The business cycle is the recurring prosperity and depression seen over economic history.  Before the modern age of advanced industrialism the prosperity could be accounted for by events such as good weather yielding bountiful crops or the spoils of war from a military victory.  Likewise, depression could be accounted for by harsh weather resulting in poor crops or from a military defeat.  In each case the causes were fairly evident. 

The modern business cycle, however, needs a more sophisticated explanation as it is a more complex phenomenon.  Marxists believed that business cycles were the inevitable collapsing of capitalism, but this theory can be discarded since capitalism has not collapsed though socialism has.  Keynesians account for the business cycle by an appropriate level of spending (prosperity) or underspending (depression) but have been baffled by the simultaneous occurrence of both inflation and depression--a condition their theory treats as being as likely as a square circle. Read more

The Spanish Scholastics of 14th through 17th century Spain had produced a body of thought largely similar to our modern understanding of economics.  The work of these scholars was largely lost to the English speaking world we've inherited.  The French physiocrats carried the discipline forward in the 18th century with prominent economists of the time including A. R. J. Turgot and Richard Cantillon.   A strategic error was made by these French advocates of laissez-faire as they attempted to change policy by influencing the King to embrace free markets, only to have the institution of monarchy itself delegitimized.  Thus a guilt by association undermined the credibility of the laissez-faire theorists. Read more

Entrepreneurship can be defined as acting on perceived opportunities in the market in an attempt to gain profits.  This acting involves being alert to profit possibilities, arranging financing, managing resources and seeing a project through to completion.  Entrepreneurs can be regarded as heroic characters in the economy as they bear the risk from bringing new goods and services to the consumer.  To quote from Ludwig von Mises in Human Action: 

They are the leaders on the way to material progress.  They are the first to understand that there is a discrepancy between what is done and what could be done.  They guess what the consumers would like to have and are intent on providing them with these things. p. 336  

Entrepreneurship is an art, every bit as much as creating a painting or sculpture.  In each case--running a business and producing a work of art--the same elements abound:  Conceiving the undertaking, taking resources and combining them into something new and different, risking those valuable resources in producing something which may ultimately prove to be of less value. Read more

There are four major schools of economic thought today.  An understanding of these four schools of thought is necessary for an understanding of economics.  The four schools are Marxist, Keynesian, Monetarist, and Austrian.

Marxist economic thought is based on the writings of Karl Marx and Friedrich Engels, who wrote in the mid to late 1800's.  Essentially, Marxist thought is based on economic determinism wherein societies go through the developmental stages of primitive communism, slave systems, feudalism, capitalism, socialism and finally communism.  In each of these stages the economic system determines the views of those living during that system.  Each includes a class struggle which leads inevitably to the next stage of societal development.  Thus feudalism has a class struggle between landlord and serf which produces the next stage, capitalism.  In capitalism the two classes are capitalist and worker.  The conflict between capitalist and worker results in the overthrow of capitalism by the working class thus ushering in socialism and ending class conflicts.  Socialism leads to the ultimate fate of humanity--communism.  Read more

The free market economy is a profit and loss system.  Typically, profits are emphasized but it should be understood that losses are equally necessary for an efficient economy.  The nature of profits are sometimes misconstrued by the general public.  Profits are not an excess charge or an act of meanness by firms.  Profits are a reward to the capitalist-entrepreneur for creating value.  To understand this we must first understand the nature of exchange.  When two parties trade they do so because they expect to receive something of greater value than that which they surrender; otherwise they would not waste their time engaging in exchanges.  Now what is the nature of a profit? 

A businessman takes input resources--land,  labor, materials, etc.--and recombines them to produce something different. Read more

Socialist theory (predicated on the labor theory of value) concludes that profits are necessarily value stolen from workers by capitalists.  This conclusion is mistaken.  The function of the capitalist is as useful as is the function of the worker; profits are as warranted as wages. 

The two functions the capitalist performs in the economy are the waiting function and the risk-bearing function.  The waiting function occurs because all productive processes require time to complete.  It is the capitalist who forgoes consumption by investing in the productive enterprise.  While the worker is paid his wages as he works, the capitalist bears the burden of receiving payment only once the completed product has been sold.

The risk-bearing function is the entrepreneurial function of bearing the burden that a productive process may turn out to be counterproductive--that is, the value of the good produced may be less than the value of resources used to produce it.  While the worker is paid his wages for his work, the capitalist bears the burden of receiving payment only if the completed product is a success. Read more

Price gouging--charging higher prices under emergency conditions--evokes strong emotional responses that are understandable but terribly wrong-headed.

In the words of economist Walter Williams, "passionate issues require dispassionate analysis."  The passion generated by price increases for necessities in an emergency is just such a case.  Three lines of analysis demonstrate that "price gouging" is not only not offensive, but that preventing it would increase misery, and that it is even a desirable practice! 

Let's take for example, the case of some hot item during an emergency, say plywood as in the aftermath of a hurricane.  Before the hurricane, plywood was selling for the nationwide price of $8.00.  After the hurricane prices of $50.00 or more may not be uncommon.

The first line of analysis should be the most meaningful for red, white and blue, freedom-loving Americans.  If one person (the seller) has plywood and is willing to part with it for $50.00, it is because he would prefer having the money to having the plywood.  If another person (the buyer) has $50.00 and is willing to part with the money for the plywood, it is because he would prefer the plywood to the $50.00.  No one is forced to engage in this transaction, individual freedom is preserved in this voluntary exchange, and it results in a mutual benefit.  Can anything be less objectionable than a free exchange of goods which results in a mutual benefit? Read more

Price controls are the political solution enacted to stop price inflation. [See Chapter 21 for an explanation of the cause of inflation.] The controls do not work. Prices are determined by supply (willingness and ability to sell) and demand (willingness and ability to buy). The price resulting from supply and demand which clears the market is not changed by a price control (a legal limit on price). The legal price is merely a misstatement of the actual conditions and is comparable to plugging a thermometer so that it never can read greater than 72 degrees even though the actual temperature may be higher. The law of supply and demand cannot be repealed.

People will call for price controls as a way to make goods available cheaper than they otherwise would be. The price controls do not make the goods cheaper and in fact cause a shortage of those goods as the demand quantity will be greater than the supply quantity. Not only do price controls cause shortages but they in fact make goods MORE expensive! Read more

The conventional, but mistaken, understanding of regulation is that consumers or workers need protection from unscrupulous big businesses and that Congress wisely and compassionately responds to those needs to rein in nefarious businesses.  Actually, business regulations were and are instigated at the behest of and for the benefit of the businesses so regulated.  In effect, regulation is a teaming of business and government to the detriment of potential competitors--which the established businesses prefer not to face--and to the detriment of the consuming public. 

On a purely theoretical basis this has to be the anticipated fundamental status of regulation.  This is because any business regulated by a government agency has a focused interest in the activities of that agency and will therefore spend a great deal of time and money making sure the regulations are enacted in such a way as to benefit the business.  Consumers, on the other hand, have a myriad of interests and only a minor or passing concern about any particular industry and the regulations affecting it.  Businesses in other words will naturally out-compete the consumer in the political realm where regulation originates. Read more

Licensing is a sub-category of regulation and so all of the same basic points regarding regulation apply to licensing.  Licensing is sold to the public on the basis that it protects consumers from low quality.  What licensing in fact does is protect the licensed from lower prices for their services!  Licensing is a means by which a special interest group--those licensed--restrict the supply of a service in order to generate higher prices for themselves. 

Licensing overrides the preferences of consumers by setting the government as the decision maker in quality standards for various services.  In effect, a particular level of quality is established by law thereby forbidding any lower quality services and depriving the consumer of his sovereignty.  Many would claim that it is necessary to have such quality standards, but often the quality standards actually have very little to do with the service being rendered.  The requirement of passing a "History of Barbering" course in order to get a license to barber is one such example. Read more

In the conventional positivist-based methodology found in today's textbooks, the term "monopoly" has been warped into any firm facing a falling demand curve.  Since all firms face a falling demand curve, the word "monopoly" has been rendered meaningless.  The original concept of monopoly meant an exclusive privilege granted by the state, or literally one seller.  Even the textbooks acknowledge these as types or sources of monopoly. 

Some pertinent examples of monopoly, correctly understood, would include the postal monopoly (it is illegal for anyone else to deliver first class mail for under $3.00 per letter), most power companies and cable television companies (it is illegal for anyone else to sell these services in their territory--much like the Mafia turf concept!), taxis in many cities (it is illegal to run without an expensive medallion which the state limits in quantity), and public schools (which force property owners to pay for them regardless of patronage).  Read more

The conventional theory of anti-trust laws (laws against monopolies) is that after the Civil War with the rise of large scale enterprises, businesses had power over consumers in being able to corner their markets.  Responding to a public need, the Congress passed the Sherman Anti-trust Act and the laws have done good ever since.  This conventional view is grossly mistaken. 

Actually, the origins of the anti-trust laws lie in politically influential businesses getting a national law passed to pre-empt state laws, to use the power of the state against their business rivals, and from a political vendetta by the bill's author against the head of a major firm.  Likewise, the laws have not served the consumer but have done the exact opposite, harming productive, cost and price-cutting businesses to the detriment of consumers.

Two famous anti-trust cases illustrate these points:  The 1911 Standard Oil Case divided the company into thirty-three separate organizations.  What was Standard Oil guilty of?  The judge decided that by integrating stages of the oil business--wells, pipelines, refineries, etc.--and by buying small unintegrated stages, Standard was preventing these separate businesses from competing with one another.  Nowhere was it found that Standard had raised prices (prices fell continuously), or had restricted output (output rose continuously)--the classical complaints against a monopoly.  Standard Oil had earned its position as the largest domestic oil producer by serving the needs of consumers and serving them very well.  Read more

Unions are a matter of pitting one group of workers against other workers; it is not a worker versus manager phenomenon.  Successful unions are those which are able to exclude workers, and the unions most able to exclude workers are those composed of skilled workers.  Skilled workers are more difficult to replace than unskilled workers and thus are better able to succeed in a strike.  As Milton Friedman has stated, "unions don't cause high wages, high wages cause unions."

When unions strike they are not merely refusing to work but are preventing any labor from being offered to the employer.  Those workers who do cross a union line are called "scabs," thereby illustrating the lack of working class solidarity and clarifying the fact that the issue is one group of workers against other workers.   Read more

Advertising has been given a bum rap in economic theory.  Aside from any inherent bias against the free market itself, the reason for this is the theory of perfect competition.  Once the economist perceives the world through "perfect competition colored glasses" it naturally follows to disparage advertising.  Given the fanciful assumptions of perfect competition--perfectly homogeneous products, perfect mobility of resources, perfect knowledge, and all firms so small that none can influence price--advertising is purely wasteful.  What valuable economic role could advertising play in such a world?  All consumers know the attributes and availabilities of the products, products are equally readily (instantaneously) available in regard to location, and the prices for these products are all the same. 

So much for advertising in a world of perfect competition.  What about in reality?  In reality, in the real world of actual competition--rivalrous attempts among firms to attract consumers--advertising does indeed play a useful, beneficial economic role.  The three major points of contention regarding advertising are persuasion versus information, waste versus efficiency and concentration versus competition.   Read more

Speculators--those attempting to gain by guessing future conditions (in particular prices)--are a subcategory of entrepreneurs; everything written previously about entrepreneurs applies as well to speculators.  However, while the public will often have sympathy and understanding for the role of entrepreneurs, there is a general disdain for speculators. 

In redeeming the reputation of speculators let me first point out that everyone speculates.  Consumers speculate when they decide to buy a house now rather than wait for lowering prices or mortgage rates, students speculate when they choose a major in college, etc.  But beyond noting the universal practice of speculating there are other redeeming qualities to speculators. 

If, for instance, someone is speculating in the future price of sugar then he will pay much more attention to the weather conditions, technology, and political influences on sugar than will the consumer.  For the consumer, sugar is a passing and minor part of his life; for the speculator it is his means of livelihood.  At a time when the price of sugar is $1 per pound a speculator will begin buying sugar if he has reason to anticipate a future lack of supply.  His speculative demand added to that of consumer demand will increase the price to say, $1.50 per pound.  This is one source of the animosity typically directed by the public toward speculators.   Read more

Insider trading--making profits in financial markets from knowledge not available to the general public--has been a universally scorned activity of late.  But what is the nature of this alleged crime?  Making financial gain on superior knowledge is exactly what the stock market is all about.

In fact, this is what all business activity is about.  Doesn't Delta make a success of its airline business because it knows better than others how to run an airline?  Doesn't Coca-Cola make a success of its soft drink business because it knows the ins and outs of production, distribution, marketing and consumer demand better than other establishments?  Certainly, Delta and Coca-Cola don't reveal to competitors their insider's knowledge of their businesses.

But beyond the universal nature of insider trading what are its effects on the stock market?   Read more

In the relentless attack on economic freedom waged by statists, the modern corporation has been targeted for scorn.  The perfectly valid theory that a profit-maximizing firm will generate efficient production for consumers has been turned into a "judo" argument against the free market.  This theory states that the old nineteenth century firm was an efficient producer since the owner (who wanted to maximize his profits) was one in the same with the manager (who made actual day-to-day decisions).  However, today the modern corporation is run by "hired gun" managers who are not the owners of the firm and its assets, and thus are less interested in profit maximization than in a comfortable existence, while the owners are often passive investors uninvolved in the decisions of running the business. 

Thus, according to these critics the firm will not be efficiently managed for consumer benefit but will result in management taking advantage of the owners for their (the managers') personal benefit.  From this viewpoint the statists argue for regulation and denunciation of the free market process--a process which often results in these large, corporate business enterprises.  (First, let me acknowledge the dichotomy of interests which does exist between the owners and the managers; a dichotomy which also exists even with a single owner and a single-employee sized firm.  The owner will be diligent in his behavior, whereas the employee does gain personal benefits from slacking.  Obviously, the benefits of having employees outweigh the negatives of having employees since we find a world of firms with employees instead of one-man enterprises.) Read more

Its often heard that government is not as efficient as business.  This is not a knee-jerk ideological reaction.  It is grounded in the real differences of the incentives facing government and private enterprises.

In the market, a private enterprise is dependent on the flow of consumer dollars into the organization for its success.  Thus a tight link exists between consumer satisfaction and business success.  In contrast, a government enterprise has a second source of income available to it--tax revenues.  With an alternate source of income to support it, a government enterprise will necessarily have a lesser incentive in serving consumers.  Realize, this is not a matter of good people in management of private enterprises and bad people in management of government enterprises, but a different incentive structure in the two arenas.

Most people attempt to please their bosses on the job as a means of generating an income.  Winning the lottery often reveals the employee's true underlying attitude toward working at the behest of the boss.  Government enterprises have won the lottery, so to speak, and thus treat the consumer not as the end all and be all for the organization but as a nuisance interfering in the peace and tranquility of the day.  Additionally, many government enterprises hold a legal monopoly relieving them of the fear of loss of customers to rivals, unlike private enterprises in a free market. Read more

Economists of all schools recognize the value of free trade:  greater overall production.  This greater production is due to the freedom of each producer to specialize in that line where he or she has a natural advantage.  The natural advantage of each trading partner results from the differences among people and locations.  A major reason the U.S. economy is as productive as it is, is that there is a large geographic area of free trade (the U.S. Constitution wisely prohibits protectionist tariffs and quotas among the various states).

Adam Smith enunciated the principle that it is foolish to produce at home that which can be obtained more cheaply abroad.  This is true not only literally of the home, but of the county, state, region and country as well.

This emphasizes that there is no distinction between trade and international trade in principle--one "exports" his labor to "import" goods consumed, as it is a cheaper means of obtaining goods than producing the consumed goods directly.

Despite the value of free trade there are continuous calls for disruption of an international division of labor by way of taxes on imports (tariffs) and numerical limitations on imports (quotas).  Such arguments are ultimately special interest pleadings advanced for the sake of a transfer of income to the special interest at the expense of the rest of the economy. Read more

Inflation results from an increase in the money supply.  The traditional definition is "a rise in the general price level," but this is actually an effect, not the cause.  Most economists have given up trying to explain the difference in common discussion, partly because most people see the world through "Keynesian-colored glasses."  Keynesian theory says there can't be inflation caused by an increase in the money supply (or from any other cause other than supply shocks reducing total supply) at the same time that there is unemployment.  Any increase in the money supply, they say, will not cause inflation--it will just put people to work, not cause prices to go up.

The theory of inflation as an increase in the money supply, causing prices to go up, is consistent with basic supply and demand analysis.  When there is an increase in the supply of a good, the value of each unit has got to go down.  It is consistent with the law of diminishing marginal utility.  It is consistent with our history--inflation in the United States has occurred at the same time that the money supply has increased (likewise in other countries). Read more

The proper methodology--the system of principles, procedures and practices applied to a branch of knowledge--in the social sciences is to begin with self-evident axioms regarding the subject to be studied.  (Self-evident meaning a proposition must be true since to deny that proposition one must employ that very proposition itself in the denial, e.g. the axiom of human action cannot be denied with out carrying out the action of the denial!) 

Economics studies the actions of human beings transforming nature-given scarce resources into usable products.  The axioms are therefore that human beings act to pursue ends (or goals) in the face of scarce resources.  Therefore by logical deduction, one can begin with the undeniable axioms of purposeful human action and scarcity and proceed.  The procession runs from human action and scarcity to choice; realizing from choice the truth of opportunity costs and continuing in like fashion to the entire field of knowledge embodying "economics."  By this method, economic truths are ascertained as long as there is no break in the chain of logical deductive reasoning.  This method is appropriate for the social sciences because in studying human behavior we can understand the motive driving human beings.   Read more

The labor theory of value is the bedrock basis of Marxist or socialist economic theory.  Disagreements between the socialist theory and that of the free marketeer can ultimately be traced back to the question of the theory of value.

The labor theory of value states that all value is a result of human labor.  The theory has a certain initial plausibility since laboring does commonly result in additional value.  However, a closer brief analysis reveals the obvious errors in such a theory. 

If the labor theory of value was correct then a diamond found in a diamond mine would be of no greater value than a rock found right next to it since each would require the same "amount" of labor-time.  A photo of a loved one would have the same value as a photo of a total stranger or of a hated enemy--check your wallets or desktops to test this theory.  According to the labor theory of value if you have a slice of pizza for lunch, valued because of the labor-time required to produce it, you must necessarily value the next slice the same.  The labor theory of value is a denial of the well-established law of diminishing marginal utility which states that the value to the consumer falls with additional consumption of the good in question.  How a true believer Marxist ever justifies ceasing pizza eating is still a mystery.   Read more

There is no such thing as a trade deficit.  The nature of trade is such that each party will make an exchange only if the good received is of greater value to the trader than the good surrendered.  Therefore, all trade generates a surplus; each party gains from a voluntary transaction.  The theory of the trade deficit is a misapplication of accounting to economic theory. 

In accounting, everything must balance or be equal.  For instance, if a firm buys office supplies for $100 it will record the transaction as a debit (or increase) of $100 in its Office Supplies account and as a credit (or decrease) of $100 in its Cash account.  Obviously, the only reason the firm would make such a purchase is if it prefers the office supplies to the cash. 

Unfortunately, this perfectly valid accounting practice has been used in such a way as to obscure the underlying economic phenomenon occurring.  With this correct understanding, the trade deficit becomes a non-issue, a meaningless--and false--statistic.   Read more

The false Marxist theory of economic class analysis is better know today, however, it was derived (in the mid-1800's) from a correct theory of economic class analysis originated by the French intellectuals of the late 1700's.  This correct analysis was emulated by James Mill in the English speaking world of the early 1800's in England. 

Mill's analysis saw the economic classes as the state rulers and those exploited by them.  In other words, what American statesman John Calhoun later called the taxpayers and the tax consumers. 

Marx took the valid theory and (misapplied) it to the relations between employers and the employed.  The Marxian version suggests an inherent antagonism between the interests of the owners of the means of production and those who sell their labor to those owners.  The truth is that there is a symbiotic relationship between employers and employed--each specializing in their own chosen pursuits (savers and investors in the means of production and laborers selling their labor for current income). Read more

If property which is justly acquired is later stolen, the corrective action is for that property to be returned to the owner from the thief, with additional compensation from the thief for the aggravation and effort of recovering it.

If the original owner should die before the property is returned, does this change the corrective action?  No.  The property should be returned to his heirs just as never-stolen property is passed to his heirs.

Does this conclusion change if there are numerous generations?  Again, the answer is no, for the principle is the same. 

What if the thief has died or has sold the stolen property, is the corrective action altered?  No, the property still should be returned to the original owners or his heirs, regardless.  (It should be noted that this is the very reason for title insurance which is so common in real estate transactions.)

Now we can apply this theory to an actual issue--reparations to Blacks due to slavery.

Were the slaves victims of theft?  Yes, of both their liberties and their production.  Therefore, the corrective action is for the slaveowner to restore the property to the slave with compensation for the aggravation and the effort of recovery. Read more

The Phillips Curve asserts a permanent trade-off between unemployment and inflation based on empirical data and the strict Keynesian theory that an economy can suffer either from inflation or unemployment problems but never both simultaneously.  In fact, there is no permanent or long-term trade-off between the two. 

The only reason that a temporary or short-term trade-off does occur is because of a lack of understanding of actual conditions by workers.  When inflation unexpectedly increases, workers are caught off guard and continue to engage in a job search based on a now-mistaken understanding of the value of money.  Once workers realize that inflation has undermined the value of money they then adjust their wage requirements upward to compensate for the reduced dollar value and thereby lengthen the duration of the job search and increase the unemployment rate itself.     Read more

Perfect competition is the perverse theory modern economics has developed in dealing with firms, prices and resource allocation.  Competition is normally, and correctly, understood to mean rivalry between firms in attracting consumer patronage.  The theory of perfect competition reflects the influence that positivism and mathematics have had on economics.

In perfect competition, all firms produce the same identical goods, charge the same price for those goods, face a perfectly horizontal demand curve, experience no transaction costs, and buyers and sellers have perfect knowledge.  Aside from the appalling lack of reality embodied in this theory--which should alone warrant its discard--the theory is also self-contradictory.  A perfectly horizontal demand curve is self-contradictory on the very grounds of its propositions.  A perfectly horizontal demand curve depicts ongoing sales at the same price, however to supply that increasing number of sales is to add to total supply, and an increase in total supply depresses prices!  A perfectly elastic demand curve is therefore a theoretical impossibility. Read more

The Multiplier is one of the major components of Keynesian analysis and policy.  The multiplier effect can be defined as the greater resulting income generated from an initial increase in spending.  (For example, an increase in spending of $100 will generate a total increase in income received of $500 as the initial income is respent by each succeeding recipient--these figures are based on an assumption that each income receiver spends 80% of his additional income and saves 20%, the formula being Multiplier = 1 / % Change in Saving.)

Fundamentally, the multiplier is theory run amok, as Henry Hazlitt has explained in The Failure of the New Economics:   Read more

The original socialist theories envisioned an abolition of not only privately owned property but also money and prices.  However, in 1920 Ludwig von Mises shocked the socialists with his demonstration that such a socialist economy would be unable to rationally allocate production.  Production in a socialist economy without money and prices would be arbitrary and lacking any rational foundation.  Money and prices provide a value measure with which to choose between competing options. 

As an example, in deciding whether or not to insulate your attic, you must compare the price of the insulation with the price of the energy to be saved.  In an economy without money and prices to convey relative values--that is, an economy with just the  goods, insulation and natural gas, you would not know if it made sense to insulate or not.  Should you repair your old lawnmower or buy a new one?  Obviously, what makes good economic sense depends on the prices of the repair and the new mower.  An absence of money and prices wreaks havoc with consumer decisions--that alone is bad enough for economic well-being.   Read more