The Austrian Theory of Constraints
“It would be so nice if something made sense for a change.” – Alice Lewis Carroll, Alice’s Adventures In Wonderland
Introduction
In the case of economics, and with the strong and outstanding exception of the Spanish [2] School of Economics of Salamanca and the later Austrian [3] School of Economics and their brave precursors throughout history, there has not been a systemic approach to the subject of economics by using cause and effect logic. Not using a proper approach, has disregarded reality and perpetuated the undesirable effect of economic policies and/or ideas to be judged by their intentions rather than by their consequences. Said consequences, put in jeopardy human progress achieved to date and even endanger survival. Survival is not mandatory let alone prosperity and progress, more so, prosperity and progress are not linear.
This is the first attempt to apply the Theory of Constraints as an independent verification of what the Spanish and Austrian schools have proposed. Even though we know the value and power of the Theory of Constraints, the world, in general, does not recognise it and/or does not apply it. The best way for the Theory of Constraints [4] to be understood for the powerful value that it can create is by showing it can logically and obviously understand the “complicated” macroeconomic environment where we live. Until then, I think that the Theory of Constraints will not be used by the majority of people and that means that we as humanity are losing valuable potential.
Using the Theory of Constraints, my objective is to prove, beyond doubt, what the core problem or root cause of all obstacles to human prosperity and individual freedom is and how it can be overcome. The fascinating news is that, if we approach the matter with common sense, we will find inherent simplicity and the answer will become obvious. With unbound human action, the sky is not the limit for sustainable prosperity and progress.
Equally important to understanding the root cause of all obstacles or core problem to human prosperity, is the introduction of the Theory of Constraints into the field of economics by using the thinking processes, the power of uniting logic systematically, so that more people will help in the effort to turn the field of economics into a hard science. It is also an opportunity for other so-called social “sciences” to become actual sciences by applying this scientific approach.
The purpose of this work is to make a positive impact in the lives of each individual and ultimately all individuals.
[1] Article based on the book “Theory of Constraints Economics – Reality, Freedom and Progress” by Jorge
Gonzalez Moore. Editorial JGGM. April 2021.
[2] The Spanish School of Economics of Salamanca (XVI and XVII centuries).
[3] The Austrian School of Economics originated in the late XIX and beginning of the XX century. This School of
Economics stated, building upon the Salamancan School thinkers, that it is only possible to develop solid and
sound economic theory based on and with fundamental logic principles.
Important note to the reader: Economics is more about the unseen consequences of state’s intervention or any
other stakeholder actions than what you can actually see (refer to Frederic Bastiat’s “What Is Seen and What Is
Not Seen”). If you want to better understand the concepts here described, I encourage you to study Professor Jesús
Huerta de Soto Lessons in Economics (Universidad Rey Juan Carlos, Madrid, Spain) in
https://youtube.com/playlist?list=PLSKbCQY095R58Q-6M9zf9W6R2g9IfZKLx (English Version).
[4] The Theory of Constraints has a wide range of applications that expand much further from just business and
processes and can be applied to all areas of human activity and knowledge. For example, in farming it is called
Liebig’s law of the minimum, often simply called Liebig’s law or the law of the minimum, is a principle developed
in agricultural science by Carl Sprengel (1840) and later popularised by Justus von Liebig. It states that growth is
dictated not by total resources available, but by the scarcest resource (limiting factor or constraint).
The law (that can be derived from the Theory of Constraints) has also been applied to biological populations and
ecosystem models for factors such as sunlight or mineral nutrients.
In chemistry, there is the ‘rate-determining step’ which can also be derived from TOC given that any chemical
reaction can only go as fast as the slowest step (the constraint: factors or elements that determine how much the
system can accomplish).
I propose that the Theory of Constraints can be applied to economic history (or to the understanding of history in
general: TOC History); for example, to the understanding of the consequences of the ban on usury (the three major
monotheistic religions have at some point banned usury: Judaism, Islam and Christianity) that did much to
complicate and obscure medieval financial practices and the creation of the “Depositum Confessatum” figure,
which erased the clear and established difference between a loan and a deposit as per Roman law. It became
standard or tradition to think and act as if all deposits were loans. If all deposits are loans, the banker does not
need to have the money or commodity available to give it back at any moment to the depositor when the latter
demands its deposit. The confusion was responsible for the introduction of the legalised fractional reserve banking
system (which before had been considered plain theft) causing credit expansion, which in turn causes many of the
economic undesirable effects since its use (hidden or legalised).
Starting Assumptions
• Interest rates are just another price in the market that indicates if one should consume or save or invest (if one should buy now or later).
• Consumption does not promote economic progress. Consumption does not support the economy; it is savings and investments that do. One can only consume what one has saved in the past (or if one is the State/government, by taxing, by debasing money or by borrowing – the loan will then be paid by taxing and debasing the money).
• Central planners cannot allocate productive factors in a manner consistent with consumer demand because the planner does not have the ability to calculate in terms of market prices. Market prices come about as the result of a competitive bidding process among decentralised private property owners who are seeking to earn profits
• Central planners in the form of politicians and bureaucrats are far from accountable for the losses and/or inefficiencies of bureaucracy or even their own actions. No one spends others’ money with the same care and consideration as they spend their own money, hence central planners are far from being able to make optimal spending decisions on behalf of others. Central planners and state/government companies suffer no real financial loss for the failure of their policies and/or actions.
• Even if the state / government had the most honest, careful, capable and intelligent bureaucrats who could perfectly match the preferences, needs and wants of each and every individual (which is not possible due to Arrow’s impossibility theorem) in the quantities and qualities desired by each individual, then it would already burden the individuals with additional costs and time compared to the individual being free to choose for themselves in a free market due to the cost of running said state /
government and its bureaucracy. Also, if an individual is obliged (through taxes or inflation) to give part of his honest income to the state / government, it means that they have obliged the individual to modify their individual preferences hence they have reduced the individual’s overall freedom.
• Debt and Deficits are unsustainable in a sound economy.
• The funds that a government spends for whatever purposes are levied by taxation, money debasement (inflation) or by borrowing (which in turn will be paid by taxation, money debasement).
• Some people have privileges or entitlements at the expense of others; hence some people exploit others.
• Not all privileges or entitlements are natural rights.
Criteria to define the symptoms or undesirable effects (UDEs):
1. It is a complete statement (written in present tense).
2. It exists in current reality – it is not a Predicted Undesirable Effect.
3. It is an “effect”, not a presumed “cause”, absence of “solution” or obstacle to implementing a solution.
4. A single effect, without an “and,” “because” or “as a result of.”
5. It is negative in its own right and can be quantified or at least qualified.
6. There is agreement that it is very important to remove it (has a significant negative impact on Goal Units).
7. It does not blame anybody directly, but describes the undesirable effect being experienced.
Where do we actually live?
Below are some of the symptoms or undesirable effects (UDEs) that we see and live every day (in no particular order).
• Individuals with little or no savings become even poorer.
• Individual’s purchasing power decreases.
• Individual’s savings decrease.
• Too much of public funds / State funds is spent on corruption.
• Too much of public funds / State funds is misused or mis invested.
• Every monetary unit of currency of fixed public funds / State funds buys less year on
year (debasement of the currency).
• Involuntary unemployment is too high.
• All individuals are unable to claim their savings from the banks at the same time.
• Taxes on individuals’ are too high.
• Capitalisation rates are not increasing fast enough.
• Real wages are not increasing fast enough.
• Taxes on corporations are too high.
• Institutionality is not increasing fast enough.
• Individuals’ ability to conduct (legal) transactions is limited.
• (Honest) Individuals have their assets frozen.
• State / government freeze individual’s financial assets.
• Individual causes are in conflict with current state / government preferences and regulations.
• There are regulations that are harmful for individuals.
• There are regulations that do not protect individual rights.
• There are regulations that treat individuals unequally.
• The currency in which an individual is allowed to transact is restricted.
• Too few (new) beneficial goods and services available for population needs.
• The rate of beneficial innovation is too slow.
• National deficits are not decreasing.
• Real estate is increasingly more expensive.
• Fewer individuals can afford the purchase of real estate.
• Consumption and high-rate investments are deferred – made at a suboptimal time.
• Savings and low-rate investments are deferred – made at a suboptimal time.
• Investments are being made in the wrong (too low return) projects.
• Some sectors have too many surpluses.
• Some sectors’ prices are too low.
• Some sectors’ profitability is too low.
• Companies go out of business.
• Some sectors have too many shortages (scarcity).
• Some sectors’ prices are too high.
• Some sectors’ profitability is too high.
• Companies that should go bankrupt remain operating.
• Capital consumption is increasing.
• Living standards for the poorest are deteriorating.
• There are common state policies (applied to everyone).
• These policies are enforced.
• Freedom to choose is reduced.
• Human action is restricted or reduced. (Innovation /creativity / competition / knowledge / etc)
• Human progress is reduced.
• Quality of affordable education is decreasing.
• Energy availability is decreasing.
• Energy prices are increasing.
• The value of money is too volatile.
• The value of money is worth less.
• Time preference is increasing.
• Short term consumption is too high.
• Natural resources are being depleted.
• Quality of affordable food is decreasing.
• There are too many unsatisfied individuals.
• Too often there are significant negative consequences to State/Government interventions.
• State Policies are not adjusted to mitigate unintended consequences.
• State Policies are not adjusted to maximise the achievement of desired objectives.
• State Interventions do not deliver the expected results.
• Central State improvements don’t meet enough unique individual’s needs.
• Central Planners and/or State/Government are unable to properly judge the return or
costs of an investment.
• Central Planners and/or State/Government dont receive market feedback (Profit and loss).
• Central Planners and/or State/Government are unable to fully calculate or foresee the consequences of all their interventions.
• Central planners don’t know what each and every individual needs or wants.
• The value of currencies are decreasing.
• All currencies backed up by the USD are being debased.
• The USD is being debased.
• Required Skills are not available (in the location).
• Work Specialisation is Lower.
• The rate of beneficial innovation is too slow.
• Productivity is decreasing.
• Resources are wasted.
• Pension systems fail.
• Welfare system is insufficient to care for all the population and their needs.
• The needs of the population are growing.
• The population feel they are entitled to more and more innovations and developments.
• The population are encouraged to believe they are entitled to innovations and
developments.
• Not all migrants are contributing to finance the welfare system.
• Not all natives are contributing to finance the welfare system.
• The welfare system attracts too many migrants.
• The welfare system attracts too many natives
• Too many people are unable to provide value (to someone else).
• People do not fully understand what and how to provide value (to someone else).
• People do not fully understand what value is (to someone else).
• Individuals that want to leave their location are forbidden to do so.
• States restrict individuals from leaving.
• States restrict individuals from arriving.
• Individual’s Freedom Of Movement is reduced.
• Wages are low.
• Unemployment is high.
• Creating new companies is difficult and risky.
• Raising capital is difficult.
• The level of available skill sets is not high enough.
• Capitalisation rates are low.
• Regulation is high (labour legislation, minimum wage laws, administrative barriers).
• Regulation is complex.
• Taxes are high.
• Legislative stability is low.
• Not having enough or better opportunities in their current location.
• Individuals want to leave.
• Free (no cost or effort required) income is viewed as more attractive than the alternatives.
• Individuals’ wealth is reduced more and more (at an increasing rate).
• All prices increase.
• There is more money available for the same level of goods/services.
• The amount of money in circulation increases.
• Fractional Reserve Banking is permitted.
• Additional Currency is created (physical and digital).
• Commercial banks keep buying State / Government debt (Government bonds).
• More and More Government Bonds are created.
• Government policies need more and more funding.
• Individuals and Politicians do not fully understand the damage of creating new money.
• There is political pressure (from the state to the central Bank) to keep interest rates artificially low.
• Individual’s wealth lost or reduced.
• Some cash belongs obsolete.
• Over time the amount of counterfeit physical money increases.
• Trade is reduced.
• Institutionality decreases.
• The size of the Capital Subscriptions (quotas) countries pay to IFIs are increasing.
• More and More Money is lent to countries by the IFIs.
• Countries make repeat defaults on the loans.
• Individuals suffer (large) disruptions to “normal” activities.
• Some Transactions are rejected.
• Additional Obstacles must be overcome to complete transactions.
• Currency Transactions have additional costs.
• Currency Conversions are required (in one or more countries).
• Central banks require (international) transactions to be in the national currency.
• Exchange rates set by the banks are never as good as the live “standard” exchange
rates.
• Corruption is High.
• Dollars and high Value Currency are sold to the Street (at huge mark ups).
• The cost of government grows.
• The size of the government grows.
• More Government resources are needed.
• Financial Regulation Levels Grow.
• Banks are Nationalised.
• State / government finances the bank in trouble (“Lender of last resort”).
• Banks Fail.
• There is not enough money in the banks to pay all the debtors/depositors.
• Banks in Financial Trouble claim the payments for government debt bonds held (from
the Treasury / Central Banks).
• Banks get into financial Trouble.
• Individuals are unable to claim their savings from the banks.
• Banks run out of money to operate.
• There are insufficient reserves remaining.
• There are too many failed investments.
• There are too many Bad Debts.
• Banks invest their reserves elsewhere (to generate higher profits).
• (Un-sponsored) Sectors are under-manned.
• Sponsored Sectors become over manned, over supplied and over resourced relative
to actual demand (Productive structure is distorted).
• Too Many resources move across businesses and sectors into Sponsored sectors.
• Recessions Last too long.
• Recessions occur (too frequently).
• Fewer Consumers available.
• Companies go out of business.
• Unemployment is high.
• Some sectors’ profitability is too low.
• Some sectors’ prices are too low.
• Some sectors have excess surpluses.
• Excess Goods / Services are produced.
• Sponsored Sectors become over manned, over supplied and over resourced – relative
to actual demand (Productive structure is distorted).
• Too Many resources move across businesses and sectors into Sponsored sectors.
• Investments are being made in the wrong Sectors (too low return).
• Required sectors are undermanned – productive structure is distorted.
• Required sectors are Under-invested.
• Prices increase (artificially).
• There is more “sponsored” money in some individuals’ pockets.
• More and More Capital is eroded.
• Recessions Last too long.
• More Consumers are eliminated.
• More Business Fail (too late).
• Demand Reduces.
• Affordable credit reduces.
• Credit Expansion increases inflation further.
• Interest Rates are increased.
• Many Salary increases will not be large enough.
• Many Salary Increases are linked to the CPI.
• Individuals and companies often take official information as “read”.
• Individuals and companies rarely independently verify state / government statistics.
• Individuals and companies are unable to think critically.
• Critical Thinking tools are not taught to individuals.
• Overall wages decrease.
• Wage increases are smaller and occur less frequently.
• Companies remove “expensive” workers (where productivity is lower than costs to
hire).
• There are fewer opportunities for individuals to get a better paid job.
• More and More Companies evaluate the wage costs against the productivity of their
employees.
• Productivity and competitiveness decrease and stagnate.
• There is less capital available (for individuals and companies) to invest in productivity
increases.
• The amount of available collective overall savings (capital) decreases.
• Individuals cannot accumulate capital.
• Individuals spend too much and save too little.
• More people require state support.
• Tax revenue is lower.
• Unemployment is high.
• Unskilled workers cannot find employment.
• Companies do not employ unskilled workers.
• Companies refrain from adding (workers) costs when productivity does not increase
by a greater amount.
• The individual’s wealth decreases.
• Pension funds lose money.
• individuals lose money.
• Shares devalue.
• Investors and traders sell more positions.
• Companies’ profits decrease.
• More company money is spent on borrowed money.
• Interest rates are (artificially) increased.
• There is Pressure to control or reduce the rate of inflation.
• Too many failed investments.
• Many investments do not provide enough returns (risky).
• Many failed endeavours (Risky).
• Riskier options are invested in.
• ROI needed reduces.
• Price of money is low.
• Low interest rate.
• Too many bad debts.
• Low solvency companies and low-income individuals dont improve their solvency and
income.
• More loans are taken and approved by people with low solvency/income.
• More loans are taken and approved.
• Requirements for approving a loan are reduced.
• there is an abundance of money.
• The available money to invest / spend is reduced.
• Politicians draw a wage (from the national budget).
• Taxes are collected.
• Tax rates are increased.
• Tax revenues go down.
• Individuals that can (those with the highest wealth) will try to move to a place where
less taxes are paid.
• Time preference increases.
• Distorted interest rates.
• Interest rates are too low.
• Interest rate adjustments are too low.
• Inflation is distorted looks lower than it actually is.
• CPI Value is lower (than actual price increases).
• Goods with (high) rising prices are systematically removed from the CPI basket (oil,
energy products and houses etc).
• Higher performing companies with no buffers suffer and fail.
• Choices and investments made (thinking they are profitable) erode buffers.
• Higher performing companies think they are more profitable than they really are.
• Businesses suffer and fail.
• Low performing companies actually are negatively performing.
• Real results look artificially high.
• Inflation is not fully removed.
• ROI and NPV are distorted.
• CPI is distorted.
• Money is being debased (ongoing).
• Additional Legal tender is being created by the state (ongoing).
• The Current consensus is that credit expansion does not cause significant distortion of
the economy.
• There is no incentive (for banks or politicians) to demonstrate the real effects of credit
expansion.
• Inflation Information does not inform individuals properly.
• It is impossible to see the variation in prices due to variation in the amount of money
in circulation.
• It is impossible to see the variation in prices due to variation in the levels of supply and
demand.
• The Common understanding and Definition of INFLATION is a single value with
multiple variables.
• More and more inflationary behaviours are taken.
• There is an erroneous working assumption that deflation is a bad thing.
• There is an erroneous assumption that as the economy grows more money is needed.
To be made available.
• The Use / Investment of IFI money rarely addresses the causes of poverty.
• More endeavours are explored to generate returns.
• People need more and more returns.
• Expansion of the state/government.
• More regulation.
• Individuals are less wealthy.
• Individuals working via the illegal (black) market have lower wages.
• Prices in the illegal (black) market are higher.
• Individuals transacting in the illegal (black) market are not protected (risk is higher).
• Individuals risk obtaining their goods and services from the illegal (black) market
• An illegal (black) market is created.
• Individuals seek out other options for obtaining the goods and services.
• The need or demand for the product or service still persists.
• Availability of the product or service decreases or disappears.
• More rules and controls increase the difficulty to obtain the goods or services.
• There are businesses in financial difficulties.
• Individual and companies loses their private property.
• Assets get collected.
• Assets are embargoed.
• Collateral gets called upon.
• Individuals and companies fall into debt with the state/government.
• Individuals and companies are unable pay taxes.
• State/government expropriates private real estate.
• Companies have less resources available for other investments.
• More resources than necessary are consumed or invested.
• Companies select a suboptimal production option.
• Individuals have less resources available for other consumption or investments.
• Individuals select a suboptimal consumption or investment option.
Current Preconditions (in no particular order):
• Inflation decreases capitalisation rates.
• Taxes decrease capitalisation rates.
• Inflation decreases the purchase capacity of individuals.
• Inflation decreases money available to accumulate savings.
• Inflation decreases money available to invest.
• Taxes decrease individuals’ money available to accumulate savings.
• Taxes decrease the purchasing capacity of individuals.
• Taxes decrease individuals’ money available to invest.
• Corruption in public funds / State funds erode institutionality.
• Individuals’ need to follow State’s rules on transaction clearing.
• Individuals’ can only use legal tender to settle transactions.
• Existing entrepreneurs are too limited in what they can achieve.
• Too few entrepreneurs.
• When interest rates are artificially high.
• When interest rates are artificially low.
• States /governments meddle with the currency system.
• Investment in sectors not incentivised by regulation/policies is decreasing.
• Boom and bust cycle.
• Some sectors are incentivised (and others are not).
• Consumer appreciation of a sector(s) is distorted.
• Investment in sectors is distorted.
• Government/ State coercion on individuals is increasing.
• Value of money depends on politics.
• The individual’s freedom to choose is decreasing.
• Government / State intervention is increasing.
• Central planning is increasing.
• Governments Perform Interventions.
• Interventions are cumulative and increasing.
• Government restricts/regulates activities.
• Government prohibits activities.
• Government sponsors activities.
• Government uses coercive force.
• Central planners cannot know what each individual needs or wants.
• Central planner will always fail to provide exactly what individuals need or want.
• Central planning has aggregated money.
• Central planning spends aggregates money in general improvements.
• All individuals are unique.
• General improvements cannot meet unique individual’s needs.
• Too many unsatisfied individuals.
• Creation of surpluses.
• Creation of shortages.
• Resources are misused.
• Central Planners are Required to assume the best policies and courses of action.
• Policies and initiatives are created by the Central Planners.
• State/Government policies and initiatives are enforced.
• Central Planners and/or State/Government do not always understand the
consequences of their chosen course action.
• Central Planners and/or State/Government do not own the money or resources they
are spending.
• Central Planners and/or State/Government are unable to properly judge the return or
costs of an investment.
• Often there are significant negative consequences to State/Government interventions.
• Central Planners and/or State/Government are unable to fully calculate or foresee the
consequences of all their interventions.
• Central Planners and/or State/Government dont receive market feedback (Profit and
loss).
• Politicians operate in a high time preference.
• Central Planning policies tend to only consider the short term.
• All systems have a feedback delay.
• The system delay from State interventions to understand the Profit and Loss feedback
is too long.
• The perception of the value of money is subjective.
• People treat their own money more carefully than others’ people’s money.
• Central Planners and/or State/Government are less careful spending money and
resources that are not their own.
• (Without feedback) policies are not adjusted to achieve the desired objectives.
• (Without feedback) policies are not adjusted to mitigate unintended consequences.
• Currencies do not have intrinsic value (Fiat Money).
• Currencies are not backed by a physical commodity (Fiat Money).
• The USD is the international currency reserve.
• All currencies are backed up by the USD to some degree.
• People are incentivised to take actions (too early / too late).
• The (future and present) cost of money is affected.
• The state / government controls interest rates.
• Through its central bank determines money or fiat coin price (interest rate).
• Central banks hold as much USD as possible as international reserves.
• Major governments’ desire to get their inflationary currencies adopted as international
reserves (find the generic issue).
• Currencies association to a definitive and unchangeable gold parity does not exist.
• Fiat money is not preserving value. (it has a cause).
• Fiat currency is not backed up by gold (absence of gold standard). Fiat money is
worthless.
• Central banks cannot or will not exchange or redeem fiat currency into the physical
commodity.
• The state / government through its central bank has a monopoly on providing the
domestic money supply or fiat coin.
• The state / government through its central bank determines money supply or fiat
currency supply.
• The state / government through its central bank determines money or fiat coin price
(interest rate).
• The population is fiat educated.
• Government decides the fiat curriculum.
• Less new ideas or initiatives.
• The population is growing.
• population is educated on innovation and developments.
• There are emerging innovations and developments.
• The welfare system provides a basic income without having to work or contribute to it.
• Capital comes from saving.
• The welfare system provides a basic income without having to work or contribute to it.
• Individuals tend to be rent seekers.
• Individuals tend to do activities where they believe the benefit (pay-out) is greater than
the effort (cost).
• The benefit (pay-out) for an individual receiving a government issued basic income is
high versus the effort (cost).
• State / government want to protect the availability of certain skill sets.
• States / government want to keep the availability of their workforce.
• State / government want to keep their taxation base.
• State / government want to maintain the contributions to their welfare state.
• State / government want to protect citizens’ job security.
• States / government want to protect their internal security.
• State / government want to protect their welfare state.
• The state can intervene in bank accounts and financial asset collection.
• Individuals collect assets in support of causes.
• Individuals can only open a bank account if approved (by the bank).
• Commercial Banks must operate under central banks regulations.
• All Banks must operate under the state / government regulations.
• Government Bonds generate interest payments for the commercial banks.
• The impact on the economy (of increasing the money supply) can take months and
years to be evident.
• Inflation does not permeate the whole of the economy instantaneously.
• Newly created money has full value when first used.
• The money the state has available to pay interest on and increasing) volume of bonds
is limited (to tax revenue).
• The money the state has available is limited (mainly by its tax revenue).
• Not all Cash can / is exchanged for new equivalent tender.
• Cash (notes/coins) regularly require replacement.
• Physical money degrades.
• Some Trade Restrictions are enforced.
• Some Trade Restrictions are not enforced.
• Not all trade transactions are permitted.
• Trade limited to state/government allows.
• International trade requires the permission of central banks.
• Some Trade Restrictions are enforced.
• Some Trade Restrictions are not enforced
• Not all trade transactions are permitted.
• Trade limited to that which is allowed by central banks / State.
• International trade requires the permission of central banks / State.
• International financial institutions (IFIs) act as global lenders of last resort.
• There are restrictions on the maximum value of a transactions.
• Funds must be legally acquired.
• Funds must not be used on illegal ventures.
• Some exchange rates are set by the market (banks) (“free” economy).
• Dollars and high Value Currency are purchased from the state at “official” rates.
• The official exchange rate and the unofficial exchange rates are often different.
• Some Exchange rates are set by governments.
• The state / government through its central bank determines the legal tender – the
national currency.
• Levels of government debt owed to the banks are not always enough to cover banking
shortfalls.
• Sponsored Sectors attract Investors.
• Sponsored Sectors attract resources.
• There are State Sponsored Areas and Sectors (to make improvements).
• Individuals with more money increase the level of demand.
• More demand causes prices to increase.
• High Interest Rates encourage saving over spending and borrowing.
• A Single CPI value is not representative for any/all individuals.
• Critical Thinking needs to be learned and practised.
• The current Syllabus has many subjects aimed at developing functioning citizens.
• The current Syllabus is full.
• Constant investment is required to maintain and increase competitiveness and
productivity. (Things don’t improve on their own).
• Min wages are set (partially or fully) based on the CPI.
• information on prices and costs of living (CPI) are regularly considered when
discussing wages and affordability.
• There is an ongoing objective to increase/protect everybody’s income.
• State / government is in charge / responsible for the welfare system.
• Most Companies are leveraged to some degree.
• The CPI is used as a main measure of inflation.
• When money costs more there is less demand for goods and services.
• Less demand lowers prices (inflation decreases).
• Some individuals will need to finance the needs of other individuals.
• Not all individuals contribute to the financing of the state / government. (Taxes /
Contributions etc).
• Taxes are collected to form the national budget.
• Currency Stability is negatively affected when inflation is high.
• Individuals tend to try to minimise that amount of taxes paid.
• Investments with longer maturity are less attractive when interest rates are higher and
vice versa.
• Investors use CPI to calculate “real” returns on investments.
• ROI / NPV of investments discount inflation from their calculations and valuations.
• Culture and education influence individuals in having growing expectations.
• Culture influences individuals’ choices and preferences (family, regional and
organisational).
• Education influences individuals’ choices and preferences.
• The state / government owns the legal tender.
• The state / government decides what legal tender is (Fiat money).
• Gold as money (Gold Standard) has been replaced by Fiat Money as legal tender.
• Gold has been the most recent form of money prior to Fiat Money as legal tender.
• Gold is a scarce commodity.
• The use of money is the most effective method to conduct trade and/or business
transactions.
• Keeping interest rates low stimulates the economy in the short term.
• The Current consensus is that credit expansion is required to grow the economy.
• Credit expansion causes short term economic growth.
• The Banks’ main driver is to make more money.
• A single measure with multiple inputs/variable distorts the areas where focus is needed
and hides where to help.
• Inflation is communicated and explained using CPI.
• CPI has multiple variables.
• CPI variation is affected by changes made to the CPI basket over time.
• CPI variation is affected by increases and decreases in the amount of money in use
(demand).
• CPI variation is affected by increases and decreases in consumers (demand).
• Regulation introduces more rules and controls.
• State / government regulates a sector(s).
• Individuals and companies do pay their taxes.
• State/government taxes individuals and companies for the use of infrastructure
(airport, ports).
• State/government taxes individuals and companies with bank transactions tax.
• State/government taxes individuals and companies with payroll taxes (e.g., to fund
Social Security, welfare, Pay-as-you-earn tax is a tax paid on each pay check to pay
towards income tax, withholding tax is money withheld from a pay check, often to
contribute to income tax liability).
• State/government taxes individuals and companies when they import goods or
services (import taxes, Tariffs or Customs Duties).
• State/government taxes individuals and companies when they get a profit or gain from
the sale of capital assets such as stock market investments or real estate (Capital
Gains Tax).
• State/government taxes individuals and companies with Environmental taxes (e.g.
taxes on carbon emissions, airports).
• State/government taxes individuals when they purchase shares (Stamp duty)
• State/government taxes some goods and services more than others ( “sin taxes” such
as gambling tax, alcohol, tobacco, and other goods such as fuel, or directed to certain
sectors such as O&G companies – Excess profits tax / Windfall profits tax is a tax on
profits gained by a company that has some kind of large unexpected profit, taxes on
items considered luxury items).
• State/government taxes companies (Corporation tax / Production taxes)
• State/government taxes individuals on their savings (taxes on interest earned).
• State/government taxes individuals when they want to gift money to non-charitable
status individuals (Gift Tax).
• State/government taxes individuals’ real estate (Stamp duty and council / real estate
taxes, property tax, sometimes known as ‘house tax’ and/or Land value tax).
• State/government taxes individual’s assets when they die (inheritance tax).
• State/government taxes the individual when they spend their money (sales tax or VAT
and/or service tax).
• State/government taxes individual’s income (income tax).
• State / government uses pubic money to provide stimulus packages (cancellation of
debt, additional credit, injection of capital, partial/full nationalisation).
• State / government deems certain goods, services and sectors to be vital to the
economy (vital goods and services and/or vital employment).
• Real estate is an asset.
• Individuals’ or companies’ assets are used as collateral against their debt.
• Central banks determine the amount of money in circulation (money expansion, money
contraction, leaving money volume the same and fractional reserve levels).
• State/government periodically require private real estate for the common good use.
• State/government regulates the use of real estate.
• Money is centralised.
• The USD is not backed up by a scarce commodity (USD is Fiat Money).
• Often times there is more than one way to satisfy a need.
• Often times there is more than one way to produce a good or service.
Connecting all the listed Undesirable Effects and Preconditions
This is a simplified and basic model, hence there are many more undesirable effects (UDEs) and preconditions not mentioned here, many more connections, and feedback loops, however, I have tried to capture the most meaningful relationships through a cause-and-effect synthesis.
Current Reality Tree Summary
Below a simplified version with the most relevant undesirable effects (UDEs) and their relationships through a cause-and-effect synthesis.
What happens next?
A loop is formed..
What is the common theme throughout the reality tree?
As per the reality tree and the cause-effect logic (use If-Then logic to connect the cause to the effect), the core problem or constraint to human progress is the fact that money (Fiat money [5]) is being continuously debased through the increase of the monetary supply caused by central
banks and credit expansion from the fractional reserve banking system.
That sole fact is the cause of all evil so to speak.
That money is being debased means that in reality, we live in a very sophisticated working camp with one commissary shop [6]. We may work very hard (if we are even allowed to perform the activity as per the regulation dictated by the camp’s Lagerkommandant and its politburo),
but we are paid with coupons printed by the politburo. Fiat money has the characteristic of being managed by central planning organisations that can manipulate its value at will, in that sense, the stability of the currency will depend on the decisions made by the political group
that is in power. This in turn creates a vicious circle in which the rulers decide to borrow fiat money to finance populist packages to win over the electorate, and this same trend will cause a rebound effect in which to stay or get to power, the politicians will have to be increasingly
irresponsible with public spending, collect increasingly higher taxes, and increasingly debase the currency, to fill in the fiscal gaps to maintain their power. There is no amount of money a politician or a bureaucrat cannot outspend.
We cannot actually save what we earn because the coupons are far from being hard money. The ultimate fundamental issue is collectivism in its purest form: absence of actual private property. If we aspire progress and prosperity, the only solution is to eliminate the core problem so that each individual can be free to pursue their interest.
The reality is that what we call free countries (including USA, UK and EU nations) do not actually have a proper capitalism system but central bank system economies with fractional reserve banking systems in the form of a sophisticated working camp. The crises and undesirable effects that we endure day in and day out, as per the current reality tree, are not
a capitalism crisis but a crisis and the effects of that perverse central banking system.
If people are incentivised in an illogical way, do not complain about apparent illogical behaviour, which in reality is the logical behaviour given that their time preference has changed due to the illogical incentive. [7]
As long as money is debased in any way, the individual is not free because they cannot and will not be able to save the earnings of their human action hence impacting their time preference, capital accumulation and this, in turn, will deteriorate any further human action:
Prosperity and progress are at stake.
[5] State-owned money or fiat money (‘Let it be done’). Fiat money is currency that a government has declared to
be legal tender, but it is not backed by a physical commodity.
[6] “What we have today is not a capitalist society but a mixed economy that is a mixture of freedom and controls
which by the presently dominant trend is moving toward dictatorship.” Ayn Rand
[7] Paraphrasing Eliyahu M. Goldratt’s reflection on measurements: “Tell me how you will measure me, and then I
will tell you how I will behave. If you measure me in an illogical way, don’t complain about illogical behaviour.”
If the incentive is to promote irresponsibility, unaccountability and stupidity, what could go wrong?
Direction of the solution: Assigning property rights
The direction of the solution consists of assigning property rights [8] which in turn allocates accountability. Unbound and free human action by assigning property rights to the
fruit of their honest work: The solution is private money. Truly private money [9].
Even if money was backed up by a store/reserve of value standard (gold standard), as long as money is state/government owned the possibility of decoupling from the standard and
debasing it remains. Gold Standard becomes less attractive as it needs to be highly centralised to provide a secure service. As history has demonstrated, gold can be easily seized by governments / states. In order to live in a global economy, a digital currency is needed.
Even a 100% Fractional Reserve Banking [10], is not enough nor sufficient, because the state can always print more money, an infinite amount given that nowadays it is not even necessary
to print it but rather introduce whatever quantity in the computer mainframe of the central bank and transfer those newly created funds out of thin air to banks. Even worse, banks create money from nothing through loans [11].
By assigning property rights, accountability and responsibility are allocated. By allocating accountability and responsibility, there will be no free lunches nor free riders [12]. Only if property rights are clearly established/defined and can be effectively defended can each individual bear the fruit/benefits and the cost of their human action [13].
Private money, being completely decentralized, would eliminate the incentives of politicians and bureaucrats to manipulate national currencies at will, in turn transferring absolute control
over their money to individuals.
If the majority of people within a nation decide to start trading in private money, the monopoly on money will be taken away from the state and this would free societies.
[8] Assigning property rights is a common-sense solution for almost any dispute, because it also assigns accountability and responsibility over the consequences including any associated costs. In management, assigning accountability tends to clearly mark roles and responsibilities and that in turn benefit the individual and their interaction with the others. Unfortunately, in public affairs the solution is in the hands of the problem (the state or government). Nevertheless, if governments actually wanted to promote human progress, they could 1. Allow
individuals to trade, save and invest in the currency of their preference so they can each protect themselves from
the worst tax: inflation. 2. Federalise the country to promote competition and freedom for each region to attract
investment and people. 3. Reduce the size of the government and limit its functions to justice and security.
[9] Money needs to be private and hard: Private, independent but transparent, with limited supply, with intertemporal
saleability, that is the ability of a money to hold on to its value across time and with a stock-to-flow ratio
significantly higher than 1. Bitcoin is the best candidate.
[10] Fractional Reserve Banking: the standard banking practice of keeping only a portion of depositors’ money on
hand and loaning out the rest. Which in essence, means creating money out of thin air too which in turn generates
inflation and distorts interest rates.
[11] Banks are a fiat miner. Loans create money out of nowhere; any lending creates new money hence increasing
money supply.
[12] Nothing is ever free; the question is who pays for it. Nobody should have to pay by means of coercion (taxes,
inflation or regulations) for someone else’s responsibilities. For example, why are people obliged to pay for the
welfare of someone’s else’s children? Why are you responsible if you did not participate nor enjoyed their
conception? Let the ones who enjoyed and participated in their children’s conception be responsible and accountable for their own creation. Of course, whoever wants to do charity with their own money is more than free and welcome to do so. The moral guide is always to respect everyone’s else’s life project, as long as it does not come with the imposition of their ideas and does not cost time nor money to others.
[13] Tragedy of the commons: When property rights are not clearly established/defined nor can be effectively
defended due to negligence or deliberate design. This setting causes irresponsible and careless actions as people do not bear the cost of their recklessness and the state eagerly passes the costs to others.
When the state loses autonomy over its currency, it would force politicians to have to make realistic proposals for public action, since they will no longer be able to count on the printing of money, intervening interest rates or other ruses to manipulate the economy and finance their monstrous spending. In turn, this would avoid large devaluations and alter the current
economic system that encourages debt, consumption and spending and not savings and sustainability.
Conclusion
A more realistic utopia: Technology as the means to promote property rights and guarantee freedom, human rights and prosperity
“The world’s problem is not too many people, but lack of political and economic freedom… The ultimate resource is human intelligence and ingenuity.” Julian Lincoln Simon [14]
We need to remember that unfortunately, progress is not linear. An if history is any reference, it is clear the devastation caused by wars, especially in the XX Century given states’ capacity to finance them through inflation by getting rid of the gold standard and the creation of the Federal Reserve in the United States in 1913 that made way for state-owned money worldwide. Moreover, in the XX Century, collectivism alone murdered more than 10015 million
people because of purges and collectivist economic mismanagement in collectivist countries.
Despite all that suffering endured during the great wars of the first half of the XX Century, humanity recovered. New amazing technologies and innovations were introduced. Technologies and inventions such as the radio, the aeroplane, the microwave oven, the mobile phone, the transistor, the Radio Telescope, the ballpoint pen, the space shuttle, the nuclear
reactor, the television, the electron microscope, solar cells, the video recorder, the fibre optic, microchips, touchscreen glass, lasers, the calculator, fuel cells, satellites, GPS, the World Wide Web, 3D-printers, Bluetooth, the computer, multiuse (reusable) rockets, online/live internet streaming, and BITCOIN. Medical advances included penicillin; cortisone; the
pacemaker; artificial hearts; the MRI scan; Chemotherapy; HIV protease inhibitor; and vaccines for hepatitis, smallpox, polio and even RNA messenger vaccines against Covid.
Even with the current constraint, the forecast of the future per person GDP based on an annual growth rate of 3 per cent, human progress will be amazing in the years to come (2014–210016) if and only if, statism is maintained at bay and freedom to human action can be protected.
[14] Julian Simon noted that in addition to more labor, a growing population produces more ideas. More ideas lead to more innovations, and more innovations improve productivity. Finally, higher productivity translates to better
standards of living.
[15] Adding the murders caused through direct assassinations, purges, gulags (systems of forced labour camps),
starvation and collectivist economic mismanagement by brutal despots and satraps such as Mao Zedong, Vladimir
Lenin, Josef Stalin, Adolf Hitler, Pol Pot, Kim Jong-un, Kim Jong-il, Kim Il-sung, Benito Mussolini, Castro dynasty, African collectivists dictators, Gustavo Petro, Hugo Chavez, Ernesto Samper, Juan Santos, Cristina Fernandez, Nicolas Maduro, Francois Duvalier, Evo Morales, Rafael Correa, Pepe Mujica, the infamous Foro de São Paulo and other collectivist tyrants. It is important to understand that independent of the name these collectivist tyrants and satraps give to their policies, their party or their oppressive and murderous regimes, collectivists and collectivism characterized themselves by their total lack of respect to human life and private property, additionally, unequal treatment under the law is always the constant. For example, the ruthless Castro dynasty is a collectivist tumour that for decades has exported misery and war to Latin America and Africa while it brutally subjugates the Cubans.
[16] HumanProgress.org https://www.humanprogress.org/dataset/future-per-person-gdp/?start-year=2014
What to change? Fiat Money [17]
Criteria [18] of a good solution for hard money:
• Finite: Resists debasement, does not lead to systematic falsification or nullification of
economic calculation. High stock to flow ratio
• Able to settle transactions (transfer of ownership -property rights assignment – must be
real, final and visible for the stakeholders)
• Resists artificial credit expansion or fractional reserve banking
• Easily divisible
• (as a minimum) retains its value: store of value or saleability through time
• Desentralised
While also continuing to be:
• Saleable through space
• Medium of exchange
• Unit of account
What to change to and how to cause the change?
A more realistic utopia starts with the implementation of private money through the use of private hard money, Bitcoin [19] would be the best current option. “Bitcoin is arguably the most advanced technology for storing value in the world, due to it being the first liquid asset that is
strictly scarce. By protecting individuals from surreptitious inflation and devaluation, bitcoin can safeguard individual sovereignty in the face of governments that have been able to finance
their extravagance at the individual’s expense for a century. Bitcoin also functions as an apolitical alternative to central banks, allowing international movement of capital without needing to resort to the legal, regulatory, and political institutions that are necessary.” [20] Bitcoin can even be safeguarded in satellites or facilities in the ocean on international waters. Banks working with Bitcoin can also operate from those locations to keep their independence. Bitcoin does require a relevant amount of electricity to power the its network [21]. However, the question should be, compare to what? What is the alternative? Is the alternative, central banks controlling the fruit of your honest work? How much is freedom and progress worth? How
much would it cost to move a billion dollars’ worth of gold versus the same value in bitcoin [22], how long would it take to move the former and the latter?
[17] Fix the money, save the world and promote human progress.
[18] According to Mises: The sound money principle has two aspects. It is affirmative in approving the market’s
choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to
meddle with the currency system. Sound money meant a metallic standard. The excellence of the gold standard is
to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of
governments and political parties.
[19] My definition of Bitcoin (BTC), is a coin with Freedom on one side and accountability on the other. It is
incorruptible money that cannot be debased. Harder to tax, harder to seize, easier to transfer, harder to steal,
cheaper, easier, faster to send around the world, borderless, competitive, and highly deflationary. BTC is neutral,
apolitical, beneficial for every individual. BTC has already won the store/reserve of value standard race, it is a
matter of time for individuals to realise the fact. The BTC standard is the only system compatible with the fullest
preservation of the rights of property and human progress. It is the only system that assures the end of inflation
and, with it, of the Money Out of “Thin Air” and the Boom-Bust Cycle.
[20] Saifedean Ammous in The Bitcoin Standard: The Decentralized Alternative to Central Banking, 2018,
Published by John Wiley & Sons Inc.
[21] “Why Does Bitcoin Mining Require So Much Power? When people mine bitcoins, what they’re really doing is
updating the ledger of Bitcoin transactions, also known as the blockchain. This requires them to solve numerical
puzzles which have a 64-digit hexadecimal solution known as a hash. Miners may be rewarded with bitcoins, but
only if they arrive at the solution before others. It is for this reason that Bitcoin mining facilities—warehouses
filled with computers—have been popping up around the world. These facilities enable miners to scale up their
hashrate, also known as the number of hashes produced each second. A higher hashrate requires greater amounts
of electricity, and in some cases can even overload local infrastructure.
Putting Bitcoin’s Power Consumption Into Perspective: On March 18, 2021, the annual power consumption of
the Bitcoin network was estimated to be 129 terawatt-hours (TWh). If Bitcoin were a country, it would rank 29th
out of a theoretical 196, narrowly exceeding Norway’s consumption of 124 TWh. For further comparison, the
“Only two things are genuinely scarce: time and bitcoin.” Saifedean Ammous
“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.” Satoshi Nakamoto
With bitcoin, a great evolution has already begun; and evolution tends to be slow,
imperceptible, irreversible, irresistible, and with astonishing consequences. Bitcoin is
evolution.
The next step is to be able to create private property. Real private property. As anyone that “owns” real estate will know, you do not own it. You can rent it even for your whole life as long as you pay real estate taxes and other related taxes. But the moment you stop paying those
taxes it will be taken from you by the state. Additionally, you are not free to use it as you like because of planning regulation and at any point the government23 may inform you that they need it for something else and take it away from you. If you are lucky, they will pay for it with state bank notes hence completing the Orwellian circle.
The ocean [24] offers limitless possibilities for freedom at an easier reach than space to create real private property or hard real estate. For example, “Freedom Haven is an open-design, freedom-based seasteading micronation founded by Tony Olsen. One of the goals for Freedom Haven is to eventually qualify as a state under the Montevideo Convention.
Requirements include:
The state as a person of international law should possess the following qualifications:
(a) a permanent population;
(b) a defined territory;
(c) government; and
(d) capacity to enter into relations with the other states.”25 This type of initiatives could very well be the basis to offer private hard money and private hard real estate.
With private hard money and private hard real estate, human progress and prosperity have a stable and steady foundation.
What can states/governments do if they want to remain competitive or in case people in those states understand that a change is needed to promote human progress and prosperity? Actually, the solution is simple and obvious and it also stems from assigning property rights:
1. Allow every individual to freely decide on the currency they want to use to save, trade
and invest.
2. Federalise the country so each region competes to attract and retain human action.
3. Allow and protect private hard real estate.
Bitcoin network consumes 1,708% more electricity than Google, but 39% less than all of the world’s data centers—together, these represent over 2 trillion gigabytes of storage.
Where Does This Energy Come From? In a 2020 report by the University of Cambridge, researchers found that 76% of cryptominers rely on some degree of renewable energy to power their operations. There’s still room for improvement, though, as renewables account for just 39% of cryptomining’s total energy consumption.
Hydroelectric energy is the most common source globally, and it gets used by at least 60% of cryptominers across all four regions. Other types of clean energy such as wind and solar appear to be less popular… cryptomining can support the global transition to renewable energy. More specifically, by clustering cryptomining facilities near renewable energy projects can mitigate a common issue: an oversupply of electricity.”
https://www.visualcapitalist.com/visualizing-the-power-consumption-of-bitcoin-mining/
[22] Bitcoin is a great storage of value option comparable to what gold is, with the difference that bitcoin is scarcer.
[23] Even in the freest countries it exists eminent domain, which is the right of a government or its agent to
expropriate private property for public use, with “payment of compensation”.
[24] “People are now working more and more at, on, in oceans. The ocean is transformed from only dustless ways
between harbours in working places where people extract oil and gas or minerals or harvest energy or food. The
ocean become vast platform for space rockets launching or offers undisputed space for living. The declared
intention of “Future of the Ocean” is to facilitate the combination and merge of the best of the millenniums old
classic maritime transport industry and from the decades old offshore industry in order to support the change of
Ocean in humankind home.” https://futureoftheocean.com/
[25] https://www.seasteading.org/active-projects/Seasteading is building startup communities that float on the ocean
with any measure of political autonomy.
Future Reality Tree
All freedoms derive from economic freedom and economic freedom depends exclusively on being able to preserve the fruit of human action. What matters is real freedom, not what is written on paper
Once we free humans from the serfdom of the state by introducing private money, then the constraint will be our very own human action (the very small and individual batch that each of us is), which paradoxically is infinite because our passion, focus, ingenuity, and imagination
are infinite and have no limit.
Now each person needs to understand their constraint (identify it) and work to exploit it, subordinate all to it and elevate it. And then of course, not let inertia become their new constraint. Undoubtedly, human action can benefit from thinking clearly.
Appendices
• Employment Evaporating Cloud
• Wages Evaporating Cloud
• Trade Evaporating Cloud
• Immigration Evaporating Cloud
• A reflection on the subject of prohibitions
• Pertinent definitions in order of relevance
• Additional References
Employment: It is crucial to note that nothing can be done without the availability and participation of human action, human work or human resource. Human action is the resource par excellence or the quintessential resource. Nothing can be conceived without work because it is not possible to produce any product nor provide any service without work being involved and carried out. So, how it is possible that there is unemployment if the claim is that nothing
is conceivable without the availability and participation of work? How is it imaginable to say that there is a surplus (unemployment) of something scarce (human action, human resource
or work)? There is a clear conflict; either work is surplus or is scarce, but it cannot be both at the same time.
There is a solution to this conflict which is; if the contractual agreements between the parties involved are free and voluntary, there will never be unemployment independent of the overall conditions. Whether we are in the most miserable of all places or the one with the most exorbitant wealth, there will never be a surplus of the scarce factor. Hence, there will never be
involuntary unemployment. Involuntary unemployment is a tragedy; the tragedy, is the individual that desperately needs and wants to work but there is no work opportunity available. We are not talking about the individual that does not want to work or does not need to (voluntary unemployment).
Imagine that you and a few other people end up as lonely castaways on a deserted and isolated island. Soon enough reality will become obvious, and you will clearly understand that
you are not in paradise and that there are not enough hours in the day, nor in the night, to do all you need to do just to subsist. The reason? You must do everything by yourself plus there
is no one to trade with. Some of you will have to fish, others will have to climb the trees to get coconuts. Fish and coconuts will become the means to trade between the group of castaways. The reality is that if you want to survive, no one will be unemployed. Everyone will be fully
employed. You could say that the income or wages (coconuts and fish) are miserable, deficient and insufficient for each of you but as you notice that is not linked to employment but rather a consequence of your ability to save and invest in capital assets (capitalisation rates) to be able
to gather more coconuts and fish and eventually be able to create some other means of supplies and income (i.e., farming).
Now imagine, someone else comes to the island, someone that has studied for 20 years to be a PhD in philosophy of social studies and says, “I offer my services as PhD in philosophy of social studies, and you need to hire me for x number of coconuts and y number of fish per
day”. After understanding the gravity of your reality on the island and how difficult it is to survive you will probably tell that person: “We don’t know what PhD means, nor what philosophy is, and we even care less if it is about social studies. What we need, what we actually require, is
someone to contribute fishing, with their hands if necessary, or climbing up a palm tree for coconuts or opening furrows for planting, with their bare fingers if needed.” If that new inhabitant of the island insists on being hired as a PhD in philosophy of social studies, and by the way, they have all the right to do so, then they will become voluntarily unemployed, even if the reality of the island is that infinite work (endless possibilities of employment) is required
to subsist. Employment is not about what someone feels they should provide but rather what the others really need, require and want. That is how the market works; it is about serving others, about meeting their needs with the abilities, skills, competencies and experience that
we each have through better and cheaper products and services. Additionally, needs are infinite and resources scarce, that is why there will always be infinite work opportunities.
So, why does unemployment exist? The answer is that there are no free and voluntary contractual agreements between the parties involved because the state intervenes with the banner of social justice. Social justice ruins all employees, especially those who desperately and urgently need to work the most. If the sum of the so-called social justice conquests is greater than the market wage, that person will immediately become unemployed because the employer will not be able to cover the cost versus the productivity that the now unemployed person can deliver.
Wages: As per the island example, there is no involuntary unemployment, but the wages are miserable and insufficient. So why do some places or countries have better wages level than others? Some people attribute the wages level to the generosity of the employers or the kindness of the state, the ability of the unions to negotiate or their capacity to go on strike and other fantasies and illusions. If the wages level had to do with the generosity of demagogues, why instead of offering a 10% increase per year for example, why not make it a million percent increase? If it is all about decreeing the wages level, do not be a scoundrel and let us make a billion per cent increase for everyone. Will it work? If the state is relentless and its coercive apparatus effective, what would immediately happen is that we have condemned everyone to starvation because no employer can pay those wages [26]. Additionally, we would create a huge black market where wages will be the market ones.
Independent of the community, the geography or the country, the only and exclusive cause of the wages level are the capitalisation rates. Capitalisation rates are the savings that have been transformed into investment in capital assets (knowledge [27], ideas, processes, equipment, machines, installations, infrastructure, etc.) that increase productivity. It is not the same to fish with your bare hands than to fish with a net and a boat. The net and the boat are capital assets that improve your productivity. Is not the same to have to climb the palm tree to reach for the coconuts than to have a ladder to do so. But for the net, the boat and the ladder to exist, someone had to save and then invest in creating and producing those capital assets so they could be available to provide more productivity. The more productive you are the better your wage will be.
Who is more productive? A farmer that farms with a tractor while listening to music in an air-conditioned cockpit or a farmer whose only capital asset is a stick. Who works more? The more productive you are the fewer hours you need to invest to do the job. And where did the tractor come from? From the savings and investments in capital assets made in the past.
When a plumber from Sudan, Haiti, Cuba [28] or Venezuela moves to Switzerland or New Zealand, they will automatically, with their same virtues, strengths, flaws, and weaknesses, get paid hundreds more in actual and real income. Why? Is it because in Switzerland or New Zealand people are more generous than in Sudan, Haiti, Cuba, or Venezuela? No, it is because the capitalisation rates in Switzerland or New Zealand that are higher than in Sudan, Haiti, Cuba, or Venezuela force whoever is hiring them to pay them the market wage. That is why in countries with high capitalisation rates it is very expensive to have a house cleaning service, is not that people do not like having them.
What provides the incentives to saving and investment to generate higher capitalisation rates? Institutionality. Institutionality is the respect for life, private property, and equal treatment under the law.
So, what would happen if a country or a certain place could manage to provide proper Institutionality? More savings and more investment would be achieved; hence the capitalisation rates would increase. All the people living there, with their same virtues, strengths, flaws, and weaknesses, would increase their actual and real income. Moreover, what if savings and investments from other places and countries were attracted due to the
Institutionality? Well, again all the people living there, with their same virtues, strengths, flaws, and weaknesses, would increase their actual and real income.
What would happen if someone tried to hire someone below the market wage? They do not get the job done because no one would come forward to do it.
[26] Forty Centuries of Wage and Price Controls by Robert Schuettinger and Eamon Butler, first published in 1979.
[27] TOC contributes to raising capitalisation rates.
[28] Assuming they are able to escape the prison island that is Cuba and become free from their horrendous servitude.
As per the 2021 Index of Economic Freedom ranking https://www.heritage.org/index/ranking New Zealand is 2nd, Switzerland is 4th, Haiti is 155th, Sudan is 175th, Cuba is 176th, and Venezuela is 177th.
Trade [29]: In the island example, even if there were infinite needs from the stranded population, there were initially not a whole lot of possibilities for trade: In the beginning coconuts and fish. Later on, through the diligent and rigorous investment of their savings and assuming
institutionality (no one is stealing the other person’s honest work) it can become ladders for fish, coconuts for nets and boats. The more trade is possible the better off the community will be because now they can each specialise in certain products and services, which will increase their productivity and competitivity which will allow them to trade to fulfil their needs.
Restrictions to trade are a threat to human prosperity and progress. These restrictions only protect pseudo businesses; these restrictions never protect the consumers, and we are all consumers. Being able to trade means that you have found a way of producing more and better products and services at a cheaper cost. This means that instead of spending more money on the same product or service you can now spare some money to either save it or buy another product or service that you require. And there will always be infinite needs.
Another way to see it is to imagine that if trade restrictions are so beneficial, why not apply them only at a country level but at a state/regional/department level too? But if they are so good, why not apply them to a shire/municipality level? But if they are so useful, why not apply them at a zone level within the municipality? But if they are so helpful, why not apply them at a neighbourhood level? But why end there? Why not apply them at a house-to-house level? You will have no choice but to sew your shoes and produce all your food and medicines (good luck with that) which means living the most miserable and tragic life; you will end up going back to the wretchedness of cave collectivism.
Another related topic has to do with erroneously stating that a trade deficit30 is a problem. Let us say you live in a house, and you use electricity; does it matter that the electricity company does not buy anything from you while you buy all the electricity from them? If you do your food
shopping from a certain shop, does it matter they do not buy anything from you? As long as you are getting what you need at a competitive price the only real issue is if you can afford it (the payment balance is the only one that matters).
[29] “Man is a trader by nature. We constantly exchange know-how, favours and goods with others, so that we can
accomplish more than we would if we were limited to our own talents and experiences. And the bigger the
population, the greater the chance that one of them will stumble onto a better way of doing things, and the more
people can benefit from that. This is why progress is related to the number of people who are connected and have
a certain freedom to innovate and imitate. The sudden development of sophisticated tool-making, art and culture
in western Eurasia about 45,000 years ago can be explained by population density. At last this region had enough
people sufficiently close to regularly transfer skills and knowledge between groups. And in fact, researchers have
found that similar ‘modern’ human behaviour appeared on other continents when the population density was
similar. So, it’s not our genes that explains our abilities and our progress, it’s our proximity to more genes
belonging to other people. Isolated populations, because they lived on far away islands and in mountain terrain,
or because they were shut off by nativist rulers, failed to make this progress.” Norberg, Johan (2020). Open: The
Story of Human Progress. Atlantic Books.
[30] A trade deficit occurs when a country’s imports exceed its exports during a given time period.
Immigration: Immigration is usually the excuse for politicians and bureaucrats to blame foreigners or outsiders for unemployment, low wages, and social security deficits. Because, of course, politicians and bureaucrats can never be the ones accountable for the misfortunes
that they produce with their interventions.
People vote with their feet (and with their money by choosing what to buy [31]), meaning that they travel and settle to where they sense they will have more opportunities to ensure a better life. This has been the constant and a driver since the dawn of humanity.
Imagine again that you arrive on a deserted island. If you are alone, you will soon realise that you need to devote all your time to gather food to survive. Now, let us imagine that another individual comes along. With the two of you, it will be easier to survive, as one of you can gather the food while the other one gathers wood for a fire. You then can exchange the result of your work, food for wood and vice versa, to improve the quality of life. Moreover, one can gather food while the other one uses its time to create some sort of item that can increase food gathering productivity (i.e., fishing rod to fish or ladder to climb the trees to get coconuts or bananas). There are now two production levels on the island, one the very basic consumer goods gathering level and the other, a first capital asset production level. Now imagine more
people come to the island and each, respecting others’ lives and their private property, continue specialising their work and cooperating through trading. Now, human progress through human action becomes possible. The more individuals available, the more opportunities to specialise, innovate and create by adding levels to the production structure, specifically by adding layers to the capital asset production capacity. This is possible if and only if there are previous savings (low time preference places more emphasis on their well-being in the further future). Without savings, there is no chance to develop capital asset production because it means that all is consumed (high time preference focuses substantially
on their well-being in the present and the immediate future). Of course, the precondition for any savings to happen is institutionality (freedom, respect to life, private property, and equal treatment under the law).
The production structure grows as individuals move from producing consumer goods to producing capital assets which in turn generate more productivity. As work becomes specialised more people, usually the autochthonous ones can move away from the production of immediate consumer goods. This means that there is always a need for individuals to replace those that have moved further from consumer goods production into the production of capital assets. The wages in the areas further from the production of consumer goods usually pay more because their productivity and specialisation are far superior. The jobs for producing consumer goods, usually require less expertise and knowledge and pay less, so those roles
are the ones usually taken by the newcomers. Immigration is a necessity to create human progress and prosperity, plus the more specialisation the more social cooperation will be required.
If and when the state intervenes, what it does is destroy the production structure, hence the individuals that were working in the different levels of that structure have no other option but to compete for jobs closer to the consumer goods production. State’s intervention dramatically reduces job opportunities, productivity, and social cooperation. The state has now put in direct collision course the autochthonous population with the newcomers. The conflict has been generated because of it. Now, the politicians and bureaucrats blame foreigners or outsiders for unemployment, low wages, and social security deficits.
[31] Each individual with their unique spending, savings and investment choices determines the value of products
and services and where the capital flows.
Laissez faire et laissez passer, le monde va de lui même.
[32] “Leave it to us, let do and let pass, the world goes on by itself!” Jacques Claude Marie Vincent de Gournay – Economist.
A reflection on the subject of prohibitions
When freedom is absent corruption takes its place.
Regulations in general and prohibitions in specific are a monster of its own. It is important to understand the difference between an addiction [33] and a crime. An addiction tends only to hurt
the addict while a crime tends to hurt others. The question is if the state should be entitled to prohibit an adult to have an addiction and why?
For example, is there any difference between tobacco, alcohol and other drugs? They are all mind-altering chemicals, highly addictive. All can be dangerous. They all generate social dysfunction; with that logic should we also prohibit the addictions generated by gambling,
video games, or social media? These addictions only differ in their legal status and social acceptability. It is clear that tobacco and alcohol kill more people than street drugs, however, tobacco, alcohol, video games, and social media are legal while street drugs are not.
It is interesting to review what happened in the United States from 1920 to 1933 when the state decided to prohibit the manufacture, sale, and transportation of alcoholic beverages in the name of promoting moderation and, more often, complete abstinence in the use of
intoxicating liquor. The result was that millions of people were willing to drink liquor illegally, which gave rise to bootlegging (the illegal production and sale of liquor) and speakeasies (illegal, secretive drinking establishments), both of which were capitalized upon by organized
crime. As a consequence, the Prohibition-era became a period of gangsterism, characterized by corruption and violent turf battles between criminal gangs.
Let us ask a few questions about how states manage addictions such as tobacco, alcohol and street drugs:
• To which one are entire national budgets spent to battle it as a crime and yet production and consumption are higher every year?
• Which one, in its production process, destroys and pollutes the environment the most and in a very serious way?
• What would so many police officers, judges and bureaucrats, who dedicate their whole lives to try to reduce street drugs trafficking do if the prohibition was lifted?
• How many people would get out of jail? How many prisons would be emptied?
• How many political campaigns or socialist regimes (such as Cuba and Venezuela)
would fall apart without having the financing from the drug traffic? How many gangs of brutal criminals against humanity would disappear without the means and resources to carry out their despicable and appalling crimes?
• Would any addict risk going to an alley to buy his dose so that dangerous criminals
can sell it to him or her at a higher price than gold or more expensive than the cure for cancer if they were free to go to the pharmacy to buy it at the price of aspirin and with less harmful substances and damaging side effects?
• There will always be addicts; addicts to food, gambling, sex, alcohol, tobacco, watching football matches, Instagram … the question is what is a vice and what is a crime? Is the state going to prohibit everything now or are they going to let the adult individual assume their responsibility to make their own decisions while facing and certainly being accountable for the consequences of those choices (freedom and accountability are the opposite sides of the same coin)?
In any case, as per the current reality, each and every one of us is paying [34] via inflation, taxes and loss of freedom, the consequences of the behaviours of the drug addicts while due to prohibition we are making it an extremely profitable business for the supply chain. For those who need to pay for the burden of the prohibition, there are at least three grave consequences:
1. Carry the burden of the enormous cost of the so-called war against drugs.
2. Carry the burden of having a more expensive health system because addicts are treated by the state’s health system.
3. Production and distribution are now in the hands of those who are expert professionals in violating the law. Prohibition automatically generates rampant corruption and atrocious
organized crime that in turn unleashes the violence and injustice that every individual then suffers. From brutal cartels and terrible corruption to petty thieves who steal from law-abiding individuals to pay their dose that is worth more than gold.
The three previous points do deteriorate human action and human capital by eroding institutionality and its institutional framework and therefore reducing capitalisation rates which in turn decrease productivity and consequently wages; because not many will think of investing
where corruption and violence are rampant if they can do it in other places with better
institutionality.
The only ones who benefit from prohibition are those who enrich themselves fabulously from it.
The reality is that the state has not been able and will not be able to prevent people from using street drugs. It cannot stop drugs from entering any country. It cannot even stop drugs from entering its own prisons. The corruption generated by drug trafficking permeates all state levels and as business as usual, the answer from politicians and bureaucrats is a bigger state
to try to prevent the corruption which in turn only generates more corruption. And yet, politicians keep telling us that the next freedom they take from us will be the last one so that they can finally get drugs off the streets and protect us and our children. It should be obvious by now that this war will never be won. The state cannot stop supply, it cannot reduce demand, and its coercion tactics do not work.
“There are wars that structurally cannot be won,
even if each and every battle is won.” [35]
[33] John Stuart Mill – a 19th century English philosopher, parliamentarian and political economist: One of Mill’s greatest contributions to philosophy was his harm principle, which holds that an action of a person should only be
legally prohibited if it causes harm to other individuals.
[34] An estimated 2.2% of the world’s population had either an alcohol or illicit drug use disorder in 2016.1 This equates to around 164 million people. (Our World in Data). However, a 100% of the world’s population ends up paying for it.
[35] Gonzalez Moore, Jorge. (2011). Un Dia Particular. Editorial JGGM.
Some of the symptoms or undesirable effects (UDEs) of prohibitions (in no particular
order).
• Prices in the illegal (black) market are higher.
• Individuals transacting in the illegal (black) market are not protected (risk is higher).
• Consumers are in direct contact with all the criminality behind the drug trafficking.
• Individuals risk obtaining their goods and services from the illegal (black) market.
• An illegal (black) market is created.
• Individuals seek out other options for obtaining the goods and services.
• The need or demand for the product or service still persists.
• Availability of the product or service decreases or disappears.
• More rules and controls increase the difficulty to obtain the goods or services.
• Corruption increases.
• Criminals have the capacity to corrupt via bribery or intimidation.
• Criminals enrich themselves fabulously.
• Drug consumers may resort to violence to get the money to pay the expensive price of
the street drugs.
• Elimination of incentives to produce drugs with less undesired side effects and at
cheaper prices in the legal market.
• Erosion of Institutionality.
• Injustice increases.
• Violence increases.
• Criminals resort to violence to deal with disputes.
• Production and distribution done by criminals.
• Substances are harmful or of substandard quality.
• Criminal enterprises have little or no standards when producing goods or services.
• Substances are produced by the criminal enterprises.
• Money is debased to pay for the war on drugs.
• More taxes need to be raised to pay for the war on drugs.
• More state/government expenditure.
• More resources solely dedicated to fight drug trafficking are required (i.e. police, army,
state agencies, justice, jails, social welfare).
Current Preconditions (in no particular order):
• Government uses coercive force.
• Interventions are cumulative and increasing.
• Government restricts/regulates activities.
• Government prohibits activities.
• Addicts are treated by state / government welfare agencies.
• Drug consumers need money to buy drugs.
• Criminalisation of the whole supply chain: Production, distribution and consumption.
• Government prohibits street drugs use.
• Regulation introduces more rules and controls.
• State / government regulates a sector(s).
Pertinent definitions in order of relevance
Self-ownership and freedom: Every individual is a self-owner, having absolute jurisdiction over his own body. In effect, this means that no one else may justly invade, or aggress against, another’s person. This self-ownership includes the freedom to choose (profession, lifestyle, movement, free and voluntary agreements) as long as it does not conflict with someone else’s self-ownership, their right to their life and their private property. To have self-ownership is to be able to make one’s own choices in all spheres of one’s life and be accountable for the consequences of said choices. One self is the first private property. Moreover, what are you, if not your private property
Respect/right to life and freedom: “no person shall be deprived of life, liberty, or property, without due process of law” (US Constitution) and “It is illicit to initiate or threaten invasive violence against a man or his legitimately owned property.” (Walter Block).
Private property: “Private ownership of the means of production is the fundamental institution of the market economy. It is the institution the presence of which characterises the market economy as such. Where it is absent, there is no question of a market economy. Ownership means full control of the services that can be derived from a good.” (Ludwig von Mises).
Moreover, assigning property rights or assigning private property means assigning the use and benefits along with the responsibility and the consequences of having said private property. Private property makes the holder accountable for said private property; for its gains and losses. Private property also means respect/right to life, private property, and equal treatment under the law (institutionality of the natural law) based on the nonaggression principle (NAP). Murray Rothbard stated the nonaggression principle (NAP) in this way: No one may threaten or commit violence (“aggress”) against another man’s person or property. Violence may be employed only against the man who commits such violence; that is, only defensively against the aggressive violence of another. In short, no violence may be employed against a nonaggressor.
Equal treatment under the law, also known as equality before the law, or isonomy: Equal treatment under the law is an ancient principle which is of vital importance to human progress. Almost every civilised society worldwide recognizes this fundamental concept, in some form at least. The basic principle recognizes that all individuals should be treated in exactly the same manner by the law, while all persons should be subject to the same laws. Article 7 of the Universal Declaration of Human Rights formalizes this basic right as: “All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination.” USA Constitution’s Fifth Amendment includes a due process clause stating that no person shall “be deprived of life, liberty, or property, without due process of law.” A phrase that was derived from Magna Carta. It is extremely important to hold governments accountable for this basic human right and fundamental principle of equal treatment under the law. However, the application of this concept, in practice, is often problematic. Confusion can arise between equality before the law and equality of outcome or opportunities. Governments can misuse the guise of equal opportunities to enforce restrictive legislation, which inhibits individual freedom and effectively denies equal treatment under the law, such as with the introduction of affirmative action policies. Such laws can penalise individuals who have perceived advantages, in order to force some semblance of equality.
Institutionality: Self-ownership, respect/right to life and private property, and equal treatment under the law based on the nonaggression principle. The latter means that “no person shall be deprived of life, liberty, or property, without due process of law”. In essence, the protection of natural rights. High institutionality implies real and material protection of natural rights along with proper regulatory stability. In contrast, low institutionality fails to protect natural rights along with regulatory instability that reduces natural rights. The use of any property of which its availability belongs to another person constitutes an unlawful assault on their right to property.
Time preference: An individual will always prefer obtaining a given satisfaction earlier than later. A low time preference will lead to more investment and less consumption in the present, while a high time preference will lead to less investment and more consumption in the present.
Human Action: Purposeful (or conscious) beneficial action — an action that is directed at attaining certain beneficial ends.
Human Progress: “Most people agree that life is better than death. Health is better than sickness. Sustenance is better than hunger. Wealth is better than poverty. Peace is better than war. Safety is better than danger. Freedom is better than tyranny. Equal rights are better than bigotry and discrimination. Literacy is better than illiteracy. Knowledge is better than ignorance. Intelligence is better than dull-wittedness. Happiness is better than misery. Opportunities to enjoy family, friends, culture, and nature are better than drudgery and monotony.
All these things can be measured. If they have increased over time, that is progress. Granted, not everyone would agree on the exact list. The values are avowedly humanistic, and leave out religious, romantic, and aristocratic virtues like salvation, grace, sacredness, heroism, honour, glory, and authenticity.
But most would agree that it’s a necessary start. It’s easy to extoll transcendent values in the abstract, but most people prioritize life, health, safety, literacy, sustenance, and stimulation for the obvious reason that these goods are a prerequisite to everything else. If you’re reading this, you are not dead, starving, destitute, moribund, terrified, enslaved, or illiterate, which means that you’re in no position to turn your nose up at these values – nor to deny that other people should share your good fortune.” Steven Pinker, Enlightenment Now: The Case for Reason, Science, Humanism, and Progress (New York: Viking Press, 2018).
Capital or Capital Assets: Savings that have been transformed into an investment of beneficial capital assets such as knowledge, ideas, know-how, processes, instruments, tools, equipment, machines, installations, infrastructure, and processed materials. In essence, anything that increases or improves productivity.
Capitalisation Rates: The rate at which capital or capital assets are accumulated to improve productivity.
Productivity: Producing more and better beneficial goods and services with fewer resources or capital. By definition, higher productivity makes everyone richer because it is about producing more with fewer inputs. Productivity = Throughput / Operating expense.
Work: Creating beneficial value for others within the institutionality framework.
Price System: It is how the market solves the problems of coordination. A free price system or free price mechanism (informally called the price system or the price mechanism) is a mechanism of resource allocation that relies upon prices set by the interchange of supply and demand. The resulting price signals communicated between producers and consumers determine the production and distribution of resources. In an unhampered market economy, the price mechanism is the tool conducive to the most efficient—i.e., desired by consumers—allocation of resources. Why? Because prices stem from the different subjective values human beings attach to the various consumer goods and services available in the economy. By repeatedly exchanging, sellers discover the values subjectively attached to consumption goods by demanders—i.e., the market value of goods. In other words, they understand which consumer values any single available good most, thus allowing each good to find the most eager owner. Notice that subjective appraisement of goods’ values is possible if and only if
goods are privately owned by the exchanging agents. In fact, without private ownership of goods, exchanging agents could not enjoy the profit rewarding the discovery of the most eager desirers of the goods they want to exchange on the market—they would not be able to attain the highest possible reward from the exchange. Analogously, absent private ownership of goods, exchanging agents could not possibly experience losses—in the form of missed satisfaction of wants—when exchanging with those who are not the most eager desirers of the goods the former supply. Additionally, nothing is free, the question is who pays for it. “It is profit and loss that force the capitalists to employ their capital for the best possible service to the consumers. It is profit and loss that make those people supreme in the conduct of business who are the best fit to satisfy the public. If profit is abolished, chaos results.” Ludwig von Mises, from Profit and Loss. The price system is the other side of human action: if you create noise in the price system you damage and interfere with human action. Free market prices are relevant to productivity: TOC’s 5 focusing steps are based on the existence of free market prices and that is why “elevate” is the fourth step and not the second step. Without free market prices, TOC 5 focusing steps are not only irrelevant but could be the demise because you are laser focusing on the wrong thing. The latter also indicates that a firm’s largest size is limited by its ability to calculate prices adequately. In other words, when prices (P) cannot be calculated, all TOC ability to generate value or throughput (T) breaks down: If P approaches 0, then T approaches 0.
Economic Calculation: “The preeminence of the capitalist system consists in the fact that it is the only system of social cooperation and division of labour which makes it possible to apply a method of reckoning and computation in planning new projects and appraising the usefulness of the operation of those plants, farms, and workshops already working. The impracticability of all schemes of socialism and central planning is to be seen in the impossibility of any kind of economic calculation under conditions in which there is no private ownership of the means of production and consequently no market prices for these factors. The problem to be solved in the conduct of economic affairs is this: There are countless kinds of material factors of production, and within each class they differ from one another both with regard to their physical properties and to the places at which they are available. There are millions and millions of workers and they differ widely, with regard to their ability to work. Technology provides us with information about numberless possibilities in regard to what could
be achieved by using this supply of natural resources, capital goods, and manpower for the production of consumers’ goods. Which of these potential procedures and plans are the most advantageous? Which should be carried out because they are apt to contribute to the satisfaction of the most urgent needs? Which should be postponed or discarded because their execution would divert factors of production from other projects the execution of which would contribute more to the satisfaction of urgent needs? It is obvious that these questions cannot be answered by some calculation in kind. One cannot make a variety of things enter into a calculus if there is no common denominator for them. In the capitalist system all designing and
planning is based on the market prices. Without them all the projects and blueprints of the engineers would be a mere academic pastime. They would demonstrate what could be done and how. But they would not be in a position to determine whether the realization of a certain project would really increase material well-being or whether it would not, by withdrawing scarce factors of production from other lines, jeopardize the satisfaction of more urgent needs, that is, of needs considered more urgent by the consumers. The guide of economic planning is the market price. The market prices alone can answer the question whether the execution of a project P will yield more than it costs, that is, whether it will be more useful than the execution of other conceivable plans which cannot be realized because the factors of production required are used for the performance of project P. It has been frequently objected that this orientation of economic activity according to the profit motive, i.e., according to the yardstick of a surplus of yield over costs, leaves out of consideration the interests of the nation as a whole and takes account only of the selfish interests of individuals, different from and often even contrary to the national interests. This idea lies at the bottom of all totalitarian planning. Government control of business, it is claimed by the advocates of authoritarian management, looks after the nation’s well-being, while free enterprise, driven by the sole aim of making profits, jeopardizes national interests. The case is exemplified nowadays by citing the problen of synthetic rubber. Germany, under the rule of Nazi socialism, has developed the production of synthetic rubber, while Great Britain and the United States, under the supren1acy of profit-seeking free enterprise, did not care about the unprofitable manufacture of such an expensive Ersatz. Thus they neglected an important item of war preparedness and exposed their independence to a serious danger. Nothing can be more spurious than this reasoning. Nobody ever asserted that the conduct of a war and preparing a nation’s armed forces for the emergency of a war are a task that could or should be left to the activities of individual citizens. The defense of a nation’s security and civilization against aggression on the part both of foreign foes and of domestic gangsters is the first duty of any government. If all men were pleasant and virtuous, if no one coveted what belongs to another, there would be no need for a government, for armies and navies, for policemen, for courts, and prisons. It
is the government’s business to make the provisions for war. No individual citizen and no group or class of citizens are to blame if the government fails in these endeavors. ‘”the guilt rests always with the government and consequently, in a democracy, with the majority of voters. Germany armed for war. As the German General Staff knew that it would be impossible for warring Germany to import natural rubber, they decided to foster domestic production of synthetic rubber. There is no need to inquire whether or not the British and American military authorities were convinced that their countries, even in case of a new World War, would be in a position to rely upon the rubber plantations of Malaya and the Dutch Indies. At any rate they did not consider it necessary to pile up domestic stocks of natural rubber or to embark upon the production of synthetic rubber. Some American and British businessmen examined the progress of synthetic rubber production in Germany. But as the cost of the synthetic product was considerably higher than that of the natural product, they could not venture to imitate the example set by the Germans. No entrepreneur can invest money in a project which does not offer the prospect of profitability. It is precisely this fact that makes the consumers sovereign and forces the enterpriser to produce what the consumers are most urgently asking for. The consumers, that is, the American and the British public, were not ready to allow for synthetic rubber prices which would have rendered its production profitable. The cheapest way to provide rubber was for the Anglo-Saxon countries to produce other merchandise, for instance, motor cars and various machines, to sell these things abroad, and to import foreign natural rubber. If it had been possible for the Governments of London and Washington to foresee the events of December, 1941, and January and February, 1942, they would have turned toward measures securing a domestic production of synthetic rubber. It is immaterial with regard to our problem which method they would have chosen for financing this part of defense expenditure. They could subsidize the plants concerned or they could raise, by means of tariffs, the domestic price of rubber to such a level that home production of synthetic rubber would have become profitable. At any rate the people would have been forced to pay for what was done. If the government does not provide for a defense measure, no capitalist or entrepreneur can fill the gap. To reproach some chemical corporations for not having taken up production of synthetic rubber is no more sensible than to blame the motor industry for not, immediately after Hitler’s rise to power, converting its plants into plane factories. Or it would be as justifiable to blame a scholar for having wasted his time writing a book on American history or philosophy instead of devoting all his efforts to training himself for his future functions in the Expeditionary Force. If the government fails in its task of equipping the nation to repel an attack, no individual citizen has any way open to remedy the evil but to criticize the authorities in addressing the sovereign-the voters-in speeches, articles, and books. Many doctors describe the ways in which their fellow citizens spend their money as utterly foolish and opposed to their real needs. People, they say, should change their diet, restrict their consumption of intoxicating beverages and tobacco, and employ their leisure time in a more reasonable manner. These doctors are probably right. But it is not the task of government to improve the behavior of its “subjects.” Neither is it the task of businessmen. They are not the guardians of their customers. If the public prefers hard to soft drinks, the entrepreneurs have to yield to these wishes. He who wants to reform his countrymen must take recourse to persuasion. This alone is the democratic way of bringing about changes. If a man fails in his endeavors to convince other people of the soundness of his ideas, he should blame his own disabilities. He should not ask for a law, that is, for compulsion and coercion by the police. The ultimate basis of economic calculation is the valuation of all consumers’ goods on the part of all the people. It is true that these consumers are fallible and that their judgment is sometimes misguided. We may assume that they would appraise the various commodities differently if they were better instructed. However, as human nature is, we have no means of substituting the wisdom of an infallible authority for people’s shallowness. We do not assert that the market prices are to be considered as expressive of any perennial and absolute value. There are no such things as absolute values, independent of the subjective preferences of erring men. Judgments of value are the outcome of human arbitrariness. They reflect all the shortcomings and weaknesses of their authors. However, the only alternative to the determination of market prices by the choices of all consumers is the determination of values by the judgment of some small groups of men, no less liable to error and frustration than the majority, notwithstanding the fact that they are called “authority.” No matter how the values of consumers’ goods are determined, whether they are fixed by a dictatorial decision or by the choices of all consumers-the whole people-values are always relative, subjective, and human, never absolute, objective, and divine. What must be realized is that within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers’ goods are faithfully and closely reflected in the prices of the various factors required for their production. Thus it becomes feasible to discover by means of a precise calculation which of the indefinite multitude of thinkable processes of production are more advantageous and which less. “More advantageous” means in this connection: an employment of these factors of production in such a way that the production of the consumers’ goods more urgently asked for by the consumers gets a priority over the production of commodities less urgently asked for by the consumers. Economic calculation makes it
possible for business to adjust production to the demands of the consumers. On the other hand, under any variety of socialism, the central board of production management would not be in a position to engage in economic calculation. Where there are no markets and consequently no market prices for the factors of production, they cannot become elements of a calculation. For a full understanding of the problems involved we must try to grasp the nature and the origin of profit. Within a hypothetical system without any change there would not be any profits and losses at all. In such a stationary world, in which nothing new occurs and all economic conditions remain permanently the same, the total sum that a manufacturer must
spend for the factors of production required would be equal to the price he gets for the product. The prices to be paid for the material factors of production, the wages and interest for the capital invested, would absorb the whole price of the product. Nothing would be left for profit. It is obvious that such a system would not have any need for entrepreneurs and no economic function for profits. As only those things are produced today which were produced yesterday, the day before yesterday, last year, and ten years ago, and as the same routine will go on forever, as no changes occur in the supply or demand either of consumers’ or of producers’ goods or in technical methods, as all prices are stable, there is no room left for any
entrepreneurial activity. But the actual world is a world of permanent change. Population figures, tastes, and wants, the supply of factors of production and technological methods are in a ceaseless flux. In such a state of affairs there is need for a continuous adjustment of production to the change in conditions. This is where the entrepreneur comes in. Those eager
to make profits are always looking for an opportunity. As soon as they discover that the relation of the prices of the factors of production to the anticipated prices of the products seem to offer such an opportunity, they step in. If their appraisal of all the elements involved was correct, they make a profit. But immediately the tendency toward a disappearance of such profits
begins to take effect. As an outcome of the new projects inaugurated, the prices of the factors of production in question go up and, on the other hand, those of the products begin to drop. Profits are a permanent phenomenon only because there are always changes in market conditions and in methods of production. He who wants to make profits must be always on the
watch for new opportunities. And in searching for profit, he adjusts production to the demands of the consuming public. We can view the whole market of material factors of production and of labour as a public auction. The bidders are the entrepreneurs. Their highest bids are limited by their expectation of the prices the consumers will be ready to pay for the products. The co-bidders competing with them, whom they must outbid if they are not to go away empty-handed, are in the same situation. All these bidders are, as it were, acting as mandatories of the consumers. But each of them represents a different aspect of the consumers’ wants, either another commodity or another way of producing the same commodity. The competition among the various entrepreneurs is essentially a competition among the various possibilities open to
individuals to remove as far as possible their state of uneasiness by the acquisition of consumers’ goods. The resolution of any man to buy a refrigerator and to postpone the purchase of a new car is a determining factor in the formation of the prices of cars and of refrigerators. The competition between the entrepreneurs reflects these prices of consumers’ goods in the formation of the prices of the factors of production. The fact that the various wants of the individual, which conflict because of the inexorable scarcity of the factors of production, are represented on the market by various competing entrepreneurs results in prices for these factors that make economic calculation not only feasible but imperative. An entrepreneur who
does not calculate, or disregards the result of the calculation would very soon go bankrupt and be removed from his managerial function. But within a socialist community in which there is only one manager there are neither prices of the factors of production nor economic calculation. To the entrepreneur of capitalist society a factor of production through its price sends out a warning: Don’t touch me, I am earmarked for the satisfaction of another, more urgent need. But under socialism these factors of production are mute. They give no hint to the planner. Technology offers him a great variety of possible solutions for the same problem. Each of them requires the outlay of other kinds and quantities of various factors of production. But as the socialist manager cannot reduce them to a common denominator, he is not in a position to find out which of them is the most advantageous. It is true that under socialism there would be neither discernible profits nor discernible losses. Where there is no calculation, there is no means of getting an answer to the question whether the projects planned or carried out were those best fitted to satisfy the most urgent needs; success and failure remain unrecognized in the dark. The advocates of socialism are badly mistaken in considering the absence of discernible profit and loss an excellent point. It is, on the contrary, the essential vice of any socialist management. It is not an advantage to be ignorant of whether or not what one is doing is a suitable means of attaining the ends sought. A socialist management would be like a man forced to spend his life blindfolded. It has been objected that the market system is at any rate quite inappropriate under the conditions brought about by a great war. If the market mechanism were to be left alone, it would be impossible for the government to get all the equipment needed. The scarce factors of production required for the production of armaments would be wasted for civilian uses which, in a war, are to be considered as less important, even as luxury and waste. Thus it was imperative to resort to the system of government-established priorities and to create the necessary bureaucratic apparatus. The error of this reasoning is that it does not realize that the necessity for giving the government full power to determine for what kinds of production the various raw materials should be used is not an outcome of the war but of the methods applied in financing the war expenditure. If the whole amount of money needed for the conduct of the war had been collected by taxes and by borrowing from the public, everybody would have been forced to restrict his consumption drastically. With a money income (after taxes) much lower than before, the consumers would have stopped buying many goods they used to buy before. the war. The manufacturers, precisely because they are driven by the profit motive, would have discontinued producing such civilian goods and would have shifted to the production of those goods which the government, now by virtue of the inflow of taxes the biggest buyer on the market, would be ready to buy. However, a great part of the war expenditure is financed by an increase of currency in circulation and by borrowing from the commercial banks. On the other hand, under price control, it is illegal to raise commodity prices. With higher money incomes and with unchanged commodity prices people would not only not have restricted but have increased their buying of goods for their own consumption. To avoid this, it was necessary to take recourse to rationing and to government-imposed priorities. These measures were needed because previous government interference that paralyzed the operation of the market resulted in paradoxical and highly unsatisfactory conditions. Not the insufficiency of the market mechanism but the inadequacy of previous government meddling with market phenomena made the priority system unavoidable. In this as in many other instances the bureaucrats see in the failure of their preceding measures a proof that further inroads into the market system are necessary.” From Bureaucracy, by Ludwig von Mises, pp. 22–31.
Market economy or free market: The market is a process of social cooperation where property rights are freely and voluntarily traded. It is inherent to human progress. The market is human action. It is about free offer and free demand. It means that no one is coercing or ordering by force anyone in what to produce or what to consume. Any attack on that freedom of producing and freedom of consuming is an attack on the voluntary autonomy of each individual.
Ways money can be spent: No one spends others’ money with the same care and consideration as they spend their own money (It is always much easier to spend someone’s else’s money than our own money), hence central planners are far from being able to make optimal spending decisions on behalf of others. In the case of state/government, and opposite to private endeavours, there is no budget constraint, meaning that state/government can keep spending even if losses accumulate because those losses will keep being covered by the state/government budget which can be financed through inflation and taxation. A private endeavour has a finite overall budget provided by its investors hence they have finite and hard budget constraints.
Central Planning: Planning as a means of social engineering. The central planner intervenes in the human action and/or the economy to manipulate the outcome. Central Planning is any form of interventionism to manipulate the outcome away from what it would have otherwise been having it been left to the freedom of choice of each individual (“spontaneous order”). States/governments are central planners par excellence (by definition). Central planning or statism is just another form of collectivism.
State/government (used as synonyms): More than defining what is, best to start with what not is. The state or government is not a representative organisation, “we” are not the state/government; the state/government is not “us.” The state/government does not in any accurate sense “represent” the majority of the people and does not even exist, we just believe it does. The state is whoever is in power and whoever through the use of coercion and representing the said state/government can obligate/force individuals in any way the state/government deems. “The state is that great fiction by which everyone tries to live at the expense of everyone else.” — Frederic Bastiat. “If the Devil’s cleverest wile was to make men believe that he does not exist, in contrast, the state’s shrewdest subterfuge is to make people think that it exists and it is necessary. The state does not exist as a real entity, they are really an organised gang who takes resources away from the rest to spend them as they see fit. It is an imaginary existence and exists only if we believe in it. States are usually recognised by other states. States are born out of war, live out of war and grow out of war. The more war there is, the more it suits the state. With each war, the state spending level increases and it never goes back to the previous spending level. As a paradox, there is no state inside the state, meaning that there is no institutionality (no rules of conduct) within the state. There is absolute anarchy in the politburo and that is why when the head loses its power it is rapidly and violently replaced.” Theory of Constraints Economics: Reality, Freedom and Progress.
Collectivism: Any forceful intervention to human free enterprise and/or private property and/or free market. Central planning through statism, socialism, fascism, or communism are all forms of collectivism.
Coercive Force: Relating to or using force or threats of using force.
Exploitation: Benefit of one group at the expense of another.
Fiat Money: “The Latin word fiat means “let it be done,” and in English, the term has been adopted to mean a formal decree, authorization, or rule. It is an apt term for the current monetary standard (legal tender), as what distinguishes it most is that it substitutes government dictates for the judgement of the market. Value on fiat’s base layer is not based on a freely traded physical commodity but is instead dictated by authority, which can control its issuance, supply, clearance, and settlement, and even confiscate it at any time it sees fit. As anything fiat, the fiat money has never competed on a free market for its users to pass the only judgement that matters: freedom to choose.” Saifedean Ammous, The Fiat Standard: The Debt Slavery Alternative to Human Civilization (The Saif House, 2021). Who decides what is legal tender that can be used for daily transactions with anyone who is under the vigilance of the state/government? You or the state? Until very recently only the state. Does it mean the state is able to control all transactions? Yes. To open any bank account, you need to give all your data to the bank. Banks are agents of the state. Your bank has to provide your details to the state and all details of your transactions if the state does wish it. Actually, any transaction of more than USD10k is usually reported to the state in the majority of countries with a central bank. The state can freeze your accounts at any point (Canada 2022 – state seized bank accounts). Yes, you can conduct transactions in cash or paper money (notes) freely and anonymously, however the state could decide that certain notes (India 2016) or even notes with certain serial numbers cannot be accepted anymore (Colombia 1994) and it means that you cannot transact with those notes anymore unless you transact with a person that does not
yet know that your paper is worthless and not legal tender anymore hence those notes will possibly not be accepted in the next transaction. The majority of money is already digital, and the next step by the states will be a digital ledger through
Central Banks Digital Currencies: Anonymity will be a thing of the past and absolute control of state-owned money a reality. Fiat money is inflationary; said inflation benefits a few (the first to use the inflated money: state, banks, organisations financed by the state) at the expense of many others (the rest of us, who pay it through inflation); it causes boom-and-bust cycles; it leads to over-indebtedness and changes individual’s time preference. USD became the reserve for all other central banks during Nixon. This means that everyone that lives outside the USA, has a double inflationary impact: Your own state money and the USD. Real inflation is much higher than the number announced by your central bank. A misconception is that the Fiat monetary system is a paper money system. It is not. The vast majority of Fiat money is digital money. Fiat money is really credit money, and it allows the state and anybody who is approved by the state to use future money, promises of future money, and to settle payments for receiving goods today. The implications are enormous given that the state and banks can always bring in more credits from the future to settle bills for today. That most of the money is digital means that if you go
to the bank and you borrow a million dollars to build your new business the bank does not actually have a printing press where they print out a million dollars in cash and hand you a wheelbarrow of money. The bank opens up a checking account for you and they assume you are going to write checks or make digital transfers on it, and then the check or transfer will go to some supplier, and then the supplier will deposit the check or transfer in their account. Notice no money has been printed and then somebody else will wind up getting that money. It is different ledgers having their amounts changed in a computer somewhere. Given that the vast majority of Fiat money is already digital, and the next step by the states will be a digital ledger: Anonymity will be a thing of the past and absolute control of state-owned money a reality. Fiat standard is the opposite to a sane monetary system, like the gold standard system, wherein there is a clear physical object that is used as money and you need to have it in your hand in order to settle trades today. Fiat standard has no physical limit on the increase of the money, you can always print more so to speak, you can always create it digitally, there is no physical constraint on it the way there is with gold or even a numerical constraint
Fiat Education: The education system is dictated, controlled, overseen and funded by states/governments through their own decree and fiat money. The latter generates incentives on what schools’ and universities’ curriculums should be about, how and what academics’ should work and research. This in turn also impacts the scientific research that is promoted.
Education in turn modifies culture and traditions. “Take over education and culture, and the rest will fall in line.” — Antonio Gramsci
Debasement of money: Reducing the real value of money. “Debasement was the State’s method of counterfeiting the very coins it had banned private firms from making in the name of vigorous protection of the monetary standard. Sometimes, the government committed simple fraud, secretly diluting the gold with a base alloy, and making short weight coins. More
characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses. In that way, government continually juggled and redefined the very standard it was pledged to protect. The
profits of debasement were haughtily claimed as “seniorage” by the rulers.
Rapid and severe debasement was a hallmark of the Middle Ages, in almost every country in Europe. Thus, in 1200 A.D., the French livre tournois was defined at ninety-eight grams of fine silver; by 1600 A.D. it signified only eleven grams. A striking case is the dinar, a coin of the
Saracens in Spain. The dinar originally consisted of sixty-five gold grains, when first coined at the end of the seventh century. The Saracens were notably sound in monetary matters, and by the middle of the twelfth century, the dinar was still sixty grains. At that point, the Christian kings conquered Spain, and by the early thirteenth century, the dinar (now called maravedi) was reduced to fourteen grains. Soon the gold coin was too light to circulate, and it was converted into a silver coin weighing twenty-six grains of silver. This, too, was debased, and by the mid-fifteenth century, the maravedi was only 1.5 silver grains, and again too small to circulate.” Murray N. Rothbard, What Has Government Done To Our Money? (Ludwig von Mises Institute, 2008).
Central Bank: A national bank that provides financial and banking services for its government and commercial banking system, as well as implementing the government’s monetary policy and issuing currency by determining what legal tender is (Fiat money). A central bank performs
five primary functions: (1) it acts as a banker to the central government, (2) it acts as a banker to banks and lender of last resort, (3) it acts as a regulator of banks, (4) it conducts monetary policy, and (5) it supports the stability of the financial system. “The alleged legitimacy of central
banks rests on three fundamental goals that central banks around the world share. The first goal is price stability, which is the belief that central banks should expand and contract the money supply in relation to actual demand and supply pressures from the economy. Goal number two is fueling macroeconomic growth prospects, which is done through lowering the cost of borrowing, which supposedly leads businesses to increase their investments, leading to increases in output and overall growth. Finally, the last goal is performing countercyclical measures, which are actions that the central bank undertakes in order to offset the high unemployment rates that may result from falling output during a trough in the business cycle.” Central Banks: Who Needs Them? No One – Vibhu Vikramaditya
Fractional Reserve Banking: The standard or modern banking practice of keeping only a portion of depositors’ money on hand and loaning out the rest. Which in essence, means creating money out of thin air when banks issue loans, which in turn generates inflation and distorts interest rates. An increase (decrease) in reserves in the banking system can increase (decrease) the money supply. The maximum amount of the increase (decrease) is equal to the deposit multiplier times the change in reserves; the deposit multiplier equals the reciprocal of the required reserve ratio.
National deficit: The total amount by which money spent is more than money received.
Taxes: Any money, resources or time taken from the individual by the state through coercion. Taxation takes from producers and gives to others. Any increase in taxation swells the resources, the incomes, and usually the numbers of those living off the producers while diminishing the production base from which these others are drawing their sustenance.
Corruption: In this context, any misuse or misappropriation of state’s money or resources, independent if it is caused by private individuals/enterprises/companies/corporations, politicians, bureaucrats or state enterprises/corporations.
Rent Seeker: Increasing one’s share of existing wealth without creating value for others. Rent-seeking results in reduced economic efficiency. i.e. lobbying for government subsidies or imposing regulations on competitors, in order to increase market share by other coercive
means rather than by free competition. Another example is the limiting of access to lucrative occupations through state certifications and licensures.
Recession: A collapse in aggregate demand, which is followed by sluggish price adjustments, is probably the most widely cited explanation for recurrent boom-and-bust cycles in economic activity. The corresponding business cycle theory was, of course, popularised amid the mass
unemployment of the Great Depression through Keynes’s landmark General Theory, published in 1936. In a nutshell, Keynes argued that shortfalls between aggregate demand and aggregate supply, which are typically associated with a reluctance to invest and a savings glut, are neither automatically, nor quickly reversed through changes in interest rates, prices,
or wages (see, e.g., De Vroey 2016, 3ff.; Niehans 1990, 349ff.). In particular, the price adjustment mechanism can malfunction, because wage reductions or interest rate cuts can lead to deflation, which lures entrepreneurs into postponing investment and, hence, aggravates the downturn. Low levels of interest rates and deflationary policies cannot restore the “animal spirits” of entrepreneurs, to employ Keynes’s famous catchphrase (1936). Rather, to revive aggregate demand by breaking the vicious cycle that depresses investment, a fiscal stimulus is arguably warranted. In contrast to low interest rates through monetary policy, demand activation through fiscal policy is thought to exhibit powerful multiplier effects on
investment and consumption and, therefore, has turned into the preferred Keynesian tool for stabilising macroeconomic activity. However, recessions are necessary evils following any
boom which has led to overinvestment and a distorted capital and production structure
(Cantillon-Hayek theory). More specifically, such distortions in prices and production are thought to be initiated by money and credit expansions. Insofar as newly created money and credit flow via specific sectors into the economy, Hayek suggested that a loose monetary policy is typically associated with a distorted relative-price schedule. Manipulated price signals misguide, in turn, individual consumption and investment decisions and, at least in some sectors, produce an overaccumulation of capital. Such overexpansion leads to an unsustainable production structure. Sooner or later, redundant parts of the capital stock have
to be liquidated, which can arguably only occur through a recession with dampened
consumption and divestment. According to this narrative, any form of macroeconomic
stabilisation policy is futile. In particular, fiscal and monetary stimuli cannot prevent, but only postpone, the inevitable downturn and, possibly, expose the capital and production structure to even greater distortions. In particular, manipulation of monetary variables does no good, insofar as such interventions preserve the mistaken price signals that lie at the origin of boom-
and-bust cycles. Economic fluctuations originate in excessive monetary expansion that distorts the price schedule and misdirects investment toward capital-intensive sectors. This leads to an overaccumulation of certain forms of capital, which must eventually be undone
through a recession. Furthermore, economic expansions and recessions typically persist for some period of time. Hence, the question of what causes this persistence arises. Whereas Keynesians emphasise the role of price stickiness, in the Cantillon-Hayek theory, cycles are
not immediately eliminated due to the delays in reorganising the capital stock, which implies that booms and busts can become entrenched. Finally, why can nominal variables, such as money, have real effects? To explain this, Keynesians invoke sticky prices. By contrast, even
when individual prices are fully flexible, the Cantillon-Hayek theory recognizes that money can flow via specific sectors into the economy. Hence, prices of goods closely associated with the economic sectors through which nominal expansions occur can change relative to other prices. Central banks distort the production structure, and create business cycles. When their policies fail, central bankers blame markets, speculators and any convenient target for the problems. They also, tacitly or overtly, inject bigger and bigger doses of inflation into the economy, even though this is what caused the problems in the first place. Why did the Fed’s policies of the 1920s and 1930s fail? Was it because the Fed contracted the money supply or was it, in fact, because the Fed, along with flawed fiscal policies pursued by the Hoover administration, was creating too much money and running huge deficits—the same policies advocated by successive administrations and around the world —thereby preventing the purging of malinvestments. The purging process would cure depressions, but with the modern banking system in place and the incentive for state/governments to spend that will never happen. “Contrary to the accepted way of thinking, recessions — properly understood — are not negative growth in GDP for at least two consecutive quarters. Recessions, which are set in motion by a tight monetary stance of the central bank, are about the liquidations of activities that sprang up on the back of the previous loose monetary policies. Rather than paying attention to the so-called strength of real GDP to ascertain where the economy is heading, it will be more helpful to pay attention to the rate of growth of the money supply. By following the rate of growth of the money supply, one can ascertain the pace of damage to the real economy that central bank policies inflict. Thus the increase in the growth momentum of money should mean that the pace of wealth destruction is intensifying. Conversely, a fall in the growth momentum of money should mean that the pace of wealth destruction is weakening. Additionally, once it is realised that so-called real economic growth, as depicted by real GDP, mirrors fluctuations in the money supply rate of growth, it becomes clear that an economic boom has nothing to do with real and sustainable economic expansion. On the contrary such a boom is about real economic destruction, since it undermines the pool of real wealth — the heart of real economic growth. Hence despite “good GDP” data, many more
individuals may find it much harder to make ends meet.” Frank Shostak. Regarding GDP, “Thus, any concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is therefore meaningless and illegitimate.” Murray N.Rothbard, Man Economy and State, Nash Publishing p 734.
Inflation as a measurement needs to be divided into:
• Increase/decrease (delta) of Monetary aggregate (Supply/demand of money) and,
• Supply/demand of goods and services.
CPI and Unitless Measurement: “Fiat money enthusiasts maintain a strange obsession with a metric produced by national governments named the Consumer Price Index (CPI). Government Employed statisticians construct a representative basket of goods and measure the change in the prices of these goods every year as a measure of price increases. There are countless problems with the criteria for inclusion in the basket, for the way that the prices are adjusted to account for technological improvements, and with the entire concept of a representative basket of goods.
Like many metrics used in the pseudoscience that is macroeconomics, the CPI has no definable unit with which it can be measured. This makes measuring it a matter of subjective judgement, not numerical precision. Only by reference to a constant unit whose definition and magnitude are precisely known and independently verified can anything be measured. Without defining a unit, there is no basis for expressing a quantity numerically, or comparing its magnitude to others. Imagine trying to measure anything without a unit. How would you compare the size of two houses if you could not have a constant frame of reference to measure them against? Time has seconds, weight has grams and pounds, and length has metres and inches, all very precisely and uncontroversially defined. Can you imagine making a measurement of time, length, or weight without reference to a fixed unit?
The CPI has no definable unit; it absurdly attempts to measure the change in the value of the unit that is used for the measurement of prices, the dollar, which itself is not constant or definable. The absurdity of unitless measurement covers up the fundamental flaw of the CPI, which is that the composition of the basket of goods itself is a function of prices, which is a function of the value of the dollar, and therefore it cannot serve as a measuring rod for the value of the dollar. As the value of the dollar declines, people will not be able to afford the same products they purchased before and will necessarily substitute them for inferior ones. Market prices result from purchasing decisions, but purchasing decisions are, in turn, influenced by prices. The price of a basket of goods is not determined by some magical “price level” force but by the spending decisions of individuals who can only spend the income they have. Purchasing decisions themselves are price-responsive and will adjust to changes in prices. The main and fatal flaw of the CPI, therefore, is that it is, to a large degree, a mathematical tautology and an infinite referential loop. Beyond the actual change in the consumer basket of goods as a result of the change in prices, there is also the change in the composition of goods as a result of the judgement and motivations of the people in charge of defining the basket of goods. Economist Stephen Roach, who was starting his career at the Fed in the 1970s, has said then-chairman Arthur Burns fought inflation by removing from th CPI’s basket of goods items whose prices were rising, while always conveniently finding a nonmonetary story to explain the price increase. By the time he was done with it, he had eliminated about 65% of the goods in the CPI, including food and oil and energy-related products. One of the most important ways in which the measurement of the CPI has been manipulated is through the removal of house prices from the basket of market goods, under the pretence that a house is in an investment good, an absurd redefinition. Investments produce cash flows, but a person’s own home cannot produce an income. On the contrary, it is consumed and it depreciates and requires continuous expenditure to maintain it. The fiat standard first destroyed the ability of individuals to save, then forced them to treat their home as their savings account. With low salability and divisibility, houses constitute terrible savings vehicles, but by excluding it from CPI, and teaching people to treat it as a savings account, inflation magically appears beneficial.” Chapter 4, CPI and Unitless Measurement: Saifedean Ammous in The Fiat Standard: The Debt Slavery Alternative to Human Civilization, 2021, Published by The Saif House.
Inflation as a Vector: “The CEO of Microstrategy, Michael Saylor, a newly converted bitcoiner, has given the best analysis of measuring inflation that I have come across. His key insight is that inflation cannot be measured as a metric; it can be better understood as a vector. There is no universal inflation rate that measures increases in the prices of all goods and
services, as inflation affects different goods in different ways. If inflation is considered as a vector wherein each good has its own price inflation rate, it becomes far easier to identify the impacts of inflation on individuals and their provision for the future. Saylor’s inflation vector allows us to see how inflation rates vary across goods depending on a few key properties, such as their variable cost of production and desirability. Goods that are abundant, not highly sought after, and require a low variable cost of production witness the least price inflation. With modern industrialization and automation driving costs down continuously, these goods are very good at resisting price rises since their supplies can be increased at a relatively small additional marginal cost. Thinking about goods in terms of their variable cost of production can show their different price inflation rates. Digital and informational goods involve a variable cost of production that is close to zero. As Saylor puts it, if nobody turned up to work at Google tomorrow, their search engine would still continue to work, and the average user would only notice problems later as they stop making upgrades. Digital goods are likely to experience negative price inflation, as they always have done. Industrial goods that can be produced at scale involve more variable costs than digital and informational goods. However, a very large percentage of their production costs are in original capital expenditure, not in variable running costs. These goods experience price inflation to some extent, albeit not very high. Industrial food is the best example of this. Even through all of the monetary inflation of the past decades, the price of a can of soda, a box of cereal, or processed food has increased very little. These goods have a low price inflation rate, in the range of 1–4% per year. Goods that involve a significant variable cost, such as those involving extensive labour inputs, will be more sensitive to price changes than industrial goods. Organically farmed produce will be more sensitive to inflation than industrial food, and fine dining will be more sensitive to inflation than automated fast-food restaurants. Goods like this will witness higher levels of inflation than digital or industrial goods. As the level of skill involved in producing goods increases, the scarcity of the labour element increases, and the price inflation rate rises. The cost of hiring highly skilled labour increases much faster than the quoted CPI rates. Another gradient along which the inflation vector manifests is scarcity, and this is where price inflation begins to appear more strongly. Inherently scarce goods manifest price inflation the most. House prices will appreciate faster than the prices of industrial products, and faster than the CPI, particularly as the latter does not include house prices, and the most desirable houses will increase in value the fastest. Property in desirable areas increases at rates that far exceed official CPI measures, and far exceed the price increases of properties in less desirable areas. Tuition in the top-ranked universities increases at similar rates to high-end property, along with luxury goods and artwork. Anything that commands some scarcity premium becomes an attractive store of value under fiat, attracting increasing demand. Whereas industrial goods can easily respond to increased demand with increased supply, scarce goods, luxury goods, and status goods cannot increase in supply and end up continuously rising in price. The price inflation rate for scarce and highly desirable assets is around 7% per year. To add to Saylor’s categories, one could also add durability as a metric, along which the inflation vector varies. Durable goods are more likely to store value into the future, and thus they are more likely to attract store-of value demand and appreciate. Perishable and consumable goods will likely have lower price inflation than durable goods. Saylor’s most brilliant insight on this issue is to pinpoint that inflation shows up in the cost of purchasing financial assets that yield income for the future. Returns on bonds have declined along with interest rates, reducing the ability of individuals to afford retirement. The market is effectively heavily discounting today’s money in terms of tomorrow’s real purchasing power as yields disappear. As the future becomes more uncertain, it is no wonder we witness a palpable rise in time preference.” Chapter 4, Inflation as a Vector: Saifedean Ammous in The Fiat Standard: The Debt Slavery Alternative to Human Civilization, 2021, Published by The Saif House.
Monetary aggregate: A measure of the volume of the total money in circulation at any given time (printed, digital and fractional reserve/credit expansion).
Inflation as measurement needs to be divided into:
• Increase/decrease (delta) of Monetary aggregate and,
• Supply/demand.
Arrow’s impossibility theorem: Say there are three alternatives A, B and C to choose among and there is a group of three people whose preferences inform this choice, and they are asked to rank or vote the alternatives by their own lights from better to worse. Their individual preference orderings turn out to be: James (ABC), Simon (BCA) and Mary (CAB).
The possible ranking of options or the vote results are:
The majority of people all prefer A, B and C at the same time which is an impossibility. In reality, only one individual will be 100% satisfied with the outcome and always two will be unsatisfied. Now, translate that not only to a vote but to state / government policies starting with welfare.
This impossibility has only one outcome from the standpoint of the state/government: The state / government (politicians, bureaucrats and enlightened intellectuals – Thomas Sowell) believe they know better than the average person and shall decide for them as is “the state are the parents and the people their children and parents always know what is best for their
children”. In reality, the state / government treats individuals as children telling them what to consume, what not to, what to spend money on and what not to, where to live, work or not to, etc. The tyranny of the enlightened (goes back to the Greek philosophers that advocated for tyrants): The fatal conceit (Hayek). Moreover, democracy is an abuse of statistics (Borges): 50.1% is a 100% and 49.9% is 0%. Contrary to the free market where everyone’s needs can potentially be met and satisfied at the same time. In a free market each person votes individually with their money and their feet.
Natural Rights or Liberties or Negative Rights: The kind of rights which impose on others a negative duty, a duty not to do anything, a duty of non-interference. If one has a right of this sort, all others have to do to respect that right is refrain from blocking me. Negative rights are sometimes called Liberties (i.e. freedom and private property). “A negative right is a right to not be constrained. The right to free speech, for example, implies only non-interference. The right to freedom of the press doesn’t mean the government has to give you a press. The good of negative freedom is, in the economic sense, not rivalrous — your exercise of free speech doesn’t leave less freedom of speech out there for others to enjoy. The list below comprises what are often called both “natural rights” and “negative rights”—natural because they derive from our essential nature as unique, sensate individuals and negative because they don’t impose obligations on others beyond a commitment to not violate them.
You have the right to:
1. Your life (unless compromised by taking or attempting to take that of another person without a self-defence justification);
2. Your thoughts;
3. Your speech (which is really a verbal or written expression of #2) so long as you don’t steal it from another without permission or credit;
4. Material property you were freely given, that you created yourself, or that you freely
traded for;
5. Raise and educate your children as you see fit;
6. Live in peace and freedom so long as you do not threaten the peace and freedom of
others.” Kevin Williamson.
Entitlements or Positive Rights: The kind of rights which impose on others a positive duty or burden, a duty or burden to provide or act in a certain way. If one has a right of this sort, you respect it by complying or providing. Positive rights are also sometimes called Entitlements (i.e. people that think they have a right to other people’s money or people have the right to get all sorts of taxpayer-financed handouts). “Positive rights run into some pretty obvious problems if you think about them for a minute, which is why so much of our political discourse is dedicated to moralistic thundering specifically designed to prevent such thinking. Consider the notion that health care is a right. Declaring a right in a scarce good such as health care is intellectually void, because moral declarations about rights do not change material facts. If you have five children and three apples and then declare that every child has a right to an apple of his own, then you have five children and three apples and some meaningless posturing — i.e., nothing, in reality, has changed, and you have added only rhetoric instead of adding apples. There are so many doctors, so many hospitals and clinics, so many MRI machines, etc. This imposes real constraints on the provision of health care. If my doctor works 40 hours a week, does my right to health care mean that a judge can order him to work extra hours to accommodate my rights? For free? If I have a right to health care, how can a clinic or a physician charge me for exercising my right? If doctors and hospitals have rights of their own — for example, property rights in their labour and facilities — how is it that my rights supersede those rights? The items below are called “positive rights” because others must give them to you or be coerced into doing so if they decline. …while I believe neither you nor I have a right to any of those disparate things in the second list, I hasten to add that we certainly have the right to seek them, to create them, to receive them as gifts from willing benefactors, or to trade for them. We just don’t have a right to compel anyone to give them to us or pay for them.
You do not have the right to:
1. High-speed broadband Internet access;
2. Cheeseburgers, cheap wine (or even expensive wine, for that matter), or an iPhone;
3. Somebody else’s house, car, boat, income, business, or bank account;
4. The labour of another person you have not freely contracted with (you cannot enslave somebody, in other words);
5. Medical care from a witch doctor or a skilled surgeon or anybody in between;
6. Taxpayer-funded (i.e., coercively-appropriated) child day-care, college education, contraceptives, colonoscopies, or sports stadiums;
7. Anything that is not yours, even though you really want it and think you are entitled to it;
8. Conscript other people’s children into schools you think they should attend;
9. Free stuff in general, unless the rightful owner chooses to offer it;
10. Anything a politician flattered you with by claiming you have a right to it.” Kevin
Williamson – the logical fallacy of positive rights.
Wealth Creation Vs Wealth Spending Matrix: Given the impossibility of proper economic calculus by central planning, actual wealth creation can only be produced by the right upper and bottom quadrants. Wealth spending is carried out by the left upper and bottom quadrants. The more people in the right quadrants the less need of assistance and subsidies from the state / government and vice versa.
Central Bank Digital Currency (CBDC): Has the potential for all transactions to be monitored, and/or taxed and/or stopped and/or reversed and fiat money can be frozen. All state issued currency can be seized at any time or for any reason (no final payment settlement ever). Debasement can be totally electronic. End of privacy, end of free movement, end of freedom to choose or expression; end of freedom.
Additional References
FOMC: The USA Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The Federal Reserve controls the three tools of monetary policy: open market operations, the interest rate, and reserve requirements (www.federalreserve.gov/monetarypolicy/fomc.htm). In an effort to decentralise power, Congress designed the Fed as a system of 12 regional banks. Each of these banks operates as a kind of bankers’ cooperative; the regional banks are owned by the commercial banks in their districts that have chosen to be members of the Fed. The owners of each Federal Reserve bank select the board of directors of that bank; the board selects the bank’s president. Congress authorised it to buy and sell federal government bonds. This activity is a profitable one that allows the Fed to pay its own bills. Thomas Jefferson, an opponent of our first national bank, is reputed to have said that a national bank is a greater threat to liberty than a standing army.
BIS: The Bank for International Settlements (BIS) mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. The BIS does not accept deposits from, or provide financial services or advice to, private individuals or corporate entities. The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Board may have up to 18 members, including six ex officio Directors, comprising the central bank Governors of Belgium, France, Germany, Italy, the United Kingdom and the United States. They may jointly appoint one other member of the nationality of one of their central banks. Eleven Governors of other member central banks may be elected to the Board. The Board elects a Chair and may elect a Vice-Chair from among its members, each for a three-year term (www.BIS.org).
FDIC: The Federal Deposit Insurance Corporation (FDIC) is a USA independent agency created by the USA Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships (www.fdic.gov).
FATF: The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and
regulatory reforms in these areas. With more than 200 countries and jurisdictions committed to implementing them. The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction. The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply (www.fatf-gafi.org).
World bank: With 189 member countries, staff from more than 170 countries, and offices in over 130 locations, the World Bank Group is a unique global partnership: five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries. The World Bank Group is one of the world’s largest sources of funding and
knowledge for developing countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development. Its five institutions are IBRD (The International Bank for Reconstruction and Development), IDA (The International Development Association), IFC (The International Finance Corporation), MIGA
(The Multilateral Investment Guarantee Agency) and ICSID (The International Centre for Settlement of Investment Disputes). (www.worldbank.org).
IMF: The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s. 44 founding member countries sought to build a framework for international economic cooperation. Today, its membership embraces 190 countries, with staff drawn from 150 nations. The IMF is governed by and accountable to those 190 countries that make up its near-global membership. The IMF provides loans—including emergency loans—to member countries experiencing actual or potential balance of payments problems. The aim is to help them rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while correcting underlying problems
(www.imf.org).