Incentives matter. We decide how to use our limited time and limited resources based on what we believe will most satisfy our needs, desires, and preferences. Regardless of whether or not we realize it, humans are constantly making countless economic calculations to rank values in terms of subjectively determined costs and benefits. This is the basic process that drives all voluntary human action; from ordering a pizza, to watching a play, to reading a blog. Economics is the science of human decision making – the science of purposeful human action.
In Part 1 we described how items do not and cannot have value apart from an individual's subjective valuation. It is important to remember that specific items have specific value to a specific individual at a specific point in time.
Since we know that we value goods as specific units in relation to our needs and desires, we can see why we don't have to make sweeping 'all or nothing' decisions. We don't have to choose between, say all the hamburgers in the world or all the lemonade in the world. The extent to which an individual subjectively values a particular good is defined at the margin. This means the value of a single unit of a particular good is determined by the value of the good's least preferred use. An explanation similar to the one presented by Thomas Taylor in an Introduction to Austrian Economics may help:
- Let's say I have ten gallons of water at my house. I might want to use two for drinking, three for cooking, four for watering the flowers, and one for making water balloons. To me, the value of my tenth gallon of water is equal to an arsenal of water balloons. If I was making a trip through the desert with ten gallons of water, I might value the water for drink over the enjoyment of a water balloon fight.
- Similarly, if I have ten gallons of water at my house with the same preferred uses as above and encounter a man selling delicious hamburgers for the bargain price of one hamburger for one gallon of water, I may very well be willing to make a trade. My cost for giving up my tenth gallon of water is the cost of the foregone alternative: the water balloons. It might even make sense for me to give up a few gallons of water depending how much my flowers need to be watered and how tasty his burgers are. In the desert scenario, depending on the length of my journey and the status of my supplies, exchanging a few gallons of water for hamburgers may be the difference between life and death.
This is an extreme example, but it shows that all individual human decision makers perform a cost benefit analysis at the margin.
Here is a great article on Health Care Incentives from the Freeman Online.
I also suggest reading this article from AmericanlyYours.com - Our perverse government’s perverse actions lead to perverse incentives
. If you are looking for something slightly more advanced, this is an excellent article: The Political Economy of Moral Hazard by Jörg Guido Hülsmann A $ AFollow me on Facebook, NetworkedBlogs, and Twitter.You can also subscribe to receive A-equals-A.com email updates by clicking the link below:
Our elected federal officials are failing miserably in performing the single most important responsibility with which the American people have entrusted to them; to "... preserve, protect, and defend the Constitution of the United States."
According to Article 2, Section 8 of the United States Constitution
:Before [the President] enter on the Execution of his Office, he shall take the following Oath or Affirmation: "I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."Judging by recent history
, this has obviously become a meaningless facade.
I ask: Why do we still go through the charade of having our presidents take the Presidential Oath if they are not expected to follow it in action?
We are obviously not instilling any level of accountability to this position because a new violator of the Oath assumes the role every four to eight years.
What about the blatant disregard for the Constitution in Congress? They take a similar oath as the president. Section 3, Article 6
says, “Senators and Representatives... shall be bound by Oath to support this Constitution.”
Senators and Representatives pledge to follow the Constitution, yet current members of Congress literally laugh at the task of upholding the Constitution
The government works for us. It can only exist with our consent. When the government rules by the whims of those in power and not by the written law of the people, it is time for the people to remove our sanction of this illegitimate power. The government has no power unless we expressly grant it (by our action or inaction).
Individuals live by right. Governments operate by permission. Individuals have the right to take any action whatsoever that is not restricted by objective law. Governments have no right to take any action unless explicitly granted to them by the people who employ their services."We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."
Only through our own apathy do we give the government unchecked power to encroach on our freedom.
On the principle of individual liberty, this great nation was formed. It is on the same principle the people must fight to take it back.A $ A
In Part 1 of Fundamental Economic Concepts
, we discussed Scarcity
and Individual Subjective Value
Today we are going introduce the concepts of production, time preference, and opportunity cost
possessing value to the individual do not occur abundantly in nature and cannot be consumed without first being produced, created, harvested, etc. through a very specific process. Goods of value must first be produced through individual thought and individual action before they can be made available for consumption. In short, life is the process of purposeful, self-sustaining action to produce things of value for consumption.
Because individuals must act in order to obtain goods of value, it logically follows that present goods, as a rule, are always preferable to otherwise identical goods in the future. This is the law of time preference
. The law of time preference is an essential fact of the human condition that is necessary in the explanations of many economic concepts. Time preference, however, is often forgotten or ignored by mainstream economists leading to necessarily false conclusions.
Human desires are virtually limitless, but resources, including our time, are limited to finite quantities. For this reason, individual humans must each decide how to best allocate their time and available resources to obtain the goods they subjectively value. Since it is impossible to satisfy all of our desires instantaneously, every action we pursue in order to obtain something of value has a cost associated with it; the cost of the foregone alternatives
The popular economic expression used to explain the cost of foregone alternatives (or opportunity costs
) is, “there is no such thing as a free lunch.” Even if someone else pays for your meal, the cost associated with the lunch is actually the value of the next best alternative you could have been enjoying instead. One individual cannot build a house, go to the mall, eat dinner, harvest crops, and watch a movie all at the same time. We have to choose what we value most based on individual preference and available resources.
The fundamental question, surrounding production of goods is not whether or not to produce, but rather how efforts are best directed to achieve the most desired values for consumption. Check out this article by Dwight Lee - Creating Jobs vs. Creating Wealth: The Jobs Created by a Government Project Represent the Opportunity Cost of the Project
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It's official. Peter Schiff received more than enough signatures from his supporters to become the first person to successfully petition his way onto the primary ballot for a Senate race in Connecticut.
Schiff will be going up against Republican Linda McMahon of World Wrestling Entertainment (WWE) showbiz fame in the August primary. The Democratic nominee is Richard Blumenthal, the state Attorney General.
For years Peter Schiff has been an outspoken proponent for sound economics, individual rights, and accountability in Washington. He warned us about the coming financial collapse while the popular media was still laughing
at him in August of 2008. His 2006 best-seller CrashProof
detailed the coming economic disaster with precise accuracy.Peter Schiff Video from the SchiffReport:
Unlike McMahon and Blumenthal, Schiff is not looking to be a career politician. He has said he only wants to serve one term. His mission: bring real transparency to Washington and be a loud voice for sound economics and financial responsibility. He is the true grass-roots candidate and definitely a Washington outsider.
Schiff is the overwhelming favorite in polls when people know who he is. The challenge – he is still relatively unknown. Though he's received much popularity in the Finance and Economic circles, he remains largely unknown to the mainstream. I urge you to watch a few of his videos on the SchiffReport on youtube
or pick up a copy of his newest book, How an Economy Grows and Why It Crashes
Peter Schiff's message is powerful: “Stand up to corruption, favoritism, cronyism, and corporatism. Remind your leaders that they are accountable to you, the voter. The solutions to Americas problems exist not in two thousand page bills or trillion dollar bailouts, but rather within the heart of each individual hardworking American.”
It's going to be fun to watch Schiff go up against McMahon, and then hopefully, Blumenthal. Once you hear him debate these politicians you'll quickly understand why he is the best candidate for Connecticut and the American people.
Help get the message out about Peter Schiff! Learn more about his campaign here
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The world in which we exist is composed of scarce resources that can be used to satisfy our virtually limitless needs, wants, and desires; more specifically the world is composed of scare resources with alternative uses
Human preferences and circumstances vary greatly. Individuals assign a particular value to an available resource through a process of individual thought. The concept of value apart from an individual living being is not possible.
Because the concept of value applies only in relation to individual preference toward specific available resources at a specific point in time, value is subjective
in this regard.
For example, a person in the desert may value a cold beverage differently than a person at home on the coach who just finished drinking a large glass of lemonade. A person's subjective valuation arises from one's desire to alleviate a particular problem in relation to the other problems to which he could devote his effort. In a world where resources (including time) are scarce, we have to choose. Goods
are items existing in scarce quantity that have subjective value to an individual. An apple or a dump truck might be a good. An element in a far off universe that has yet to be discovered is not a good. Goods have no inherent value by themselves. In order for something it be a good it must be useful to someone.Click here for a pdf
of all twelve parts of the Fundamental Economic Concepts
from A-equals-A.com. Additional Suggested Readings:
Peter S. Heinecke - The Fallacy of Comparable Worth
- "Comparable worth [intrinsic value], under the guise of justice, offers us tyranny and economic disaster. We must reject it."
Frédéric Bastiat - Economic Harmonies
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- "Having once established that value is not inherent in matter and cannot be classified among its attributes, I am far from denying that value passes from the service into the product, or commodity, in such a way as to become incorporated, so to speak, in it. I beg those who disagree with me to realize that I am not such a pedant that I would exclude from our language such familiar expressions as: "Gold has value," "Wheat has value," and "Land has value." I believe only that I am within my rights in asking for a scientific explanation; and if the answer is "Because gold, wheat, land, have an intrinsic value," then I believe I have the right to say: "You are wrong, and your error is dangerous. You are wrong, because there is gold, and there is land, that is valueless—the gold and the land that has not yet been the occasion of any human service. Your error is dangerous because it leads to classifying as a usurpation of God's gratuitous gifts to men what is actually man's simple right to exchange his services with other men."
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"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard
Understanding basic economics is one of the essential pillars in spreading a consistent message of liberty and battling the misinformation peddled by the mainstream media and politicians. A-equals-A.com
has updated the Fundamental Economic Concepts
page. There is a lot of information here. Feel free to browse the page or download a listing of the concepts in its entirety from the Archives
. Over the next two weeks or so we are going to be featuring a new concept each day here on the blog. This pace may be easier for some to digest. Either way, the information is out there. Enjoy! Fundamental Economic Concepts
QUESTION: Are there any other fundamental economic concepts you think we should cover?
- Scarcity and Subjective Individual Value
- Production, Time Preference, and the Cost of Foregone Alternatives
- Incentives and Margin - Two Keys to Understanding Human Decision Making
- Consumer Goods, Capital Goods, and Savings
- Property *Newly Added
- The Market *Newly Added
- Division of Labor and the Benefits of Exchange - Specialization and Knowledge Sharing *Newly Added
- Prices *Newly Added
- Money *Updated
- Capital and the Structure of Production * Updated
- Recessions and Depressions: What Causes the Business Cycle of Booms and Busts?
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This article by Vijay Boyapati posted on mises.org is too good not to share with as many readers as possible.
I strongly suggest you read the article What's Really Wrong with the Healthcare Industry
by Virjay Boyapati. The problems and solutions Boyapati presents should be considered by anyone engaged in the discussion around real healthcare reform.
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in addition to NetworkedBlogs
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Thank you for your continued support to spread the message of a reason-based philosophy of life and liberty!A $ A
- Dubbs Galt
For those that regard Franklin D. Roosevelt and the New Deal as the nation's savior during the Great Depression, the fact that Obama is employing many of the same strategies and "solutions" used by FDR may be a signal of comfort during the unrest of financial crisis. However, those that study history have good reason to be less than optimistic.
No doubt FDR inherited a broken economy. By the time FDR took office in March of 1933, nearly 3 in 10 workers were unemployed. Similar to Obama, FDR was faced with the challenge of dealing with a battered economy, damaged by past administrations. The Federal Reserve's expansion of cheap credit under the Coolidge administration (1923-1929) created an artificial boom leading to an inevitable market correction. Hoover, who – in reality - was nowhere near the free-market idealist portrayed by US 'history' books, turned a recession into a depression with unprecedented interventionist policy.
When prices fell in 1929, Hoover artificially propped up wages causing massive unemployment. He destroyed prospects of international trade by enacting protective tariffs. He ran “deficits with record spending on public works, the first federal welfare program, and the first large-scale federal farm program. The results were budget deficits and 25 percent unemployment”. Hoover turned a recession into a depression. But, FDR took the depression and made it GREAT.
The result was a decade and a half of economic misery leaving a wake of entitlement programs that have lead our nation down the path of bankruptcy. “President Roosevelt became Hoover on steroids”. The only things the New Deal succeeded in doing – prolonging economic recovery and growing the power of government. Somebody please tell me, why do we continue to teach our children that the New Deal ended the Great Depression? According to economist Robert Murphy, the unemployment rate was still 19% in 1938 and and it didn't drop below 10% until 1941. Other nations such as Canada recovered much faster than the US and didn't experience nearly the same level of economic pain.
In 1939, according to then US Treasury Secretary, Henry Morgenthau, Jr., on FDR's New Deal policies:
- "We have tried spending money. We are spending more than we have ever spent before and it does not work... I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot."
The parallels between Obama and FDR outlined by Burton W. Folsom Jr. in Comparing the Great Depression to the Great Recession are startling. There is no doubt Obama inherited a mess caused by ruinous interventionist policy from previous administrations. The Bush administration must be recognized as the antithesis of free-market; a few examples include artificial expansions of the money supply, massive stimulus programs, radical increases in public debt, and politically motivated bailouts. As far as the economy is concerned, Obama is Bush on steroids.
FDR used the mentality of “take a method and try it: If it fails, admit it frankly and try another. But above all, try something”
to push through government programs and force the creation of industry cartels during the Great Depression. Obama uses this same strategy today to grow the government to satisfy his own agenda.
If our government is in the business of just trying something
, I say we try eliminating the engine that causes these avoidable depressions in the first place – the Federal Reserve. I propose that we admit that government intervention always fails. The asset bubble that resulted in a crash in 1929 was caused by the Federal Reserve. The asset bubble that resulted in a crash in 2007-2009 was caused by the Federal Reserve.
I say the government should step aside and let the free market repair the economic damage created by government meddling in the first place.
As economist Murray Rothbard noted
- “If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly-disappearing depression into a lingering and near-fatal malady... Roosevelt only advanced, to a greater degree, what Hoover had pioneered...The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression.”
The current administration, taking a play-call directly from the failed policy of FDR, is on track to ensure we make the Great Recession a long, extended period of economic misery. I'm just not sure America can afford to play this game again.A $ A
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Many of the articles on A-equals-A.com
are rooted in Austrian economic theory. For anyone interested in learning the basics of Austrian theory (as well as gaining an understanding of what differentiates Austrian economics from the mainstream approach), Mises.org published an article titled A Primer on Austrian Economics
by Jonathan Catalan this past Friday. Jonathan is a very clear writer. This is a great article covering the basics of Austrian theory as well as a brief history of the Austrian school. I'm taking a class right now on the Theory of the Business Cycle
and promise that understanding the Austrian theory of the causes of the cyclical economic booms and busts ending in recession is very relevant to understanding the financial crisis today. "With an ongoing financial crisis and an impending greater crash, there is no better time to become aware of the consequences of interventionism."
- Jonathan Catalan
I think you will enjoy Johnathan Catalan's article: A Primer on Austrian Economics
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Click here to read my description of the Boom/Bust Business Cycle
Click here to read my essay Austrian Economics Booms in Popularity, Busts Mainstream Myths.
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