period in the whole of human history.

However the story is not so straightforward for it is in fact true that a greater demand to hold cash changes the structure of production but not its level. As we noted earlier, cash is it self a good and the demand to hold cash is itself an act of consumption. An increase in the demand for it is, therefore, an increase in consumption and results in a higher societal time preference and a rise in interest rates. Indeed this makes intuitive sense. If the holding of a cash balance is a hedge against uncertainty, a higher degree of security will be accompanied by a willingness to engage in more roundabout methods of production and to exchange present money for assets that promise to pay a greater amount of money in what is, relatively, a certain future. If that certainty disappears, however, people begin to prefer liquidity today rather than liquidity tomorrow, curtailing their investment in future goods and selling them for cash now. Societal time preference and, therefore, the rate of interest rises. The selling price of the monetary commodity – e.g. gold or silver – will rise while its costs of production will fall, so that resources will shift into the gold or silver mining industry in order meet the new demand for money. There is therefore no reduction in production, merely a shifting of production out of lengthier, roundabout production processes and into the production of a) the monetary commodity, and b) lower order producer goods and consumer goods that can quickly be bought with the hoarded money when adverse conditions arise2.

Societal Profits and Societal Losses

The foregoing analysis gives the impression that a profit that appears somewhere in the economy (i.e. a relative scarcity) must be offset by a loss somewhere else in the economy (i.e. a relative glut). Is it true, therefore, that societal profits are always mirrored by societal losses?

Accounting profits are an excess of revenue over cost – that a firm has paid out less money that what it has received. Losses are the opposite, a firm paying out more money than what it receives in revenue. If all cash income was added to a firm’s profits and all cash expenditure added to its losses then it would be true that societal profits would equal societal losses as no firm could receive more in revenue than it paid out in expenditure without somebody, somewhere, paying out more in expenditure than they received in revenue in order to fund this difference. Indeed, the social function of all entrepreneurs is to arrange the structure of production in a way so that it best meets the needs of consumers. The decisions they make have to be made in advance, resulting in an appraisal of what it is that consumers will value tomorrow. They subsequently set about incurring costs by purchasing factors of production that they arrange into a production structure that they think will best meet the needs of consumers. If all of the entrepreneurs managed to arrange, on day one, the production structure exactly as consumers wanted it on day two, come that latter day revenue would exactly equal cost. The entrepreneurs would have utilised just the correct quantity of factors and have produced just the right quantity of specific goods that consumers were willing to pay for. No one entrepreneur would have bought too many producer goods and deprived an alternative end of their use, nor would any entrepreneur have bought too few producer goods and permitted too much of their use to alternative ends3. In reality, however, this state of apparent perfection is never reached and the resulting structure of production is never completely in tune with the valuations of consumers. Every structure of production is begat by a forecast, a prediction, or empathetic understanding of the businessman for his clients. It therefore never quite hits the mark and some goods will be relatively over-produced while others will be relatively under-produced. If a firm overproduces then the revenue it received was insufficient to pay for the factors of production, in other words that there were competing ends that were bidding up the prices of these factors and that the firm starved these ends of their means of production. A loss cannot materialise therefore without a corresponding underproduction elsewhere, meaning that revenue for these latter goods was more than sufficient to pay for the factors of production, in other words that these entrepreneurs did not bid up the factors enough to starve the loss-making ends of superfluous production.

So is it true, then, that every successful, profitable businessman is riding high on the losses of someone else? That for every entrepreneur arriving to work in a chauffeur-driven limousine another has been relegated to taking the bus?

Not at all, for it is entirely possible for societal-wide profits (and societal-wide losses) to emerge. This is owing to the capitalisation of durable producer goods. As a durable good is expected to produce revenue-generating consumer goods not immediately but also into the future, the capitalisation of a producer good is the market value of that asset’s future revenue, discounted to allow for the fact that these revenues are future revenues and not present revenues. At the point of purchase, therefore, the good is not recognised as an expense of the purchaser but as an asset (and correspondingly the cash that paid for it will show up on the asset side of the balance sheet of the vendor). No cost at all is shown in the accounts of anybody. Rather, the cost of the good is recognised incrementally over its lifetime as it depreciates, i.e. its use in furnishing consumer goods renders lower its ability to produce goods in the future. Entrepreneurs therefore face a choice – to increase present production and increase present sales revenue but at the same time incur the cost of heavier depreciation charges; or to reduce production and preserve the capital value of the asset but reducing sales revenue. Once again, the entrepreneur has to appraise how many goods to produce today and how many to leave for production tomorrow. If the revenue received from expanding production is exactly equal to the depreciation charge of the capital good (plus other costs) it means that he has exactly produced the favoured amount of present goods at the expense of future goods. The market was willing to pay in present goods precisely what it lost in future goods. What, though, if there is a profit? This means that the revenue received is greater than the cost of depreciation, in other words, the entrepreneur withheld from production more present goods than the market was willing to pay for. Future production will therefore be higher but at the expense of present production. And correspondingly, if there is a loss it means that revenue was insufficient to pay for the cost of depreciation – the entrepreneur produced too many goods in the present when they were more valuable in the future.

Societal-wide profits and losses therefore emerge when collectively entrepreneurs under and overproduce, respectively, present goods. Profits represent entrepreneurial saving – the deferment of present production for future production – whereas losses represent entrepreneurial dis-saving – the ravaging of future production for the sake of present production. And as we know it is saving that is the hallmark of capital accumulation, the increase in production and ultimately a higher standard of living. Dis-saving, however, results in capital consumption, a decrease in future production and ultimately a lower standard of living4.

Does this mean, then, that “vicious” entrepreneurs can simply withhold from present production increasing numbers of goods, driving the profit rate higher and higher and spreading widespread misery? No, for in the first place this ignores the non-capitalised factors of production. If an entrepreneur reduces production in order to drive up profits then he also has to reduce his demand for these latter factors – including non-durable producer goods but especially labour. The cost of these factors will therefore decrease, leading to competitors to employ them, restore full production and reduce the market share of the abstaining entrepreneur. The same would also be true of a cartel. If entrepreneurs in concert decided to restrict production, swathes of non-capitalised factors would become available and eventually the cartel would break when one of the entrepreneurs takes advantage of the opportunity this affords. But the main effect of societal profits is that they afford the ability to expand production. For if depreciation charges are lower than revenue then it means that comparatively less has to be spent on maintaining the existing stock of capital. Entrepreneurs can therefore do one of two things – either expand the existing capital stock, in which case production of the same consumer goods will be increased, thus lowering their price and capturing market share from competitors; or they can invest in more roundabout production processes that will afford the ability to provide more newly introduced consumer goods that have never appeared before. A variant on the second option is that, as entrepreneurial saving represents a fall in societal time preference rates, the interest rate will also fall and new entrepreneurs whose projects were too costly before will now offer to borrow the saved funds and invest them in their more roundabout processes of production. Hence you get the famous “Hayekian triangle” – a production structure that becomes longer and thinner as resources are directed out of producing and maintaining the existing capital stock into producing new capital.

Indeed entrepreneurial profit is simply the corollary of private saving. In both cases an excess of revenue over cost means that consumption is denied to the present in favour of the future, these funds being diverted to new, higher stages of production that result in a greater outlay of consumer goods. The greater the profit margin in the lower stages then the greater this effect will be.

Obviously the opposite happens when profits are reduced – more has to be devoted to maintaining the existing capital structure with comparatively less being used on expansion. If losses are experienced then capital is actively being consumed as there are no funds at all left over to replace the existing stock once it is fully depreciated. Production therefore declines along with the standard of living.

Conclusion

It is clear then that under-consumptionist theories are nothing but a tissue of falsehoods. In summary:

  • Goods ultimately trade for other goods and the production of one good requires the use of other, real goods;
  • General gluts cannot arise on the market; only specific gluts and specific shortages which will become apparent through the price system and ultimately through the exchange ratio between goods;
  • It is the task of entrepreneurs to ensure that these gluts and shortages do not arise, the pricing, profit and loss system regimenting them in the fulfilment of this important function;
  • The business cycle is a specific glut of capital goods and a specific shortage of consumer goods on a wide scale; that the pricing, profit and loss system has been distorted by credit expansion leading entrepreneurs to believe that the economy can support a larger capital structure than it really can;
  • Increased demand for money does not have any effect on the level of production and is no cause for alarm; it may affect the specific structure of production but this is wholly in line with the valuations of consumers.
  • Profits and losses do not offset each other – societal profits and societal losses are possible. Societal profits indicate a lowering of the societal rate of time preference, leading to capital accumulation and the expansion of production; losses indicate a raising of the societal time preference rate, leading to capital consumption and a decrease in production.

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1We are, of course, ignoring for the purpose of this illustration the issue of constancy. For more on this see Ludwig von Mises, Human Action, pp. 102-4.

2Whether an economy is operating with a fiat money or a commodity money is what makes the difference between whether an increased demand for cash will leave the time-structure of production unchanged (as in our first scenario laid out above where the exchange rate of goods remains equal) or whether the time-structure will be changed. See Jörg Guido Hülsmann, The Demand for Money and the Time-Structure of Production, Ch. 31 in Jörg Guido Hülsmann and Stephan Kinsella (eds.), Property, Freedom and Society, Essays in Honor of Hans-Hermann Hoppe. See p. 322 for an explanation of how the shift in the time-structure of the economy that occurs under commodity money (but does not under fiat money) better serves the needs of consumers than a production structure that is left as it was before. All we need to note here is that with either fiat or a commodity money the level of production does not change and that there is consequently no depression of business brought about by under-spending or under-consumption.

3This is the hypothetical “equilibrium” state that seems to be the shibboleth of mainstream economists.

4It is, therefore, supremely ironic, let alone wildly inaccurate, that opponents of the free-market charge profit-seeking with the depletion and destruction of the Earth and its natural resources. This fallacy stems from always focusing on the fact that entrepreneurs want to maximise revenue while completely ignoring the fact that they also have to minimise costs. Profit indicates a saving of resources, not their depletion – the entrepreneur has advanced fewer goods than the market was willing to pay for. By incurring costs lower than revenue he has saved resources, not decimated them. It is precisely those assets over which full private property rights (and hence, their capitalised value) are available to the capitalist-entrepreneur that are not in short supply or at any risk of being depleted. For the ever present urge to reduce costs means that they cannot be depreciated more quickly than the market is willing to pay for, otherwise losses will be incurred. Those resources over which there are no private property rights, however – in particular forests, fish stocks, “endangered” animals – are precisely the ones where we experience a depletion. With no one able to enjoy the capital value of these assets and to incur the cost of their depletion against their revenue there is no reason to avoid their decimation.

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A Tactic for Liberty

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The present author is not a keen debater, whether this be face-to-face or in online conversation. In responding to comments or endorsements that others make I find it very difficult to suppress the urge to blast them with everything I know (or think I know), drowning them in a flood of refutation leaving neither of us with much time to draw a breath. The futility of such an approach should be obvious. With those who possess convictions that are as firm as one’s own then you are only likely to encourage an equal and opposite deluge in return, the conversation then descending into ever deeper levels of minutiae that leave the original topic forgotten. On the other hand with those who have not thought about the matter, however, and have made, perhaps, a casual or emotional comment, overwhelming them is likely to turn them off rather than engage them. At some point, with either type of person, it might even descend into a battle of reputations with each side simply eager to outdo the other for the sole purpose of saving face and pride, with no actual truth ever realised at all. Indeed one great risk with such a method of debate is to leave the other person feeling somehow unworthy or stupid, turning him off entirely to any future engagement of such questions even if he concedes his immediate point.

In some ways it is important to distinguish between these two different types of person with whom one might debate. Ideological leaders are always a bare minority of the population and it is their ideas that shape those of others. To survive, any regime only depends on, at the very least, its mere acceptance by the majority of the population and does not require their overwhelming support. It is only able to achieve this passive acceptance if it has, for the most part, the upper hand in convincing them that it is on the right side of the ideological battle. It is, therefore, these people, the masses, who will be the deciding factor in any outcome between individualism and statism, or between liberty and tyranny and not the intellectual bodyguard themselves. Our task as libertarians is to convince these people that our way of thinking is the correct one. It is not to engage them in mental warfare as if they are all devoted Marxists and ultra-statists. The road to liberty will not be paved with the skulls of ideological enemies but will be trodden by the boots of the masses.

Nevertheless there is a sensible method of argument that is, I think, more effective in meeting both types of person than tit for tat retorts. It is, in fact, not to argue at all but to ask questions of what the other person has stated. Why do I think that this is a sure tactic for convincing the other person that liberty is right, to perhaps modify his views? And why even might it achieve the ultimate pinnacle – to become a passionate supporter of liberty himself?

  • Questioning requires him to speak first; he therefore sets the scope of the discussion as everything you ask in each question must in some way relate to his previous statement; he therefore feels in control of the debate;
  • You are permitting him to show what he knows rather than simply throwing arguments back at him to challenge; you are therefore according him more respect as a contributor to the debate than you would be if you were simply shouting back at him;
  • It requires him to concentrate on justifying his position rather than on challenging yours; as each pair of exchanges are based on what he says then the crucial elements of truth are introduced by him as he answers your questions; his argument must therefore be justified in terms that he sets rather than you; then, if he is truly wrong, there will come a point when his argument leads to an absurdity or an incorrect conclusion;
  • If he is wrong then it will be by his own demonstration and realisation; it will make him feel as if he has worked out the “correct” position himself. At the very least he might go away with food for thought.

So next time, when someone says something like “Government should ensure a higher minimum wage for low paid workers”, instead of firing a cannon of arguments about how the minimum wage leads to unemployment, is an unjustifiable interference in self-ownership and contract, etc. etc. ad nauseam, simply ask him “How will this make workers better off?” He might then say  (perhaps thinking you’re a little stupid) “Because they will get more money!” To which you can then add the question: “But I don’t understand – doesn’t that mean that the employer will have to have more money too? How does he get it?” And what might unravel is not only the whole body of truth concerning the economic effects of minimum wage laws but – more importantly – how leaving the wage rate to the free market and free exchange is, in fact, the best deal that employees will get.

It is true of course that this tactic might take a long time to reach a conclusion. It might also take place in stages and not in one go. Further, it might not ever reach a conclusion at all if the other person decides to abandon the debate. But at least you’ve tried your best in according him the air to express and justify his opinions. If this does not cause him to realise the truth then he will at least walk away with his pride intact, and may be in a state that makes him more receptive in a future debate.

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