J. Huie

The control of the production of wealth is the control of human life itself.

Hilaire Belloc

Economics is the study of the issue of scarcity. There are more demands on resources available than the ability to fulfill these demands.

There are three basic questions which any economic system tries to resolve:

1. What will be produced?2. How will it be produced?3. For whom will it be produced?

Traditional economics tended to be resolved in a consistent manner. Usually the chief political body made the decisions if there was not some customary allocation.

While it was fairly predictable if practiced in an unbiased way, the potential for arbitrary access or lack of access to resources could become very significant to certain individuals.

Small groups rather than large countries have a better chance at operating successfully under this type of system.

Based on the idea of a favorable balance of trade, mercantilism was a policy whereby a state tried to maximize exports purchased with hard currency while minimizing imports through tariffs and quotas.

Hard currency accumulation—such as silver and gold—was viewed as the source of wealth; those countries which possessed the most gold and silver were thought to be the most powerful.

Since most European states began adopting these policies in the 1500s, there was little chance, unless a country possessed some good or service which was otherwise unavailable, of achieving an advantage over rivals because they were doing the same thing. Therefore, control of foreign markets became a necessity. Thus, mercantilism was a key factor for imperialism.

Mercantilists viewed competition as a negative force, because it directed energies away from a perceived greater efficiency in unified action.

Mercantilist governments frequently awarded monopolies. Classic examples are the Hudson’s Bay Company and the English East India Company.

Colonial trade was tightly controlled to the mother country’s advantage. This, too, created problems. Taxes, tariffs, controls on imports, were considered unjust, especially after many Enlightenment ideals had proposed the equality for men, including, implicitly, colonials.

Control of and taxes on tea were an impelling feature of the Thirteen Colonies rebellion against and eventual independence from Great Britain and its mercantilist policies.

The nature of mercantilism encouraged conflict, and with the increasing imperial rivalries, European states were forced to expend large sums to administer and to protect their empires. War was a frequent event during the seventeenth and eighteenth centuries between these mercantilist states.

The Enlightenment, following upon the scientific revolution, tried to discover natural laws that governed human institutions.

John Locke, an English philosopher had undertaken work to support the rights of the govern to remove their government when it failed to meet their needs. The principle of individualism thereafter played a large role in the Enlightenment thinkers’ ideas. This call for a change to the then absolutist governments and economic control would come to be known as classical liberalism.

Modern understandings of economics began with the work of the physiocrats. These French economic thinkers of the mid-eighteenth century made suggestions to improve the economy.

Their arguments did little to sway their French rulers. However, their ideas influenced others.

Adam Smith (1723-90)The chair of moral philosophy at the University of

Glasgow, Smith keenly studied the wealth of the tobacco merchants in the Scottish city. From what

he observed from them and other activities by other Scots, he came to develop the study of political economy. As such, he is often considered to be the father of economics.

Much of Smith’s observation and thought can be found in A Theory of Moral Sentiments (1759), but his larger and later An Inquiry into the Nature and Causes of the Wealth of Nations (1776) is viewed as the tome founding his laissez-faire economics.

Smith recognized, despite the focus on individualism, that positive social relations were inherent in a properly functioning market. Honesty and trust played a role.

In these exchanges, both parties had to have their needs met to a degree—a win-win situation.

Supply and demand for goods and services would best determine prices, rather than arbitrary rules established by some person or group, whose access to all necessary and relevant economic information was unlikely.

Government intervention was to be minimal, as its actions distorted the marketplace signals. Government had only three legitimate tasks. (see next slide)

Supplying an army and navy . . .for defense purposes only

Police and courts . . . rule of law . . . to protect property rights, personal well-being, and enforce contracts

Provide certain public services where it was impracticable or dangerous for private ownership (in terms of distorting the market) . . . consider the lighthouse

Smith held that the specialization of tasks (division of labor) increased efficiency and quality. As individuals did small tasks repetitively they became expert. His study of the pin factory was used to illustrate this.

He thought that competition among producers of goods and suppliers of services rather than monopolization yielded greater efficiency and satisfaction of wants. Why? Each competitor had to do something special to win over a customer. This usually was seen in ways of driving down costs.

Private property allowed entrepreneurs to utilize these resources in ways they best saw fit. It also helped secure their ability to lay claim to any fruits from its use or non-use.

He noted that the market was coordinated by “the invisible hand.” The interactions of buyers and sellers provided information—usually in a “short-hand” of prices—that informed them on how best to employ their resources. For instance, if prices were high, it was an indication that a business opportunity to provide that good or service made sense, and thus the necessary resources could be efficiently employed.

It should be noted that Smith wanted perfect competition. That is, there would be many, many, many producers producing the same item. At best all that could be achieved was imperfect competition. Many producers producing similar items. This tended to favor small business.

Smith opposed oligopoly—a few producers producing similar items; and monopoly—one producer.

As Smith noted, quite often merchants and businesses will act against competition in an attempt to secure more of the market share for themselves. They will collude with government to impose regulations and other coercive means against their competitors, driving them out of the marketplace.

During the Progressive era activist governments, in the name of public welfare, often allied with bigger businesses (in meat processing and utilities) to impose onerous regulations to ensure public health. Even when there was some truth to their claims, it was usually done such that smaller competitors could not afford to meet these regulations, leaving these larger “cooperative” businesses alone in the market.

Throw Pillow

The real tragedy of the poor is the poverty of their aspirations.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

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.

Folly and injustice seem to have been the principles which presided over and directed the first project of establishing those colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality.

The mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquility of any body but themselves.

The Nobel prizing-winning economist and philosopher Friedrich Hayek noted that the marketplace satisfied self-interest through positive exchange with others, seeking to satisfy their self-interest. Thus, whether intentionally or not, people were helping others through the goods and services they exchanged. And, unlike traditional societies, these benefits occurred without an individual needing to know or even care about the person with whom he or she was exchanging resources. It widened the “circle” of potential traders. Of course, this led to international trade.

The economic and science writer Matt Ridley noted that these kinds of interactions contributed to the evolutionary development of morality. In other words, interaction in the marketplace rewarded characteristics such as honesty, and those who practiced or exhibited these characteristics tended to have more potential exchange partners. Thus, those who had or adopted those characteristics tended to be successful enough that these became a customary practice.

ZAKFRIEDMAN

His idea of competitive advantage reinforced the ideas of free trade and specialization put forward by Adam Smith.

Ricardo also developed a theory called the Iron Law of

Wages, which held that the supply of labor, if large, could

drive down real (those adjusted for inflation) wages.

This Iron Law of Wages also noted that in the long-term, wages would need to be depressed

to preserve the profit margin.

There are several criticisms, from the economic left and

right (such as the pro-market

Austrian school) of this idea.

This British merchant and statesman advocated free trade. His anti-Corn Law stance and his objection to tariffs would, he argued, facilitate world peace. The conflicts resulting from protectionism would be gone.

Some of his ideas were adopted and for a while in the later 1800s there was

relative peace among the European states regarding economic activities.

The anti-individualist ideas of nationalism, militarism, and protectionism, began to take hold, though as the nineteenth century ended, ending this first phase of (economic) globalization. The First World War (1914-18) was in part caused by these anti-individualist actions. After the First WorldWar government interventions in

economics returned, notably in a series of steps decreasing, if not stopping, free trade.

Laissez-faire never really existed as Smith advocated. However, during the industrial revolution (c. AD 1750-1850) in Great Britain, government provided few services beyond what Smith had proscribed. Britain retained a huge empire, which interfered with the real actions of the market, though.

The United States of America is often cited as an example, at least before the 1930s. However, the government was always larger and interfering more than Smith advocated.

The first American administration of George Washington was a small government, but even his administration took a larger role, such as Alexander Hamilton’s creation of a national bank and the incurring of a national debt to establish a credit history, than laissez-faire permitted.

The Civil War saw an expansion of government and its intervention in the economy.

World War I led to significant government control over the economy. In fact, President Woodrow Wilson was a Progressive—essentially a party connected with modern liberalism.

While Calvin Coolidge (1923-29) was essentially hands off, the US maintained high tariffs, nonetheless.

After all, the chief business of the American people is business. Of course the accumulation of wealth cannot be justified as the chief end of existence.

Note: he also said, in the same speech,

We make no concealment of the fact that we want wealth, but there are many other things that we want very much more. We want peace and honor, and that charity which is so strong an element of all civilization. The chief ideal of the American people is idealism. I cannot repeat too often that America is a nation of idealists. That is the only motive to which they ever give any strong and lasting reaction.

From: "The Press Under a Free Government,” Washington, D.C. on January 17, 1925.

Hayek argued that the market system, because of its decentralized approach, was the best economic system. Why? It is impossible, he pointed out, for planners to know all the requisite economic data to meet economic needs. What is more, the question of using that data objectively becomes problematic. Planners’ decisions are influenced by their own or the regime’s subjective qualities and interests.

“It is the absence of market prices that makes socialism unworkable,” as Ludwig von Mises pointed out in the 1920s. Socialists have oftenconsidered the question of production an engineering question: Just do somecalculations to figure out what would be most efficient. It’s true that an engineer can answer a specific question about the production process, such as, What’s the most efficient way to use tin to make a 10 ounce soup can, that is, what shape of can would contain 10 ounces with the smallest surface area? But the economic question—the efficient use of all relevant resources—can’t be answered by the engineer. Should the can be made of aluminum, or of platinum? Everyone knows that a platinum soup can would be ridiculous, but we know it because the price system tells us so. An engineer would tell you that silver or platinum wire would conduct electricity better than copper. Why do we use copper? Because it delivers the best results for the cost. That’s an economic problem, not an engineering problem. —David Boaz

In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat.

Leon Trotsky (1937)

It is significant that the nationalization of thought has preceded everywhere pari passu with the nationalization of industry.

E. H. Carr

Ideas evolve by descent with modification,just as bodies do, and Darwin at least partlygot this idea from economists, who got it from empirical philosophers. Locke and Newton begat Hume and Voltaire who begat Hutcheson and Smith who begat Malthus and Ricardo who begat Darwin and Wallace. (continued)

Before Darwin, the supreme example of anundesigned system was Adam Smith’seconomy, spontaneously self-orderedthrough the actions of individuals, rather than ordained by a monarch or a parliament. (continued)

Where Darwin defenestrated God, Smith haddefenestrated government. Neatly, this yearalso sees a Smith anniversary, the 250th

birthday of his first book, The Theory ofMoral Sentiments, a book that is very Darwinian in its insistence that sympathy is what we would today call innate, that people are naturally nice as well as naturally nasty.

Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations.

Smith, Adam, A Theory of Moral Sentiments.Boaz, David, Libertarianism: A Primer.Hayek, F. A., The Road to Serfdom.Hayek, F. A., The Fatal Conceit.Lindsey, Brink, “The Decline of the First

Global Economy”.Ridley, Matt, The Origins of Virtue: Human

Instincts and the Evolution of Cooperation.

Reason TV.com.Youtube