Monday, July 18, 2011

On Markets and Money

The American economy is based upon the ‘market.’ Following that, what must be asked is ‘what is the market?’ The market (or marketplace) is where ideas (abstractions) or goods/products (concretes) are brought forth to be offered to the public, or to those interested.

Now, that is in itself abstract so let us examine how the market came to be – examine its nature. Being where ideas or goods are brought forth to be offered means a couple of different things: 1) someone has something to offer; 2) someone is interested in what another has to offer. For example, farmer Jed has harvested his corn and sees that he has more than he needs to survive until the next harvest, while rancher Sanders has raised extra chicken and has more than he needs to survive; both men have more than they need of a given good. As they have excess of what they need, they bring the excess to where they might be able trade their excess: where Sanders may want some corn and Jed may want some chicken. They discuss and with each desiring what the other has, come to an exchange of value X amount of corn for Y number of chickens. But, as the market is open to those interested, let us add farmer O’Malley who has excess potatoes and is interested in Sanders’ chickens. Now, in the best of worlds, each would have enough to fulfill what each other wants: plenty of chickens for each. However, as this is the best world we have and it involves scarcity, there won’t be enough chicken for each and for Sanders to maintain his productivity; he does himself, and those he deals with no good if he sets himself to go out of business. With only Y number of chickens to trade, he has to decide what is more valuable: corn, potatoes, some of each or just keeping his stock. Jed and O’Malley will barter with Sanders as to what would be a good price to get the chickens.

Sanders has a monopoly only for there not being another who offers chicken or any other meat product, while the others offer vegetables (not a scientific term); Sanders, being the only one who offered meat could dictate price since there isn’t another chicken rancher, while Jed and O’Malley offer a more interchangeable good. But, if Roy came along and he offered beef, Sanders wouldn’t be able to dictate price like he used to because, like Jed and O’Malley having to compete against each other, Sanders would have to compete against Roy for the meat market.

Each party, in order to stay in business, would have to maintain their product. Not only would they have to maintain it, they’d have to improve upon it for in the market, there are numerous other Jeds, O’Malleys, Sanders and Roys, each offering a good that may be the same, or similar. In order to compete and maintain a profitable business, whoever entered the market would have to find ways of getting and keeping customers, and that is done primarily by lowering cost, and by improving quality. The market is where economics rule: incentives blended with scarcity.

To move bushels of produce, or dozens to thousands of animals is logistically problematic so the barter system is to be replaced. Something of value as agreed upon becomes a substitute so trade may be easier: money is created. Money is a standard, tied to an objective value that is agreed upon by the parties, for they choose to accept money as payment when they could still accept forms of barter instead. Money is to be representative of a portion of what could be used to trade for any produce. Traditionally, and for millennia, that objective value was gold; metals are enduring, and precious metals, like gold remain pure. With an objective value, what comes is that Z amount of gold could buy X vegetables, or Y meat. Produce comes and goes, but the gold endures. Various people are able to do business, so that vegetarians may still sell produce to a rancher who may not have goods to barter.

Returning to our mini-market, production may be stabilized and predicted to an extent, but it is never guaranteed; various forces may affect production: drought, sickness (plant or animal), excess along with changing appetite in the market. If there was a fungus that wiped out 50% of the corn, while at the same time there was a boom on chicken production while demand remained the same changes in price would be needed. With less corn the price would have to be raised for Jed would have to make more from each amount of corn in order to cover loses and to maintain production, while the price of chicken would have to go down for there would be too much to go around and keeping all that stock would cost Sanders to maintain so he would want to unload more and to tempt customers to buy more than they originally would.

However, if the production remained the same, but the demand changed to only 50% of the corn was demanded while twice as much chicken was demanded, the prices would have to be changed again. Jed would have to lower his price in order to sell what he could to try and break-even at least, or to minimize losses, while Sanders would increase his prices to maximize profit while involving the most customers who themselves would compete by bidding up to satisfy their incentive in getting the chicken they desired so much; Sanders’ suppliers (feed, fencing, etc) also would raise their prices. That would ensure other suppliers would compete for those scarce resources. This continues from the fence-maker requires an increased demand from the metal forger, who requires an increase from the miners, who require an increase in the tool-makers and labor market – that also affects each other level. Like everyone else, each is looking to satisfy his incentive to make a profit to better his life, improve his product, and create a cushion in case of lean times and at least maintaining a level of production. With the customers who are buying at the higher prices, a single customer is not able to purchase all of the stock, so that more customers are able to purchase some of the stock. From the increase demand and cost, other producers from around will have an incentive to spend the money to bring their goods over so they can also partake in the business; more goods are brought to be sold.

In very short-form, that is the market for products. However, it would be folly to assume a static nature for things change: technology, appetite, populations and more, continually change. Some change more quickly than others, but they all change. With those changes in society, the market will be affected.

As an example of change, let’s say that Jed has been a steady supplier of corn and his customers are happy. However, one day a new farmer of corn, Del, comes to the market. Del offers corn, but because of how he can produce it, he has more to offer so he can offer it at a lower price. Intrigued by the savings, Jed’s customers try Del’s corn and find not only is it less expensive, but it tastes better as well. Regardless of how long Jed may have had his customers, he is now in danger of losing them as his customers pursue their incentives (self-interest) and get the most for their dollars, enabling them to purchase more of another good, or save. Jed has two choices: adapt or perish (in business). Even if Jed cannot adapt, Del’s position of on top of the corn market is not static for the forces of the market dictate, in time, Del may be replaced as well.

Now, to see how the market cannot work (be self-adjusting) lets introduce artifice into the market: i.e. governmental regulation. If to ensure ‘fairness,’ because those who did buy the chicken at the lower price no longer could buy as much as they had before, those consumers went to the government (lets say, Sam) to regulate the prices: someone outside supply or demand dictating prices. When the demand for Sanders’ chicken skyrockets and the market says he has to raise prices, but the market price was ignored and Sanders was force to sell his chickens at a below-market price demanded by Sam, then fewer people would buy more and take up the resources quickly; it would, in essence, a state-mandated percentage-off sale, where Sanders takes the loss. Sanders wouldn’t be able to make a profit for his suppliers charges would still go up from increased demand. If there was to be a price control on all aspects of production (Sanders, and all those he deals with in feed, fencing, etc) then the market would dry up for each of them, like the consumers, seeks to satisfy their incentive, and with less incentive the cost of production goes up. People work more at that which is profitable for it increases the quality of life and offers building a cushion during lean times; if the work isn’t profitable and potential profit is not seen, then there won’t be the same incentive to work, meaning less work going into the chicken market, meaning less chickens available. Distant producers will not bring their product. State-mandated percentage-off sales end up being going-out-of-business sales. Mandated labor without profit is slavery.

That artifice was directly on the producer, out to the consumer. Next we will examine what happens when a regulation is imposed upon the market, but not on a producer directly.

Jed was the first corn farmer, and already had a business base. Through being a farmer, he employed (directly and indirectly) many people to help grow, harvest, ship, package and sell his corn. However, with Jed having a monopoly on corn (not all vegetables), Del decided to try and offer his corn and the customers found his corn was better. Jed no longer has a monopoly and needs to adapt; however, instead of adapting his business to what is in the market, Jed seeks Sam to restrict the access of Del (and all like him) to sell to the consumer base, or restrict the consumer base’s ability to buy through such measures as licensing fees and new, selective taxes (e.g. tariffs and ‘sin’ taxes). Sam introduced artifice so the market isn’t correcting itself. New supply and demand has been created, but Sam is denying their effect. A monopoly has been created. The monopoly that Jed had originally was because of no one else selling corn, but anyone could enter and compete for customers. The monopoly introduced by Sam is non-market, State-mandated monopoly, and others could not compete for Jed’s customers. That means Jed could do what he wanted, charge what he wanted and let quality go for he wouldn’t have the incentive to lower prices or improve his goods; his customers would get lesser quality and have to pay more for it.

Now we’ll look at introducing artifice into the market through the money supply. Gold is heavy, so something else that represents varying amounts of gold is created, e.g. coins and bills. But those monies are tied to the gold for the gold is an objective value. If money is not tied to an objective value, and can be created arbitrarily through artifice in the money supply, then it is not tied to a value system, and is not attached to that which states something is worth anything else. It would be as worthless as taking anything, any scrap of worthlessness and stating it as value. It was agreed that Z amount of gold was worth X or Y of another good. But, as hauling gold is difficult, notes are used instead of bulk gold to represent the varied amounts of gold. As the gold is finite, the value from it is finite. Here is where artifice is introduced: if without an increase in the base value (gold) more notes representing a piece of that value are created. If there was a system of value, but more money was added without adding to the value system backing it, then each unit of old and new money becomes worth less with each unit created: a pie can only be divvied up so much, but it cannot be duplicated (unless more of the backing value was gained, i.e. gold mined).

In the marketplace of ideas, there is similarity in that someone who advances an idea comes forth, as does another with a different idea. Those two debate and present their cases for their respective ideas and from who presents the better argument, or is more persuasive, the audience will listen to that speaker and accept their ideas. Knowledge is the key component in the market. This is true with ideas or goods, for the better idea presentation wins, just as the better corn farmer. There may be a temporary setback; there may be one whose sophistry convinces that rotten corn may be good, or that this specific idea is good, but with experience and the knowledge that comes from it the truth may be discovered and it can be conveyed so that corn will not be purchased, that idea will not be believed, and the better good and idea will prevail. Through people pursuing their incentives, the market as a whole will self-correct when artifice is not introduced.

Briefly, that is the market.

Monday, July 11, 2011

Paying a fair share

Definition of being fair (summarized): of pleasing appearance; in accordance of merit; consistent with logic/ethics.
'The rich need to pay their fair share' has been a saying for decades, so that many politicians and their constituents today repeat it is nothing new. But, let's look at what is fair.
The definition of 'pleasing appearance,' by its definition is that which pleases the senses; that is subjective. Pleasing appearance is based on appetite, and varies as much as how a pleasing meal looks when contrasted between a steak-lover and a vegetarian. This definition cannot be objectively fair.
That which is 'in accordance of merit' is based on a value system. The questions that follow are what, and whose values? The question that follows the former is whether those values are objective or subjective. This definition is not sufficient to be objectively fair.
The last part of 'being consistent with logic/ethics' implies an objective standard. Logic and ethics are not ambiguous; they are objective. This is where fairness can be examined.
To return to the calls of the rich needing to pay their fair share, that call is made to justify higher (existing and proposed) taxes on those who are considered rich. We first need a line of demarcation: at what amount of wealth is one considered wealthy? Though those labeled as 'millionaires' are the figureheads, those (households) who make $250k+ a year make that demarcation line (some say only $200k+) to be considered rich.
A look at the progressive tax system shows that the lower incomes pay as little as 10%, while the upper incomes may pay 35%+ of their incomes to the federal government. With all the deductions available, however, the amount of those who actually pay federal income tax changes drastically. In 2006, the number was around 41% of the population who didn't pay any federal income tax; recently, that number has increased to around 50% of the population. With lower estimates, after deductions the average taxpayer pays 18%, while the average rich taxpayer pays 27%; higher estimates show those who earn more may pay more than 60% of their income. As for the highest wage-earners of the top 1%, some liberal estimates show they pay 25%, while conservative estimates show they pay 40% of federal income tax. Either 25% or 40%, from only 1% of all wage-earners... how is that fair?
Now, without a detailed examination of how that tax revenue is spent (a whole other article), let us look at how 'fair' the tax system is for the people who pay into it. This won't be based off a pleasing appearance, for that is appetitive; this won't be based on an accordance of merit, for that alone doesn't describe the system the merit is to be based upon; it will be based on consistency with logic and ethics.
Logically and ethically, when one has a value and they trade away that value it is because of the nature of a trade that the traders receive something in return. With the progressive tax system, it is not a trade on either side: those who pay more have paid more into a system they do not receive as much from, and those who receive more paid less (if any) into a system they receive more from. If one has a value and they want to give it away, it is charity and charitable giving is a value to the giver; if one has a value taken away without permission, it is theft. A corollary of that is as a value to be exchanges amongst traders, the values are wanted. Just because a value was taken from a vegetarian, he will not be receiving something of value if he is given a steak in return.
Regardless of the level of income, there are things that each individual wants and needs as part of living as a man, and in a commonwealth; among these are food, housing, liberty among numerous other things. Some are goods; some are rights. A good is created by someone; a right is inherent in the life of man. In assessing these goods and rights, we can see where the line of demarcation may exist between positive and negative laws.
A positive law is where the State is to give, or guarantee something; a negative law is where the State is restricted from acting against an individual who is acting on his own behalf. Positive laws seek to give goods; negative laws protect individual rights. One cannot make a good a right, for to make a good a right is to mandate that it has to be made, and that is made by someone who loses his right to choose how to live his own life. There is the crux: positive and negative laws cannot coexist, so one must be chosen.
To bring this back to a 'fair share' we can see that in order for one who cannot afford to receive a good, another who has the resources has those resources taken away by legal force. The system created to ensure the redistribution is the current tax system. Those who the system is designed to help may not pay any income taxes; those who do not receive any benefit from the system of redistribution pay a higher percentage of their income. How is that 'fair?' Even with a positive law in place, fairness (only in terms of paying for it, not in an actual goal of fairness - again, taxes on their own is another article) could be met by making sure everyone paid an equal percentage of their income, with no deductions (deductions only go to the selected/eligible and are not fair for all). The rich would still pay more in amounts, but not in percentage: that is how percentages work. If there was only a 10% tax (wishful thinking), it would take 1,000 men who earned $20,000 a year to equal one who earned $20,000,000 - a thousand to one. Now, add to that figure the current system and it becomes nonsensical for the 1,000 are no longer paying anything, while the rich one actually pays more - multiplying by 0 cannot be done. To return to our rich line demarcation, those who receive the most while paying the least may make less that $50,000 a year. There is $150k-$200k left before one is considered rich; these people still pay and don't receive as much, though not to the level of those beyond the rich line. Shall we again look at what is fair?
Returning to positive and negative laws, the Constitution is a charter of negative liberties on what the State cannot do to an individual. Imagine how much each individual would still have if the State wasn't perpetrating injustice by violating its highest law, and violating it in a most egregious way by taxing productivity.
This faulty system hasn't changed for the better, yet. But that doesn't mean it can't be changed. "The Delusion of the day is to enrich all classes at the expense of each other; it is to generate plunder under the pretense of organizing it." -Frederic Bastiat

Saturday, July 2, 2011

Coming back...

After completing my degree (Masters of Science in Forensic Psychology), working on two books and finalizing one for publication - along with regular work - I'll be coming back and posting soon.