In order to better understand REAL Economics and how it differs from Ordinary Economics we are going to imagine a country which is much like all the other countries of the world except that they have managed to think a bit more carefully than the rest of us. We will imagine their development from a primitive society to a well developed economy in the modern sense but there will be one or two subtle differences which will develop into major differences over time.
Let us imagine this mythical land somewhere north of Greece and Turkey but below Russia and imagine that it is bounded on the South side by 300 metre high cliffs and to the North and the two sides by very high and steep mountains with only two passes down to the rest of the world. One to the East and one to the West.
The inhabitants of this land had arrived there from all directions from 500BC onwards and finding the land to be a warm and pleasant place they had stayed and prospered. They were never considered interesting by the armies of Egypt, Greece or Rome but numerous adventurous peoples had come over the years bringing their knowledge and experiences with them.
One thing about which they were absolutely certain. A strong leader was a very dangerous thing and to be avoided at all costs. They had many experiences of "strong men" leading "rape and pillage" parties in their previous countries and were well aware of the devastation they can bring. Especially if they built up a large army of soldiers.
They eventually spread out over the land and lived in various villages and when the first strong leader began building a force of young men and started making demands in his village, the other village elders gathered all their men together and placed the strong leader under arrest. 1000 men against 30 was no contest.
The strong leader was then tried and found guilty of attempting to disrupt the peace of the land and he was banished. They attached him to a catapult and hurled him over the 300 metre drop. Banishment for life!
As a result of this experience the villagers organised a People for Peace society and they used the catapult as their symbol. Whenever a villager looked like he was moving towards being a "strong leader" the society would gather its members together and march to see the "strong leader". They would then form a large circle around his house and stand silent holding large placards showing their catapult symbol.
This peaceful protest always had the desired effect and nobody else has tried to be a strong leader since those ancient times.
So for 1000 years this land was peaceful and since there was good farmland and similar animals, trees and minerals to the rest of the earth they were self-sufficient and wanted for nothing. The new arrivals brought new ideas and new ways of doing things so their knowledge and enterprise grew as much as anywhere on earth.
Then in 500AD they experienced the big earthquake. Fortunately with their light timber frame dwellings there was not a great deal of damage but both passes out of the land were badly damaged and this made it impossible for anyone to climb up to Nowhere.
So while the rest of the world was regressing through the Dark Ages our Nowhereans were living peaceful and prosperous lives in their villages and towns and on their farms.
Life was good.
Sep 30, 2010, 12:02
Austrian economists think of economics as the study human action - hence the name of Ludwig von Mises' book, Human Action. So let us see how Ludwig's understanding of human action leads to the development of an economy and discover what sort of economy it is.
All animals act to better their conditions. That is they search for a more equable climate or fresh water or shelter or a position of safety from predators. Humans are no different but because they have better thinking capabilities they are continually working on new ways to improve their current condition. You may have noticed this of yourself. A feeling of dissatisfaction with one's current lot leads a person to thinking about a change for the better. These thoughts encompass the mundane to the complex. From shifting location to get a better job to creating new and exciting technologies in a completely new way and making a fortune. Anything is possible and there are many examples from history of human action generating great wealth and providing satisfaction and happiness for many as a result. Just think of Henry Ford and Bill Gates as examples.
If we think about it we realise that this is what humans are doing all the time. It is indeed this restless energy employed to continually improve the current situation that leads to human action of various sorts and not just an improvement of the individuals' condition but a betterment of conditions for the wider range of humanity.
This study is known as praxeology and is described here - http://www.mises.org/rothbard/praxeology.pdf
The sum total of individual human action designed to improve the individual's lot gives us the complete economy. The economy of a country is the sum total of all human activity within that country.
Notice that all this action is concerned with improving the individual's own circumstance. However, what happens when we seek to improve our condition is that we do things that help others. As long as we do not steal or engage in other illegal or fraudulent activities then when we work for money we are only paid by someone who benefits more from our efforts than having their money stored away.
When people engage in this apparently selfish behaviour the consequence is that everyone gains. This notion was called the invisible hand by Adam Smith in his book, "The Wealth of Nations, published in 1776."
The people of Nowhere began to understand all this and so they developed a strong tendency for allowing everybody to follow their own way. After all, no-one really knew what should be invented, they just knew that when someone invented something new, it was either useful and people would want it or it wasn't useful and the idea was forgotten.
So the community was not afraid of new ideas - in fact they were rather receptive to creativity in all its forms.
Sep 22, 2010, 14:55
Division of Duty
One of the things that people noticed once they began trading one item for another was that the people making the items were concentrating on the item they could produce best and which would benefit them the most. So that as cobblers worked at making sandals they found that they could swap those sandals for a range of the things that their families needed each week - such as food and shelter. And if they organised their work efficiently then they were able to produce extra sandals and use them as a store of wealth for emergencies. Or for extra treats for the family. Or they could save them up as cobbler Tan did and use this store to pay a trainee cobbler to make more sandals. Eventually Tan was making sandals for his own village and the one down the road.
We can see that this is the beginning of specialisation and when the tailor started the same "factory" approach he too used economies of scale to ramp up production and sell more trousers. Of course the cobblers and tailors in villages around the vicinity got to hear of this and became very worried. They had two options:
Extort an agreement which would stop this destruction of their livelihood, or
Since violence or the threat of violence was likely to send the perpetrator on a one way journey over the cliffs, they opted for the second choice - competition.
They started thinking about ways they could make better sandals and trousers. How they could make them cheaper. And how they could distinguish their product from the others. They also started thinking about how they could tell all the villages within one day's horse ride of this new idea.
The result was that all the people in the villages in the region began to buy better sandals and trousers for less cost. This enabled them to save money and think about how they could do the same thing with their own business.
Farmers in the region began to specialise in the food that grew best on their land and they too enjoyed the cornucopia of wealth being generated from self interest.
And thus we have the market economy born of selfishness and producing an abundance goods - more and more at ever cheaper prices. This was indeed the Golden Goose that was very good at laying Golden Eggs for all. For all who worked, that is.
You will have noticed, of course, that all this started out with one person deciding to improve his lot by thinking a new thought and working hard.
All this wonderful Golden Goose economy started out with the Entrepreneur.
It was not dependent on consumers. The concept of a consumer did not exist of course. Everybody was a consumer and a worker. This was just a normal part of life.
This Golden Goose process did not need outside command and control mechanisms. It especially did not need a government to make it happen.
Trading markets develop spontaneously from basic human desires to improve their lot and soon after trading markets started up the people started using money to facilitate the exchange of goods.
Sep 21, 2010, 10:07
While this Golden Goose economy was developing around Nowhere the inhabitants discovered the need for something to be used as money. That is, a medium of exchange. This would make their trade much more efficient - if they could only agree on what to use.
In our world many things have been used for money. For instance, in the concentration camps for captured soldiers in Germany during the second world war it was not long before there was an internal economy shifting goodies from the Red Cross around amongst the soldiers and they used cigarettes as money. Interesting that their money was not particularly durable but notice that it had value in and of itself. Many things have been used for money over the history of the world from conch shells to cattle.
However the Nowhereans were fortunate in their search for the ideal money as many of the inhabitants of this fair land were Greeks escaping from the continual wars and destruction of their lives. These Greeks included a number of intellectuals who brought with them the writings of the Greek philosophers. They had studied Aristotle and knew his writings about money and what constitutes a most useful commodity that could be used for money.
The Nowhereans decided to adopt Aristotle's contention that money should be durable, divisible, consistent, convenient, and have value in and of itself.
Durable. Money had to last for a long time. Nobody would accept money that might rot or break easily. So food or pottery were not suitable.
So diamonds would not be suitable since when they were broken down their value would be less than one big one. Giving change would be difficult.
Each piece must be the same as another. Real Estate wouldn't be any good because every bit is different from all others in some way.
The money must be of a handy size that could be carried around easily.
Have Value In And Of Itself
After all if it didn't have a value no-one would accept it in exchange. Nobody exchanges an item of value for something with no value. The exchange must please BOTH parties or the exchange won't happen.
There was only one thing that satisfied all criteria and that was gold.
(See Doug Casey on Gold; http://www.caseyresearch.com/displayCwc.php?id=20)
(See also, Money; http://www.marketoracle.co.uk/Article10370.html)
Apart from all that, some Nowhereans had come from countries that were using gold and silver for money and they were accustomed to this time honoured tradition.
In addition the nearly as good commodity, silver, was good for money of lower value items. Since silver was more common than gold (about 15 times as in the rest of the globe) it was useful for small purchases. It wasn't quite as durable as gold but it did last for a very long time.
So they mined for the gold and silver and worked out how much it cost to mine them and make a profit and then sold them into the market at that rate. That is the value of the gold or silver directly related to the amount of effort it took to find and store and weigh and stamp the different weighted coins of gold and silver.
Thus gold and silver coins became a store of work! Since the amount of gold or silver was proportional to the amount of work required to extract it from the mine its value was proportional to its weight. So the Nowhereans measured their wealth in grams of gold (gg) and grams of silver (gs).
After that the price of everything was measured in gg or gs.
This enabled people to determine the worth of various types of work in the villages and pay according to the supply and demand. With everyone haggling and bargaining the market continually worked out the price of everything that anyone wanted to sell. This scheme worked brilliantly and the Golden Goose continued to produce many golden eggs!
Sep 20, 2010, 10:42
A Chemist Explains Why Gold Beat Out Lithium, Osmium, Einsteinium ...
There are very good reasons why gold has been used as money for thousands of years by many different societies. An understanding of the chemistry of elements explains why this happened.
[ Visit Website ]
Sep 20, 2010, 08:00
We now have an entrepreneurial society using gold and silver for money, but how do the actual REAL Transactions work?
Remember, we have discovered the Golden Goose economy of Nowhere depends on each person trying to improve their satisfaction and enjoyment of life. Everyone tries to swap what they have for something that suits them better. This includes people working for an enterprise who exchange their time for money.
If we think about this last statement a bit more closely we begin to realise that people must value the money they get more than the hours expended. If they didn't, they simply wouldn't bother to do the work.
A friend of mine asked his teenage son if he would like to have a job over the holidays and earn some money. His son said that he didn't. My friend was puzzled by this as he could remember the advantage when he was a kid of earning a wage and then being able to buy stuff in the weekend. So he asked his kid, "Why not?" "Well," said the son, "If I want something I just ask mum!"
This illustrates how we must have a feeling of dissatisfaction to begin with before we are prepared to get out and do something about it. We also learn that work brings about the satisfaction of that need and this is why we discover that we quite like work. We find it satisfying!
We also learn that some work is held in high regard or is difficult or messy and people will pay more for it and some work is easier to do and so people will pay less for it.
This encourages us to train and educate ourselves for difficult and challenging work which is high paying.
This brings up an interesting point. We don't make the exchange unless we get more than we give! But this is of course from our point of view. The employer also gets more than he gives. He gets the profit from employing that person and that profit is high enough to help pay for all the costs of running the enterprise. If he cannot make a profit by hiring the person then he won't. This is how jobs are created and lost in Nowhere.
Sep 19, 2010, 17:59
Price and Value
With this insight into the buying and selling process we learn that price and value are two different things.
When the Nowherean goes to the market to buy a new donkey he takes with him some gold and silver coins. He has been around for a while and he knows about how much the donkey will cost him. However, he will not pay more than he has to as every gram of silver not spent here can be used for something else.
At the market he examines the donkeys on sale and haggles a bit with the various traders about their price and the history of the beast.
Eventually he settles on one likely animal and makes an offer - lower than the donkey owner has been indicating. When the exclamations and arm waving has settled down they have an agreed price and our new owner exchanges his hard earned cash for the beast.
You will realise from this that the buyer will feel that he paid more than he wanted to but he still felt that the donkey was worth more to him than the 30gg + 5sg which was the final price. The original owner of course, will feel that he has been beaten down in price, but he obviously thought that the money was worth more than the donkey.
From this we conclude that the buyer valued the donkey more than the money and the seller valued the donkey less than the money. The price was a definite amount which might be useful information for other donkey transactions. Value is a subjective feeling which will differ amongst people and explains why a transaction will take place.
Sep 18, 2010, 11:28
Return to the REAL World
So we have conducted our thought experiment and have created a world where people live and work without outside interference. No marauding armies. No rape and pillage. No Gangsters demanding money with menaces. No government.
We will take our leave of Nowhere and return to the REAL World for a look at some aspects of Economics as we find it in our lives.
We will return.
Sep 17, 2010, 11:05