poetgrant

written philosophy

This is a short essay that I have written to further define terms and to make sure that anyone reading this collection of essays understands the more basic principles of micro-economics.

Supply and demand is the basic concept of markets that attempts to define the relationship between the consumer and the producer of goods. It has been defined as a natural law of economic activity. Packed into that definition is the understanding that on a macro scale, human psychology trends in a generic pattern when it comes to consumption of goods and services.

In short, that pattern is that when a demand for a good or service is greater than the supply or production capacity of that good or service, the subsequent price will increase to a level that will naturally ration that good or service until supply can be increased to match demand more appropriately. Such natural rationing has proven throughout history to be more effective than synthetic rationing done by governments since it is driven by a natural consequence to supply.

When supply is interrupted by the use of extra-market force (i.e. governmental force, private cartelism, and etc.) the price of the good will increase, which will decrease the demand for that good. This is the basis for why governmental forces and private cartels tend to last only a short time relative to the overall market timeframe.

Supply and demand will, therefore, necessarily limit cartels and monopolies in a very serious way, is has been shown through the limited history of capitalism.

Murray Rothbard worked his way through the economic history of the United States and one of the topics he touched on was the cartelization of the railroads in the 1800s. The railroad industry tried multiple times to form trusts and cartels in order to corner the market and maximize profits, but they were fighting against the law of Supply and Demand and they continued to lose time and time again. It wasn't until they gained the blessing of the government through a number of laws and contracts that allowed them to prop themselves up as a sanctioned trust. It was not a movement of activists that stopped the trusts from forming, nor was it protestors, rather it was simply a loss of demand in the railroad sector of the economy because the cost was too great. People couldn't afford to use the railroads as a cartelized economic entity, so they didn't and the cartel failed.

This is why the argument for government control to stomp on monopolies fails the test of logic. The only time you would need government to solve the problem of monopoly is if the monopoly is enforced by the government, otherwise it would naturally fail simply because demand would decrease until the monoplized goods would no longer be profitable.

If Walmart decided to buy up all of its competitors so that it could raise its prices and lower how much it pays its employees in order to maximize profits, there comes in a problem. If there is no competition and prices are able to rise freely, then higher prices will necessarily exclude certain people from participating in the Walmart market. Those people would have to seek such goods from other sources. But perhaps Walmart doesn't care because that is the bottom 10% of their customers. The rest will continue to pay higher prices because they perceive Walmart as the only place to buy their food and toys and tools.

Now, losing that lower 10% of customers may seem insignificant to Walmart, but alas they must find other ways to feed themselves and this creates an opportunity for competition in the market. Demand for goods from Walmart at this point will be stagnant since they have raised prices subjectively rather than according to demand. Meanwhile, some other small company will be selling to the lower 10% at prices that they can afford. If the other 90% find out that they can get their salt for a whole lot less, then some of them may start buying from this other company. This will cause demand for salt at the other company to rise very quickly and demand for salt at Walmart to drop equally.

Perhaps then Wonderbread can be purchased more cheaply at this other company. Then demand for Wonderbread at this new lower price will rise quickly. Eventually, this new company will be making quite a bit of money and they can expand and challenge Walmart. Walmart will then be forced to lower prices to meet demand. The law of Supply and Demand is called a law because it has always worked this way. No company can keep a sector of the market cornered indefinitely, nor even very long.

Supply and demand is not a man-made law either. It isn't something that some guys got together and decided upon. It is more like a law of physics. It exists as an observation of the natural order. It is a law that must be taken into consideration when creating new frameworks for a national economy. If someone wants to create a utopia from a communalist ideology, then they must consider how their framework will interact with supply and demand. If it works against supply and demand, then such a framework will inevitably need to fight against such laws continually. If the framework takes into account the law of supply and demand, then perhaps it will have a chance to exist for more than a few short generations.

Application

The economic system in the US continually works against the law of supply and demand, and therefore continually suffers from a misallocation of resources. The government tends to direct resources as it sees fit and the result tends to be market instability in the long term. The US government trades longterm stability for short term growth, as we can see in what is being hailed as “Trump's Economy”. He is trading longterm stability so that the economy during his term as president can look “great”.

In the end, the resources could be allocated in a more efficient and beneficial ways if the government would allow them to, but that would appear weak. How would Trump or Obama or Bush or Clinton get re-elected if they appeared weak? Even Reagan did a pretty bad job of allowing supply and demand to allocate resources, though he is called “the free market president”. His presidency was the furthest thing from acknowledging and respecting the law of supply and demand.

I would insist that my readers try reading a few things further about supply and demand to gain a fuller understanding of its roots and how it works because regardless of the type of economy a landmass claims, they must all obey this law, as it is one of the only things in economics that has yet to be contradicted effectively.

The Attempts to Form Cartels

Supply and Demand, definition

Foundations of Economic Analysis

In my last post I mentioned productivity as a concept of human action. Let's discuss the roots of the word.

Productivity is defined by the Oxford English Dictionary as:

  1. Economics. The effectiveness of productive effort, especially in industry, as measured in terms of the rate of output (of goods, products, etc.) per unit of input (of labour, materials, equipment, etc.). Also in extended use.

To Act

But let us venture backwards a little. What is it that makes up productivity? That is simply action. As Murray Rothbard describes it:

All human beings act by virtue of their existence and their nature as human beings. We could not conceive of human beings who do not act purposefully, who have no ends in view that they desire and attempt to attain. Things that did not act, that did not behave purposefully, would no longer be classified as human.

With this definition in mind, to act is simply to be human. But it goes deeper than that. To act is to be a being with purpose. A dog may act in its own self-interest, just as a man may act in his own self interest. Objects that do not act are inanimate objects without consciousness. Therefore action is the essence of being conscious. So how do we extrapolate from this term to a more macro level?

Productivity requires action toward a certain goal. Ideally a person's productivity works towards a wholesome goal of supporting a discriminate or indiscriminate livelihood, more often to their own benefit. A person may act and become productive in order to benefit another person as well, but the key to this definition is that they act toward a productive end. There must be a goal in mind, even if that goal is not in the forefront of the mind.

As an example, let's say that you wake up in the morning. What is your first act of the day? Do you stay in bed and soak up the warmth held in your blankets? Or perhaps you get up and brush your teeth? Both of these things are acts of productivity in their own way. The first is an act to appease your body's need for warmth and the second is an act to prevent cavities and bad breath. Your actions are productive to long-term and short-term goals. Either way your actions are productive. If instead you decide to wake up and do some heroin, your act is immediately productive. It produces euphoria and good feelings initially.

Different acts produce a different set of productive environments. Brushing your teeth sets a long-term environment of productivity. You will have fewer cavities and your breath will be fresher than the person that decides to stay in bed or the person who decides to do some heroin. This will set you up for more productive acts in the future while the other two examples will set you up for fewer productive acts in the future. Therefore acts are only part of productivity. The other part of productivity must then be guided by something like reason and discernment.

Reason

Reason is a topic that can take up an entire book, so we will only define it for the purposes of this essay here.

Reason is defined in the Oxford English Dictionary as:

  1. A cause, explanation, or justification for an action or event.

Reason is the ability, therefore, to justify or explain an act. On a deeper, human level, reason is the conscious explanation of an act. That is, reason is the human ability to think consciously about how current action will positively or negatively affect future productivity or action.

With that in mind we can safely say that what makes up the act of being productive is action and reason. Productivity is not the same as that which is produced. Human productivity is action and reason that results in some sort of product as a result of action/labor.

Labor

I will touch more on the Labor Theory of Value later, but for now let's just define labor

Labor is the action exerted by a person toward a specific goal. The result of labor is production. Therefore is it upon labor that an economy is built. A person could labor at a workshop with the end goal of producing tables. The tables would then be the product of his labor. These are simple concepts, but they must be stated here in order to help define the term for future argument.

Adam Smith said in Wealth of Nations:

The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save himself, and it can impose upon other people… Labour was the first price — the original purchase-money that was paid for all things.

While it can be argued that labor is the first price of all costs, this concept has been extrapolated by economists like Karl Marx and David Ricardo to mean that the value is derived from labor, which is a dangerous association to make cosidering how complex human interaction truly is. Since the economy and trade are simply the evolution of how humans interact in a regulated basis and in a peaceful way, the claim that labor is the basis for cost, and therefore price, is a huge claim full of assumptions, most of which are difficult or currently impossible to resolve.

Labor is not simply a cost basis for a product. It is, rather, a form of product. Let's say that you go to a business owner who is in need of help. You can offer your labor at a cost. You are, therefore, selling the business owner a product known as labor in return for perhaps money or some other tradeable good. However, the product you sell is a single cog in the machine of industry. If you sell your carpentry labor to a table manufacturer, your labor is a single cost-point in an array of cost-points. When you combine the array of points, you get the true cost.

There could be a number of costs involved in manufacturing a hard good such as tables:

  • labor
  • lumber
  • taxes
  • regulations
  • power
  • insurance

The above are just a few of the major cost-points in the actual cost-array. The larger the bus