no third solution

Blogging about liberty, anarchy, economics and politics

The Return to Depression Era Economics

August 12th, 2009

First it was the broken-window debacle known formally as CARS, or colloquially as “Cash For Clunkers”: by Government edict, thousands of functioning vehicles were destroyed with sodium silicate. Adding insult to injury, the vehicles (parts of which were ostensibly salvageable) will be scrapped. Thanks to CARS, the replacement driver-side door that you neede for your 1995 whatchamacallit is going to be a little bit harder to find. The market for used cars, and the market for replacement/salvage parts just got a little bit thinner, so prices go up a little bit more.

And then there is agriculture, which has been silently (but openly) engaging in what can only be described as price-fixing. It’s been said elsewhere, but I’ll repeat it: if any other industry openly flaunted it’s price-fixing policies (Big Oil, anyone?) it would quickly draw the ire of politicians, bloggers, and Joe Six-Packs everywhere. Everyone would be in an uproar over “price gouging”.  But I’ve heard nary a whisper about this:

U.S. dairies will remove 86,710 cows from their herds to be sold to slaughterhouses as part of an industry-funded program intended to boost milk prices by curbing output.

The buyout is the third such cull in nine months, the Arlington, Virginia-based National Milk Producers Federation said today in a statement. The most recent buyout completed last month involved 101,000 cows, the most ever for the groups so- called Cooperatives Working Together program, which began in 2003.

— AZCentral

It makes no difference whether these attempts at price-fixing are done at government’s behest, or by cooperatives or cartels trying to bolster their own bottom lines. Attempts to maintain these prices are as sure to fail in the medium- to long-run as water is sure to find its level. In the 1930s, during the height of the Great Depression, farmers were urged to cull their herds, slaughter baby pigs, plow under their fields, etc., all with the goal of keeping prices high. Employers were urged to keep wages high (although many cut working hours to save on expenses) based on the fraudulent notion that production depends on consumption, when in fact it is exactly the opposite.

[I]t is of paramount importance to recognize that such an abundance of goods and services can only arise through production at some historical time, or in other words, that in order to consume, production must first occur. — Say’s Law of Markets: The Case For Doing Nothing

Given the frequency with which people fail to comprehend Say’s Law, you’d think it is a novelty. Unfortunately, it’s not. During a depression/recession, the problem is not that prices have fallen, on the contrary, the problem manifests itself because prices were too high in the first place, and indeed are still too high.

The Great Depression was awful. And it’s frightening to witness the “endarkenment” happening right before our eyes. These same policies have all been tried before, and they’ve never done anyone a damn bit of good. This time won’t be any different.

Via CoyoteBlog by way of Beck.

What is Profit?

July 11th, 2009

This question comes up from time to time, so I’ll answer as best I can.  I choose to use the definition in its pure, unadulterated form, a close approximation of which is given by Investopedia:

A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses … needed to sustain the activity. [link]

This is quite close to the definition I recently used in Profit IS Justified by Entrepreneurial Risk: for any given interval, Profit equals Revenue less Expenditures. Incidentally, this is not that far off from Franc’s definition (you may recall that Franc vehemently disagreed with the position I took in the aforementioned post) given in a post about the Corporate profit motive, with which I agree at least somewhat [1] in spirit:

In a free society, where there is no exploitation, the profit you make on a given product is, in general, the material expression of how other people evaluate the worth of your product… individual profit [is] something we can understand and contend with in a free society.

You’d almost think he was channeling Mises.[2]  Although individuals may also experience “profits” by exploiting others (more on this, below), there is nothing either explicit or implicit in this definition about exploitation. Consequently, profit (or loss) is the end-result of all production, undertaken by anyone, within any socioeconomic framework.  Profit (or loss) is what remains after the bills are paid.  Therefore I conclude that exploitation is neither a necessary nor sufficient condition to bring about profit, and I reject the Trojan Horse definition, which smuggles the assumption that profit requires exploitation.

But what about the exploitation?  If your definition of “profit” includes this smuggled premise, in my opinion you are really describing an entirely different animal. I more closely associate the exploitative phenomena with economic rent (The Economist, for its faults, gives a very precise textbook definition):

[Economic rent] is a measure of market power: the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use… In perfect competition, there are no economic rents, as new firms enter a market and compete until prices fall and all rent is eliminated.

I’ve alluded to this in the past.  The invaluable functions of the price system (which have no corollary in a non-market economy), are its ability to send signals [3] to the market.  By following profits and avoiding (or cutting) losses, the tendency of a free economy (one where competition is as atomistic as possible) is towards equilibrium, and the existence of profit is a fleeting disequilibrium which signals to individuals, “Not enough of X is being produced!”

For if enough were being produced, there would be no profits to be had, and if instead too much were being produced, there would be mounting losses.

Production will increase in those spheres where profit is to be gained, the increasingly available quantity of product in this market will drive prices down to a theoretical minimum or perhaps temporarily even lower. At this “equilibrium” price revenues are just enough to satisfy opportunity costs. Accordingly, the experiences of “profit” or “loss” are the calculus used to right the economy when it’s out-of-whack — to coordinate the infinite array of human desires with the finite array of resources at our disposal.

At the very least then, the exploitation theory of profit would need to assert that non-exploitative profit is a catalyst for economic rents, in other words, it would need to negate everything we understand about perfect competition and economic disequilibria, and most of price theory, to boot.

Why Profit?

The “evenly rotating economy”, one with neither profit nor loss, (in which all needs are omnisciently forecast, and all resources are allocated in precisely the right quantities, times, and places, such as to satisfy those needs at the precise moments of their realizations) does not exist.

If, under the above definitions of profit, rent and competition, you’re still asking yourself why anyone needs to profit, you might as well be asking yourself, “Why does anyone need to eat?”  As the purpose of eating is to sustain life, the purpose of production (whether it be for your own use or another’s) is profit. Eating permits us to live another day, while profit allows for that day to perhaps be more enjoyable than the previous.

  1. c.f. Mike Gogulski’s reply for an accurate summarization of my objections thereto.
  2. c.f. Mises 1949, p.299. “Production for profit is necessarily production for use, as profits can only be earned by providing consumers with those things they most urgently want to use.” — h/t QuebecoisLibre
  3. Prices convey information about the magnitude and intensity of any of the infinite array of human wants, desires, and needs, and about how to best allocate the finite resources at man’s disposal, which can in no other way be conveyed as quickly, as precisely or with as little effort.

Leasing and Renting in a Free Economy: Dealing With Scarcity

July 8th, 2009

As long as resource scarcity is a fact of reality, there will be some conflict between the limitless spectrum of human desires, and the limited resources at our disposal. Among these conflicts is that fact that not all resources will at all times be immediately available, especially within our own community, and that sometimes our desires conflict with others’.  Exchanging, or offering to exchange by sale of goods with one another on these terms, is one manner by which market participants simultaneously mitigate conflict, and allocate scarce resources.

To differentiate from an agreement to purchase an item permanently, we might consider agreements to lease or rent the item in question.  One would purchase a car from another, if he believed he had a great and continued need for transportation.  One might rent or lease a car from another, if he believes he only needs temporary transportation.

Deep in the comments to Profit IS Justified by Entrepreneurial Risk, I posed a question to db0, inquiring why:

  1. One should not be allowed to offer some of his belongings for temporary use, to another individual
  2. No other individual would be allowed to offer some of his belongings in exchange for temporary use of anothers’

In his response, db0 says both of these things are to be allowed, but qualifies the former by excluding “rent, wage-labor, interest” as “usury”, and further:

[T]his is not about preventing individuals from participating in such a transanction but to convince them not to. If we are to reach a libertarian society, then this kind of mentality will be built up as we progress towards it

I don’t understand why it is desirable to convince people not to participate in voluntary transactions, all parties to which believe said transaction is to their benefit. Consider: if I have an item, which I am using, and someone else says to me, “I would like to use that item for a few days, mind if I borrow it?” how should I respond?

On one hand, I might simply say, “No, I’m using it and therefore you can’t use it.” On the other hand, there is most likely some exchange he could effect, which would induce me to surrender (temporarily) the use of the item, and would offset the discomfort[1] I would otherwise experience if I were to loan it to him for “free”.

I do not mean to argue that “free” transactions won’t take place in a liberated economy.  Even in our current society, free transactions take place all the time. You borrow a compound mitre saw from your father, or an extension ladder from someone at work. Perhaps you loan a book or a CD or a video game to a friend[2]. And transactions of these sorts are wonderful.

They are wonderful because they are indicative of qualities inherent to true community: friendship, trust, neighborliness; all qualities inherent to true community.  I think in a free society, we would see more transactions like these (several orders of magnitude more, hopefully!), but I am by no means convinced that value-based exchange, especially the renting or leasing of items, would simply cease to exist.


1. Even considering an item that I am not immediately using, we might surmise that I am saving it for some anticipated future need, therefore anyone who wishes to use it now should pay (at the very least) for the depreciation of the item, and perhaps a small risk premium to account for the possibility that the item might be irreparably broken while in his possession.


2. But the people receiving these “free” loans are never under any illusion that they own the item which you’ve let them borrow, and for the most part, we understand that if the item is broken or stolen, the right thing to do is to offer to replace it.

no third solution

Blogging about liberty, anarchy, economics and politics