Free Market Economics a Syllabus

Free Market nA Syllabus

by Bettina Bien Greaves

THE FOUNDATION FORECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK IO533

ABOUT THE PUBLISHER

The Foundation for Economic Education is a non-political, nonprofit, educational institution. Itssenior staff and numerous writers are students aswell as teachers of the free market, private owner-ship, limited government rationale. Sample copiesof the Foundation's monthly study journal, TheFreeman, are available on request.

Published 19752nd Printing 19773rd Printing 1984

ISBN-0-910614-53-9

Copyright 1975 by Bettina Bien Greaves

Printed in U.S.A.

PREFACE

The idea that led to this SYLLABUS was sparkedmany years ago by Rosalie Slater and Verna Hall.On a visit to The Foundation for Economic Educa-tion (referred to in this SYLLABUS as FEE) inIrvington, they asked if FEE had a high schooleconomics text to help teachers present free mar-ket ideas in the classroom. I agreed to assemblesomething suitable if a teacher should inquire.When a specific inquiry came to FEE, I discoveredthat to do a satisfactory job would be a major un-dertaking. The enthusiasm of Mrs. Peggy BryanCrump, herself a high school economics teacher,spurred me on to make the effort.

Thanks are due first of all to FEE and FEE'sPresident, Leonard E. Read, who pressured mefrom time to time to "get the SYLLABUS in the pasttense," as he would put it. My debt to ProfessorLudwig von Mises, his many books and his sem-inars which I attended for many years is immeasur-able. My husband, Percy L. Greaves, Jr., the econo-mist and an even longer-time student of Mises thanI, deserves credit for having contributed substan-tially to my economic education through his ever-ready, patient and careful explanations over theyears we have been together. Beth Herbener of the

Foundation's staff was extremely helpful in ready-ing the final manuscript for the printer. But tre-mendous credit should go to my secretary, Mrs.Virginia Clifford, who proved a veritable "miracleworker" by deciphering successfully my many-times revised and reworked rough drafts and trans-forming them into clean, neat copy. Special thanksalso for Mrs. Valerie Powell's help with the typingand proof-reading.

This SYLLABUS will have been more than fouryears in the making—from the time the first wordwas put on paper until copies come from the print-ers. I make no pretense at being an original think-er, for the economic theories presented here havehad a noble ancestry. My understanding has beenderived from others—through their books, lecturesand discussions. However, it is my hope that in thisSYLLABUS I have interpreted and "translated" intosimpler terms the profound economic theories setforth by Mises and his fellow "Austrian" econo-mists so that they may reach a new audience ofteachers and, through them, young people onwhom depend the prospects for freedom in thefuture.

BBG

in

TABLE OF CONTENTS

Part 1—Basics

1. General Introduction 3

Questions to determine student understanding 7

Bibliography 9

2. What Is Economics? 11

3. The Nature of the Individual—Values and Actions 15

4. Private Property and Exchange 21

5. Social Cooperation and the Market 29

Part II—Economic Principles6. Prices, Pricing 37

7. Savings, Tools and Production 54

8. The Entrepreneur and the Profit and Loss System 68

9. Labor, Wages and Employment 79

10. Money, Credit and Banking: Barter vs. Monetary Transactions 98

11. Competition, "Big Business," and Monopoly 126

12. Interregional Trade 145

Part III—Historical and Political Aspects

13. History of Economic Thought 161

14. Capitalism, the Hampered Market Economy, Socialism (Communism) 175

15. Economic History 195

16. Summary 214

Glossary 223

Index 238

Activities Index 242

PARTI

BAS/CS

1. GENERAL INTRODUCTION

This SYLLABUS is intended to help teachers of highschool economics explain economic principles inthe classroom. However, it contains many sugges-tions for introducing and explaining economics toyounger students, as well as material to challengeolder students and even adult readers. In any case,many ideas are included for varying the material—by dramatizing and simplifying explanations foryounger students or "enriching" them for moremature students with extracurricular readings,papers and projects.

Any teacher embarking on the course outlined inthis SYLLABUS should be fully aware that it presentsthe economic theory of the free market. It beginsby defining economics and describing briefly howthe science of economics has been developed overcenturies. It discusses various thinkers and philos-ophers who have contributed to economic under-standing.

The theme throughout is that economics is astudy of the consequences of (1) individual choiceswhich depend on the ideas individuals hold and(2) individual actions taken in the conscious at-tempt to attain the various goals held by the indi-viduals concerned. Current economic events be-come intelligible only when explained on the basisof economic laws derived from this insight into thenature of human action. Current economic prob-lems can be solved only after one understands howthese problems have developed—out of governmentinterference with the "natural" economic forces,which evolve from the voluntary actions of indi-viduals, whether acting alone or in conjunction andcooperation with others.

The material in this SYLLABUS is arranged inthree Parts, each including several Units dealingwith major subject areas. Each Unit consists of (1)descriptions of various SUGGESTED ACTIVITIES to

illustrate and dramatize the theories presented,(2) an EXPLANATORY TEXT, (3) a list of the signifi-cant terms used in that Unit which are defined in

the GLOSSARY and (4) a short list of RECOMMENDEDREADINGS. The alphabetized GLOSSARY with defi-nitions of the more important economic terms andconcepts discussed throughout the SYLLABUS ap-pears at the back of this volume.

A collection of readings—FREE MARKET ECONOMICS:A BASIC READER—has also been compiled to ac-company this SYLLABUS. This companion volumecontains 81 readings, arranged according to the 16subject categories of the 16 Units in this volume,as well as a copy of the same complete alphabet-ized GLOSSARY to be found in the back of this SYL-LABUS volume. The Readings are referred tothroughout the SYLLABUS by their number in theREADER.

There is more than ample material for a fullyear's course in this SYLLABUS. TO select just whatto include, the teacher should look over the mate-rial in advance in the light of the time available andthe interests and capabilities of the students. Acomplete course might well be based on Part IIalone. Or a single Unit could be used, with variousRECOMMENDED READINGS, as a specialized or mini-course. If time is especially short or the studentsrelatively slow learners, instruction could be limit-ed, with the aid of a few of the pertinent SUG-GESTED ACTIVITIES and easier readings, to thesemajor points:

1. economics deals with the actions of individualsbased on their personal ideas, values and goals(Unit 3)

2. market prices are determined by acting individ-uals who buy or refuse to buy (Unit 6)

3. the purchases of consumers determine the sizeof every businessman's "gate" or "box officereceipts" (Unit 8)

4. money is a "trading commodity" that evolvedout of barter—describe our coins and papermoney physically and explain how to use abank (Unit 10)

5. use Aesop's "The Grasshopper and the Ant" toexplain savings and the development of tools

FREE MARKET ECONOMICS: A SYLLABUS

(Unit 7) and then introduce as much economichistory as seems appropriate to show how peo-ple have used tools over the centuries to in-crease production (Unit 15)

In any event, to use the SYLLABUS to best advan-tage, the teacher should become thoroughly famil-iar with it.

Several of the SUGGESTED ACTIVITIES used toillustrate and help explain economic theories in theclassroom will require time to carry out and shouldbe started in advance. In addition to the usual rec-ommendations that various books be read and re-viewed by the students, reports prepared and pa-pers written on suitable topics, here are a few ofthe SUGGESTED ACTIVITIES which call for planningif they are to be carried out in connection with thepertinent Units:

1. Books to be read and researchdone on such topics as:a. the lives and experiences of

individual entrepreneurs, in-dustrialists, inventors Units 7, 8, 11

b. the historical development ofspecific business firms andindustries Units 7, 8, 11

c. the history of inventions,tools, machines, industrialtechniques, transportation Unit 7

d. the history of workers, work-ing conditions, productivityand labor unions Unit 9

e. the interdependence of pro-ducers and consumers in adivision of labor economy Units 5, 12

f. the development of worldtrade and trade routes Units 5, 12

g. the ideas and contributions ofindividual economists Unit 13

h. the theories of a specific"school" of economic thought

Unit 13i. the governmental regulations

and controls affecting a spe-cific industry Unit 14

j. the economic development ofa specific country or geo-graphical area.. Unit 15

2. Local speakers to be invited toaddress the class:a. a businessman, entrepreneur

or the official of a large cor-poration Units 8, 14

b. a bank official Unit 10

3. Reports on projects of any stu-dents in the class who partici-pated in the Junior Achievementprogram Unit 8

4. Request the annual reports oflarge corporations Units 7, 8, 11

5. Investment by the students offictitious "nest eggs" on thestock market Units 7, 8, 11

6. Write letters to the editors of lo-cal newspapers, commenting oncurrent events in the light of eco-nomic principles covered in theclassroom Units 14, 15

7. Order film-strip, "Understand-ing Inflation" Unit 10

8. Arrange field trips to local es-tablishments such as:

a. factories Unit 11b. stock exchange or broker's of-

fice Units 7, 11c. bank Unit 10

9. Relating the economic principles being dealtwith in the classroom to what is going on inthe world is important. The teacher should,therefore, bring to class from time to time fordiscussion newspaper clippings which illus-trate economic theories and the way govern-ment interventions have affected economicactivities.

10. Have the students watch newspapers andmagazines for articles dealing with economicmatters—business, money, competition, invest-ment, and so on. Each student may choose atopic, with the teacher's approval, and startaccumulating a file of clippings on that sub-ject, for possible use later in preparing papersor reports. One student might take "money,"another "new businesses," another "bank-ruptcies," and so on. Here are a few topics onwhich students could accumulate newspaperclippings and magazine articles:

Money and bankingLarge corporationsBusiness activities within your state, or

across state lines, that is "interstatecommerce"

New businessesNew products or inventions


ManufacturingAdvertisements which refer to economics—

for instance, Warner & Swazey has pub-lished good ones on free enterprise andMobil on the reasons for the energyshortage

BankruptciesTransportation routesForeign investmentsInternational tradeProduction in "undeveloped" areas or spe-

cific countriesPrice and wage controlsMinimum wage lawsAgricultural productionChanges in land uses, such as for highways,

building construction or demolition,zoning, and so on

Labor unionsWages and employment

11. Students might interview local businessmen,asking their reasons for entering a particularbusiness when and where they did. Why didthey decide to produce certain goods or ser-vices and not others? What investment wasneeded? What competition did they en-counter? What government agencies, licensesand forms were involved? Have new govern-ment rules and regulations forced them tomake changes in their methods of operation?Have they succeeded, at least in part, in ac-complishing what they had hoped? If so, why?If not, why not? Do they anticipate having tocope with any particular problems or difficul-ties in the future?

12. Arrange a field trip to a local museum or his-torical home. Then compare living conditionsof the past with those of today. Call attentionto some of the primitive and often quite in-genious tools used, to make manual labor eas-ier or more effective. Contrast the relative self-sufficiency of a community or family in earlierdays with today's widespread interdepend-ence based on our complex and ultra-finespecialization and division of labor. List on theblackboard and discuss some of the activitiesformerly carried out in the home or local com-munity which are now handled by specialistsproviding goods and services for a far-flungmarket. See how long a list may be compiledand discuss the reasons for such highly devel-oped division of labor.

13. Hold "sound off" sessions from time to time.Name a specific subject the students havebeen studying, call on a student, and have him"sound off" for two minutes. Use a stopwatch.If another student catches the speaker in anerror he or she should raise his or her hand,be asked for the right answer and, if correct,given the floor to continue for another twominutes by the stopwatch. Using a stopwatchhelps make the students eager to participate,keeps them alert and challenged to listen forfactual misstatements.

14. Divide the students into two or three teams, tocompete with one another in a battle of knowl-edge based on quick recall, along the lines ofa TV quiz show or the old "College Bowl" or"It's Academic" program. Anyone who thinkshe knows the answer to a question should raisehis hand. Call on the first student to volunteer.If the answer is correct, credit that team withten points. The team with the highest score atthe end of the period wins. This activity isprobably more appropriate for use with Unit13 on the history of economic thought thanwith any other for historical data lend them-selves most easily to the formulation of shortfactual questions.

15. As the course progresses and the studentscomplete their individual research projects,try using the TV interview or panel discussionformat to present the results of their studies tothe class. For instance, one student might playthe part of the moderator, asking the studentsquestions on current economic programs suchas minimum wage laws, inflation, tariffs orimport quotas. If some students have madespecial studies of the theories of leadingeconomists such as Adam Smith, Jean Bap-tiste Say, Frederic Bastiat, John Stuart Mill,Carl Menger, John Maynard Keynes, HenryHazlitt or Ludwig von Mises, a debate or roundtable discussion might be held among severalstudents, each representing one of these not-ables and arguing in the light of his doctrines.

16. The Congressional Committee format mightbe used. Student "Congressmen" would ques-tion student "experts" on their recommenda-tions for legislation to enact, amend or repealprice controls, farm subsidies, welfare bene-fits, the right to own and trade in gold, federalspending on schools or highways and the like.

When working with high school students, keep

6 FREE MARKET ECONOMICS: A SYLLABUS

in mind that they are often restless and impatient.Shift pace from time to time. The SUGGESTED AC-

TIVITIES with each Unit offer many more ideas forvarying techniques. The questions formulated inthe EXPLANATORY TEXT may be used as the basisfor discussions, oral reports, research, written pa-pers or essay-type examinations. No class will havetime to implement all the SUGGESTED ACTIVITIES

described, so pick and choose according to the in-terests and capabilities of your students.

REFERENCES

It is impossible to keep up with the latest newsas to what books are in or out of print. However,the majority of the books listed on the BIBLIOG-

RAPHY (pp, 9-10) and among the RECOMMENDED

READINGS at the end of each Unit should be in printand, thus, readily available from their respectivepublishers, local bookstores and/or this Founda-tion (write for our latest catalog). Consult the cur-rent edition of Books In Print. Out-of-print titleshave been limited primarily to fairly well knownbooks that should be found in most sizeable li-braries. However, the teacher might well find ithelpful to have a few books on hand as a "nucleuslibrary" in the classroom for easy reference. Thetwelve titles marked t on the BIBLIOGRAPHY areespecially pertinent and recommended for this pur-pose.

In addition to various books and the articles in-cluded in the BASIC READER, copies of at least onedaily newspaper and various news weeklies shouldbe available in the classroom. The students shouldbe encouraged also, to become familiar with thefollowing types of references.

1. Encyclopedias—The students will have occa-sion, when working on papers and special re-

ports, to refer to the encyclopedias available inthe school library.

2. Old mail order catalogs—It would be helpful tohave on hand some of the early Sears, Roebuckand Montgomery Ward catalogs that have beenrevived and reprinted lately. These illustrategraphically the tremendous changes whichhave taken place as the result of new ideas, newinventions, new products, and new methods ofproduction.

3. Biographies and histories—Teacher and librar-ian should accumulate biographies of econo-mists and businessmen, as well as histories ofbusiness firms, industries, inventions, traderoutes, methods of transportation, and so on.Such books would be suitable not only for ref-erence but also for assigned book reviews inconnection with Units 7, 8, 11, 12 and 15.

4. Periodicals—It would help to have the followingavailable for reference in the classroom library:BarronsBusiness WeekThe Freeman (available since 1965, bound in

annual volumes)U. S. News 6- World ReportWall Street JournalMiscellaneous bank letters such as those of the

Federal Reserve Bank of PhiladelphiaFederal Reserve Bank of St. LouisFirst National City Bank (Monthly Economic

Letter)Morgan Guaranty Trust Company (Survey)

NOTE: On the BIBLIOGRAPHY as well as on the lists ofRECOMMENDED READINGS throughout t he SYLLABUS,the more difficult readings are starred with asterisks.The other titles should be intelligible to most highschool students.


QUESTIONS TO DETERMINE STUDENT UNDERSTANDINGSome or all may be asked at the start

of the course and then again upon its conclusion

QUESTIONS

1. What is "economics?"

2. Should individuals be allowed to own privateproperty? If so, why? If not, why not?

3. Why do people trade with one another?

4. Who benefits from a trade?

5. Does a buyer or a seller benefit more from atransaction? Explain your answer.

6. What is the purpose of production?

7. Why do people want jobs?

8. Can it be said that production is the outcomeof the cooperation of many persons? If so, howdoes their cooperation lead to production? •

9. What are the economic consequences of com-petition among producers? Workers? Trad-ers? Customers?

10. What is an "entrepreneur?" What does he do? 10.

11. How do producers in a free market learn whatgoods and services to produce and how much toproduce?

12. What must a businessman do to make aprofit?

ANSWERS1. The study of purposive human actions (Units

2, 16 and GLOSSARY).

2. Yes, for it enables them to better attain theirvarious ends (Unit 4).

3. To improve their respective situations (Units4, 5 and 12).

4. Both parties, if they trade voluntarily and an-ticipate the future correctly (Units 4, 5 and12).

5. Comparisons are not possible for each party'sgain depends on his/her subjective (personal)values (Unit 3).

6. To provide for consumption (Units 2, 3, 4, 7, 8,etc.).

7. Because for most people having a job is theeasiest way to get what they want and need toconsume (Unit 9).

8. Production is the outcome of cooperation—inthe form of specialization, division of laborand exchange (Units 4 and 5).

9. Producers are pressured to serve consumers atthe lowest possible prices (Units 8 and 11).Workers are encouraged to do their best andassured that employers will pay them the mar-ket value of their output (Unit 9).Traders are spurred to search throughout thetrading area for things consumers want andneed (Units 8, 11 and 12).Customers are provided with freedom tochoose among varieties of goods, services,prices, etc. (Units 6, 8, 11 and 12).

An entrepreneur tries to produce things con-sumers want, in the hope of earning profits(Unit 8 and GLOSSARY).

11. Through consumer purchases, refusals to pur-chase, their "gate" or "box office receipts"(Unit 8).

12. Provide consumers with things they want andwill pay more for than it cost to produce them(Unit 8).


13. Why do some businessmen suffer losses?

14. What does it mean when a businessman earnsa profit (or a loss) on a free market economy?

15. Does it help or hurt economic production forpeople to save?

16. What is a "tool?"

17. What are the advantages, or disadvantages, ofusing tools and machines in production?

18. What is "money?"

19. How are prices determined on a free market?

20. How are wages and salaries determined on afree market?

21. What is "inflation?"

22. Who, or what, is responsible for inflation?

23. What is, or was, the "Industrial Revolution?"

24. Modern capitalism is characterized by massproduction. What does this mean?

25. What is the effect of high or progressive taxeson production?

26. Suppose the government tries to regulate andcontrol buying and selling on the market?

27. Suppose the government compels a business-man to sell his output at artificially low prices.What effect will this have on supply? De-mand?

28. Have you or your family bought anything inrecent weeks that came from another state orcountry? If so, why did you buy it?

13. They fail to satisfy consumers, or fail to keeptheir costs below what consumers will pay(Unit 8).

14. Success (or failure) in serving consumers(Unit 8).

15. Saving helps production, for the tools andmachines which make more production easierand quicker depend on savings (Unit 7).

16. Anything that is used for a purpose (Unit 7and GLOSSARY).

17. They make it possible to increase the quantityand improve the quality of production (Unit 7).

18. A very marketable commodity, a "tradingcommodity" or medium of exchange (Unit 10and GLOSSARY).

19. By the bidding and refusals to bid of potentialbuyers and sellers (Unit 6).

20. By the bidding and refusals to bid of potentialemployers and employees (Unit 9).

21. An increase in the quantity of money (Unit 10and GLOSSARY).

22. Anyone who may increase the quantity of the"trading commodity"—under present condi-tions, governments and banks that are priv-ileged to issue banknotes and/or expandcredit are responsible for inflation (Unit 10and GLOSSARY).

23. Any significant shift in industrial methods isan "industrial revolution." However this termis frequently applied specifically to the 18th-19th century change-over from manual laborto steam power and small-scale to mass pro-duction methods (Units 7, 9,15 and GLOSSARY).

24. Production on a large scale for many custom-ers (Units 11, 15 and GLOSSARY).

25. Reduced production and increased costs(Unit 14).

26. It hampers production and violates consumersovereignty (Units 11 and 14).

27. Shortages will develop on the market, for de-mand will rise but production will decline(Unit 14).

28. If imports were voluntarily purchased, thepurchaser must have thought they were thebest things then available for the money (Unit12).


29. How do you define a free market? Humanrights? Property rights? Capitalism? Compe-tition? Laissez faire? Communism? Social-ism?

30. What economic system is most productive?Why?

29. See GLOSSARY definitions.

30. A free market economy—because competitionamong producers to serve consumers assuresthe greatest amount of production at lowestpossible prices.

BIBLIOGRAPHYOF

BOOKS REFERRED TO IN THE SYLLABUS

An asterisk (•) indicates more difficult readingst Recommended for classroom Nucleus Library

°Ashton, T. S. An Economic History of England: The18th Century (New York: Barnes & Noble, 1954)

f° , The Industrial Revolution: 1760-1830 (NewYork: Oxford Univ. Press, 1948/1962/1973)

f Ballve", Faustino. The Essentials of Economics.From the Spanish, 1956. (Princeton, N. J.: D. VanNostrand, 1963; Foundation for Economic Educa-tion, 1969)

Bastiat, Frederic. Economic Harmonies. From theFrench, 1851. (Princeton, N. J.: D. Van Nostrand,1964; Foundation for Economic Education, 1968)

Economic Sophisms. From the French,1844-1850. (Princeton, N. J.: D. Van Nostrand,1964; Foundation for Economic Education, 1968)

The Law. From the French, 1850. (Founda-ttion for Economic Education, 1950/1961)

"What is Seen and What is Not Seen."From the French, 1850. Reprinted in Selected Es-says on Political Economy (Princeton, N. J.: D. VanNostrand, 1964; Foundation for Economic Educa-tion, 1968)

f°Boehm-Bawerk, Eugen von. Value and Price. Fromthe German 4th edition of Capital and Interest,1921. (South Holland, 111.: Libertarian Press, 1960/1973)

Campus Studies Institute. The Incredible Bread Ma-chine (San Diego, Calif.: World Research, Inc.,1974)

f Carson, Clarence B. Throttling the Railroads (In-dianapolis, Ind.: Liberty Fund, 1971)

f Chamberlain, John. The Enterprising Americans(New York: Harper & Row, 1963/1974)

Cooley, Oscar W. Paying Men NOT to Work (Cald-well, Idaho: Caxton Printers, 1964)

Curley, Charles. The Coming Profit in Gold (NewYork: Bantam Books, 1974)

f Curtiss, W. M. The Tariff Idea (Foundation for Eco-nomic Education, 1953/1962)

Defoe, Daniel. Robinson Crusoe (1719). Many ed-itions.

•Dietze, Gottfried. In Defense of Property (Balti-more: Johns Hopkins Press, 1971)

Fleming, Harold M. States, Contracts and Progress:Dynamics of International Wealth (Dobbs Ferry,N. Y.: Oceana Pubns., 1960/1966)

Ten Thousand Commandments: A Story ofthe Antitrust Laws (Englewood Cliffs, N. J.: Pren-tice-Hall, 1951; New York: Arno Press, 1971)

°Greaves, Percy L., Jr. Is Further Intervention a Curefor Prior Intervention? (Foundation for EconomicEducation, 1956)

° Mises Made Easier: A Glossary for Ludwigvon Mises HUMAN ACTION (Dobbs Ferry, N. Y.:Free Market Books, 1974)

f° Understanding the Dollar Crisis (Belmont,Mass.: Western Islands, 1973)

* Hayek, F. A. Capitalism and the Historians (ChicagoUniv. Press, 1954/1963)

* The Counter-Revolution of Science (NewYork: Free Press of Glencoe/Macmillan, 1952/1964)

* The Road to Serfdom (Chicago Univ. Press,1944/1956)

Hazlitt, Henry. The Conquest of Poverty (New Ro-chelle, N. Y.: Arlington House, 1973)

f Economics in One Lesson (New York: Har-per & Brothers, 1946; 2nd ed., New York: MacFad-den Pubns., 1962; New York: Manor Books, 1973)

* The Failure of the "New Economics"(Princeton, N. J.: D. Van Nostrand, 1959; New Ro-chelle, N. Y.: Arlington House, 1973)

Man vs. the Welfare State (New Rochelle,N. Y.: Arlington House, 1969)

What You Should Know About Inflation(Princeton, N. J.: D. Van Nostrand, 1960/1965;New York: Funk & Wagnalls, 1968)

'Kirzner, Israel. The Economic Point of View (Prince-ton, N. J.: D. Van Nostrand, 1960)

'Menger, Carl. Principles of Economics. From theGerman, 1871. (New York: Free Press of Glencoe/Macmillan, 1950)

Mises, Ludwig von. Bureaucracy (Yale Univ. Press,1944; New Rochelle, N. Y.: Arlington House, 1969)


The Free and Prosperous Commonwealth.From the German, 1927. (Princeton, N. J.: D. VanNostrand, 1962)

The Historical Setting of the AustrianSchool of Economics (New Rochelle, N. Y.: Arling-ton House, 1969)

Human Action (Yale Univ. Press, 1949;2nd ed., 1963; 3rd ed. Chicago: Regnery, 1966)

Planned Chaos (Foundation for EconomicEducation, 1947/1961); reprinted as "EpilogueSocialism, 1951/1969)

Planning for Freedom (South Holland, 111.:

in

Libertarian Press, 1952/1962/1974)Socialism. From the German, 1922. (Yale

Univ. Press, 1951; London: Jonathan Cape, 1969)'North, Gary. Marx's Religion of Revolution (Nutley,

N. J.: Craig Press, 1968)Petro, Sylvester. The Kohler Strike (Chicago: Reg-

nery, 1961; Belmont, Mass.: Western Islands, 1965)Polo, Marco. The Travels of Marco Polo (c.1300).

Many editionsRead, Leonard E. Anything That's Peaceful (Foun-

dation for Economic Education, 1964)Deeper Than You Think (Foundation for

Economic Education, 1967)The Free Market and Its Enemy (The Foun-

dation for Economic Education, 1965)Let Freedom Reign (Foundation for Eco-

nomic Education, 1969)Roche, George C. III. Frederic Bastiat: A Man Alone

(New Rochelle, N. Y.: Arlington House, 1971)f Rothbard, Murray N. What Has Government Done

to Our Money?(Colorado Springs, Colo.: Pine TreePress, 1964; 2nd ed., Santa Ana, Calif.: RampartCollege, 1974)

*Rougier, Louis. The Genius of the West (Los An-geles: Nash Pub., 1971)

•Smith, Adam. The Wealth of Nations (1776). Manyeditions

Sumner, William Graham. What Social Classes Oweto Each Other (1883). Many editions. (Caldwell,Idaho: Caxton Printers, 1952/1970)

Velasco, Gustavo R. Labor Legislation from an Eco-nomic Point of View (Indianapolis, Ind.: LibertyFund,1973)

Weaver, Henry Grady. The Mainspring of Hu-man Progress (Foundation for Economic Education,1947/1953)

White, Andrew Dickson. Fiat Money Inflation inFrance (1912). Many editions

Williams, Roger J. You Are Extraordinary (NewYork: Random House, 1967; Pyramid Books, 1974)

2. WHAT IS ECONOMICS?

SUGGESTED ACTIVITIES

1. The teacher might start the first class by ask-ing the students to answer some or all of the ques-tions appearing on pp. 7-9. Make it clear that thisis not a test of any kind. The teacher may holdon to the papers and be guided by them in decidingwhat to emphasize. At the end of the course, askthe same questions over again, and then compareand discuss with the students their two sets ofanswers.

2. Each student might talk with at least twoadult friends, relatives or neighbors who studiedeconomics in school. Ask what they rememberabout the subject. Has their study of economicsproved helpful? Student reports on their surveyscould be another indication of what deserves spe-cial attention in this course.

3. This first Unit deals with very deep philo-sophical concepts which may be difficult for aver-age high school students to grasp. Thus, the teach-er may choose to deal only briefly with this Unit.Point out simply that economics is the study of howevery individual, every single one of us, tries touse the resources available to him to satisfy as besthe can at any moment as many of his variouswants, material and non-material, as possible. Re-fer to the several readings relative to this Unit todiscuss the general subject matter and method ofeconomics.

4. Exceptional students may be interested in ex-ploring more deeply the fundamental philosophicalconcepts introduced here. They should be encour-aged to study the additional readings recom-mended. Have them consult the GLOSSARY and alsoregular dictionaries and encyclopedias for defini-tions of such terms as "axiom," "postulate," "the-ory," "induction," "deduction," "a priori" and "aposteriori."

NOTE: Mises Made Easier: A Glossary for Ludxvig vonMises HUMAN ACTION, prepared by Percy L.Greaves, Jr. (Dobbs Ferry, New York 10522: FreeMarket Books, 1974) should be especially helpful inexplaining these theoretical terms.

Some students may have encountered these con-cepts in other classes, geometry for instance. Letthem ponder the six a priori postulates cited in thisUnit, pp. 13-14. Are they really self-evident con-cepts, concepts each of us understands simply be-cause we are human beings, living, breathing andacting in accordance with our inherent nature? Ormust they be learned through observation, experi-ence, study? Contrast a priori knowledge with aposteriori knowledge, i.e., knowledge acquiredthrough observation, experience and learning. Canthe students formulate other postulates that mightbe considered a priori? Discuss some of the the-ories that may be deduced from basic a priori as-sumptions.

EXPLANATORY TEXT

This first Unit deals with very deep philosophicalconcepts. After reviewing them as they are pre-sented here, the teacher may choose not to dealwith this Unit at length in the classroom. Read thetext that follows and let your judgment be yourguide.

I. What is the relationship of economics to otherfields of knowledge? In order to simplify the learn-ing process, knowledge is subdivided into "disci-plines" or subjects, each of which may then bestudied separately. Yet each of these subjects isreally a part of knowledge as a whole. Each at-tempts to explain some aspect of the universe andlife within it, as well as the changes that take placeover time. "Economics" is the name given to thatparticular branch of knowledge which deals withpeople, individuals, human beings, specificallywith reference to their choices, preferences andconscious actions undertaken in the attempt to at-tain their various goals. In brief, economics is thestudy of human action, conscious, purposive hu-man action.

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2. How does economics differ from other studiesconcerning the action of individuals? It should bestressed that economics is the study of the con-scious, purposive, intentional actions of individ-uals. Economics is not the study of unconscious(chemical and physiological) changes within thebody—for instance, the digestive process or thefunctions of heart or lungs. This field is studied bychemists, physiologists and doctors. Economics isnot the study of subconscious influences or of thereasons for mental and emotional attitudes. Psy-chologists and psychoanalysts try to explain whypeople act one way and not another. Physical andchemical actions and reactions, as well as mentaland emotional attitudes, certainly do influence in-dividuals and thus their ideas and actions. Econo-mists recognize this, to be sure. However, the fieldof economics is limited to studying only the con-scious, purposive, intentional actions individualstake in the attempt to accomplish the various goalsthey want.

Historians also deal with the actions of individ-uals. However, history reports and interprets thepast actions of individuals as specific, particular,unique events, in a certain historical setting at adefinite point in time. Economics, on the otherhand, describes and interprets human actions fromthe point of view of the characteristic all such ac-tions have in common—their purposiveness, thefact that they are undertaken by human beingswho are consciously trying to attain some definiteend or goal. By explaining the consequences of thepurposive actions men take, economists help peo-ple choose those actions most likely to have the re-sults desired and so enable them to plan more suc-cessfully for the future.

3.What is the "economic point of view'? Eco-nomics deals with the actions of individuals actingalone, as well as when many individuals act to-gether, in cooperation or in competition with oneanother. It is the purposiveness of an action thatmakes it an economic action. Thus, the "economicpoint of view" is the consideration of actions fromthe point of view that they are consciously, pur-posively and intentionally aimed at goals.

Even though Robinson Crusoe was completelyalone on an island, he acted "economically," for heacted consciously, purposively and intentionally toattain various goals. Crusoe couldn't satisfy all ofhis various wants at once, of course. He had to seekthem as best he could, one by one, each accordingto its relative urgency to him under the circum-

stances. He was continually having to reassess hissituation, cope with some new complication andtake care of the most urgent problem at any mo-ment, before setting out to accomplish anythingelse. Throughout his entire adventure on theisland, Crusoe strove consciously, purposively toattain various goals. Thus, he was "economically"motivated, just like every other human being. Itis the purposiveness of any action that makes it"economic."

4. How does economics help to explain complexeconomic phenomena? The actions and choices ofa Robinson Crusoe are relatively simple to under-stand and explain. Yet most actions involve manypersons. Situations become more complicatedwhen large numbers of individuals are involved sothat their actions inevitably intertwine and influ-ence one another.

The various actions of individuals become inter-connected and interrelated with one anotherthrough the market. Even when individuals act in-dependently, they make decisions in the light ofwhat others are doing. Everyone's ideas, choicesand actions are influenced by the actions of others,and his actions in turn, impinge upon (affect)everyone else. The more people involved, the morecomplex and intricate become the consequences oftheir actions. In a large populous area, such as theUnited States where many people live and worktogether, the effects of any economic activity be-come widespread and inextricably intertwined.Thus, the worldwide network of interconnectingactions is extremely complicated.

It is the task of economists to unravel complexeconomic phenomena and show how they evolvedout of countless human actions. Economists try totrace economic consequences back to the economicunit, i.e., back to the individual actor and his in-dividual actions. This approach to economics iscalled the "micro-economic" approach. Interpret-ing complex interrelationships in this way calls forserious study and careful analysis. However, thismethod is the only way to understand how eco-nomic phenomena come about, what actions leadto what consequences and what practices and pol-icies will be best to follow in the future.

5. How does this "micro-economic" approachcontrast with "macro-economies'*? Nowadayswhen most people talk about economics, they thinkof monetary statistics, figures on total production,averages, prices and so on. To obtain these data,they seek information on the quantities of physical

2. WHAT IS ECONOMICS? 1 3

goods and services produced and consumed in acommunity, total the dollar prices asked for thesegoods on the market and paid for the servicesrendered, etc. They call these statistical studies"macro-economics."

All economic statistics of this type are based onpast actions. They are historical data. They relateto specific economic events of the past at certaintimes and places, but they do not explain how theycame about. To understand what economic statis-tics represent, they must be interpreted in the lightof micro-economics. They must be explained interms of the economic units from which they de-rive, i.e., the individual actions of individual actors.They must be explained as the outcomes of theideas, choices and conscious actions of many in-dividuals. Just as physical scientists must study thechemicals, cells and organs in the human body toexplain how it functions, so must economists studythe micro units of which macro-economic data arecomposed to understand how the economy oper-ates. Only by showing how the individual actionsof many persons are interconnected and lead intime to elaborate interpersonal relationships on themarket is it possible to make complex economicphenomena intelligible.

6. How do people know things? Before deal-ing more specifically with the discipline of eco-nomics, it might be well to spend some time dis-cussing the origin of any knowledge. For centuries,philosophers have debated and pondered whereknowledge comes from. How do we know any-thing? How can we be sure that something isreally true? After serious consideration, thinkershave come to the conclusion that basically thereare two kinds of knowledge—a priori and aposteriori.

A priori Knowledge

A priori knowledge or understanding is self-evident in nature. It is what people know "nat-urally," without even having to try to learn. It isthe type of knowledge or understanding which pre-cedes the learning experience. In other words, apriori knowledge is what individuals know almostinstinctively, without having to experience or fig-ure it out for themselves.

A priori knowledge helps us improve our antic-ipation of the things people are likely to do. Wemay use a priori concepts just sitting in an arm-chair and thinking logically to develop more com-plex ideas and theoretical knowledge. Using rea-

son and logic in this way to derive (deduce) the-ories from self-evident a priori axioms, definitions,propositions is called "deduction." Deductionmight be called the "armchair method" of ac-quiring knowledge.

A posteriori Knowledge

A posteriori knowledge is knowledge derivedfrom observation, experience, study of the past andcontrolled experiments as in the laboratory. Thisis also called empirical knowledge. A posteriori orempirical knowledge is something we learn. Weare not born with this kind of knowledge. It is notintuitive, instinctive or innate in human nature. Wemay acquire a posteriori knowledge by severalmethods: (a) experience or the method of trial anderror; (b) observation; (c) controlled experimentssuch as are conducted in laboratory study; and (d)historical study and analysis of past events. Ourinterest in these inductive methods is primarily todistinguish them from the method of economicswe shall be using in this SYLLABUS—deduction, i.e.,reasoning logically, step by step, from basic a pri-ori assumptions.

7. What are the categories of a priori knowl-edge? A priori categories may be described as themental equipment by which men think, reason, in-terpret experience and acquire knowledge. A prioricategories are necessary for people to think, rea-son, learn, profit from experience, and take con-scious purposive action. No person could make anyplan or accomplish anything in the absence ofthese basic a priori assumptions. We may list thesefundamental categories as follows:

a. Regularity—Men expect to find order and con-sistency in the world. An object will always re-act in the same way, under the same conditions,to the same stimulus. For instance, water willalways boil if placed over a hot enough flamefor long enough. Animals tend to respond in thesame way to the same influences. Individualsalso demonstrate a certain regularity in theirbehavior. Our world is part of an ordered uni-verse where actions may be taken in the reason-able anticipation of certain definite results.Human life and purposive action are inconceiv-able in the absence of regularity.

b. Logic—The logic men use, the way they reasonfrom an accepted proposition, assumption, ax-iom or postulate, using deduction to reach aconclusion, is the same for all men throughout


the world. The discipline of geometry followsthe method of logic—from axioms, via deduc-tions or syllogisms to a theorem. Similarly,economic reasoning is based on a priori axiomsand develops its theories deductively, step bystep. Human life and purposive action are in-conceivable in the absence of logic.

c. Causality—One thing leads to another. Actionshave consequences. Causes have effects. Con-versely, when something happens, we expectthat it had a cause and look for the factor re-sponsible. This concept too is fundamental ifmen are to act in anticipation of improving theirrespective situations. Human life and purposiveaction are inconceivable in the absence of caus-ality.

d. Time—In this world as we know it, events takeplace over time. Men realize that they cannotbring about changes all at once. It takes timefor the consequence of any event or action toappear, even those which, like bomb explo-sions, seem to occur almost instantaneously atthe moment of impact. Human life and purpos-ive action are inconceivable in the absence oftime.

e. Change—This is a world of change. It seemsself-evident that conditions are always in flux.In the absence of change, there would be noreason for men to act and no purposive actionsfor economists to explain. Human life and pur-posive action are inconceivable in the absenceof change.

f. Value—People are not neutral with respect totheir environment. They recognize some condi-tions which they prefer to others. They havevalues, wants and goals which vary from per-son to person, from place to place, from time totime. When individuals are seeking to attain thevarious things—material and non-material—thatthey value more than the things they alreadyhave, they are acting purposively. Thus, humanlife and purposive action are inconceivable inthe absence of value.

8. Is economics based on "a priori" or "a pos-teriori" knowledge? The subject of economics, thescience of human action, rests on a priori truths,principles which are fundamental to the way menact. An a priori principle must appear to be prac-tically self-evident, so fundamental that we can-not conceive of life in this world under other con-ditions. In the absence of these a priori principles,life would be a different sort of existence from that

we now know here on earth and people would bedifferent kinds of creatures from what they are. Inthe absence of these a priori principles, therewould be no conscious, purposive human action ofthe type economists study.

NOTE: The teacher should, of course, be alert to thefact that philosophers still debate whether or not anyknowledge is truly a priori, or whether even the mostelementary understanding really develops as a resultof some experience or other. However, we can leavethis dispute to the philosophers. The primary concernin using any word is to define it. A posteriori and a pri-ori will be used in this SYLLABUS in accordance withthe definitions set forth here.

GLOSSARY WORDS(For definitions, see GLOSSARY, pp. 223ff.)

ACTIONAGGREGATEA posteriori KNOWLEDGEA priori KNOWLEDGEDEDUCTIONECONOMIC GOODSECONOMICSEMPIRICAL KNOWLEDGEFREE GOODSHISTORYHUMAN ACTIONINDUCTIONMACRO-ECONOMICSMICRO-ECONOMICS

RECOMMENDED READINGSMore advanced materials indicated by an asterisk (•)

ArticlesIn the BASIC READER:

2. "Something for Nothing?" Mark C. Schinnerer3. "The Broken Window," Henry Hazlitt

*4. "The Individual in Society," Ludwig von Mises

Additional titles:"Economics," Henry Hazlitt—in The Freeman, March

1970"Economics: A Branch of Moral Philosophy," Leonard

E. Read—in The Freeman, January 1972

Books

Bastiat, Frederic. Economic Harmonies (Van Nostrand1964; FEE, 1968)

•Greaves, Percy L., Jr. Understanding the Dollar Crisis(Western Islands, 1973). Chapter I

* Hayek, F. A. The Counter-Revolution of Science(Free Press of Glencoe/Macmillan, 1952/1964). PartOne

•Menger, Carl. Principles of Economics (Free Press ofGlencoe/Macmillan, 1950). Chapters I and II

* Mises, Ludwig von. Human Action (Yale, 1949/1963;Regnery, 1966). Introduction and Chapter II

3. THE NATURE OF THE INDIVIDUAL-VALUES AND ACTIONS


1. To help students realize that economics isabout how-we-try-to-get-what-we-want-with-what-we-have, ask each student to list a dozen or sothings he or she wants to do or to have in the short-run or immediate future, the medium-run, i.e.,next week, next month, next year, or the stilllonger-run of several years hence, etc. Then dis-cuss what each goal will call for in the way of (a)money, (b) equipment, (c) effort and (d) time.

2. Ask each student to list the various steps nec-essary to accomplish at least one of his or hershort-, medium- or long-run goals. Explain thateverything we try to do requires (a) planning, (b)time, (c) resources or "tools" of some kind. For in-stance, if a student must turn in a term paper with-in the next 24 hours, he may have to completefamily chores first, visit the local library, do someresearch, assemble notes, paper, typewriter, andthen stay home, in lieu of going out with friends,to complete the assignment on time. Another stu-dent's medium-run goal might be to improve hisor her skill at shooting baskets, which calls for"tools" (a basketball and a basket), planning toforego other activities and to arrange transporta-tion to the gym, energy and time for daily practice.Students seeking longer-run goals—college, a car,or some special career—should recognize easilythat such goals take (a) planning, (b) time, and (c)resources or "tools."

3. Ask each student to write down how hewould use a hypothetical (a) $100 gift and (b)$1,000 reward for information leading to the arrestof a jewel thief. How much would he spend and/orsave? What would he buy for himself and others?

4. Discuss how the goals and would-be pur-chases of different students vary. Take advantageof this opportunity to point out that there is infinitevariety among the wants of individuals, reflectingthe infinite variety that exists among individual in-terests, ideas, goals, values, likes, dislikes, gripes,

aptitudes, health, wealth, age, family situation,personality, character, temperament, and so on.No two persons will ever be aiming at the sametime, at precisely the same wants, in precisely thesame order of urgency. Nor will the same person,at two different times in his life, value preciselythe same items in the same order of importance.

5. Most novel plots describe actions on the partof hero or heroine undertaken in the attempt to re-lieve some "felt uneasiness," attain some desiredgoal and/or avoid certain situations the actors con-sider undesirable. It might be helpful to have eachstudent analyze—from the point of view of theideas discussed in this Unit (see especially para-graphs 3, 9 and 10)—some novel read outsideschool or for another class. Robinson Crusoe wouldbe a good book for this purpose. Ask each studentto review the plot and make a list of the valuesand/or goals of a hero or heroine, arranged accord-ing to their relative urgency in the eyes of the actorinsofar as this may be revealed in die book. Thentake at least one specific action of hero or heroineand show how the author recognized

a. the conditions necessary for a person to act(1) dissatisfaction with the existing situation(2) an idea about how to improve things(3) hope of success.

Discuss also

b. what else is needed to accomplish a goal(1) planning(2) time(3) means or resources of various kinds.

Then point out how the actor's action was influ-enced by

c. outside factors such as(1) accidents(2) changes resulting from natural causes(3) the actions of others(4) changes due to the passage of time(5) mistakes on the part of the actor.

15


EXPLANATORY TEXT

This Unit deals primarily with the concept of ac-tion and the values of individuals as motivatingfactors.

1. Summarize briefly the material covered inUnit 2. Stress the fact that economics is the studyof the peaceful means each of us uses in the at-tempt to attain as many of our various goals in lifeas possible. Refer to the GLOSSARY definition of"Economics." Point out also that we do not alwaysaim at positive goals. Considerable effort is oftenspent on accomplishing what might appear to benegative goals, i.e., trying to avoid undesirablesituations. Thus some of our wants in life are onlyrelatively desirable, that is they are "lesser evils"in that they are less undesirable than some othersituations we want to avoid.

Refer again to the six categories of a prioriknowledge described in Unit 2. Each of us is ableto act and, in fact, we do act, only because theworld in which we live is an "ordered world" inwhich these aprioristic, self-evident axioms aretrue. The "natural order" in the universe—with re-spect to physical phenomena and interpersonalrelations—rests on these six a priori postulates. Weare able to live, breathe, think, reason, choose,make decisions, plan and act in the attempt to im-prove our respective situations and to accomplishour respective goals only JDecause these a prioriconcepts are true and we have confidence they willcontinue to be true indefinitely. In a world in whichthese conditions did not prevail it would be impos-sible for human beings like us to survive, or to act.In re-examining these a priori concepts, ask whatit would mean to us and life as we know it if theywere not true:

a. Regularity: Suppose no one could count onany regularity in the world. Suppose physicalmatter did not follow certain "laws," that noone could ever know the likely consequences ofanything, and that it was impossible to rely onthe results of our actions or those of other per-sons? Would we be able to act if we could notcount on the fact that the same combination ofcauses, under the same conditions, would al-ways have the same results?

b. Logic: Suppose it were not possible to reasonor think things out logically, step-by-step, toreach conclusions? Or suppose other personsat different times and places reasoned with adifferent logic, so no two persons could ever

agree? How could anyone then conceive of anidea or a plan for cooperating with others thatmight improve conditions? Or carry it out, if hedid?

c. Causality: Suppose events did not have conse-quences, actions did not lead to results? Howcould a person take steps to accomplish a pur-pose?

d. Time: Suppose there were no such thing asthe passage of time, that everything took placeinstantaneously? Suppose there were no inter-val of time between the beginning and end ofan event, between start and finish? How couldanyone then think, reason, plan, act in the at-tempt to attain various ends?

e. Change: Suppose nothing ever changed inthis world, suppose there were no movement,no erosion, no birth, no life, no death, no action,no opportunity to bring about changes? If noth-ing could ever be any different, why try to doanything?

f. Value: Suppose people were completely indif-ferent to their surroundings? Suppose theywere like stones or other inert objects, simplyuninterested as to whether or not they werebuffeted around at the mercy of inanimateforces—fire, currents of air, water? Suppose noone had any preferences and thus no reason totry to bring about changes?

2.What is the unit of economics, the buildingblock, so to speak, on which the science of econom-ics is based? Economics, as we have seen, is thestudy of purposive peaceful human actions. Thusthe units we deal with are the individual actions ofindividual actors. We must start, therefore, by con-sidering what action is, the prerequisites for actionand the factors that permit, induce and influenceindividuals to act.

In studying economics, we have an advantageover physical scientists—chemists, geologists orastronomers, for instance, who are studying chem-icals, rocks or the stars and planets. Physical sci-entists can know nothing about their subject mat-ter by insight or introspection; they must learneverything through experience, observation, con-trolled experiments and research. On the otherhand, economists have an insight into their subject—human action—even before they start studying.Because they are individuals themselves, they act.Consciously or unconsciously, therefore, they un-derstand why individuals act. Every human beingrealizes that he is acting at any instant purposively,

3. THE NATURE OF THE INDIVIDUAL—VALUES AND ACTIONS 17

consciously, intentionally, to attain the particularend, goal or value he considers most urgent underthe specific circumstances prevailing at the time.Thus, we have a "head start" of a sort in economicsfor we are studying something we already knowsomething about.

S.What conditions are necessary for an individ-ual to acft Each of us knows that he acts becausehe hopes to accomplish something. But let's breakthat statement down a bit. In the first place, whena person acts, he is dissatisfied in some way withhis situation. Secondly, he must have an idea aboutsome condition he would prefer. And thirdly, hemust have hope that action on his part can help tomake things somewhat better. Thus, every actionnecessarily involves three essentials—(a) dissatis-faction or "felt uneasiness," (b) an idea and (c)hope.

Let the students discuss these three prerequi-sites. Can they conceive of anyone's taking a pur-posive action if these three conditions did not pre-vail? (a) Suppose, for instance, a person had nounsatisfied want, no "felt uneasiness," no irritationhe wanted to remove, no "evil" he wanted to avoidor condition he wanted to change? (b) Suppose, inspite of being dissatisfied with something in hispresent circumstances he could think of no bettersituation, no way to relieve the condition that madehim unhappy? (c) Suppose, in spite of having anunsatisfied want and an idea as to what he wouldprefer, he had no hope that anything he could dowould be effective?

Everyone "naturally" tries to improve his situa-tion as he sees it and he will always make an effortto do so unless he considers his situation com-pletely hopeless. To help the students realize howstrong is this drive to act in the attempt to relievea present "felt uneasiness," ask them to name whatkind of obstacles it would take to prevent themfrom acting. Given a dissatisfaction and an idea asto something they would prefer, what would it taketo keep them from trying to do something about it?For instance, physical restraint by another person,imprisonment, weakness, inability, lack of skills,absence of tools, funds, or means of getting them,the conviction that any decision or action on theirpart would be thwarted or its effects counteractedbefore any good could come of it. Many examplesmight be cited from books depicting life in prisonor concentration camps to illustrate how deter-mined individuals may be to improve their situa-tions as best they can—in spite of serious obstacles

—and how ingenious they often are in conceivingof ways to do so.

4. Granted individuals act, how does this simplefact contribute to economic understanding? Therecognition that men act is one step in the logicalexplanation of economic phenomena. In the firstplace, an action necessarily means that the individ-ual acting is not indifferent to his surroundings. Hehas some dissatisfactions, some felt uneasinesses,some preferences. He has values, ideas, likes, dis-likes. He has hopes or expectations that his deci-sions and actions will help to improve matters. Thevery fact that an individual acts indicates that, atthe time he acts, he prefers the specific object (ma-terial or immaterial) that he is seeking, values itmore, despises or fears it less, than any other con-ceivable alternatives. He wants one thing more ur-gently and promptly than anything else. He is aim-ing first at the particular goal he considers mostimportant.

This analysis of the nature and purpose of an in-dividual's conscious actions leads logically to therealization that every individual has values. Helikes, loves, respects, admires, wants, desiressome things or conditions more urgently than oth-ers. Thus, consciously or unconsciously he is con-tinually arranging and rearranging his variouswants or "lesser evils" in the order of their impor-tance or urgency to him. He has a "scale of val-ues," his own personal, unique, individual scale ofvalues. His ideas, goals, wants, preferences, valueschange from time to time. As they change he re-vises his scale of values mentally, changes hisplans and shifts his activities so that he is alwaysaiming at the goal that then enjoys top billing onhis own personal scale of values.

Actions truly speak louder than words. For thisreason, economists analyze, and businessmenstudy carefully, the actions of individuals for cluesto the things people really want.

5. What is the importance of value for the studyof economics? The study of the purposive actionsof individuals involves the concept of value directlybecause a person's subjective values furnish himwith his reason or purpose for acting. Every in-dividual is different, unique and the ideas and val-ues which influence him are infinite. Yet every hu-man being brings some sort of order out of this"chaos" of infinite alternatives by mentally arrang-ing his various values, wants and goals on a"scale," in the order of their importance to him.Thus, each person has his own personal value scale


on which he continually values, ranks, grades andcompares in his own mind all the various alterna-tives open to him. When individuals have contactwith one another, their values and their actionsbased on their values, rub up against one another.In this way a person's own values and actions in-fluence the values and actions of others and theirvalues and actions in turn influence him. The out-come of this interplay of personal contacts, rela-tionships and influences is social cooperation, ex-change, the market economy. Modern economistshave come to recognize that the key to understand-ing and explaining all economic phenomena—the division of labor, wages, prices, savings, invest-ment, money, banking, trade, and so on—is subjec-tive value. The complex market phenomena we ob-serve in the world today all derive from the inter-connection and interrelationship of countless indi-viduals seeking to express their own personal, sub-jective values as best they can. In the followingunits, the connection between complicated eco-nomic phenomena and the personal, subjectivevalues and actions of the many individual partic-ipants on the market will be developed logically,step-by-step.

6. What is the source of personal subjective val-ue? Value is in the minds of men. The value ofanything depends on the ideas an individualholds concerning its usefulness (utility) to him insome way or other. His views as to its usefulnessmay, or may not, be justified. Its utility may be realor imagined, but in any event it is a person's ideas,right or wrong, as to the value of something whichdetermine the goals he will seek and the actions hewill take.

The views people hold concerning value areoften based on actual physical properties of an ob-ject, characteristics which may be expressed in fig-ures and measured. But not always and seldom ex-clusively. For instance, the efficiency of a fuel (oil,gas, electricity or firewood) for heating purposesaffects, but does not completely determine, itsvalue in the minds of men. The pleasure a personmay derive from daydreaming before logs burningon an open hearth or from the cleanliness of elec-tric heat may add to the subjective value to him ofthose fuels, irrespective of their relative efficiencyor inefficiency for heating. How about the earningsof this year's most popular musical groups? Arethey related to the measurable decibels of theirmusic or the number of songs in their repertories?Or do they rise or fall in response to the personalsubjective values of teen-aged fans? Can the stu-

dents think of other examples when the "value" ofsome good or service to people is obviously due topersonal, subjective ideas that have little or norelation to physical and measurable properties?(Viz., the original painting of the Mona Lisa, abaseball autographed by Babe Ruth or any otherlegendary sports figure, an outfit of the latest styleintended for a special occasion, a cheerful mongrelthat has become a family pet, etc.) The ideas peo-ple have, rightly or wrongly, lead to their personal,subjective values. These values, real or imagined,determine an individual's choices, decisions, pref-erences and thus his action, or inaction, as thecase may be.

7.What is the difference between the objectivecharacteristics of something and its subjective val-ue? "Subjective" contrasts with "objective" asthe impressions an object makes on a person'ssenses and thoughts contrast with the object'sphysical properties which may be measured andstated in numbers. Objective characteristics are in-trinsic to the object being described. Objectivelydescribed, a crowbar is "a bar of iron or steel,usually wedge-shaped at the point or working endand more or less bent." Subjectively described, acrowbar may be "valued" by an individual as atool for lifting heavy loads or as an instrumentfor murder. Objective values are always the sameunder the same conditions. Subjective values al-ways rest on interpretations, ideas and the pur-poses in the mind of the individual, the subject,making the analysis. Subjective values cannot bemeaningfully counted, added or measured. Sub-jective values, like love, can only be compared bythe person doing the valuing and arranged by himaccording to his own personal scale of values.

8. How does the study of the values and actionsof ONE individual contribute to an understandingof the economic activities of SEVERAL or MANYindividuab? Only the hermit, or an unwilling"Robinson Crusoe," plans and acts alone. Most ofus, most of the time, live in society with other peo-ple, and must take them, their ideas and their ac-tions into consideration when making our ownplans. Our personal value scales, choices and ac-tions impinge in one way or another on the per-sonal ideas, value scales, choices and actions ofothers. We cooperate. We compete. We gain manyadvantages from the ideas, contributions and pro-duction of others. But sometimes we are hamperedby their activities also. We may be precluded fromaccomplishing some goal we had chosen for our-selves by the competition of others and our efforts,

3. THE NATURE OF THE INDIVIDUAL—VALUES AND ACTIONS 19

in turn, may impede them at times too. In anyevent, most of us are seriously influenced by otherpersons in all we think and do. By the same token,our ideas, decisions, choices, goals and actions, in-fluence them as well. The ideas, choices and ac-tions of countless individuals, each of whom actsto relieve his own felt uneasinesses as best he can,lead to the various economic phenomena coveredin this SYLLABUS—private property, market prices,capital accumulation, profits and losses, money,credit and banking, competition and monopoly,trade across national boundaries, and so on.

9. Once an individual makes a decision—on thebasis of his subjective values—to act, what does ittake to attain his goal? A felt uneasiness, an ideaand hope must precede his decision to act. Thoughtprecedes action, it is true, but mere thought alongthese lines is not enough. To actually accomplisha goal calls for more. Also essential are (a) plan-ning, (b) time, (c) resources, i.e., various means,information, tools, labor, skills, knowledge aboutthe physical world, etc. Thus if an actor expects toaccomplish his purpose, these three things must bepresent. Moreover, they must be present in cer-tain relationships to one another. The steps a per-son takes in line with his plans, the timing of hisactions and the various means he selects must besuitable for, and compatible with, the purpose andnot such as to shut out or preclude the success ofhis chosen goal.

10. Why do individuals often fail to reach theirgoals? Whatever we do, everyone always aimsat success—success as each of us sees it. But manyfactors can interfere, (a) Accidents can happen.(b) Natural phenomena may drastically alter con-ditions, (p) The actions of other persons can upsetour plans, (d) Many other changes may come withthe passage of time, (e) In addition, everyone isfallible.

We all make mistakes at times—mistakes inchoosing goals, mistakes in selecting the means weadopt in the hope of attaining goals, mistakes injudging the information available to us, and so on.As time passes, changes in conditions may hamperour efforts or turn them to naught. Even if we doaccomplish the most urgent goal aimed at on ourscale of values, new circumstances may preventthis from giving the satisfaction expected; we mayfind we would have been better served to strivefor something else. Some goals may be mutuallyexclusive, accomplishing one may prevent us fromattaining another, or even preclude our seekingsomething else later which appears desirable in the

light of new events, ideas and values. Human errorand changes that come with time complicate thesituation for every one of us.

To illustrate some types of interferences, theteacher might refer to football. Point up the sim-ilarities between purposive actions in real life andpurposive actions on the football field. In bothcases, the "players" are likely to encounter inter-ferences compelling them to change their plansand perhaps even precluding their accomplishingtheir aim. For instance, a football player's break orsprain is an (a) accident. The outcome of a playmay also be affected by (b) natural conditions—weather, (c) the action of others—blocking andtackling, (d) human error—fumbles, (e) changesthat come with the passage of time—team tacticsvary according to the score and the number ofminutes or seconds remaining in the game. Actionon the football field is like life in miniature, a sortof demonstration model where the nature of thepurposive actions of individual players can beeasily analyzed.

SUMMARY

Individuals are not neutral or indifferent to theirsurrounding. They prefer some things, some situa-tions to others; they have values. Every one of us isdifferent, unique, with his own personal, subjectivescale of values. In view of our individual prefer-ences and personal values, we experience dissatis-factions, "felt uneasinesses" which we seek to re-lieve. Each of us tries to improve his situation ashe thinks best. In the process he is always aimingat the goal he considers most urgent at the mo-ment. He is able to act because he lives in a worldwith a certain "natural order." At the same time,he faces uncertainties and interferences, whicharise with the passage of time due to accidents,errors, natural changes and the actions of otherpersons. As changes take place, he tries to adjustto the new circumstances and still accomplish hisvarious goals as best he can. In the process, themarket economy develops step by step.


ACTIONA priori KNOWLEDGEECONOMICS


" F E L T UNEASINESS"

GOAL, ENDMEANSOBJECTIVE CHARACTERISTICSSCALE OF VALUESSUBJECTIVE VALUEUSEFULNESS, UTILITYVALUE

RECOMMENDED READINGSMore advanced materials indicated by an asterisk (*)

Articles

In the BASIC READER:5. "The Biology of Behavior," Roger J. Williams6. "The Only Kind of People There Are," Roger J.

Williams7. "The Unknown Quantity," Madelyn Shepard Hyde8. "Freedom's Theory of Value," Leonard E. Read

Additional titles:"Why Humans Must be Free," V. Orval Watts—in The

Freeman, March 1966

Books

Bastiat, Frederic. Economic Harmonies (Van Nos-trand, 1964; FEE, 1968)

"Boehm-Bawerk, Eugen von. Value and Price (Liber-tarian Press, 1960/1973)

Defoe, Daniel. Robinson Crusoe. Many editions'Greaves, Percy L., Jr. Understanding the Dollar

Crisis (Western Islands, 1973), Chapter II'Menger, Carl. Principles of Economics (Free Press of

Glencoe/Macmillan, 1950). Chapter III'Mises, Ludwig von. Human Action (Yale, 1949/1963;

Regnery, 1966). Chapters I and IVSumner, William Graham. What Social Classes Owe

to Each Other (Caxton Printers, 1952/1970)Williams, Roger J. You Are Extraordinary (Random

House, 1967)

4. PRIVATE PROPERTY AND EXCHANGE


1. Write one or all of these quotations on theblackboard, or distribute them on mimeographedsheets:

a. If wishes were horses then beggars would ride.b. Thus human economy and property have a joint

economic origin since both have, as the ulti-mate reason for their existence, the fact thatgoods exist whose available quantities aresmaller than the requirements of men. Prop-erty, therefore, like human economy, is not anarbitrary invention but rather the only practic-ally possible solution of the problem that is, inthe nature of things, imposed upon us by thedisparity between requirements for, and avail-able quantities of, all economic goods. (CarlMenger, Principles of Economics, p. 97)

c. Property is the fruit of labor—property is de-sirable—is a positive good in the world. Thatsome should be rich . . . is just encouragementto industry and enterprise. Let not him who ishouseless pull down the house of another; butlet him work diligently and build one for him-self, thus by example assuring that his ownshall be safe from violence when built. (Abra-ham Lincoln. Address to the Workingmen's As-sociation of New York, March 21, 1864)

Discuss these three quotes with the class. Itmay prove suitable to refer to them from time totime in the course of this Unit for taken togetherthey describe one aspect of reality—the "economicproblem." (a) Everyone dreams of the delights tobe realized from having more than he can everrealistically expect to attain in view of his availableresources, (b) There is not enough of everythingin this world for everyone to have all he wants ofeverything. Parents may say of a youngster whowants to gorge on candy that "his eyes are biggerthan his stomach," i.e., his desires are greater thanhis "resources," his limited stomach capacity. Sim-ilarly, each of us, like the beggar who wishes for a

horse, wants many things, aims at stars, dreams of"castles in Spain," but has at hand only limitedtime, energy and resources, (c) It behooves us,therefore, to see that those who have property arefree to use, invest and enjoy it in peace for onlythen can each of us be assured that he will be per-mitted to do the same, if, as and when he ac-quires property of his own.

2. Draw a simple diagram on the blackboard asfollows:

x Wishes/"horses to ride"»% Dreams/"castles in Spain'

j The "economic problem" con-GAP< sists of trying to reduce

J the size of this gap.

/ Resources at hand, inborn" \ abilities and skills

So long as we live, act purposively, and do not re-linquish all thought of trying to improve our situa-tion, we must face this "economic problem." Thatis if we hope to attain our most urgent goals, eachof us must try to expand his own resources and im-prove his own abilities, so as to raise the bottomline in this simple diagram as close as possible tothe upper line, representing our respective dreams.In this Unit, we consider how available resourcesmay be increased through voluntary exchanges.

3. Discussing these three quotations could leadto an anlaysis of "property rights" and "humanrights." If property is one resource or means need-ed for attaining various goals, ends and values—whether material or immaterial—do not a person's"human rights" actually depend on his "propertyrights"? "Property rights"—i.e., the right to ac-quire, keep safe from violence and use physicalthings as one wishes—are essential for the protec-tion of "human rights"—i.e., the right to be free,think as one wishes, follow one's personal religious

21


beliefs, pursue philosophical and intellectualgoals and enjoy leisure time. Point out that pro-duction calls for the use of private property andsavings. Even those persons who do not them-selves crave many physical possessions—modernhermits or civilization "drop-outs," for instance—still use and consume many things that require theuse of property others have saved and invested, forthey usually depend to a considerable extent on themarket and mass production for their basic food,clothing, shelter and transportation. Value scalesmay differ, what one wants to have, to consumeand to use may vary drastically, but everyone bene-fits from a policy that helps to keep safe from vio-lence the physical property belonging to them aswell as to anyone else whose production they maysome day want to use. Thus, it is only the protec-tion of "property rights" that makes possible theenjoyment of "human rights."

4. Private property, its historical developmentand its importance, would be a suitable topic forterm papers. The subject could be tackled at dif-ferent levels, depending on student interests andaptitudes. Student essays could be simple reviewsor summaries of the writings of Frederic Bastiat,whose works most high school students should un-derstand, and his thesis of "legal plunder" as a vio-lation of private property rights. Or they could bebased on research into the historical and legalbasis for private property—referring to more ad-vanced studies, such as Gottfried Dietze's In De-fense of Property and Ludwig von Mises' Social-ism. In either case, daily newspaper items—con-cerning the uses of private property (to developmines, construct factories, build private homes, ad-vertise merchandise for sale, etc.) and concerningthe destruction of private property through crim-inal violence and governmental interventions, suchas progressive taxes, land reform, price/wage/rentcontrols, and so on—may be cited to illustrate cur-rent attitudes toward private property here andabroad. To interpret daily news events in the lightof the respect, or lack of respect, accorded theowners of private property today, see various ar-ticles in the BASIC READER, especially those rec-ommended for use with Units 14 and 15 (Nos.67-79).

5. Start a bulletin board exhibit to dramatize thethesis of Henry Hazlitt's "The Broken Window"(Reading No. 3). Clip and post news stories aboutthe destruction of private property and discuss theconsequences. Floods, fires, quakes, storms, land-slides, etc., destroy tremendous amounts of prop-

erty every year, causing severe personal sufferingand loss of wealth and production facilities. Armieslay waste to private farms, factories and homes.Refer to the fates of individuals affected by recentdisasters, pointing out how difficult it is for personsto help themselves when they have lost propertyand tools. When their wealth is destroyed, theymust devote tremendous effort to mere survivaland to trying to replace what they have lost. AsMr. Hazlitt explains, productive efforts and pur-chases are shifted—to acquire the things now need-ed—to the detriment of the business firms thatwould have been patronized otherwise. Like theowner of "The Broken Window," a person whosehome is destroyed transfers his business from thetailor from whom he would have purchased a suitif all had gone well, to the glazier and other con-struction workers who can replace and repair thedamage.

NOTE: If some losses are compensated for by charityor covered by insurance paid for in advance, this doesnot invalidate the theory. A charitable contribution oran insurance policy simply spreads the cost of a lossover a longer period of time and among more people-all those who contributed to the charity or bought in-surance policies and have not been compensated forlosses. Anyone who donates to charity or buys an in-surance policy is paying—in advance and in install-ments—a part of the cost of repairing future brokenwindows while refraining at the time from buyingtailored suits for himself. Thus the economic effect isthe same whether the cost of replacing the brokenwindow is paid directly or indirectly through charity ora prior purchase of insurance—some would-be pur-chasers of tailored suits are paying the cost of thebroken window's repair, thus stimulating temporarilythe business of glaziers to the relative disadvantageof the tailors.

6. Students should be encouraged to look forillustrations of the importance of private propertyin their readings for other classes—literature andhistory, for example. Men denied the freedom touse as they wish property which they have ac-quired by moral means—so long as they do not in-terfere with the equal rights of others—are reducedto the status of beggars or slaves. Consider, forinstance, the experiences of Jean Valjean in LesMiserables and Winston Smith in George Orwell's1984. Many other novels and incidents in historyfurnish ample evidence of the importance of pri-vate property for the well-being and freedom ofindividuals, ofttimes by reverse example, as whengovernments confiscate private property.

4. PRIVATE PROPERTY AND EXCHANGE 23

EXPLANATORY TEXT

Economics, we have seen, is the study of theconscious, purposive actions of individuals. Eachof us is always trying to attain his, or her, mosturgent goal under the prevailing circumstances.Each of us always seeks to use the means whichhe hopes will prove most suitable for attaining thisparticular goal. The opportunity to acquire prop-erty, to hold and to use it as each of us thinks best,is essential if we are to plan and to act with anyhope of accomplishing our various goals. In thisUnit we shall be discussing the role of private prop-erty and trying to dramatize its importance toevery single one of us.

1. Why do acting individuals want to own prop-erty? Individuals have many goals in life. Variousmeans (resources or "tools," material and immate-rial) are needed to attain these goals. Thus, indi-viduals want to gain control of the necessarymeans. Control is crucial. If a person cannot con-trol the way resources are used, these resourcesare really not available to him. He cannot con-sider them his.

Most people want to survive, so they seek firstof all to acquire the necessary means for survival.They seek ownership and control of their basicmaterial needs (food, clothing, shelter). It was thedesperate urge to survive and to sustain his familythat led Jean Valjean (Victor Hugo's Les Miser-ables) to the theft of a loaf of bread when he sawno legal opportunity open to him to obtain food.Only after persons have access to these fundamen-tal necessities can they start thinking about livingwell or living leisurely. Then, if it appears feasible,almost everybody will try to obtain a few "extras,"which they believe will make living more comfort-able and enjoyable. Most people also usually havesome ideological, cultural or spiritual goals, whichcannot be satisfied merely by acquiring more phys-ical goods and services. However, even such "high-er" goals depend to some extent on having controlof physical goods and services, i.e., resources. It isa rare person indeed who is so much on fire withthe desire to create, to invent, to paint, to write,etc. that he can ignore being wet, cold and hungry.Most persons who want to write ideological essaysor philosophical books appreciate having a type-writer, a dictating machine and the services of astenographer.

The satisfaction of the various wants which ap-pear on every individual's unique and ever-chang-

ing scale of personal (subjective) values, dependson the ownership and control—or at least the oppor-tunity to acquire ownership and control—over theuse of resources and "tools" suitable for attainingthese wants. The greater the means at a person'sdisposal, the more successful he is likely to be inaccomplishing the things he wants in life. Aspointed out above, control is essential! If the stu-dents are familiar with Orwell's 1984, they willrecognize that Winston Smith was not a free manbecause of Big Brother's restrictions on the owner-ship and use of private property. Recording histhoughts in a private diary was suspect. His rentalof a room for private purposes was forbidden. Tobe free one must have the opportunity to controlthe means needed to obtain one's goals. To controlthe use of resources, one must own them or be freeto cooperate or make agreements with their owner.Therefore, the desire for private property, the wishto own resources personally, so as to be able to usethem as desired, is a logical outcome of the a priorifact that individuals have "felt uneasinesses," val-ues and goals which they want to satisfy.

2. What is the origin of "private property"? It ispopular to point out that all private property orig-inated with the use of force, through conquest orsimply by the occupation of vacant land. This isundoubtedly true. Cavemen and nomad tribes set-tled unclaimed land. Kings and armies conqueredterritory from previous occupants. In either case,they appropriated something to themselves with-out having produced or traded to obtain it. Their"might" may not have made "right" but it gavethem the power to assume ownership and to exer-cise control. They held and used their lands as longas they could, to produce for themselves and re-ward friends and supporters, relinquishing ter-ritory only when forced to do so by a stronger pow-er. In this way, property was acquired, held andparcelled out by the conqueror, in the feudal,status society, among his knights and vassals. Lessfortunate persons survived as serfs and lackeys,their very lives depending on the whims and suffer-ance of the "nobles" whose property they worked.

Today's pattern of ownership throughout theworld has evolved over many centuries as the re-sult of countless billions of successive transfers.Although most transactions have probably beenvoluntary, some have been involuntary and/or co-erced. Many shifts in the ownership and control ofproperty have resulted from conquest, violenceand deceit. When that is the case and the wrong-doers can be apprehended, prompt retribution for


the misappropriated and stolen property should bedemanded. However, as time passes, it becomes in-creasingly impossible to make any meaningful re-imbursement. To try to make restitution now, forinstance, for the conquests of kings and warlordscenturies ago would be absolutely hopeless. Whoamong us today would be willing to relinquishhome and savings to the present-day descendantsof the Celtic tribes whose properties were seized in1066 by William the Conqueror? By what logicwould the posterity of the wandering Asiatictribesmen, dispossessed in the 12th and 13th cen-turies by Genghis Khan, be entitled to claim yourproperty or mine?

Natural catastrophes and accidents also play arole in shaping the ownership of wealth and prop-erty. Newspaper photographs frequently reveal thehelplessness of the victims of wars, floods, fires,earthquakes, etc. If the opportunity to work, amassproperty and trade exists, those made destitute bythe loss of their property will begin once more toacquire and to produce the things they need toaccomplish their various ends. The experiences ofthe early settlers at Jamestown and Plymouthshow the effect of permitting individuals to ownproperty and use it as they wish. Without the op-portunity to acquire property, the Colonists hadbeen close to starvation. See "American Commu-nism, I and II," (Reading No. 77). Still today, ifvictims of disaster have no hope or opportunity ofacquiring property, they must beg for handoutsand will survive only as the dependents of otherpersons who continue to produce with the aid ofprivate property. The bulk of the wealth in exist-ence today has undoubtedly been created by theinspiration, peaceful production and voluntarytransactions of individuals with the aid of privatelyowned resources.

3. How is the "distribution" of property ar-ranged? Over many centuries, laws and judicialdecisions have defined "private property," draw-ing the line between what is my property and whatis yours, deciding what "belongs" to whom. Pro-cedures have been developed for settling disputesamong persons who disagree as to who is entitled,legally and morally, to any particular item. Policieshave also been established to assure property own-ers of the freedom to hold or dispose of their ownprivate property as they wish—so long as they donot use it in such a way as to violate the equalrights of other persons.

In a peaceful society, when a good or service isproduced, it comes into existence as the private

property of the persons involved. If there is no in-terference with force or threat of force, the value ofany good or service produced is apportionedamong all who have helped in its production, inaccordance with the relative value of their respec-tive contributions. If something is produced fromscratch by one man, from raw materials he grewor extracted on his own land using only his ownlabor—as Robinson Crusoe did—he is obviously en-titled to consider it his own private property. If heproduces it from materials purchased with priorearnings or borrowed funds and manufactures itwith the assistance of many persons, each cooper-ating in accordance with a previously agreed uponcontract or understanding, its market value will beshared by all who helped in its production in linewith their earlier agreements. This process makesit possible for everyone to know in advance howthey will share in joint efforts. In this way, themarket values of goods and services produced in apeaceful society—where government recognizesand protects the right of persons to own property,to make voluntary contracts with producers andsuppliers of raw materials, workers, shippers andretailers—are "distributed" in the course of produc-tion.

Most of us acquire the relatively small share ofthe total holdings of private property in the worldwhich each of us calls his own by producing andtrading. In the free market economy wealth comesinto existence in the course of being produced byspecific individuals. This means that most wealthin existence—in a society in which government rec-ognizes and protects the right of persons to ownprivate property and to use it to seek his own ends—is legally owned and controlled at the instant itcomes into existence by those who earned it fairlyand squarely on the market, acquired it in trade,or received it as a gift or inheritance from someoneelse who earned it fair and square. Private prop-erty is already widely dispersed, therefore, in theprocess of its production.

NOTE: TO show the class how the production processitself "distributes" or disperses property and thus theownership of wealth, ask them to list—perhaps on theblackboard—the many types of workers who contributeand, as a result, receive an agreed-upon sum for theirefforts. For help in thinking along these lines, seeLeonard E. Read's "I, Pencil" (Reading No. 15). Thestudents might mount, on a world map or globe, pic-tures or dollar figures representing the goods and ser-vices produced and dispersed as private property inthe process of the production of pencils, for instance.Logs are shipped to a Pennsylvania factory from the


Pacific Northwest and graphite from Ceylon, but themoney paid to lumberjacks and graphite miners re-mains with them to exchange as they wish for goodsand services. Their wages represent their share of thefinal value of the property (i.e., the pencils) theyhelped to produce.

4. How is the ownership of property related toexchange? Every action is an exchange. When-ever an individual acts—in the attempt to relieve a"felt uneasiness"—he is exchanging one situationfor another. He may be trading a position, a com-modity, a service, a promise or information, forsomething else which he hopes will furnish himwith more satisfaction. If all goes well, he expectsthe new situation will be an improvement over theprevious one.

Persons trading in a peaceful society must havethe legal and moral right to dispose of whateverthey are offering to exchange. No one can tradewhat he does not have or is not free to dispose ofas he chooses. Thus, the act of exchanging, itself,requires that the individuals concerned own, andbe entitled to control, what they are exchanging.

NOTE: This is the essential difference between cap-italistic production in a free market, and communism.In a free market, individuals own property and are freeto use it as they wish, provided of course they do notviolate the equal rights of other persons in the pro-cess. Under communism, the right to own and disposeof private property is severely limited. Even commod-ities intended for personal consumption may not befreely traded. Still more significant is the fact that un-der communism the right to own and trade the goodsand services used in production—raw materials, factor-ies, machines and labor—is almost completely monop-olized or controlled by government authorities. Thisdistinction will be further elaborated in Unit 14.

The important thing to note at this point is thatvoluntary exchanges depend on the existence ofprivate property and the capability of owners todispose of their property as they choose. Ex-changes are seriously hampered and trade declinesin societies where there is little or no assurancethat property will be "safe from violence," orwhere government denies and/or restricts the rightof individuals to own property and their freedomto use it. On the other hand, voluntary transactionsmultiply and, as a result, trade and productionflourish in a free market, capitalistic society whereindividuals have the opportunity to acquire, holdand freely dispose of their property. Thus exchangeis an outcome of the right to own private property.

5. How is the right to own property related tospecialization and the division of labor? Unlesspeople can acquire private property, they have

nothing to exchange. If they cannot acquire thebasic necessities of life through trade, they mustproduce them themselves. Therefore, in societieswhere the right to accumulate private property isabsent or severely limited—by law, isolation or re-ligious taboos—every family unit must become al-most completely self-sufficient, gathering and pro-ducing its own food, clothing, shelter and every-thing else its members want. In such small com-munities necessity compels everyone to be "a jackof all trades, master of none." A trip to a museumto study the historical exhibits or artifacts of ab-original societies should help the students visualizetheir simple production methods. The members ofsuch communities specialized very little becausethey had no opportunity to trade the products ofspecialized production, whether baskets or arrows,for other things they would have liked but couldnot find or make locally.

In today's society, we can see the results of manycenturies of permitting individuals to own privateproperty and to trade. Traders have faced seriousobstacles at times—physical difficulties as well aspirates, highwaymen, thieves and other swindlersas well as severe and often unpredictable govern-ment restriction and regulation. Nevertheless, bydividing the process of production into many spe-cialized tasks and exchanging with one another theresults of their individual efforts, producers andtraders have learned over the years how to producemore and more of the various things people needand want to have.

Individuals today may specialize in any one ofcountless types of work, according to their respec-tive situations, interests, health, talents, inclina-tions and personal values. They may then ex-change the products of their efforts for whateverothers are willing to give for it on the market. Inthis way, specialists obtain their basic necessitiesand the various other things they want. Exchang-ing the good or service they produce for the goodsand services they want is the easiest and cheapestway for them to accomplish their respective goals.When the steam-shovel operator digs an excava-tion, the wheat grower operates a farm, the actorappears in a show, the automobile mechanic re-pairs a car, or a stenographer types business let-ters, each is using the simplest, most efficient andmost congenial means available to him to obtainhis various necessities and other wants on his ownpersonal scale of values. Today's extremely com-plex system of finely-divided labor with its super-fine specialization, mass production and trade has


evolved step-by-step over centuries. It is the out-come of the right of individuals to own privateproperty, to use it as they choose and to trade it forsomething else if they wish—so long as they do notinterfere with the equal rights of others.

6. What is the role of government with respect todefining, "distributing" and protecting privateproperty? Government is the generally recog-nized, organized agent of force in any society. Itsmajor responsibilities are keeping the peace,settling disputes and protecting private property.Protecting "private property" assumes, of course,that what is "private property" has already beendetermined in principle, that there is generalagreement as to how decisions shall be made as towho is entitled to what and what belongs to whom.The limited supplies of things in the communitymust already be apportioned among the many per-sons who would like to have them in accord withsome generally accepted arrangement which al-most everybody accepts as final. In a totalitarianstate, the dictator decrees how much everyone is tohave. In a communal society, where all propertybelongs to the collective, there must be somescheme for deciding how to distribute an "equalshare" of everything that is available—baby dia-pers, tobacco, crutches, eyeglasses, musical in-struments, and the like as well as the customaryitems of food, clothing and shelter—among allthose entitled to share in its consumption.

In a capitalistic free market society, as we haveseen in paragraph 3 above, property tends to go tothose who help produce it, in proportion to theirrespective contributions. Those who contribute agreat deal receive the most; those who contributelittle, receive little; those who contribute nothingat all are not entitled to anything unless someone—a loving parent, a friend or philanthropist—chooses to share with the non-producer a part ofhis own production. This arrangement seems "fair"and "just" to most people. Children usually see thelogic of this position when they read about it in"The Tale of the Little Red Hen" (Reading No. 70).Its apparent fairness not only helps most people toaccept it readily but also makes it relatively easyto implement and to enforce. Also, when peopleexpect to receive a larger share of production ifthey put forth greater personal effort, they have anincentive to work harder, longer and more intelli-gently. Once the colonists at Jamestown andPlymouth, who had been on the verge of starva-tion, recognized this logic and permitted individ-uals to own private property and keep their pro-

duction for themselves, they began to prosper.See "American Communism, I & II" (Reading No.77).

The institution of private property obviates theneed for "distributing" what is produced, for prop-erty is already widely dispersed, in the capitalisticmarket economy, in the course of production.Thus, the role of government is to protect the rightsof individuals who have acquired property bypeaceful means (through production, voluntaryexchange, donations or inheritance), settling dis-putes that may arise as to ownership, and assuringthe rightful owner that his property shall be keptsafe from violence insofar as possible.

If a person expects that his actions will enablehim to acquire personal property, and that great-er, more effective effort will permit him to acquiremore property, thus increasing his resources andthe means available to accomplish his variousends, he is spurred on to greater productive effort.Once a person recognizes this and has reasonableassurance also that his property will be kept safefrom violence, he will expect to gain more by hon-est effort than by force or threat of force. He willthen have reason to respect the equal rights ofothers to acquire, hold and use private property fortheir wishes. Peaceful interpersonal cooperationand exchange rely on this mutual respect.

Abraham Lincoln realized this. He knew thatproducers needed an incentive to produce; theymust have a reasonable expectation that what theyproduced would be safe. Thus, the governmentshould not allow anyone to destroy the propertyof others. The acquisition of property furnishesproducers with the incentive to produce so that itwas desirable that "some should be rich." As Lin-coln put it:

Let not him who is houseless pull down the house ofanother; but let him work diligently and build one forhimself, thus by example assuring that his own shallbe safe from violence when built.

In this way, by permitting and protecting theright of persons to own private property and touse it as they wish so long as they do not interferewith the equal rights of others to own and usetheir private property, greater and greater divisionof labor, specialization and trade, have becomepossible throughout the ages. Increased productionhas been the result. At the same time, the right toacquire property has given people the opportunityto attain personal independence, freedom and se-curity. Those who cannot own property must relyon a "master" to provide them with the necessi-


ties of life. Without the right to own property, mencan be no more than serfs or slaves. The history ofindividual freedom and independence, therefore,has been the history of recognizing private prop-erty and protecting it from violence and confisca-tion.

NOTE: The progressive "liberation" of women, blacksand members of any other minority group in thiscountry would be a suitable topic for student research.The recognition of such persons as individuals, withrights equal to those of any other individual, has beenaccompanied by and dependent upon the recognitionof their rights to acquire property, to dispose of it asthey personally choose, and to make contracts in theirown names.

7. How does private property help to resolve the"economic problem"? By now the studentsshould be aware of the fact that every human beinghas many more wants than he can satisfy with hisavailable resources. As a consequence, everyone isalways competing with others in the attempt to in-crease his available means, attain more of hismany wants and accomplish more of his goals,more easily and more promptly than he otherwisecould. To explain this gap between resources andwants, which is inherent in the nature of the worldand the nature of men, refer once more to thesimple diagram (p. 21) illustrating "the economicproblem." Thus, both market economy and privateproperty had their origin, as Carl Menger pointedout in the quotation cited (p. 21) in the fact thatgoods are not as plentiful as the things men want.

Property, therefore, like human economy, is not anarbitrary invention but rather the only practically pos-sible solution of the problem that is, in the nature ofthings, imposed upon us by the disparity betweenrequirements for, and available quantities of, all eco-nomic goods.

In our "niggardly" world of limited means,where men have unlimited wants, it would seeminevitable that the "law of the jungle" would pre-vail, that men would live a "dog-eat-dog" exist-ence, and that only the "fittest" would survive.However, men have found a peaceful way to in-crease their resources (through owning and ex-changing private property), to expand production(through capitalism) and thus to help reduce thegap between resources and wants.

NOTE: It was John Stuart Mill (1806-1873), the Clas-sical economist, who described the world as "nig-gardly," implying that it was "stingy" or "tightfisted,"so to speak, unwilling to relinquish resources unlessmen put forth much strenuous effort. For further com-

ments on Mill, and his place in the history of economicthought, see Unit 13.

SUMMARY

The institution of private property evolved on ac-count of the "niggardly" nature of the world (lim-ited resources) and the nature of man (limited withrespect to available time, energy, tools and abil-ities but unlimited with respect to wants). By mak-ing it possible for people to benefit personally ifthey put forth greater effort to produce more forthemselves or to exchange, the right to acquireprivate property encourages them to try to over-come the "niggardliness" of nature. Thus the insti-tution of private property is perhaps the most im-portant means available for coping realisticallywith the "economic problem."

The right to own and control private propertypermitted the development of individual freedom,independence and relative economic security. In-dividuals who may own food, clothing, shelter andvarious other things needed to satisfy their wants,need not do the bidding of a "master." The obliga-tion of a government that wants to preserve per-sonal freedom, independence, economic securityand a relatively peaceful society, therefore, is toprotect the "property rights" of all citizens equally,without prejudice or favor. Only when there iswidespread recognition and protection of the rightof individuals to acquire and to hold property is itpossible for the market economy to flourish and forpeople to produce more, confident that their prop-erty will be safe. When they are more amply sup-plied with resources to use themselves or to tradewith others, they are in a better position to narrowto some extent the gap between what they haveand what they want, and so to accomplish more oftheir various goals.

GLOSSARY WORDS(For definitions, see GLOSSARY, pp. 223//.)

"DISTRIBUTION," ECONOMICDIVISION OF LABOR"ECONOMIC PROBLEM"EXCHANGE"HUMAN RIGHTS""NIGGARDLY," "NIGGARDLINESS" OF NATUREPRIVATE PROPERTYPRODUCTION

PROPERTY RIGHTSRESOURCESSLAVERY, SERFDOMSPECIALIZATION


RECOMMENDED READINGSMore advanced materials are indicated by an asterisk (*)

ArticlesIn the BASIC READER:

9. "Property," James Madison10. "Letter to His Stepbrother," Abraham Lincoln11. "Property Rights and Human Rights," Paul L.

Poirot12. "Who Conserves Our Resources?" Ruth Shall-

cross Maynard13. "The War on Property," Paul L. Poirot70. "A Lesson in Socialism," Thomas J. Shelly71. "The Tale of the Little Red Hen," W. A. Paton73. "Not Yours to Give" David Crockett77. "American Communism, I & II," Percy L.

Greaves, Jr.

Additional titles:* "Changing Concepts of Private Property," Bertel M.

Sparks—in The Freeman, October 1971

"Ownership As a Social Function," Paul L. Poirot—inThe Freeman, October 1971

°"Prophets, Jurists, and Property," William J. Palmer—in The Freeman, February 1967

°"The Puritan Experiment in Common Ownership,"Gary North—in The Freeman, April 1974

Books*Boehm-Bawerk, Eugen von. Value and Price (Liber-

tarian Press, 1960)*Dietze, Gottfried. In Defense of Property (Regnery,

1963; Johns Hopkins, 1971)Fleming, Harold M. States, Contracts and Progress:Dynamics of International Wealth (Oceana Publica-tions, 1960)

*Menger, Carl. Principles of Economics (Free Press ofGlencoe/Macmillan, 1950). Chapter IV

*Mises, Ludwig von. Socialism (Yale, 1951; J. Cape,1969). See Chapter I in Part I, and the index citations

•Smith, Adam. The Wealth of Nations (1776). Chap-ters I-VIII

5. SOCIAL COOPERATION AND THE MARKET


1. Discuss with the students their experienceswith pets or wild animals. Has any of them ever no-ticed animals engaging in what might be inter-preted as (a) purposive, conscious action? (b) spe-cialization? concentration on a single task? (c) di-vision of labor? (d) exchange? or (e) cooperation?The complex communities and specialized activ-ities of ants and bees are frequently cited as ex-amples of the division of labor and specialization,although this type of adaptation to specific tasksappears genetic and instinctive, having nothing incommon with the purposive or conscious actions ofhuman beings. However, some of the more highlydeveloped animals appear to use rudimentary rea-son and logic at times. For instance, there seems tobe some division of labor or specialization amongthe three small dogs in the author's household. Oneof the three, "Tommy," is definitely the spokesmanfor the other two, barking for all three when any oneof the three wants to go out or in. Upon occasion,"Tommy" seems to reason and plan ahead—if hismother or sister is sitting where he wants to be, hebarks with excitement as if a dog or cat intruderwere in the yard and then, when they jump downand run outdoors to investigate, he hops up and liesdown in the spot just vacated. Many animals learnto respond with apparent reason to various com-mands. Also many stories have been told of ani-mals that have shown considerable intelligence inwarning people of danger, rescuing them fromtrouble and helping to find lost persons. However,the students should realize that animals reasonand cooperate only to a very limited extent as com-pared with men. The ability of human beings to(a) act purposively, (b) specialize, (c) arrange forthe division of labor, (d) make exchanges, (e) co-operate is so much more developed that, for allpractical purposes, we may consider them the onlycreatures we know of on earth who are capable ofreason, logic and purposive action.

2. To give the students some idea of the tre-

mendously complex system of cooperation onwhich each depends every day, have them specu-late on the countless numbers of persons who co-operate daily with them in various ways. To besure, each of us may be actively aware of frequentfrustration due to non-cooperation—on the part ofslow drivers, shoddy workmanship, constructionbarriers blocking normal routes, family problems,and the like. Yet every one of us benefits at everyinstant from countless acts of cooperation. List in-dividual workers and categories of persons (em-ployees, employers, inventors, savers, investors,administrators, salesmen, truck drivers, and so on)whose cooperation supplies us all with daily food,clothing, shelter, transportation, books, entertain-ment, etc. Frederic Bastiat's thoughts along a sim-ilar vein might help to spark the discussion:

On coming to Paris for a visit, I said to myself: Hereare a million human beings who would all die in a fewdays if supplies of all sorts did not flow into this greatmetropolis. It staggers the imagination to try to com-prehend the vast multiplicity of objects that must passthrough its gates tomorrow, if its inhabitants are tobe preserved from the horrors of famine, insurrection,and pillage. And yet all are sleeping peacefully at thismoment, without being disturbed for a single instantby the idea of so frightful a prospect. On the otherhand, eighty departments* have worked today, with-out co-operative planning or mutual arrangements, tokeep Paris supplied. How does each succeeding daymanage to bring to this gigantic market just what isnecessary—neither too much nor too little? What, then,is the resourceful and secret power that governs theamazing regularity of such complicated movements,a regularity in which everyone has such implicit faith,although his prosperity and his very life depend uponit? That power is an absolute principle, the principleof free exchange. (1845) ••

3. If time permits, research might be assignedinto the historical developments of markets. This

* "Departments" are political subdivisions of France. This iscomparable to saying all 50 states contribute to the provisionstrucked each night into Los Angeles or New York.

**pp. 97-98 in the anthology of Bastiat essays, EconomicSophisms, 1964/1968.

29


would give the students a chance to notice how thevoluntary cooperation of individuals, each act-ing in the hope of accomplishing his own personalgoals and values, in the light of the conditions un-der which he lived, gradually led to exchange fromcommunity to community, then across nationalborders and eventually to trade that is practicallyworldwide. Such trade made it possible for peopleto have things they couldn't produce locally. In-formation on the history of early developments oftrade and markets is pretty well scattered. It isfrequently found in texts and reference books withmaterial on the development of towns or cities,life in ancient Greece or Rome, the Phoenicians,medieval fairs and markets, the trading companiesof the 16th and 17th centuries, such as the EastIndia, Virginia and Plymouth Companies (the ship-ment of fur pelts to England was an important in-dustry of Plymouth's early years), China trade andthe clipper ships, piracy, etc. (If students shouldchoose to study piracy on the high seas or wars,for example, they should try to show in each casehow this particular form of violence delayed, mademore difficult, or prevented the voluntary coopera-tive efforts of acting individuals.) Papers or reportson the history of trade routes and the developmentof commerce could be turned in and/or discussedin conjunction with Unit 12 on "InterregionalTrade" or Unit 15 on "Economic History."

4. To relate classroom lectures and student pa-pers or reports to this particular unit on "SocialCooperation and the Market," special emphasisshould be given to these three points:

a. Voluntary cooperation takes place at every stepalong the way.

b. Barring force, fraud or human error, everyonewho cooperates voluntarily hopes to gain by ac-complishing some particular want or goal onhis or her own personal scale of subjective val-ues.

c. Those who acquire the new goods or services,made possible by the expansion of coopera-tion, also benefit insofar as they are able to ac-complish a want or goal on their scale of valueswhich they otherwise couldn't have at all, orat least not so easily.

EXPLANATORY TEXT

As pointed out in Unit 2, economics is the studyof the actions of individuals. As everyone of us isan acting individual himself, we all have a priori

knowledge of the nature of action. We know firsthand that action is purposive. We can make plansand take actions in the hope of attaining specificends, because we live in an "ordered world" char-acterized by regularity, logic, causality, time,change, value.

In Unit 3 we learned that everyone of us has hisown personal (subjective) values and goals in life.Consciously or unconsciously, each of us ranksthese various wants on a scale of values in the or-der of their relative importance to him or her. Atany instant, everyone is always trying to relieve the"felt uneasiness" he finds most aggravating or tosatisfy the want he considers most urgent. We arealways looking for the most suitable means for ac-complishing our various purposes. We hope that, ifwe can avoid making mistakes, our actions willhave the results intended and lead to the goal wedesire.

As explained in Unit 4, the necessity of beingable to use resources as we wish, to serve our pur-poses, makes the right to own property important.Persons with private property can exchange goodsand services with one another. This permits themto specialize and divide work up into simpler, moreeasily mastered activities. Exchange of the prod-ucts of their relatively more specialized labor thenfollows. Thus, the division of labor and trade arelogical outcomes of the institution of private prop-erty which, in turn, derives from the a priori prem-ises we have discussed—namely, that men act, havevalues and seek goals.

When people specialize and trade, they can sat-isfy more of their wants more easily than if eachhad to be a "jack of all trades," relying only on hisown production. In Unit 5, we shall be consideringone more logical outcome of purposive human ac-tion—namely, cooperation and the development ofmarkets and the market economy.

1. How do the actions of animals and the actionsof human beings (men) differ? The distinctionbetween the actions of animals and the actions ofmen is not always sharp and clear. Some animalsappear to act as if they were reasoning. Apes havebeen reported to use sticks as "tools." Some an-imals even seem to plan an action for the purposeof accomplishing a later, more distant goal. How-ever, this ability of animals to think and act logic-ally is obviously limited. Human beings, on theother hand, reason, act purposively, seek goals anddevelop plans of great complexity, covering exten-sive periods of time. They are not so rigidly bound

5. SOCIAL COOPERATION AND THE MARKET 31

by genetic characteristics and instincts as are ants,bees, birds, for instance, and even elephants, apes,dogs and horses. Only men seem to have unlim-ited wants. Only men appear able to use mind andimagination to adapt available resources to servetheir own ends and to alter their environment sub-stantially to suit them better. Only men seem totake advantage of their unique individual talents todevelop specialized skills, divide up the work andtrade their products with one another. Only menseem to recognize the tremendous potential advan-tages of social cooperation. Thus, there seems to bea fundamental difference in character between theactions of animals and the actions of men.

2. What are the advantages of interpersonal orsocial cooperation? Different individual traits,capabilities, interests (physical, mental, emotional,etc.) lead quite naturally to a certain amount ofspecialization and cooperation within a single fam-ily or primitive tribe. Logic leads people—evenmost simple minded, untrained and unskilled per-sons—to recognize still further potential advan-tages from wider social cooperation which experi-ence and observation soon bear out.

Interpersonal cooperation proves helpful inmany ways. One obvious advantage is to make pos-sible more difficult tasks than could be accom-plished by one man alone. Two or more men co-operating might shove a large boulder, that oneman alone could not budge, over a cliff to kill anenemy. Two or more men cooperating might cor-ner an animal that would escape a single hunter.With a second man to help, Crusoe might havebeen able to drag to the water's edge the huge treehe had hollowed out to make a boat in which hehoped to escape his island.

Persons who are stranded alone in the wilds—theoccasional downed pilot, hunter or explorer—findlife difficult at best. They may forage for them-selves or try to improvise with their limited knowl-edge and the few tools available to them, but alonethey can accomplish very little. Many who havesurvived such experiences have written booksabout them. However, if a person in such a predic-ament has a cooperative companion or two, asRobinson Crusoe did after rescuing Friday, theycan do more, more easily, are more likely to sur-vive in better condition until help comes, or evento be able to rescue themselves. The larger thenumber of persons in the group, the more oppor-tunities there will be to cooperate for mutual bene-fit. When several families form a society, the op-portunity to gain through social, interpersonal,

cooperation multiplies. As more and more personsbecome involved and cooperation extends to othercommunities, the opportunities to specialize, totake advantage of individual talents and interestsincrease many times over and the division of laborcan be still further extended. This encourages thegrowth of skills, improves efficiency, contributesto increased production and makes more freetime available to rest, to play and to think.

As gains from social cooperation become great-er, they spiral upward, creating still further bene-fits. See Fred I. Kent's "Letter to His Grandson"(Reading No. 19). As the numbers of persons andcommunities cooperating increase, the areas ofspecialization and trade can be broadened in char-acter as well as geographically. If this process ispermitted to continue and is not disrupted by cat-aclysms of nature, war or violence of other kinds,the opportunities for developing new ideas andnew ways to cooperate so as to contribute to hu-man welfare seem almost endless. Thus, social co-operation, a logical development from the ideasand purposive actions of countless individuals overages, is a very significant means for expandingavailable resources so as to better satisfy humanwants, and reduce the gap, described in Unit 4(p. 21), between the limited resources availableand the unlimited wants of men. By cooperatingwith many persons—the more the better—everyoneof us is in a better position to alleviate the "eco-nomic problem" than if we lived alone in isolatedfamily units, or in a less extensive marketeconomy.

3. How is cooperation arranged? Strictlyspeaking, there are only two ways to organize co-operative effort—(a) by force, command, order,direction, decree, or (b) by voluntary, interpersonalagreement and contract. Totalitarian states, dicta-tors and armies use the first method, issuing ordersand assigning a rigid channel of command, thuscreating a command society. Individuals living in afree market economy adopt the second method, sothat a contract society evolves.

4. How does a complex market economy, likethe one we have today, evolve from the simple ex-changes and cooperative efforts of a few individ-uals? There are at least three ways to speculateon the make-up of today's market economy—(a)chronologically,* as the outcome of an irregularhistorical development since time began, evolving

"For a detailed treatment of the economic history of theworld, see Unit 15.


as a result of countless events and purposive ac-tions of individuals, (b) economically,*9 startingwith a specific item purchased by a particular per-son and tracing its production in time and spacethroughout the economy, back to the entrepre-neurs whose original ideas were responsible forits creation, and (c) schematically, as if one wereto snap a giant photograph with a tremendousmagic camera, equipped with special lens and filmthat could freeze and record every activity goingon throughout the entire economy at one particularinstant, revealing the elaborate legal and economicnetwork of interconnecting cooperative agree-ments and contracts. The mutual interdependenceof every one of us may be demonstrated by allthree approaches. To explain more fully, let us ex-amine each in turn.

a. Chronologically: Recognition that interper-sonal cooperation could be helpful certainly camewell before the age of written history. Thus to spec-ulate on the historical development of the presentmarket economy, one must try to think back to theage of prehistoric man and imagine how one man'swants and actions may have led to cooperationwith others. Perhaps the first cooperative effortoccurred when several hunters tracked down adangerous animal that had been killing their chil-dren and laying waste their meager hoards of food.Maybe someone shared a lucky find—a burgeoningberry patch or a freshly killed animal—with an-other, in exchange for help in erecting a shelter.Or perhaps one man helped another who wasstruggling to roll a large tree trunk to the water'sedge and the two together succeeded where onealone had failed. It could be that one of these two,or a third man who chanced along, then conceivedof a new idea for binding several such tree trunkstogether to make a raft to carry several persons orextra provisions. In any event, the success of onecooperative effort must have led the participantsto reason that other cooperative efforts might alsobe helpful. One successful cooperative effort islikely to spark others, as well as new ideas for im-proving conditions. In this way, step by step,cooperation led to larger and more elaborate en-terprises. Such huge firms as GM, GE, IBM andU. S. Steel are merely the products of countlessacts of cooperation on the part of thousands ofpersons—thinkers, teachers, inventors, workers andsavers—over long periods of time and space.

**For a fuller explanation of the economic development ofmarkets, see especially Units 7 and 8.

The earliest known archeological finds, the cavepaintings of Southern Europe and other artifactsfrom ancient times, furnish evidence that menhave cooperated in countless ways for many thou-sands of years. In early Egypt, there must havebeen considerable trade and communicationamong communities along the Nile. With the Phoe-nicians, Greeks and Romans, the area of contactand cooperation expanded and commodities weretraded beyond the Mediterranean, even as farnorth as the present British Isles.

With the fall of Rome, the Empire's large tradingarea and its rather large market built on wide-spread social cooperation, specialization and divi-sion of labor deteriorated. Europeans of the MiddleAges lived in fairly small, substantially self-suffi-cient communities, having relatively little contactwith the outside world. It took centuries for a sub-stantial international trade to develop once more—step by step as a result of the activities of manypersons. In medieval times there were only a fewitinerant peddlers. The Crusades helped to open upthe Far East trade, primarily in luxuries such assilks and spices. Then gradually traders from a fewItalian cities and from the North Sea ports beganto extend the area of cooperation and exchange.Periodic fairs and markets were held in medievaltowns. Tradesmen and artisans congregated inthe larger communities, which increased in popula-tion over centuries until they became sizeablecities. In the 15th, 16th and 17th centuries, ex-plorers sought new routes to the Orient. Tradingcompanies opened up new sources of raw mate-rials and eventually established trading posts. Sev-eral of the American colonies were settled as busi-ness ventures, intended to supply their backerswith fur pelts, tobacco and other raw materials notreadily available in Europe.

It is relatively simple to trace the chronologicaldevelopment of interpersonal cooperation in thishemisphere from the time the first colonies wereestablished here. There is no need to review U. S.history in an economics course. The importantthing to point out in this Unit is that the historicalevolution of trading furnishes many illustrations ofbenefits to be derived from interpersonal social co-operation.

b. Economically: The second approach to ex-plaining how social cooperation leads to the mar-ket economy starts with the final consumer, theperson who buys something in a store for his ownpersonal consumption. Let us consider a simplelead pencil for instance. At each stage in the pro-

5. SOCIAL COOPERATION AND THE MARKET 33

duction of a pencil, all those who cooperate mustsomehow be furnished with (1) the education andtraining necessary for their jobs, (2) the specifictools of their trade and (3) the food, clothing,shelter they need to survive as well as (4) all otherthings they purchase for themselves and families.To supply a single worker in this far-ranging chainof production with even one single thing he needsto do his job calls for widespread cooperationamong a huge assortment of producers, just as itdoes to produce the pencil itself. Thus, every stagein the production of the pencil calls for the produc-tion of other tools also which demand differentkinds of knowledge and different assortments ofskills. This elaborate network of highly developedcooperation—needed to produce a simple pencil—reaches into all four corners of the earth and callsfor so much specialized knowledge and skill thatno one person can comprehend it all. See LeonardE. Read's "I, Pencil" (Reading No. 15).

When we realize that something apparently sosimple as a lead pencil involves the cooperation ofso many specialists that no one man can master allthe knowledge and skills involved, we may beginto have some idea of the tremendously complexand almost miraculous cooperation required tosupply each of us with the many things we use andconsume every day—not only pencils but also cansof soup, clothing, homes to live in, electronically-produced entertainment, trucks, automobiles andso on almost ad infinitum. The purchase of a pencilor anything else relies on a long chain of coopera-tive activities, each undertaken by individuals act-ing consciously and purposively, to attain his ownpersonal (subjective) wants and values. Eachhoped to gain through cooperating with others whoexpected to gain too in the process. The individualswho produce the many things we use are broughtinto contact through this network of cooperation.As the final stage in its production, the things webuy are transported to stores and advertised to at-tract potential consumers. In this way social coop-eration makes production and the market possible.

c. Schematically: A third way to visualize howeveryone is connected with everyone else throughthe market process is to imagine that we can takea giant photo of the entire market economy. Let uspretend we have a giant camera with a magic lensand special film. Let us assume that if we were tosnap a picture with such a magic camera it wouldreveal the complex worldwide network of interper-sonal agreements and contractual bonds as theyexist at a specific instant. Such a magic photo

would look like a tremendous spider web. At thecenter would stand an individual, whatever in-dividual the camera focused on. Radii would ex-tend like spokes from that particular person to allother persons with whom he had agreements orcommitments at that particular moment—landlord,employer, grocer, tailor, banker, etc. All these radiiwould also be connected by cross bars with count-less other radii in the "cobweb," as this partic-ular individual's banker, landlord, employer, groc-er, tailor and banker also have agreements withmany others.

If our magic camera were to focus at that sameinstant on another individual in the market, itwould reveal that individual also standing at thecenter of a similar web-like network of interper-sonal agreements, all overlapping in an extremelyintricate arrangement. Theoretically each of usstands at the center of such a cobweb of economicand legal agreements. The possibility of a photowhich can reveal all these inter-connecting eco-nomic and legal relationships is just as fictitious,of course, as the magic camera we have imagined.However, visualizing such a photograph may helpstudents recognize the intricacies of the manycooperative activities going on at any moment ina sizeable market economy.

SUMMARY

Social cooperation is a logical outcome of thenature of human action. As individuals act con-sciously to attain their various goals they findinterpersonal cooperation is a helpful technique or"tool." It helps them accomplish more than theycould alone. Working with others, they can satisfymore of their various wants and values than theycould by acting alone, increase production and,thus, narrow the "gap" between their available re-sources and unlimited wants and so relieve the"economic problem."

One cooperative effort leads to others. Trade orexchange is one form of cooperation. In time, mendevelop markets where they may exchange on amore or less organized basis. As more and morepersons cooperate and trade, the market economyexpands and interpersonal agreements becomemore and more complicated. Nevertheless, in-tricate though the market economy becomes, weshould never lose sight of the fact that at any par-ticular instant it is always the end result of thecountless actions, choices, preferences, exchanges,


and cooperative efforts individuals have made overtime and place in the past, each in the attempt toattain some personal (subjective) value or goal. Torecapitulate briefly:

1. Acting men recognize that there are advan-tages to be derived from cooperating

2. Cooperation means helping others in the expec-tation of mutual gain

3. Trade is a cooperative effort, by which bothparties to the trade give and both receive somegood or service they could not otherwise have.Thus barring force, fraud and error, cooper-ation helps everyone

4. Through cooperation, everyone who gives andreceives is encouraged to specialize further andcomes to rely on exchanges for the things theywant and need

5. With increasing trade, everyone becomes moreand more interdependent. As a result, marketsdevelop. Today's complex market economy issimply the logical and natural outcome ofcountless purposive actions of individuals, eachalways seeking, as best he can under the cir-cumstances, the most urgent goal on his per-sonal scale of values.


COMMAND SOCIETYCONTRACT SOCIETYCOOPERATION, SOCIAL AND INTERPERSONAL

"ECONOMIC PROBLEM"FREE MARKET

MARKETMARKET ECONOMYMARKET PROCESSRESOURCESSPECIALIZATIONTOTALITARIAN GOVERNMENTTRADE

RECOMMENDED READINGSMore advanced materials are indicated by an asterisk (•)

Articles

In the BASIC READER:14. "Free Will and the Market Place," Frank Chod-

orov15. "I, Pencil," Leonard E. Read

Books

Bastiat, Frederic. Economic Harmonies (Van Nostrand,1964; Foundation for Economic Education, 1968).See pp. 1-19

Campus Studies Institute. The Incredible Bread Ma-chine (World Research, 1974)

*Menger, Carl. Principles of Economics (Free Pressof Glencoe/Macmillan, 1950). Chapter IV

*Mises, Ludwig von. Human Action (Yale, 1949/1963;Regnery, 1966). Chapters VIII (especially pp. 143-145) and XV

Read, Leonard E. Anything That's Peaceful (FEE,1964)

"Smith, Adam. The Wealth of Nations (1776). Manyreprints. Especially Book I, Chapter III

Sumner, William Graham. What Social Classes Oweto Each Other (1883). Many reprints. Chapter IV

PART II

ECONOMIC PRINCIPLES

6. PRICES, PRICING


This Unit on market prices and pricing is one of themost important in the SYLLABUS. The pricing auc-tions described below provide a change of pacefrom more traditional classroom work and shouldbe fun. They demonstrate that market prices (a)are based on the subjective values and actions ofthe individuals concerned and (b) help to directgoods and services to the persons who value themmost. Ample time should be spent on this Unit.Once the students understand the connection be-tween the subjective values of individuals, theiractions, and market prices, the rest of the courseshould be relatively clear sailing.

1. To demonstrate how prices are determined,the teacher should hold a fictitious auction in theclassroom. The specific object to be "auctioned"should be described in detail. It should be some-thing with which students are familiar, preferablysecondhand so that its market value will depend onthe eagerness to trade of potential buyers and sell-ers, rather than on a manufacturer's recommended"list price." Here are a few suggestions—an auto-mobile (Ford, Pinto or Volks, perhaps), a motor-cycle, electric guitar and amplifier, a stereotape deck or combination tape recorder and player,portable TV, record player or AM/FM radio. Thedescription should give brand name, original price,date of purchase, general condition, type of equip-ment, accessories, etc. See classified ads for sug-gestions. It might be well to write a description onthe blackboard. When the items being auctionedhave been described, ask each student to decidewhether to participate in this fictitious auction asan owner and thus a possible seller of the item—ifthe price is right—or as a potential buyer seekingto make such a purchase. Each should write downhis decision—"owner/seller" or "would-be buyer."Then ask (a) each owner/seller to make a note—forhis eyes only—of the lowest price at which he wouldbe willing to sell and (b) each would-be buyer towrite on his sheet—again for his information only—

the highest price he would offer for such a pur-chase. To add drama to the auction, all potentialsellers might be asked to move to one side of theroom before the bidding starts, the would-be buy-ers to the other. The teacher, as auctioneer ormoderator, should then call for bids. As the teachernames a price, have those students who would bewilling to sell, or buy, at that suggested price, raisetheir hands, stand up or move to the center of theroom. The lower the price, the more would-be buy-ers will be bidding and the fewer, if any, ownerswill be ready to sell. As the bids rise, less eagerbuyers will drop out of the bidding; more ownerswill enter the auction as higher prices make sellingseem more advantageous. The object is to find the"market price," the price that will "clear the mar-ket" under the circumstances, i.e., the price atwhich the number of items offered and the numberof items wanted are the same. It may be that attimes a few eager would-be buyers will offer suchhigh prices for an item that owners are enticed tooffer more units on the market than buyers willpurchase at the price. In that case, keep thebidding going; lower the asking price somewhat;the number of units offered will then decline, thenumber of units wanted will rise, until eventuallysupply and demand on the market will be equal.

2. The purpose of this fictitious pricing auctionactivity is to show that the prices at which goodsand/or services are exchanged on the market—ifnothing interferes—are always determined by thechoices and preferences of individuals. At the con-clusion of the auction, explain in simple terms thatit illustrates how individuals act, bargain and com-pete with one another, each on the basis of his ownpersonal (subjective) scale of values, needs, wants,ends and goals. See p. 52 of this Unit for a list ofthe steps in this logical explanation.

3. Again and again in the course of this Unitthe teacher should emphasize that the entire mar-ket economy is a complex of many such auctions,all overlapping and interconnected with one an-other. Auctions are taking place all the time, when-

37


ever and wherever two persons consider tradingwith one another. They may decide to exchange,or they may decide against exchanging, but ineither case, goods, services and/or money, wereplaced "on the auction block," so to speak, andoffered to potential takers. All goods and servicesoffered in any way to potential buyers—through ad-vertisements, on grocery shelves, in departmentstores, at gasoline service stations, auto showrooms, restaurants, bookstores, theaters, etc.—areup for "auction," i.e., available to potential cus-tomers for purchase or rejection. Potential traders—buyers and/or sellers—consider the specific unitsavailable, compare various alternatives and cir-cumstances, their respective scales of values, andthen bid for definite items—perhaps successfully—or refuse to bid and walk away. The marketeconomy at any instant is the product of countlesssuch "auctions," each resulting from specific deci-sions by specific individuals who have bought,sold, or refused to buy or sell specific items offered.Market prices emerge from the specific purchases,and/or refusals to purchase, of countless individ-uals, each acting on the basis of his own personalsubjective values, ideas and goals.

4. Perhaps it would be helpful to conduct a sec-ond and/or a third auction in the classroom. Selectanother object, describe it in detail and let the stu-

dents choose once more whether to act as owner,and thus a potential seller, or as a would-be buyer.Have each buyer note his top offer, each owner hisrock bottom selling price. Then proceed with thebidding for this second item. At the conclusion ofthis auction, repeat once more the logic it demon-strates as set forth in the EXPLANATORY TEXT thatfollows.

5. Three problems for the especially interestedstudent follow (pp. 38-43 of this Unit). They maybe copied on the blackboard, shown on an over-head projector, or duplicated in sufficient quanti-ties to distribute to every member of the class.Each problem is an auction, describes units of anobject being offered on the market, the valueplaced on each unit by their owners and the pricesvarious potential buyers are willing to pay. Withrespect to each problem, ask (1) the number oftrades that will result under the assumed condi-tions and (2) the limits within which the marketprice will fall. Answers and explanations to eachproblem follow immediately. One problem mightbe discussed in the classroom. See the conclusionson p. 52 for the reasons why the market price mustfall within certain limits. Then reproduce copiesof the other two problems for the students to fig-ure out for themselves—as homework or in theclassroom.

PROBLEM A

BILATERAL COMPETITIONASSUMED SUBJECTIVE VALUATIONS OF SIMILAR TAXIS

OWNERS OF 13 TAXIS POTENTIAL BUYERS

AcesBagsCod'sAce'sDove'sEby'sBag'sAce'sFork'sGuy'sAce'sBag'sDove's

1st1st1st2nd1st1st2nd3rd1st1st4th3rd2nd

How many sold?

$4,000.3,800.3,750.3,600.3,500.3,450.3,380.3,360.3,330.3,250.3,050.2,800.2,600.

Law'sMoon'sNid'sLaw'sOtt'sPry'sMoon'sLaw'sPry'sNid's

Within

3rd2nd2nd2nd1st2nd1st1st1st1st

what

$2,7502,9203,0803,1303,4003,5503,6803,7804,1004,250

price range?

NOTE: This auction approach, based on explanations set forth by the Austrian economists,Eugen von Boehm-Bawerk and Ludwig von Mises, was developed to explain mar-ket pricing by Professor Percy L. Greaves, Jr., in the course of his years of teachingand lecturing. This particular problem is reprinted from pp. 82-87 of his book,Understanding the Dollar Crisis (1973).

6. PRICES, PRICING 3 9

PROBLEM A (Answer)

BILATERAL COMPETITIONASSUMED SUBJECTIVE VALUATIONS OF SIMILAR TAXIS

OWNERS OF 13 TAXIS POTENTIAL BUYERS

These 7owners will

NOTsell

These 6ownersWILL

sell

Ace'sBag'sCod'sAce'sDove'sEby'sBag's

Ace'sFork'sGuy'sAce'sBag'sDove's

1st1st1st2nd1st1st2nd

3rd1st1st4th3rd2nd

How many sold?

$4,000.3,800.3,750.3,600.3,500.3,450.3,380. y

3,360.3,330.3,250.3,050.2,800.2,600.

6

Law'sMoon'sNid'sLaw's

y/ Ott's' Pry's

Moon'sLaw'sPry'sNid's

3rd2nd2nd2nd

1st2nd1st1st1st1st

Within what price iBetween $3,360 and

$2,750.2,920.3,080.3,130.

3,400.3,550.3,680.3,780.4,100.4,250.

-ange?$3,380

These 4

potentialbuyers willIN U 1 Buy

— "Margin"

These 6potential

buyers WILLbuy

To understand the way a pricing auction works—in this example or in real life—is not easy. There-fore we shall try to make it clear by spelling outthe logic of the answer, step-by-step.

Imagine an auctioneer asking for bids:$2,600—10 potential buyers will clamor to pur-

chase, but only a single cab will be offered$2,800—9 eager buyers want to buy, but only 2

cabs will come on the market$3,050—8 potential buyers are willing to pay that

much, but only 3 cabs will appear on the mar-ket

$3,130—7 would-be purchasers are bidding, butonly the same 3 cabs are offered by their cur-rent owners

$3,250—6 would-be buyers are now in the mar-ket, but only 4 owners of cabs are willing tosell—too few to satisfy the demand at thisprice

$3,300—6 would-be purchasers are still biddingand a 5th owner is now ready to sell, but this isstill one short of satisfying the market demandat this price

$3,360-$3,379.99—SOLD!

Once the auctioneer raises the asking price to$3,360 (but not up as far as $3,380), a 6th cabwill be offered, bringing to the market the numberof cabs needed to satisfy the demand at that price.Thus, to "clear the market" in this example, theprice must be:

1. more than $3,130—to keep would-be buyersfrom bidding for a 7th cab which no currentowner would be willing to sell at that price

2. less than $3,400—to persuade a potential buyerto bid for a 6th cab.

BUT the market price for cabs is also more narrow-ly defined in this example between $3,360 and$3,380 as follows:

3. $3,360 or more—to induce the owner of a 6thcab to sell

4. less than $3,380—to prevent a 7th cab, forwhich no potential buyer is available in this ex-ample, from being offered on the market.

Remember that no one who wants to buy a cab(or anything else) will knowingly allow anyone elseto bid it out from under his nose for less than he iswilling to pay. The more eager of the would-be pur-chasers will offer enough more to bid the cab awayfrom other potential buyers who don't value it thatmuch—up to the point (the margin) at which thedollars they would have to pay are worth more tothem than the cab (or other item) for which theyare bidding.

Similarly, no owner who is willing to sell willknowingly permit another owner and thus poten-tial seller to make a sale at a higher price than hewould be willing to accept. If an owner wants themoney being offered for a cab (or anything else)more than he wants the cab (or other item), he will


try to undercut other would-be Sellers, up to thepoint (the margin) at which keeping the cab (orother item) is worth more to him than the moneyhe would receive in trade.

The end result of this particular auction, there-fore, is that the 13 available taxis wind up in thehands of the persons who place the 13 highest val-ues on owning them. A shorthand way to figure theanswer—given the values placed on cabs in this par-ticular example and barring changes of any kindwhich might cause the market participants to re-shuffle in their minds the relative values, i.e., therelative importance to them, of cabs and dollars—is

to count the number of cabs in existence (13) andthen to determine where the 13 cabs would bemost highly valued. Upon completion of the bid-ding and the exchanges that take place as a resultof this auction, the 13 cabs will be found in thehands of the persons who want them the very most,those who place the 13 highest values on havingthem. In this diagrammed example, the 13 cabswould wind up in the possession of the buyers be-low and the owners above the line who value hav-ing (keeping or purchasing) a cab as much or morethan whatever the market price proves to be, be-tween $3,360 and $3,379.99.

PROBLEM B

10 IDENTICAL UNITS (OR SETS)—PORTABLE TVs, STEREOS, MOTORBIKES,ELECTRIC TYPEWRITERS, ELECTRONIC COMPUTERS, CAMERA EQUIP-MENT, SPORTS OUTFITS, ETC.—OFFERED FOR SALE ON THE MARKET.

Top offering priceof 20 potential

BUYERS

$372.50370.00365.00362.50360.00357.50345.00330.00323.00310.50300.00290.00272.50267.50255.00250.00230.00227.50225.00170.00

How many units (or sets) will be sold?At what price?

Rock bottom priceof 10 owners

i.e., potential SELLERS

$400.00375.00360.00355.00350.00347.50330.00320.00310.00295.00

6. PRICES, PRICING 41

PROBLEM B (Answer)

10 IDENTICAL UNITS (OR SETS)—PORTABLE TVs, STEREOS, MOTORBIKES,ELECTRIC TYPEWRITERS, ELECTRONIC COMPUTERS, CAMERA EQUIP-MENT, SPORTS OUTFITS, ETC—OFFERED FOR SALE ON THE MARKET.

"Margin"


BUYERS

$372.50370.00365.00362.50360.00357.50



These 6 potential buy-ers will make purchasesat a price which will fallsomewhere between$350 and $355 per unit(or set)

$400.00375.00360.00355.00

These owners will notsell because they valuetheir property at, orabove $355

350.00347.50330.00320.00310.00295.00

"Margin'

These 6 owners will sellto anyone ready andwilling to pay $350, ormore, per unit (or set)

345.00 These potential buyers330.00 will all be eliminated323.00 from the market be-310.50 cause they are not300.00 ready to pay $350 or290.00 more per unit (or set).272.50 The most-eager-of-these267.50 - less - eager - potential255.00 buyers will drop out of250.00 the bidding when the 6230.00 still more eager would-227.50 be buyers raise their225.00 offers above $345—to170.00 $350, at least, as they

must to induce a 6thowner to sell

How many units (or sets) will be sold? 6

At what price? At or above $350 but under $355. Only if the price is within this range will it makesupply and demand equal and "clear the market."

PROBLEM BThis example could be described as a temporary

"sellers' market." The would-be sellers of a prod-uct may have a heyday for a time in a sellers' mar-ket for they may receive what they consider areally good price for their product. In a "sellers'market," would-be buyers are demanding more ofa good or service at prices sellers are asking thanis readily available on the market. As a result,eager would-be buyers compete vigorously withone another to purchase the existing supplies, thusbidding up the price per unit. In time this will stim-ulate more owners to sell and/or potential pro-ducers to increase production. Thus, the same prin-ciples apply in a so-called sellers' market as in anyfree market auction when exchanges are complete-ly voluntary:

1. no one trades unless he or she expects to be bet-

ter off as a result of the transaction than theywould be otherwise

2. at the conclusion of the auction, the availablesupplies wind up in the hands of those personswho place the highest values on them—previousowners who choose to keep what they have andwould-be purchasers who want some of thegood or service being traded enough to per-suade previous owners who value it less to re-linquish some of the units in their possession

3. at the market price finally agreed upon, thesupply offered and the demand for it, are equal—any temporary advantage to sellers producedby the relatively eager demand of would-bebuyers is dissipated as information concerningthe market supply and demand situation is dis-persed, in the course of the pricing auction, bythe bids and asks of market participants.


PROBLEM C



BUYERS

$400.00375.00360.00355.00350.00347.50330.00320.00310.00295.00

How many units (or sets) will be sold?

At what price?

Rock bottom priceof 20 owners,


$372.50370.00365.00362.50360.00357.50345.00330.00323.00310.50300.00290.00272.50267.50255.00250.00230.00227.50225.00170.00

PROBLEM CThis example could be described as a temporary

"buyers' market." Would-be buyers of a productenjoy making purchases on a so-called buyers'market. On a buyers' market, the quantity of agood or service available at prices potential buyersare willing to pay tends to exceed their demand forthat particular item. Thus, would-be sellers com-pete vigorously with one another to make sales,lowering their asking prices in the process. On aso-called buyers' market, sellers usually receivesomewhat lower prices for their merchandise andbuyers are apt to find what they consider real "bar-gains"—unless or until owners of that particularitem decide it is not worthwhile to sell at the pricethey will receive and/or producers make plans torestrict production and/or turn to producing some-thing else they expect consumers to want moreurgently. However, the same principles apply in aso-called buyers' market as in any free market auc-tion when exchanges are completely voluntary:

1. no one trades unless he or she expects to be bet-ter off as a result of the transaction than theywould be otherwise

2. at the conclusion of the auction, the availablesupplies wind up in the hands of those personswho place the highest values on them—previousowners who choose to keep what they have andwould-be purchasers who want some of thegood or service being traded enough to per-suade previous owners who value it less to re-linquish some of the units in their possession

3. at the market price finally agreed upon, thesupply offered and the demand for it, are equal—any temporary advantage to buyers producedby the relative eagerness to sell on the part ofowners and producers of the item being tradedis dissipated as information concerning themarket supply and demand situation is dis-persed, in the course of the pricing auction, bythe bids and asks of market participants.


PROBLEM C (Answer)


'Margin"-


BUYERS

Rock bottom priceof 20 owners,


$400.00375.00360.00355.00350.00347.50330.00320.00310.00

These 9 would-be buy-ers will purchase units(or sets) from the 9owners who value theirproperty the least. Al-though every one ofthese would-be buyerswould be willing to payas much as $310, mar-ket conditions in thisexample enable them tobuy at a lower price—less than $300. If theyoffer more, a 10th own-er will offer to sell; sup-ply would then exceeddemand

$372.50370.00365.00362.50360.00357.50345.00330.00323.00310.50300.00-*—J

This owner will offer tosell if the price per unit(or set) rises to $300 ormore. But a 10th uniton the market under thecircumstances wouldnot find a buyer, so thata price of $300 wouldnot "clear the market";it would make supplyexceed demand

295.00 •At a price of $295 or 290.00less, this 10th would-be 272.50buyer would appear on 267.50the market. Demand 255.00would then exceed sup- 250.00ply. Thus, to eliminate 230.00this potential buyer and 227.50"clear the market," 225.00would-be buyers must 170.00offer more than $295

These 9 owners will sellto the 9 most eagerwould-be buyers. Al-though every one ofthem would be willingto accept $290 per unit(or set), the market con-ditions in this exampleassure them a higherprice. All would-be buy-ers must offer morethan $295 to prevent a10th potential buyer,who will not payenough to induce a 10thowner to sell, fromcompeting on the mar-ket

How many units (or sets) will be sold? 9

At what price? More than $295, but less than $300.

"Margin'

EXPLANATORY TEXT

If time or class interest does not permit devotingattention to the basics presented in Part I, theteacher may start with this Unit. As a matter offact, Part II alone should furnish more than amplematerial for a semester course, for practically allthe topics traditionally included under "eco-

nomics" are covered here. For the benefit of any-one starting with this Unit, therefore, a brief sum-mary of the basics dealt with in Part I follows:

1. What are the basic assumptions and steps inlogic on which economic theories rest? Eco-nomics is the study of the conscious, purposiveactions of individuals, seeking to relieve some "feltuneasiness" and thus to accomplish the most


urgent goal on his or her personal scale of subjec-tive values.

a. Individuals are able to act to attain variousgoals because of the nature of our "ordered uni-verse," where six a priori characteristics pre-vail. (Unit 2)

1. Regularity 4. Time2. Logic 5. Change3. Causality 6. Value

b. We know things about the nature of consciousaction because we are all acting individualsourselves. (Unit 3)

1. Men act purposively to attain ends2. Their wants are endless3. Their means are limited4. Their values are personal (subjective)5. Their ideas, values and goals are always

changing6. They may make mistakes7. At any instant in time, they are always aim-

ing at what they consider most important8. They always try to use the easiest and

simplest way to get what they want; inother words, they "economize"

c. Three conditions are necessary for an individ-ual to conceive of acting. (Unit 3)

1. Some dissatisfaction, a "felt uneasiness"2. An idea concerning a better situation3. The hope that action can accomplish some-

thing worthwhile

d. There are three requirements for acting. (Unit 3)1. Planning2. Time3. The necessary resources (tools, knowledge,

etc.)e. Individuals are always pondering and experi-

menting to find easier and better ways to ac-complish the things they want. Some of theirthoughts and efforts have proven successful.Thus, acting men have discovered a number ofhelpful devices for attaining their various ends.They have found they can accomplish more oftheir goals better, easier, or better and easierif they respect the rights of individuals to ac-quire, hold and use private property as theywish. By specializing, cooperating and ex-changing with one another, everyone can havemore than if he lived and labored in isolation.Thus, it becomes apparent that the basic eco-nomic concepts follow "naturally" and logic-ally from the nature of man and the universe:

1. Private Property (Unit 4)

2. Specialization and Division of Labor (Unit4)

3. Exchange (Unit 4)4. Social Cooperation (Unit 5)5. Markets (Unit 5)

It is the task of economic theory to explain—withthe use of logic—how the complex modern marketeconomy has developed out of the purposive ac-tions of individuals. In this Unit, we shall showhow prices evolve as individuals—each acting inde-pendently and/or in cooperation with othersthrough the market—value, choose, express pref-erences and seek their various, most urgent goals.

2. What is the significance of the fact that everyindividual always aims at what he wants most?An individual's urgency, or indifference, with re-spect to various goals is reflected in his actions. Aperson's eagerness, or lack of eagerness, to acquirea particular good or service affects the "price" heis willing to pay for it in terms of other goods andservices. If he considers something vitally impor-tant, perhaps even necessary to keep him and hisfamily alive and well, he may be ready to give al-most anything he has to get it. The more urgentlyhe wants something, the greater effort he will bewilling to make, the more he will be ready to offerfor it, the harder and longer he will work if neces-sary and the more eagerly he will bargain. Howmuch difference this will make under any partic-ular circumstance will always depend on his per-sonal (subjective) values, other alternatives opento him and the urgency to him of the want he hopesit will satisfy.

Whether we realize it or not, every one of us isalways weighing in his mind the relative worth tohim of (a) what he wants that he does not have and(b) what he has that he might be able to offer intrade. Economic texts frequently refer to the tre-mendously high value a person will place on adrink of water if he is lost in the desert. If coal, oil,gas and electricity for civilian use are scarce ornon-existent as in wartime, a family might burnbooks or furniture to keep warm—books or furni-ture which, under other circumstances, would bemuch more valuable for other purposes than asfuel.

Everyone has a different list of wants and scaleof values but everyone will work hardest and mostenergetically for the things he values most. We allact this way. A child who is saving for a new bikewill be eager to help with family chores if that in-creases his weekly allowance. A teenager who


wants a car of his own will be willing to work hardto pay for it and its operation. High school girls willwant to baby-sit long hours if this provides moneyfor exciting vacations and travel.

The more we want something, the more we willoffer if we think we have a chance of getting it. Thismeans that when the best and easiest way to getthe things we want most is to buy them on themarket, we will be ready to work longer hours toearn more money and pay higher prices for them.The more eager buyers are, the more urgent theirdemand—other things being equal—the higher theprices they will offer.

Sellers, too, are individuals who aim at whateverthey want most. Instead of offering money forgoods and services, sellers offer goods and servicesfor money. The more eager they are to find buyersand make sales, the greater the inducements theywill offer and—other things being equal—the lowerthe prices they will be willing to accept for a spe-cific item. Thus, the eagerness of sellers tends topush prices down.

The market price of any definite quantity of agood or service at a particular time and place is theresult of a meeting between persons with differ-ent viewpoints—sellers who are offering goodsand/or services and buyers who are offeringmoney for goods and/or services. Both parties mayhiggle and haggle to obtain the best trade possi-ble. They may both begrudge what the other isasking, but if a willing exchange results, it is be-cause both believe it will improve their respectivesituations and so help both acquire something orreach some goal on their respective lists of wantsor scales of values:

It is naught, it is naught, saith the buyer:but when he is gone his way, then he boasteth.

(Proverbs 20, 14)

3. If it is "natural" and logical for everyone tostrive harder and offer more for the things he val-ues most and even needs to survive, why is some-thing that everybody wants and needs to live—likeair or, except in the middle of a desert, water—,practically free for the asking? And on the otherhand, why are diamonds or gold so costly whennobody really needs them to survive? For cen-turies, thinkers tried to explain this apparent con-tradiction, this "paradox of value.'*0 However, to-

*See Unit 13 on the "History of Economic Thought" for anoutline of this intellectual development.

ward the end of the 19th century some economistsfinally came up with a satisfactory explanation.Prior to that time, market prices were usuallythought to depend on the type of goods involved—whether they were necessities of life or luxuryitems, etc. But when the solution was finally re-vealed, the clue was found to depend upon the ap-plication of the concept of subjective personal val-ues to the specific unit or quantity of a good orservice with which an individual was concerned ata specific time and place.

A person's incentive to act at a particular placeand time comes from the satisfaction he expectsto derive from the action or from the specific unitor quantity of the good or service he hopes to gain.Individuals don't act in a vacuum. They always actin the light of a specific situation. They considercircumstances. They look at alternatives. For in-stance, if there is lots of clean, fresh water aroundso that it is easy to have a drink at any time, theywon't offer much for a cup of water, though theyprobably would offer a great deal for potablewater in the middle of a desert. Even though everyone of us must have water to live, we will not, andneed not, pay as high a price for a drink when gooddrinking water is readily available as we would ifthat particular quantity of water was the onlywater available for survival. Thus, the value of anyparticular item at a particular place and time de-pends on the urgency of the individual's demandfor that particular thing under the circumstancesprevailing.

On a desert, where a canteen of water is the onlypotable liquid within miles, it may represent thedifference between death and survival. In thatcase it could be as valuable to an individual as hislife. If he had a bottle of soda also, a flaskof wine, or a retinue of attendants all bearing pro-visions, the value of that one canteen of waterwould be somewhat less. How much less would de-pend on circumstances. If that same person werecamped by a mountain stream or seated in a well-equipped home with hot and cold water availableat the turn of a faucet, he probably would not pay apenny extra for a glass of drinking water. In eithercase, the important consideration is the individ-ual's evaluation of the specific quantity of the goodor service in question, given the situation—his spe-cific wants and needs, the available supply, otherpossible sources, potential substitutes and antic-ipated changes.

The value of diamonds is explained in a similarway. The important consideration is always the


value to the individual concerned of the satisfac-tion which depends on the specific diamond inquestion, given the particular situation. What is thevalue to him of the use or pleasure a particulardiamond may provide? How plentiful and acces-sible are similar diamonds? Are suitable substi-tutes obtainable? If so, how difficult or expensivewill it be to acquire them? Are the individual'svalues likely to change in the future to render thisparticular diamond more, or less, important to him,or perhaps even a source of misfortune? Are futuremining or production techniques likely to makediamonds more plentiful, more easily accessible,more available for less important uses and, thus,less valuable to individuals who will then find thatonly a lesser satisfaction depends on a single dia-mond? Or might diamonds become more desiredin the future for industrial uses, jewelry or invest-ment, relatively more scarce and less easily ac-cessible when compared with the demand forthem. In that case, the limited supply of diamondswould be devoted only to providing more urgentwants or needs. As a result, the value to a specificindividual of a single diamond—on which a moreurgent satisfaction now depends—will tend to rise.Just as in the case of drinking water, the value ofa particular diamond will always depend on theurgency of the individual's desire for the satisfac-tion he expects it to yield at a particular time andplace—in comparison with other alternatives.

4. How does an individual decide among manypossible alternatives? Most people usually knowat any moment what it is that they want most.Once in a while, a choice may be difficult. We mayeven decide later that the decision we made wasnot a wise one. However, few people become sooverwhelmed by the complexity of a situation thatthey freeze and cannot act at all. We usually de-cide and act with little hesitation and our actionsusually produce about the results expected.

Almost without realizing what we do, most of us,most of the time, analyze a situation mentally andbreak it down into manageable portions beforeacting. We eat a meal a mouthful at a time; weclimb a mountain step by step; we construct sky-scrapers brick by brick or steel beam by steelbeam. We break things down into "bite-sized"pieces or stages. Similarly, when we go to a store,the decisions we face at any instant are alwaysnarrowed down to comparing the advantages and/or disadvantages of buying or not buying a cer-tain quantity of a particular item, with the ad-vantages and/or disadvantages of holding on to,

not parting with, the particular units of money orof anything else that the item we are consideringwould cost.

Whenever we act—produce, buy, sell, trade, con-sume, etc.—we always consider a specific situationin the light of the particular conditions we are fac-ing at the time. An individual acts only when thesatisfaction he expects to derive, or the dissatis-faction he expects to avoid, by acting is worth morein his mind than the value of the time and energyand everything else he must give to make the ex-change. The value, usefulness or "utility" of what-ever it takes to tip the scales at the "margin" andactually induce a person to act is called the "mar-ginal utility."

The price of an item on the market depends onits marginal utility in the minds of the particularpersons who are potential competitors for theavailable supply. The marginal utility of a partic-ular unit of a good or service to any individual de-pends, in turn, on the satisfaction that particularitem is expected to furnish him under the circum-stances, i.e., the satisfaction he would lose if thisparticular unit were lost. As we have seen, theloss of a canteen of water on a desert could meanthe loss of a person's very life and under that con-dition, the marginal utility of a canteen of waterwould be worth that person's life. On the otherhand, in a comfortable home or beside a mountainstream, the marginal utility of a glass of waterwould be no more valuable than the relative en-joyment of remaining at rest in an easy chair orbeside the camp fire; a person would have to want adrink of water more than his ease to be persuadedto walk to the kitchen tap or to the side of themountain stream to fill his glass or cup.

The marginal utility of any item hangs or falls onthe possession of one more, or one less, unit ofthat particular good or service. This is the "mar-ginal unit" of any item, the last unit for which themoney and/or effort it costs seem worthwhile, thelast unit that is worth striving for under the circum-stances. No one will knowingly or voluntarily workharder or pay more for any additional unit of some-thing than its marginal utility to him, i.e., the valueof the satisfaction he expects to derive from thatone unit. If conditions change, so will the "mar-ginal unit" of a good or service as well as its "mar-ginal utility."

NOTE: The concept of the marginal unit and its mar-ginal utility was developed primarily by the "Aus-trian School of Economics" (Unit 13). To spark dis-cussion and explain more fully the importance of the


marginal unit, i.e., the particular quantity of a goodor service being considered, and its marginal utility,i.e., the particular satisfaction which hangs or falls onthe possession of the marginal unit, the teacher mightwrite several quotations on the blackboard. For sug-gestions in guiding the discussion, see the commentsbelow each quote.

"A horse! A horse! My kingdom for a horse!"WILLIAM SHAKESPEARE, Richard III (ACT V,SCENE IV)

What is the marginal unit? A horse.What is its marginal utility? Its usefulness toRichard III as a means to retain his ill-gotten king-dom.What is the value of this marginal unit? To Rich-ard III, at that moment in battle it was practicallyas important as the kingdom for which he had lied,conspired and killed.How is the value of this marginal unit to RichardIII related to the price he was ready to pay, orpromise, for a horse under the circumstances?Let the students speculate on the urgency of Rich-ard Ill's demand for a horse, relative to the supplyavailable, in the midst of the battle to save hiskingdom. Note that the supply available in themidst of a battle is by no means the same as thesupply available in the kingdom.

"A little Neglect may breed great Mischief: forwant of a Nail the Shoe was lost; for want of aShoe the Horse was lost; and for want of a Horsethe Rider was lost, being overtaken and slain bythe Enemy; all for want of Care about a Horse-shoeNail."

BENJAMIN FRANKLIN, MAXIMS PREFIXED TO PoorRichards Almanac (1757)

What is the marginal unit? A horse-shoe nail.What is its marginal utility? Its usefulness as anaid to the proper care of a horse.What is the value of this marginal unit? Prac-tically the equivalent of the rider's life. Note thathere again the circumstances under which the mar-ginal utility of a horse-shoe nail is equated witha rider's life must have involved a chase when lackof time and opportunity made it impossible for therider to obtain a new horse-shoe and wait for thehorse to be shod.

"Wherever men recognize that the requirementsfor a good are greater than its available quantity,they achieve the further insight that no part of theavailable quantity may lose its useful property or

be removed from human control, without causingsome concrete human needs previously providedfor to remain unsatisfied, or without causingthese needs now to be satisfied less completelythan before."

CARL MENGER, Principles of Economics, p. 95

Menger (1840-1921), "founder" of the AustrianSchool of Economics, was the first to clearly de-scribe the concepts of "marginal utility." His book,written in German, was published originally in1871.

Re-read Henry Hazlitt's "The Broken Window"(Reading No. 3) in the light of this quote. What"concrete human need" did the baker lose whenthe hoodlum threw the brick? Protectionagainst the elements and window display space.

After the baker replaces the window, which ofhis wants will be less well satisfied than before?Clothing.

Speculate on the effect of this loss on the tailor.His wants cannot be as well satisfied as if he hadbeen able to produce and profit from the sale of anadditional suit of clothes.

Bring to class a recent newspaper account of anaccident or natural catastrophe (flood, fire, earth-quake, bombing, etc.). Discuss the "concrete hu-man needs previously provided for' which mustnow, as a result of this loss of useful property, re-main unsatisfied. To replace the property lost ordestroyed, goods and services must be shifted fromuses for which they had been intended. This meansthat lumber, bricks, stones, mortar, labor, etc.,used to rebuild the structures destroyed, will notbe available to expand production. Thus, any formof destruction makes each unit of the remainingstocks more valuable, i.e., it increases its marginalutility and hampers increased savings, invest-ment and thus, economic development.

Is it possible to estimate the economic value ofthe loss from such a catastrophe? Like the brokenwindow, every loss has far-reaching consequences,often difficult or even impossible to trace. How-ever, it is possible through economic calculation,to compare the monetary value of the material lossand the monetary value of the goods or servicesneeded to compensate for the destruction. In theprocess of making repairs and restoration, peoplewho want goods and services very urgently forthese purposes will bid them away from those whovalue them less. As a result, the goods and servicesused to compensate for losses are taken fromwhere they have not had as much value given the


new circumstances—i.e., they would be shiftedfrom uses that are now "submarginal"—so theymay be applied to uses which have become moreurgent as a result of the catastrophe. In this way in"The Broken Window," the baker shifted money hewould have used for a new suit, now rendered a"submarginal" use of funds in his view, to replacethe window, which had become his most urgentunsatisfied want. On the baker's scale of values,the marginal utility of a new window was morethan that of the new suit he relinquishes. Thus,the economic value of property destroyed may becalculated by comparing it with the "marginal util-ity" of the goods and services used in the attemptto make up for the loss.

Human lives, historical treasures and naturalwonders are irreplaceable. Their full values areimpossible to estimate in money terms. In calculat-ing the "marginal utility value" of such losses, onemust make some attempt to consider not only themoney equivalent of the income they would prob-ably have furnished in the future, as judged frompast experience, but also the contributions—in theform of love, pleasure, local pride, etc.—they wouldhave been expected to make if they hadn't beendestroyed.

"And the common people have furnished excellentproof of their sensitivity in economic matters byrecognizing the essential nature of value long be-fore the scientists did. Science was misled by con-fusing utility with value, and so it declared goodslike air and water to be things of the greatest usevalue. The man in the street observed or sensedwith greater accuracy and in spite of sciencetreated air and water as they deserved to be treat-ed, namely as things without value. And for cen-turies, long before science set up the doctrine ofmarginal utility, the common man was accustomedto seek things and abandon things, not in accord-ance with the highest utility that they are by na-ture capable of delivering, but in accordance withthe increase or decrease in concrete utility that de-pends on each given good. In other words, he prac-ticed the doctrine of marginal utility before eco-nomic theory discovered it."

EUGEN VON BOEHM-BAWERK, Value and Price, AN

EXTRACT FROM Capital and Interest (1960 ED.,

PP. 203-204; 1973 ED., P. 102)

Boehm-Bawerk (1851-1914), noted econo-mist of the "Austrian School," also served as Min-ister of Finance in the government of the oldAustro-Hungarian Empire. His major contribution

was in applying the theory of subjective value toexplain how interest rates are determined by thechoices and actions of individuals (Unit 10).

What do economists seek to accomplish in de-veloping economic theories? They want to ex-plain the way people act. With a better understand-ing of the actions of individuals, we are in a betterposition to cooperate and work effectively throughthe market economy. One of the greatest insightsto be derived from an understanding of the waypeople act is that we "common people" recognizequite logically and naturally that goods and ser-vices, which are scarce relative to demand havevalue, and those, which are overabundant in rela-tion to their known utility, do not. In Value andPrice (1960 ed., p. 136; 1973 ed., p. 21) Boehm-Bawerk wrote:

". . . the common man would not be misled into theerroneous selective judgment that every quart of wa-ter he draws from the kitchen tap is therefore atreasure of immense value, and cheaply purchased at$1,000."

What is the significance of this insight—name-ly that the "common man" readily recognizes the"marginal utility" of a good or service and con-siders this when acting? Most people generallyknow very well what is, and what is not, valuableto them and to the market. As a result, they tend to"economize." They try to use sparingly thosethings of the greatest value, saving them for onlytheir most urgent needs. Things which are rela-tively more abundant, more readily accessible and,thus, somewhat less valuable on the market may beused more liberally and applied to relatively lessimportant purposes also.

How does this tendency to "economize" affectthe "marginal utility" of a good or service and,thus, its market price? No one will knowingly orvoluntarily pay more or work harder for somethingthan he has to. The scarcer a good or service is,relative to the demand for it, the more competitionthere is for it on the market, the higher the pricepeople will be ready to pay per unit, and thus thegreater the pressure will be to see that it is re-served for only its most important uses. This helpsto assure that its utility at the "margin," i.e., theleast important purpose for which it will be used,will reflect the urgency of the demand for it rela-tive to its supply. This "marginal utility," reflectedby individuals through their choices and actions,then helps guide persons in comparing values andbidding on the market. Thus the market prices thatresult from the competitive bidding of owners


(potential sellers) and would-be owners (potentialbuyers) are determined by the natural and logicalattempts on the part of countless individuals, eachseeking to accomplish as easily and as cheaply asconditions permit, his or her most urgent goals,consistent with their personal (subjective) ideasand values.

"The law of marginal utility does not refer to ob-jective use-value, but to subjective use-value. Itdoes not deal with the physical or chemical capac-ity of things to bring about a definite effect in gen-eral, but with the relevance for the well-being of aman as he himself sees it under the prevailingmomentary state of affairs. It does not deal pri-marily with the value of things, but with the valueof the service a man expects to get from them."

LUDWIG VON MISES, Human Action (3RD ED.,1966), p. 125Mises (1881-1973) was the leading spokesman

of the Austrian School of Economics for manydecades. He authored several important books andnumerous articles on economics and the limitedgovernment philosophy of classical liberalism.

Review the meaning of "value" and the differ-ence between the "objective characteristics" of anitem and its "subjective value." (See the EX-PLANATORY TEXT of Unit 3 as well as the GLOSSARYdefinitions of these terms.)

How does an understanding of "subjective value"explain why some people will offer more moneyfor some things than would seem to be justified bytheir objective attributes? How about such thingsas a rabbit's foot, tickets to sports events or firstnight shows, wide or narrow neckties, cigarettes,mink coats, stylish clothing in the latest fad, or aRolls Royce? As Mises says in the quoted passage,the value of things, which is reflected in theirmarginal utility per unit, is derived from "the valueof the service a man expects to get from them."[Italics added]. This may, or may not, be relatedto the physical and chemical service it actuallyrenders.

Comment from this point of view on the valueof some of the goods and services the students, ortheir families, appreciate subjectively for qualitiesother than their objective (physical and chemical)characteristics. For instance, contrast the objectivetraits of a "fun" vacation, a foreign sports car, anew fashionable outfit, the prestige of belongingto a popular social set, club, group or gang, thepleasure of gaining recognition for prowess in

sports, etc., with the possible subjective satisfac-tion each may furnish.

5. How do the ideas and values of countless in-dividuals lead in time to market prices? Now wecome to a consideration of the way the uncountedbillions of individual value judgments and actionsfit together to make the market. The most impor-tant thing to keep in mind is that the entire marketeconomy and everything in it are continually influx. We might compare the economy with a gigan-tic ever-moving jigsaw puzzle, composed of count-less ever-changing pieces. Every personal valuejudgment, choice, preference or action is a piecein this huge jigsaw puzzle. As individuals altertheir personal (subjective) values and take actionsin response to the new circumstances with whichthey are faced, the overall market jigsaw is altered.

Individuals meet, cooperate, exchange and tradein the attempt to attain their various and respec-tive goals. In this process their personal values andactions bump up against one another. Each indi-vidual influences others and is, in turn, himselfaffected by these interpersonal contacts. The ideasof others often lead us to change our views, shiftour personal scales of subjective values and takedifferent actions from those we had intended. Thecompetition of others for a good or service we hadthought we wanted could, for instance, persuadeus to put forth greater effort to obtain it, i.e., offera higher price or a greater inducement to its pres-ent owner to part with it. Or on the other hand,that very same competition might cause us to shiftto a substitute good or service or even change ourplans completely.

Let us take one example—for instance, pizzaslices or hamburgers and cokes. If we are willingto work harder or longer to earn more, in orderto gorge ourselves on pizza slices or hamburgersand cokes, our eagerness will lead us to increaseour production. This will permit others to haveand enjoy more of the particular good or ser-vice we are producing and offering. Thus it be-comes easier and cheaper for others to attain theirrespective goals. On the other hand, our eagernessto put forth greater effort, offer more and bidhigher prices reflects the marginal utility of pizza,hamburgers and cokes in our eyes and helps to en-hance their value on the market. Our more eagerbidding tends to increase their prices and makethem more expensive for others to purchase. Thisincreased demand, relative to supply, inducessome people to economize by consuming fewerpizza slices, hamburgers and cokes. At the same


time it may persuade someone to open a new pizzaparlor or hamburger outlet. In this way, the ideasand actions of one individual eventually impingethrough the market on the ideas and actions of allother individuals associated in any way with thatparticular trading area.

6. How do the ideas, values, choices and actionsof an individual help to determine the pattern ofproduction? Everyone is a consumer. We work,either to produce what we want to consume or toearn money so as to be able to buy what we wantto consume. Once a person has acquired somepurchasing power, by having produced some goodor service for which others offer something intrade, he appears on the market as a potentialbuyer. He then bids for goods and services—reject-ing some items and bargaining in the attempt toobtain others, the things he wants most urgently.As a customer each of us acts in response to hisown varied and ever-changing personal valuescale. He spends money for things he hopes willfurnish satisfaction.

Persons in sports speak of their "gate," peoplein show business of their "box office receipts."Gate or box office receipts reflect the preferencesof consumers. They represent the "votes" on themarket of persons who chose to buy tickets for aparticular event or show in preference to anythingelse they might have purchased. The more popularthe star, or athlete, the more exciting or enjoyablea game or performance is expected to be, the morecustomers will want to buy tickets and the largerthe gate or box office receipts will be.

The hundreds of thousands of dollars per filmthat producers pay a big movie star are furnishedby hundreds of thousands of customers, customerslike you and me, who buy tickets to see these starsbecause that is what we, the customers, want mosturgently under the circumstances in exchange forour dollars. The box office receipts from movieslike "Gone With The Wind," "The Sound ofMusic," "My Fair Lady," etc., are tremendous be-cause thousands and thousands of customers paidto see them, enjoyed them, and recommendedthem to others who did the same. The box officereceipts of less popular actors and less successfulshows may be so small that they do not even coverall costs. The producers of such shows lose money.Thus every producer of movies, sports events, oranything else, wants a big gate or large box of-fice receipts, so he aims at supplying consumerswith what they want.

NOTE: Ask the students where the money comes fromthat famous movie stars pay for their elegant homesand expensive cars, clothes and jewels. Why do foot-ball and baseball managers sometimes pay millions ofdollars to hire a particular player? Are such highsalaries "justified"? If they are justified, why do yousay so? If not, why not? Is anyone harmed if somepersons are paid such huge sums? Suppose movieproducers and the owners of football or baseball teamswere not allowed to pay any popular star or playermore than a limited amount. How would that affect(a) their business (the production of movies or thesport involved)? (b) its customers or fans? (c) the in-dividual actors or players?

We may apply this same terminology to anybusiness. The money a firm's customers pay for thegoods and/or services it produces determines thecompany's "gate" or "box office receipts." Eventhe wages paid an employee may be looked on as"box office receipts." For instance, the "box officereceipts" of a secretary or of an automobile me-chanic reflect the value to customers of whatevergood or service he or she contributes to the producttheir employer is selling. (See Unit 9 for a full ex-planation of the way wages are determined on themarket.)

A firm's box office receipts may sometimes fallbelow, or only barely cover costs for some reason—because its managers underestimated expenses,misinterpreted markets, or did not satisfy cus-tomers sufficiently, etc. Then it may earn no profitsat all and even end up with losses. Practically noone wants such a state of affairs. As a matter offact, no businessman who wishes to stay in busi-ness, continue operating and maintain his capitalinvestment can long afford losses. Therefore, hisgoal must be to supply consumers with things theywant and will pay for. So producers study the pur-chases consumers have made in the past for cluesas to what they are likely to want in the future.They try to avoid producing things consumers willnot buy. In this way, producers are guided by thepurchases consumers make—or refuse to make. Ona free market, therefore, where every dollar a firmtakes in comes from customers who are "voting"their preferences, the consumers direct producersalmost as puppeteers control their marionettes bypulling strings.

Let us go back to the simple lead pencil men-tioned in Unit 5, where we considered coop-eration through the market. Suppose you buy a pen-cil. In making that purchase you act like a pup-peteer manipulating all the various producers in-volved. You pull strings which lead to lumbermen,


steel workers who make saws, miners of graphiteon the island of Ceylon (now Sri Lanka), manufac-turers of paint and lacquer, truckers who bring thepencils to market, the local stationer, his salesclerk and stock boys, and so on—all this and stillmore when you simply buy a humble pencil. (Re-fer once more to Leonard E. Read's "I, Pencil,"Reading No. 15.)

If someone wants entertainment, he pulls differ-ent strings, manipulates other producer-mario-nettes than those in the pencil industry. Entertain-ment-seeking consumer-puppeteers pull stringsleading to rock bands, TV or movie producers,actors, singers, comics, electronic specialists, filmmanufacturers, etc. Thus, individuals who pur-chase specific items and refuse to purchase others,give "orders" to producers and influence, throughthem, the future pattern of production. When to-morrow comes, the goods and services that willthen be offered on the market will reflect the ac-tions of individuals today, as these actions havebeen interpreted to the best of their ability by busi-nessmen planning future production in the hope ofmaking profits by satisfying future consumerwants and needs.

NOTE: Businessmen today do not operate in a com-pletely free market, of course. Many artificially-cre-ated obstacles and restrictions interfere with, and dis-rupt, the transmission of clear and distinct signalsfrom consumer-puppeteers to producer-marionettes.These artificial interferences—as well as the natural,physical, geographical and market factors business-men are always coping with—must be taken into con-sideration. These artificial interferences include manygovernment rules and regulations such as subsidies forsome persons, penalties for others, restrictions, taxlevies, etc. The effects of such government interven-tions are another story—to be dealt with later, espe-cially in Unit 14.

7. How do the ideas, choices and actions of in-dividuals help to determine market prices? Per-sons with goods or services they hope to sell mustcontinually experiment to discover the "marketprice" of any particular item. As the students willhave learned from the classroom auctions, it is pos-sible to determine, by continued bargaining, theprice at which an item will "clear the market" atany particular moment. At that price, determinedby the relative eagerness and subjective values ofowners or potential sellers and would-be buyers,the number of units of a good or service wantedand the number offered will be the same. But noone can know in advance what this price will be.Charts, graphs and computers offer no help. Busi-

nessmen consider past experience but temper itwith their best understanding of the situation andtheir most intelligent estimate of the expected de-mands of consumers in the future.

Businessmen experiment with various prices ona trial and error basis. Experience and market stud-ies furnish some clues, but the best they can do isto select a tentative price for their good or serviceon the basis of their best estimate of what consum-ers will pay per unit. This becomes their "askingprice." This "asking price" may appear to be"fixed" or "administered." They may print this"asking price" on their product's label, list it in ad-vertisements and even instruct their salesmen toquote this price to potential buyers on a take-it-or-leave-it basis. However, this "asking price" is ac-tually just the first step in trying to bring about atrade that will be mutually satisfactory. If a busi-nessman wants to sell his entire stock eventually,if he wants supply and demand to come out moreor less even, his "asking price" cannot be con-sidered as permanent or "fixed." Nor can he "ad-minister" prices. If he does not enjoy a speciallyprivileged position, protected by governmentfrom competitors, it is the businessman's potentialcustomers who can say "take it or leave it," refuseto buy from him and look for substitute goods andservices. Thus if the businessman wants to sell, hemust remain flexible and willing to raise or lowerhis "asking price" according to the wishes andwhims of consumers, as they express them on themarket.

Whether the would-be seller of a product is alarge corporation, be it General Foods or GeneralMotors, or a peddler in a Middle East bazaar, he isalways at the mercy of consumers on a free market.If he wants to sell and cannot find a buyer at hiscurrent "asking price," he must be ready to adjustto the situation. He need not necessarily change his"asking price" directly in terms of money. He mayjuggle the "real price" in a number of ways, someof which the students will recognize as more or lesscommon. If stocks remain unsold after some time,the would-be seller may hold an "end of the sea-son" sale of remainders at "special" (lower) prices.He may give discounts, offer refunds under certainconditions or make special offers—two for a dollarand so on. He may increase or reduce the originalguaranty, depending upon the consumer demandfor his product. He can give trading stamps or spe-cial giveaways to purchasers, distribute couponsoffering money off on purchases. He can furnishfree installation and/or service, or he can charge


extra for one or both. In any event, businessmenare continually juggling their "asking prices," inthe attempt to discover the price at which theirparticular good or service will "clear the market."The better they succeed in doing this repeatedlyand continually, the more profitable their businesswill tend to be, and the better they will satisfy thepersonal (subjective) values of individuals, each ofwhom is being helped in the process toward hisown various ends and goals.

8. What are the logical conclusions to be drawnfrom an analysis of a free market auction? Afterconducting a classroom auction according to theprocedure described in SUGGESTED ACTIVITY NO. 1of this Unit, itemize and discuss the following spe-cific points demonstrated by the auction:

a. Everyone—owner or potential seller and would-be buyer alike—was bidding in the attempt toimprove his or her situation as he or she saw itunder the given circumstances.

b. Everyone bid according to his or her own per-sonal (subjective) scale of values.

c. Would-be buyers of a good or service do notconsider the total supply. Rather each com-pares in his own mind the relative advantagesand/or disadvantages of buying—or refusing tobuy—a certain specific quantity or unit.

d. Owners, i.e., potential sellers, also considertheir property in units, weighing separately intheir minds the pros and cons of selling onemore, or one less unit or item at the specificterms being offered at a specific place and time.

e. If neither buyer nor seller makes a mistake—dueto unexpected changes in value judgments, fu-ture needs and wants, etc.—both expect to gainfrom the trade.

f. No one who sells anything voluntarily expectsto receive something he values less, and he verylikely receives something he values more, thanwhat he relinquishes in trade.

g. No one who buys anything voluntarily is forcedto pay more, and he very likely pays less, thanthe value he expects to derive from the item hetakes in trade.

h. Owners who do not sell hold on to their prop-erty because they consider it more valuable un-der the circumstances than what they couldthen receive for it in trade.

i. Thus, barring force, fraud, violence and error,there is a tendency on the market for goods andservices to be traded to, and held by, those whowant them most.

j. Any owner who insists on asking more than themarket—whether due to error, ignorance, stub-bornness or outside interference (price mainte-nance agreements, for instance)—will sell fewerunits than he would at the market price and hemay sell none at all.

k. Any would-be buyer who refuses to offer atleast as much as the market price—whether due toerror, ignorance, stubbornness or outside inter-ference—will find fewer units available for himto buy and he may not find any at all.

1. In the light of (j) and (k), therefore, it is appar-ent that the greatest possible number of vol-untary, mutually agreeable transactions takeplace at the market price. When would-be buy-ers refuse to pay that much per unit for any-thing, owners refuse to sell as many; when own-ers insist on a higher price per unit, would-bebuyers are not ready to buy as many.

m. The would-be buyer buys and the owner sellsa specific item because, at the terms agreedupon, trading seems more beneficial to boththan any alternative open to either. At the sametime, those who refuse to buy or sell a specificitem do not anticipate a gain sufficient to com-pensate for the trade or for other opportunitieslost.

n. Thus, the market price for a certain quantityand quality of any good or service depends, inthe last analysis, on the personal (subjective)values of actual and potential buyers and sell-ers.

o. The price paid on the free market for any par-ticular item, therefore, conforms to the "Law ofPrice." It is forced by competition and the pric-ing process to fall within certain limits deter-mined by the personal (subjective) values of thebuyers and sellers at the margin—i.e., the invis-ible dividing line between those who buy andthose who refuse to buy the specific units ofgoods and services produced and offered on themarket.

SUMMARY

The free market is a complex of many "auctions,"going on continually everywhere as persons whohave goods and services consider alternatives, seekto improve their respective situations, try to ex-change what they have, in order to acquire thingsthey prefer and decide whether to buy, sell, or re-fuse to buy or sell, in any given situation.

In the world we live in, changes are always tak-


ing place. Everything in the market economy iscontinually in flux. However, one tendency pre-vails in a free market economy. The availablesupply of any item is always being shifted—fromthose who value it less to those who value it more.Potential buyers will keep bidding its price upuntil those who want it less urgently are eliminatedfrom the bidding. By the same token, the ownersmost eager to dispose of the good or service beingauctioned will experiment with lower asking pricesuntil they succeed in finding buyers for the stockthey want to sell. On a free market, there is a ten-dency for this bargaining process to continue untilthe quantity offered at a certain price preciselyequals the quantity buyers are willing to purchaseat that price. The actual price at which sales will beconcluded at a particular time and place willnever be less than the lowest price any successfulseller would have been willing to take nor morethan the highest price any successful buyerwould have been willing to offer. Thus, in anyvoluntary transaction, barring force, fraud or hu-man error, both buyer and seller consider theyhave made a good bargain.

In a free market, the price of any item must al-ways fall somewhere between the limits set bythe value scales of the buyers and sellers at the"margin" the invisible dividing line betweenthose who trade and those who dont. This is the"Law of Price."

It might be mentioned in passing that the great-er the number of potential buyers and sellers in anymarket, the closer the "bid" and "ask" prices willcome to one another and the more narrowly themarket price will be determined by the subjectivevalues of the marginal buyers and sellers. Thusthe tremendous size of the modern market econo-my and the great numbers of potential buyers andsellers in the trading area mean that the prices ofmany items quoted on the market fall within suchnarrow margins that they practically appear to beobjectively based. They may seem to depend al-most entirely on the physical characteristics andproduction costs of the goods and services in ques-tion. However, even in such a large trading area,the market prices of both consumers' and produc-ers' goods still stem from the personal and subjec-tive ideas, values, choices and actions of separateindividuals.

World market prices are arrived at in a way sim-ilar to that demonstrated in capsule form throughthe classroom auction experiment. World marketprices too are the outcome of purchases and refus-als to purchase, i.e., the bargaining of individuals,each acting in accord with his or her own personal(subjective) ideas and values, each aiming at whathe or she considers most urgent at the moment, inthe light of prevailing circumstances.


"ADMINISTERED PRICE"BUYERECONOMIC CALCULATIONECONOMIZEMARGINMARGINAL UNITMARGINAL UTILITYPARADOX OF VALUEPRICEPRICE, LAW OFPURCHASING POWERSELLERSUBJECTIVE VALUE

RECOMMENDED READINGSMore advanced materials are indicated by an asterisk(*)

Articles

In the BASIC READER:16. "Cost-Plus Pricing," Paul L. Poirot17. "Charging 'All the Traffic Will Bear!'" Leonard

E. Read18. "How Should Prices Be Determined?" Henry

Hazlitt50. "Freedom to Shop Around," Hart Buck

•61. "The Formation and Function of Prices," Hans F.Sennholz

Books

•Boehm-Bawerk, Eugen von. Value and Price (Liber-tarian Press, 1960; 1973)

Greaves, Percy L. Jr. Understanding the Dollar Crisis(Western Islands, 1973). Chapter III

Hazlitt, Henry. Economics in One Lesson (Harper,1946; 2nd ed., MacFadden, 1962; Manor Books,1973). Chapters 15, 16, 17, 18

•Menger, Carl. Principles of Economics (English trans.of 1871 German, Free Press of Glencoe/Macmillan,1950). Chapters V, VI and VII

*Mises, Ludwig von. Human Action (Yale, 1949 and1963; Regnery, 1966). Chapter XVI

7. SAVINGS, TOOLS AND PRODUCTION


Several of the activities outlined below—suggestedhere in anticipation of Unit 8, "The Entrepreneurand the Profit and Loss System," and Unit 11,"Competition, 'Big Business' and Monopoly"—taketime to carry out. Therefore, if they are to be at-tempted, the sooner started the better. In additionto the brief description of each activity here, seealso the pertinent sections in those two later Units.

1. This is a good time to introduce the subjectof stock exchanges and their role in the marketeconomy. If a local exchange or broker's officewelcomes visitors, plan a class field trip to see itsfacilities. Many stock exchanges and some of thelarger brokers furnish free literature to students.Each student might write to a source of material onstock market trading—for instance, the New YorkStock Exchange (11 Wall Street, New York, NewYork 10004) or the publisher of The Wall StreetJournal (Dow, Jones & Co., Inc., Educational Ser-vice Bureau, P. O. Box 300, Princeton, New Jersey08540)—for copies of brochures and pamphletsavailable to students.

2. Each student might write for a recent AnnualReport of a large corporation whose stock is tradedon the market. These corporations and their An-nual Reports are discussed on pp. 76-77.

3. Show the students how to read the reports ofdaily stock exchange transactions, as they appearregularly in local newspapers, The Wall StreetJournal and Barrons. See the excerpt from oneday's stock report, reproduced and explained hereon pp. 58-61.

4. To help explain the role of the stock market asa means for pooling the savings of many persons,perhaps a share or two of stock in some companymay be purchased. There are legal restrictions onthe ownership of stock by minors. If the studentsare over 18, however, they may form an investmentclub, collect a small sum from each student mem-ber and buy stock in the name of the club. If the

students are younger, they will have to pretend tobuy the stock, or have it bought in the name of anadult. In any event, discuss various industries—aviation, mining, railroads, petroleum, entertain-ment, retail food stores, etc. Then select a specificfirm whose stock is currently traded on the marketat a price within the limits of the sum to be in-vested. Local libraries, investment brokers or se-curities analysts may be willing to let one or sev-eral students consult their files on various firmsfor information on their products, history and fu-ture plans. The students should also watch forarticles about specific companies in magazines andnewspapers such as Barrons, Business Week, For-tune and The Wall Street Journal. If a few sharesare actually to be purchased, one or several stu-dents should make the arrangements through alocal broker or banker. The certificate of stockownership may take several weeks to come fromthe company, so the earlier this project can bestarted, the better. Also, to assure prompt comple-tion of the transaction, it should probably be made"at the market." Once a purchase is made—in factor in fiction—the students should follow the com-pany's progress, perhaps charting the daily orweekly closing prices of its stock on graph paperor the blackboard. If exceptional changes in priceoccur, speculate* on their likely causes—in the lightof current events and the economic theories beingstudied.

5. Another way to interest students in the stockmarket is to have each "invest" a hypothetical sum—$10,000 to $100,000. This should also help toillustrate the great contribution stock marketshave made to production by permitting the accum-ulation of vast sums, from the savings of manyrelatively small savers and investors, to carry outgigantic enterprises that would not have beenpossible otherwise. At the same time stock marketsprovide flexibility of investment, as stockholdersmay buy and sell with relative ease, thus shiftingtheir savings when it seems advisable in anticipa-tion of changes in consumer needs and wants. As

54

7. SAVINGS, TOOLS AND PRODUCTION 55

hypothetical investors, the students should lookfor firms whose products they expect will succeedin satisfying the future wants of consumers. Theyshould investigate the recent record of the com-panies whose stock they consider buying, theirproducts, research activities and future plans. Lookfor information in such periodicals as Fortune (seeespecially its annual directories in May, June andAugust of the largest firms in various categories),The Wall Street Journal, Business Week, Barronsetc., and such aids to investment as Moody s,Standard & Poors, and the U. S. Department ofCommerce's industrial reports. When a student hasselected one or several stocks to "buy" with his orher fictitious nest egg, have each proceed as fol-lows:

a. Prepare a personal ledger sheet (see sample,p. 57) to record stocks purchased, costs involved,receipts from dividends, sales, etc. If printed ledgersheets are not available, have each student drawthe necessary columns—date, item, debit, creditand balance—on ruled paper.

b. As explained, the major contribution of stockmarkets is to permit the accumulation of vast sumsfor capital investment. At the same time, the easewith which individual stocks may be purchasedand sold allows for flexibility of investment in re-sponse to shifting consumer demand. However,current governmental restrictions and the tax struc-ture add to the cost of every stock market trans-action, promoting an artificial rigidity of invest-ment. To illustrate the situation as it actually is, thestudents' investment activities should be as realis-tic as possible within the restrictions imposedby their simplified record keeping. With respect toestimating the taxes they would have to pay on allearnings, see paragraph (g) below. Allowance

should be made in their accounts for a broker'scommission on every purchase or sale. Add a flatcharge (1.5% more or less) for the broker to theprice on all stock purchases or sales—small, mediumor large. See the sample ledger sheets on page 57.

NOTE: Brokers' fees, formerly figured on a slidingscale (from about 10-12$ on small orders down to .5 or.25% on large ones) became competitive on May 1,1975, when the SEC abolished fixed commissions.Because stock market purchases and sales are tradi-tionally handled and reported in "round lots" of 100shares each, the percentage charged by brokers forarranging the sale or purchase of a "round lot" of 100shares is somewhat less than for handling a purchaseor sale of stock in "odd lots," i.e. in lots of a smallernumber of shares, several "lots" of which must beassembled to make a "round lot" before the sale orpurchase may be completed.

c. For the sake of convenience, it should be as-sumed that all stocks are traded (bought or sold)at the stock's closing price of the previous day, asreported in the morning's paper.

d. Perhaps one student in the class, whose inter-ests turn in this direction, will volunteer to act asclass "broker." If a calculator is available, thatwould be helpful. At some definite pre-determinedtime each day—limited perhaps to the first 10 or 15minutes of the class period—each student shouldsubmit to the class "broker" his buy or sell orders,if any, signed in writing.

The student "broker's" responsibility would beto calculate the cost of any student investor's trans-action, figure the price of the stock at the previousday's closing price, record the transaction on thestudent's personal ledger sheet and issue to eachstock purchaser, as evidence of ownership, asimple typed, handwritten, or mimeographed"stock certificate" as follows:

500SHARES

COMMON STOCK

i s the

C E R T I

owner

F I C

XYZ CORPORATION

of f ive

A T E

hundred

Date

0 F

shares of

of issue J^

0 W N E

500SHARES

COMMON STOCK

common s t o c k .

R S H I P


If the student shareholder, in this case "Jo e

Doakes," sells his stock, he will surrender this cer-tificate, receiving in exchange a receipt for theshares he is selling, a money credit on his ledgersheet, a new certificate for the number of sharesstill held from his original purchase if he keepssome rather than selling all, and/or a stock certif-icate for any new shares he may purchase with theproceeds of the sale. For keeping these records forthe entire class, the "broker" might be given creditequivalent to a term paper or some special re-search assignment required of the other students.

e. The students should watch the papers for newsof dividends issued by the various companieswhose stock they "own." The Wall Street Journalhas a regular column entitled "Dividend News."Barrons is especially helpful, for it includes this in-formation in each of its weekly stock market re-ports. Whenever a dividend is announced as "pay-able" on stock a student holds as of the "date ofrecord," that student should make a note to remindthe class "broker"—perhaps each student should setup his own "tickler file"—when the payment datearrives. On that date, the class "broker" will thencalculate the total dividend due on the number ofshares in that student's portfolio on the date of rec-ord and enter the appropriate credit in the propercolumn of the student's ledger account.

f. The students may "buy" and "sell" shares ofstock as they wish, so long as they invest no morethan that to which they are entitled by their orig-inal hypothetical $10,000 to $100,000 nest egg. Ifthey receive cash or stock dividends, that increasestheir assets. If they sell shares which have appre-ciated in value, then too they may have moremoney than before. However, their assets will de-cline if the market prices of the stocks they buy godown. And they may dwindle also as a result of de-ducting the two brokers' commissions involved—i.e., the fee charged for arranging the originalpurchase and the second fee made for arrangingthe sale.

NOTE: Frequent transactions should not be encour-aged because (1) they are costly; (2) the importance ofthe stock market as a source of funds for long-term in-vestment should be stressed; and (3) the mechanicsof handling multiple stock transfers each day could be-come extremely time-consuming to the detriment ofthe regular class instructions. However, the studentsshould have an opportunity to trade when they con-sider changes in their market portfolios advisable.

g. Whether or not the students are asked to takeinto account in their fictitious transactions the in-

come taxes they would have to pay in real life ifthey became successful investors, they should atleast be told about them. If their investments were"for real," they would have to report their incomeat the end of the year and pay a tax (roughly 25%at current rates, depending on their total income)on any income—over costs—received from the saleof stock held less than six months from the date ofpurchase. (If stock is held six months or longer, anyincrease in its market price is now considered"capital gains" and the tax of about 25% is figuredon only 50% of the gain from its sale.)

h. The students might prepare a graph for eachstock purchased, charting the fluctuations in itsprice per share at the close of each day (or week),depending on the stock, the number of weeks avail-able and the time allowed each day for this project.

i. At the end of the course, or term, the studentsshould "sell" or estimate the then-current marketvalue of their holdings—as of the closing price pershare on the class' final day of trading—and com-pare it with their original "nest egg." Even if themarket prices of the stocks "purchased" have risenit is not likely that many students will have reapedtremendous paper fortunes during the few weeksof the course. Brokers' commissions and taxes willprobably have taken most of any gains, especiallyif the students have bought and sold with any fre-quency. However, each student should prepare a"Statement" of the market value of the holdings inhis portfolio, as of the close of business on the lasttrading day of the term. (See sample, p. 57.) Theexercise should be enlightening and educational,however, irrespective of paper profits or losses.

NOTE: It might be well to give some recognition tothe students who follow current events, business newsand corporation activities closely and, as a result, windup with the best returns on their original $10,000 to$100,000 "investment." Suitable awards would be atyped certificate presented with fanfare, inexpensivebull or bear cufflinks, pins, tie tacks, dollar-signmoney clips or perhaps copies of a suitable book.

6. Discuss the theoretical distinction between(a) the goals, ends or values people are aiming atand (b) means, resources or "tools," i.e., anythingthey consider useful in helping them attain theirvarious goals, ends and values. After defining"tools" (see GLOSSARY definition) in the broadestsense of the word, ask the students to name some"tools" they use each day and the purpose eachfulfills. Write the names of various tools in onecolumn on paper or the blackboard and in anothercolumn the purpose for which each tool is used.


ACCOUNT NO

NAMEADDRESS

SHEET NO

TERMS

RATING

CREDIT LIMIT

DATE

Aug.

Sept-

Nov.

JMov-

Dec.

9

2k,

25

\

8

2k

313

14

ITEMS FOLIO V

Opening BalanceAmerican H&brs — 1066 shares @4%

Brokers Qomwssioo -- 15%

Am. H*torsD;yi<knd'- 10*per $tere

Du?ont —lOOsha/es QI09&

Broker's Connnyss ion — / • $7$£^5ti^r^7r^6ddfi"300iShdrcs @74$&

QroHsr's Commission—A 5%

thrdMofor —IOOO L5/?ar<?sC5>L33

Sroferis Oomsn;&3/on—/.5Vi>l)ufont ste>d<cii\tidznd~^hl5 per share.

DEBITS

^31565

/ O K / 2

557

33ooo

4-95

06

5019

5091

00

00

CREDITS

100 00

113 OO

BALANCE

looooo

156259-55S9

95659

8ffff6

47497^.L 0 30TO T07

I39S1

J31H

13$59

oooo

<*7

37

?7

(A

/8

37

SI

37

37

ACCOUNT NO

NAME

ADDRESS

SHEET NO

TERMS

RATINGCREDIT LIMIT

Jan. ^.30

March /

10

ITEMS FOLIO V

lordMptordeclares divid&TcLtc

FordMpt&rdtV/ctznd -EOt-pvshafz

C&mrmsion -/><5%

Qorr)<r\ission ~ /•£%

Ford -I600<so/d®37*

DEBITS

2 ISO

5S375

CREDITS

800'°5500 M

q&ooo00

37250 °°

BALANCE

/355? 37

3Q5I5IZ

7SZ2S IS-

II3075IZ.I/&5/637


The students should think of such tools as auto-mobiles used for transportation, hammers used todrive nails and build houses, coats worn to keepwarm, stoves used to cook on, books, coffee pots,pencils, etc., each of which serves a specific pur-pose. Highways used to travel on are also "tools"in this sense. So is pocket money which is availableto use in case one wants to buy something. So tooare recipes, facts or knowledge which help peopleaccomplish what they want to do more easily,quickly or better. The purpose of this activity is topoint out that a "tool" is anything which has a useto an acting individual. It is its usefulness in theeyes of individuals that makes it a "tool." Some-thing no person can conceive of using for any pur-pose would not be a "tool" by this definition. Theidea of a "tool" has meaning only from the point ofview of individuals with personal (subjective) val-ues and ideas, who reason, make choices, act pur-posively and use resources and means to accom-plish particular goals.

7. To dramatize the advantages furnished bysavings over many centuries, ask the students toname the places they and other members of theirfamilies have traveled in recent months—for funover weekends and holidays, for business, to andfrom stores, schools, the homes of friends, etc.Write these locations on the blackboard, or haveeach student list them on paper. Calculate the dis-tances traveled on each occasion, and the time con-sumed en route. Then ask the students to do alittle research. Have them talk with older friendsand relatives. How would (a) their parents and (b)their grandparents have gone to the same placeswhen they were teenagers? What kinds of vehicleswould their parents have used, 20 to 25 yearsearlier? their grandparents, 40 to 50 years ago?How long would the trips have taken them? In ad-dition to the reminiscences of persons who re-member, other sources of information about travelin the fairly recent past might be consulted—oldtravel guides and magazines of several decadesago. Books and articles about the history of ships,trains, automobiles, trucks, planes, etc., would behelpful also, as weD as biographies of people whowere living and traveling then.

8. Going back a little farther in history, the stu-dents might look up Marco Polo (1254-1324).Compare his prolonged travels to China with therecent journeys of Presidents and Secretaries ofState. Discuss the savings needed to produce jetplanes, airports, communications systems (radio,TV, telephone, relay satellites, photographic

equipment, typewriters, electronic tapes, radar,and so on)—all of which were lacking when MarcoPolo lived but which help make a modern travel-er's journey quick and comfortable.

9. What tools now help to make travel easierand quicker than it used to be? Perhaps a bulletinboard exhibit could be planned around the themeof transportation—to illustrate how more savingsmade possible better tools enabling us to travelfarther and faster than our ancestors could. Thebulletin board should include not only pictures ofold and new automobiles, planes, highways, air-ports, etc., but also pictures to show how savingswere used to produce modern vehicles—factories,machines, assembly lines, electronic computers,vehicles used for transporting parts and raw mate-rials and also the mines, plantations, rivers, etc.,from which the raw materials themselves weretaken.

10. Each of the readings recommended for thisUnit might be assigned to be read, summarizedand discussed. Ask the students to list the varioustools mentioned. Do the readings offer any explan-ation as to why or how savers and inventors de-veloped these tools? How is each used? How doeseach tool help to improve conditions for the peopleover what they were before? Does it also contrib-ute to increasing future production?

EXPLANATION OF A DAILY REPORTOF

NEW YORK STOCK EXCHANGETRANSACTIONS

Reprinted opposite is a small section from theDaily Report of the NYSE transactions for Decem-ber 4, 1974, as it appeared in The New York Timesthe following day. Every company listed on thatExchange, whose stock was traded in the course ofthat day, was included on the Daily Report to-gether with miscellaneous additional informationabout each firm's stock and that day's transactions.Prices are reported in dollars and eighths of dol-lars. The various data presented are arranged incolumns, reading from left to right, as follows:

Column1 &2—The highest (and lowest) prices at which a

share of that company's stock had beentraded so far during 1974

3 —The name of the company, followed imme-diately by the annual dividend paid per


THE NEW YORK TIMES, THURSDAY, DECEMBER 5, 1974

New York Stock Exchange Transactions1974 Stocks and Div. Sales Not

i<3h Low In Dollars P E 100s High Low Last Chg

A-B-C-D6 I 46 1 - 414 *

5^-813'45 ! 4

I I J 4117,B3161 '2

9 'a

5814'g23/s

241529 "„24 SB1P/817-Vit41

9 V B

32 ?'•7 Vs

23' 212' a3 2 ' 421*4

9 •••8

54 U22+817 V:25^8

10U7^-4

17 3«5P/43552 V%

129125

22408 9 ' 416' U

393

29'?23'415232519J 4

U2/"8• J ' , 4

WEDNESDAY. DECEMBER 4, 1974

Day's /——Year to Date — - >Sales Tuesday vear Ago 1974 1973

!?.580,000 13,620.000 19,180.000 3.739,939,192 3,705,589,587

High 1.0«

3O'-a Abbt Lb 1.3228-'-i ACF In 2.608'< AcmeClev 11*8 AdmDg .04e7'3 AdmE 1?0e1;s AdMill .15p3'/a Addres .30P6'/2 Advlnv .30e

15'» AetnaLf 1.08251 '7 AetnaLf pf 24J4 Aguirre Co55/s Ahmans .20I'-'j Aileen Inc

35-8 AirPrd .20b10+e Aircolnc .90

1' s AJ Industris117

NEWYORKSTOCK EXCHANGECOMPOSITE INDEX

HIGH

CLOSING

LOW

Stocks and Div. -..dies NetDollar " [ !00s High Low Last '. tig

Akzona 1.207*8 Ala Gas 1.185-'-B Alaska Intrs

137B Albanyln .604',4 Al&ertoC .36

10 Albertsn .6019M> AlcanAI 1.406'4 AlcoStd .48

12"e AlconLb .202 Alexdrs .10e4 AlisnM 2.64e6Vi AllegCp .45e

21'.4 AllgLud 1.6011+4 AllgPw 1.5241,8 AllenGrp .40

23 AlldCh 1.8010' e AlldMnt .54U7;a AlldProd 116V8 AlldStr 1.50

15B Add SupmktbH AllisChal .263'. 2 AllrtAut .566J4 Alpha PI .72

28-Vs Alcoa 1.3421V; AmalSug 2a32Va Amax 1.7580 Amax p«5.25. 6 AMBAC .50

2^« Amcord .24

14 Amerce 1.2014i% A Hess .30b41 A Hes pf3.5O5'.4 AAirF i l t .445^8 Am Airl in3+8 A Baker .20

2734 A Brnds 2.56!8+8 12V? AmBdcst .9*8 4',2 AmBldM .32

22Vi Am Can 2.2018 A Can pf 1.752 V4 ACenM .25p

12 A Chain 1.2017'B A Cyan 1.506'2 AmDisti l .50

15 A DisTel .522Vs AmDualVt9+4 ADul pf.84a

AmEIPw 23*8 AFamilv .24

AmFin .2018"? AGIBd I

4 VB h d I- a' rFcoieCB .SOFordM 3.20ForMcK &8FMK. pf1.80FtDea 1.24aFtHowP .40FosterWhl 1Foxboro .60FrnklnM .40FreepM 1.60Fruehf 1.80FuQua IndGabielnd ItGAC CorpGAF Cp .52GAF pf 1 20

18"3 GamSk 1 40GamS of 1.75

19' 1 tannet t .44GardDen .76

7'2 Garfmkl .961J'2 Garlock .8881* Gas Svc 1.12

Gateway in2Js GCA Corp5V« Gemini Cap

10 Geminiin la7 GA In 1.29h

27^8 GnAOil .80b22'4 GATran 1.8033 GATn pf2.5O

GenBanc .807 GnCable .64

IOV2 GenCig 1.206 G Cinma .44

Gen Develpt13' 2 Gen Dvnam30 GenEI 1.6016 GnFood 1.40

•* i1 4024 28

6. . . 7913 114

5 3213 14

10>819'4131?17'/216'-a27'/4

121 13+a182 25'8

50 16'251 3 's

JO -i10 81913-816''8

26'41325 >816 8• 3 ' 2

30' 2 +10'4...19 . . .U"c...17 -.-n-16 —26^8-

I f J825" « +1 6 ' s . . .3V2—

3' sV eJVy

12'822

20-4

7 7 814!88'v1 } '87-iS 4

1 1 ' J7-4

3828 '438V 2

8 ' 4

1 1 1 47'?

17'835^418'7

I'.'i1

2 ' 8 — ' -1 - - ' 8

7' a 7 ' a - -\12'2 1 •••*

192018' '7'

13V8'<1 *•

2'51

11 '

1 J 3.422 r JJ

20Vj'--"'s

, 7i«— ^ 8

13' 8 - •«8' .4— • t

; 1 j 8— 1 «

2 ' ?t y s - '41 1 V - j + ' ,

T OJ O J O . . . . . .

27' 7 28',4+ i»38V2 38' 7- I?8 8'. 4+ '17'-'2 7 ' , - ' . ,

1 13/8 1 1 + 8 - '.87*8 7+8

161

35'8 16J/4— '48 35^8+ ' .1 } 7 'i A. „ : j.,

Most Active StocksWednesday, December 4,1974

Company Volume Last Net Chng.

Fairmont 297,100 6»/2 -f «4

Westgh El . . . . . .225,200 8 ^Southern Co . . . . 134,200 9»/4 — ',4Texaco Inc 133,800 20% — 14

Am Tel & T e l . . . 127.600 417gSierra Pac P . .123,600 8 — «4

Bath Ind 116,600 4'/4 - V2

Gen M o t o r s . . . . . 114,500 29»/2 — V8

Homestkc 101,400 43% +2%Alcoa 99,800 27«/8 —2%4

CNAFinl . . 96,600 3 + %Polaroid 89,600 20%East Kodak 86,800 62|,g + KKresgeSS 84,000 TWH : : : 1 7Am Home 74,300 3 4 ^ + 1

^ Sales in ful l .Unless otherwise noted, rates of dividends in the fore-

going table are annual disbursements based on the lastquarterly or semi-annual declaration. Special or extradividends or payments not designated as regular are,identified inthe following footnotes.

a -Also extra or extras b -Annual rate plus stockdividend. c--Ltquidating dividend, e- Declared or paid inpreceding 12 months, h - Declared or paid after stockor paid this year, accumulative issue with dividends marrears, n New issue, p. Paid thi? vo«u. dividendorritted, d^tfc'-^d or no action taken ,u l ^ t dividendmeeting, r Deuarfd or paid in preceding 12 months,estimated cash value on ex-dividend or ex-distributiondate.

cid—Called x-Ex dividend, v - Ex dividend and sales infull, xdis Ex distribution, xr Ex rights, xw Withoutwarrants, ww With warrants, wd When distributed,wi When issued, nd Nextdaydeliverv

vi In bankrupts y or receiversnip or being reorganizedunder the Bankruptcy Act, or securities assu-ned t)v suchcompanies, tn -Foreign issue subiect to interestequalization tax.

Where A soht or stock dividend amounting to i)<: ;><M i>' i tor more has been pa^J the war ' mgh-iow tange end

v idena are shown for the new stot-K GHI >.

Copyright 1974 by The New York Times Company. Reprinted by permissi<


share of stock (see footnotes at bottom ofright hand column for explanation of smallletters)

4 —The ratio of the Price (P) of a share of thecompany's stock to its Earnings (E) re-ported during the previous 12 months

NOTE: P/E ratios are recalculated daily by dividingthe firm's earnings into that day's closing price pershare of stock. A low P/E ratio indicates a higher po-tential yield to the investor who purchases stock atthat day's closing price than does a high P/E ratio.For instance, a P/E ratio of 10 means the company'sreported earnings during the previous 12 months wereabout l/10th of that day's closing price for a share ofstock, whereas a P/E ratio of 25 means the firmearned only about l/25th of its stock's closing pricethat day. P/E ratios fluctuate, therefore, with thefirm's earnings and with the price of its stock. Notealso that a firm's earnings and its dividends practicallynever coincide. Many companies prefer to reinvest asubstantial portion of their earnings in their opera-tions so they usually pay out in dividends only a frac-tion of their earnings. However, a company's div-idends may temporarily exceed its earnings; if a firmincurs losses, it may choose to continue paying div-idends for a time as usual—out of savings—to maintaina consistent record of dividend payments and in antic-ipation of economic recovery and a return before longto earning profits.

5 —Total sales that day, in round lots of 100shares, of that company's stock

6 &7—The highest (and lowest) price at which around lot of 100 shares of that firm's stockwas traded in the course of the day's trans-actions

8 —The price at which the last round lot of 100shares of that company's stock was tradedon that particular day

9 —The difference (i.e., net change) betweenthe closing price of that company's stockthat day and its closing price the day be-fore.

Let's consider a particular firm's stock:Eastman Kodak—Wednesday, December 4, 1974:This stock was one of the most actively tradedstocks this day on the Exchange. See the list of"Most Active Stocks" at the right. The first twocolumns report a substantial range between thehighest price, 117*2 ($117.50) and the lowest price,6OJ2 ($60.50) at which a share of the company'sstock had been traded during the calendar year1974, prior to December 4. Column 3 gives thename of the firm, Eastman Kodak, and its annualstock dividend per share—$1.56 + unspecified ex-tras (indicated by the reference to footnote "a")

which could have been an additional money pay-ment, stock dividend, rights to purchase stock at aspecial price, etc. Column 4 shows the P/E ratio tobe 17, revealing the company's reported earningsfor the previous 12 months to have been aboutl/17th of the day's closing price. Column 5 reportsa total of 868 round lots of 100 shares traded dur-ing the day, i.e., 86,800 shares of Eastman Kodakstock changed hands on December 4, 1974. Theprices paid for Eastman Kodak stock on December4 (columns 6, 7 and 8) varied between a high of63H ($63.50) and a low of 618 ($61.50), and itclosed at 62)4 ($62,125), up % of a dollar, or 37.5<P(column 9) from the closing price of the day before.Now that we know Eastman Kodak's closing price($62,125) and the P/E ratio, we can calculate itsreported earnings for the previous 12 months asbeing in the vicinity of $3.68 per share of stock.

Using this explanation as a guide, let the stu-dents explain another listing on this excerpt, orfrom another recent Daily Report of the NYSE.Take a later listing of Eastman Kodak, for instance,General Motors, or any other corporation report-ing sales of stock on the Exchange. Reproduce oneof several such listings on the blackboard and askthe students:

1. Is this company's stock now priced high or lowin comparison with its price over the last 12months or so?

2. How many round lots and/or shares of stockwere traded that day?

3. At what prices?4. What was the closing price?5. Using the P/E ratio and the closing price, esti-

mate the firm's approximate earnings duringthe previous 12 months.

The chart labelled "Daily Sales in Millions"shows the total number of shares of stock tradedeach day on the NYSE, and needs no further ex-planation.

Changes in stock prices are also studied assidu-ously by many market investors in the attempt todiscover trends in business conditions. The chartentitled "New York Stock Exchange CompositeIndex" is made by totalling, averaging and thencharting the daily averages of high, low and clos-ing prices of all stocks listed on the "Big Board."Each vertical line extends from a day's average lowto that day's average high; the short cross-bar rep-resents that day's average closing. The "12-Month

7. SAVINGS. TOOLS AND PRODUCTION 61

Trend, Weekly Close" chart is similarly preparedfrom the closing prices of all NYSE stocks duringthe previous 12 months at the conclusion of eachweek's trading on Friday—or earlier if for any rea-son the market was closed on Friday.

NOTE: Many investors on the stock market considerthe total number of shares sold and average pricessignificant for anticipating future trends in businessconditions. Few sales and low prices are often thoughtto be signs of economic depression while many salesand high prices are considered indicative of improvedbusiness conditions. However, both high or low pricesand slow or frantic activity on the stock market maybe due to other factors. As we learned in Unit 6, pricesare exchange ratios, reflecting the relative eagernessof owners and would-be purchasers to trade specificunits of particular goods or services at particular timesand places. Thus a high (low) price for a share of afirm's stock may reflect (a) the anticipation of futureprofits (losses) for that company and/or (b) declining(rising) confidence in the future of the dollar. Thus, ifmany persons are eager to exchange dollars for tang-ible goods—such as shares of stock in various corpora-tions, which they expect will retain their market val-ues better than dollars will—the prices of shares ofstock on the market will tend to go up. Generally risingprices on the stock market, therefore, may reflect awidespread anticipation of future inflation (increase inthe quantity of money) and need not necessarily meanthat traders expect economic conditions to improve.Moreover, it is important to remember that such sta-tistics are necessarily always historical; they are basedon data derived from past events. Thus the signif-icance of stock market statistics and charts rests onthe way they are interpreted.

For additional comments on stock market activitiesand reporting, see Unit 11, pp. 127-130.

EXPLANATORY TEXT

The simple message of this Unit is that peoplecan eat more, enjoy higher standards of living andhave more leisure and cultural advantages if moreis produced and available to consume. The easiestand quickest way to produce more is to use moreand better tools. And the only way to have moreand better tools is to save, i.e., to consume lessthan the total amount of things produced and de-vote these savings to developing tools.

1. How do savings start? If people are allowedto own private property and are not preventedfrom using it as they wish, some of them quite nat-urally and inevitably, will try to accumulate a littlemore food, clothing and shelter than they need atany one moment. Life is uncertain, especially forprimitive peoples who have only their own hands,

wits and human energy to use in providing forthemselves and their families. Sooner or later, ifthey are able, they will start accumulating some re-serves for "rainy days." Prehistoric men who livedin caves must have known from bitter experiencethat there were times when they would be cold,hungry, sick and helpless. If they could manage in"good" times to consume somewhat less than theyproduced, then they would have some supplies leftto tide them over bad times. Aesop's story of "TheAnt and the Grasshopper" illustrates this point:

On a cold frosty day an Ant was dragging out someof the corn which he had laid up in summer time, todry it. A Grasshopper, half-perished with hunger, be-sought the Ant to give him a morsel of it to preservehis life. "What were you doing," said the Ant, "thislast summer?" "Oh," said the Grasshopper, "I was notidle. I kept singing all the summer long." Said the Ant,laughing and shutting up his granary, "Since youcould sing all summer, you may dance all winter."

Aesop's moral to this little tale was: "Winter findsout what summer lays by." Following Aesop'sfable, we may contrast the grasshopper's "timepreference" with the ant's "time preference." Thegrasshopper prefers to consume and enjoy life to-day; the ant prefers to consume today only a partof what it produces and set aside something for thecoming winter. There is a little grasshopper ineach of us; we all consume some part of what weproduce today—as a matter of fact we must con-sume something today in order to survive. Butmost of us also have some of the ant's "time pref-erence"; we set aside a part of what we have fortomorrow, next week, next winter or next year. Itis the ant-like time preference in persons which in-duces them to try to prepare for the "rainy days"that are bound to come from time to time. Thesavings of "ants" are "rainy day savings." Rainyday savings consist of stocks of consumers' goods—food, clothing and shelter—that individuals pro-duce, do not consume immediately, but set asideto eat, use and wear later.

The first step in accumulating rainy-day savingsmust always be the acquisition and/or productionof various consumers' goods; the next step is toexercise restraint so that some of these goods arenot consumed in the present but are set aside forfuture use. To start saving for "rainy days," menmust have more food, clothing and shelter thanthey absolutely need for basic day-to-day survival.Men living under primitive conditions may comeby such a "surplus" by hunting, fishing or foragingextra long, extra hard, or through an extra luckyfind.


2. What induces men to accumulate "rainy-day savings"? Change is a part of life in thisworld of ours. Change is one of the six basic apriori assumptions which make it possible, desir-able and necessary for men to act. The existenceof change means inevitably that things may getbetter—or worse! In any event, change creates un-certainty.

To survive change and uncertainty may be diffi-cult if one has no surplus stocks of consumers'goods to fall back on. Therefore, men reasoned,some reserves might be helpful to tide them overdifficult times. And they began to make consciousefforts to prepare for "rainy days." Thus, reasonand the drive to relieve "felt uneasinesses" andattain ends induce men to adopt the time prefer-ence of Aesop's ant. Rainy-day savings, therefore,are the outcome of conscious, rational and purpos-ive actions. Among rational, thinking humanbeings, the time preference which leads to restraintin consumption is strengthened by reason, logicand the expectation that saving some things to con-sume later will enable them to cope more success-fully with the uncertainties the future is likely tobring. The specific form "rainy day savings" maytake will depend on the ideas and personal (sub-jective) values of the individuals involved, as wellas on the raw materials, energy, knowledge andtime they have available—plus their anticipationsof the future.

As we learned in Unit 3 (p. 17) three conditionsare necessary for men to act: (1) some dissatisfac-tion with their present situations, (2) an idea aboutconditions which would represent an improve-ment, (3) the hope that action will make thingsbetter. Applying this analysis to "rainy day sav-ings," we can easily recognize that men will tryharder to produce more and to refrain from con-suming a part of their production in the presentonly if they (1) are dissatisfied, perhaps apprehen-sive in some respects about the future, (2) believethat having a reserve of consumers' goods will helpthem cope with future uncertainties, (3) have somehope that their actions will benefit them and theirloved ones. Why put forth greater effort if there isno chance of personal benefit? Why bother towork, produce and to save if they expect the wealththey accumulate to be confiscated or taken fromthem by force? Refer here to the moral of W. A.Paton's "The Tale of the Little Red Hen" (ReadingNo. 70).

The time preference Aesop attributed to antsrests, among acting men, on reason and logic—they

consider it in their personal interest to try to savesomething for the future. Those most likely tomake the effort to save for "rainy days" are thosewho have confidence that they and their lovedones will be able to reap the potential advantagesof any savings by being better able, as a result, tocope with "rainy days" when they arrive. For theant-like time preference to exist and have a signif-icant impact on the actions of men, their rights toown private property, hold, accumulate and dis-pose of it as they wish (Unit 4) must be recognizedand safeguarded. On the other hand, the grasshop-per-like time preference is bound to prevail amongmen who have little hope of benefiting from put-ting forth greater effort to produce and from dem-onstrating greater restraint in consumption. HadAesop's grasshopper succeeded in forcing his de-mands on the ant, or had the other barnyard crea-tures ganged up on the Little Red Hen and takenher production by force, neither ant nor Little RedHen would have been likely to work so hard an-other time. They would not have postponed con-sumption in the expectation of reaping later bene-fits, but would have consumed their entire produc-tion "today." People among whom a grasshopper-like time preference prevails, therefore, inevitablyconsume almost immediately practically every-thing they produce and find themselves poorly pro-vided for later when "rainy days," or "bad times"come.

3. How were tools first developed? Pure man-ual labor is hard, tiring and not very productive.Thus men quite logically look around for ways tomake their efforts less tiring and more effective.Sooner or later, even among primitive peoples,someone will have an idea for using some objectto make hunting, fishing or foraging a bit easierand more efficient. Someone might try using alarge stick as a club, a log as a float, a stone as amissile. Once a person recognizes (a) an object(b) to be useful (c) for a purpose, he has a "tool."

Archeological artifacts reveal evidence of thethings people produced in ancient times. Anthro-pological studies describe how men lived in prim-itive societies. Both archeologists and anthropol-ogists report evidence that, very early in the historyof the world and at widely scattered locations, in-dividuals developed tools to help them better satis-fy their basic needs. Many museums display someof these simple tools. Further evidence of the pro-duction and use of tools by primitive peoples isfurnished by modern anthropologists and sociol-ogists who study groups of people living today


completely removed from civilization—such as thecave-dwelling Tasaday Tribe in the Philippinesand various isolated Indian tribes in South Amer-ican jungles. Living in warm, lush climates, thesepeoples need very little clothing or protection fromcold. They can forage for food in luxuriant forests.Yet they still accumulate some meager reserves ofconsumers' goods, some "rainy day savings," sothey may devote some time and energy to otherthan their immediate necessities and transform theraw materials at hand into a few simple tools.

The starting point of any tool is (1) an idea. Butthe development of tools also requires the earlieraccumulation of (2) "rainy day savings" so thatsome persons may spend their (3) time and (4) en-ergy to develop the idea into tools. Tools savetime and effort. But their main advantage is thatthey enable the user to increase production. Asmore is produced more will be available to con-sume. Also as more is produced, it becomes easierto set aside still more reserves for later "rainydays."

4. What makes it possible to develop the com-plex, sophisticated and efficient tools used todayin mines, factories, on the highways and whereverproduction is carried on? Ideas, PLUS plain or"rainy day savings," PLUS materials, PLUS time,PLUS energy enable people to produce tools. Oncethey have a few tools, they can produce moreconsumers' goods more easily. If they produce in-creased reserves of consumers' goods, largeenough not only to tide them over "rainy days" butalso to last while they devote more time and en-ergy to implementing new ideas for developing stillbetter tools, their next logical step is to start ac-cumulating reserves of tools. More tools and bettertools enable them to produce still more in the fu-ture, more easily and more efficiently. If peoplethen start saving purposively to produce tools,their savings are no longer simply "rainy day" orplain savings of consumers' goods. Purposive sav-ing for the production of tools, that is for the pro-duction of producers' goods or factors of produc-tion, is "capitalist saving."

Capitalist savings are undertaken to increase thestocks of consumers' goods—but not directly. Cap-italist savings increase the quantities of consum-ers' goods indirectly—by first increasing the avail-able supplies of producers' goods or tools withwhich still more consumers' goods may be pro-duced in the future.

The production of consumers' goods with theaid of tools, machinery and other factors of pro-

duction, made possible through capitalist savings,is sometimes called a "round-about method of pro-duction." But this term is slightly misleading. Thereason tools and machines are used in productionis because they actually help make productionmore effective, more efficient, more fruitful. Thusproduction with the use of tools and machines isreally the most direct method of production avail-able. As a matter of fact, without the aid ofcountless, specialized tools—in mines, on farms, infactories and so on—it would be impossible to pro-duce the tremendous quantities of consumers'goods now needed to support the world's popula-tion. Thus, no matter how complex, sophisticatedand time-consuming it may be, production withtools that proves economical, not wasteful (i.e., itproduces profits for the enterprise, not losses) isnot a "round-about" method of production at all;it is really the most direct and most efficient pro-duction method known.

When producers have more and better tools towork with, they can expand production. The morethey produce, the more people can consume whilestill setting something aside for the future. Some oftheir increased savings will be in the form of great-er stocks of consumers' goods, reserves for "rainydays." But in a capitalistic society, some of thepeople who refrain from consuming a part of theirproduction will produce and accumulate not onlyplain or "rainy day" savings to consume later butalso "capitalist savings," i.e., tools and machinesto be used for the further development and pro-duction of tools and machines. These "capitalistsavings" may then be employed by producers whospecialize in making still more and better tools. To-day's very complex and sophisticated machinesand production methods are merely the outcome ofthis simple sequence. As production increasedover the centuries step-by-step improvements weremade in tools. With more and better tools avail-able, it became possible to produce even more,permitting the development of still more and bettertools. And so the process continued down to mod-ern times.

5. What determines how much will be con-sumed and how much saved? People act on thebasis of their ideas. Their decisions to spend or tosave are also determined by their ideas and val-ues. Most people would probably prefer to spendthan to save, to enjoy life like the grasshopperwithout having to think about the future, ratherthan to plod along steadily in the manner of theant, refraining from consuming all they produce in


order to save something for tomorrow. However,few people if any are entirely "ant" or "grasshop-per" in their time preferences. Most people con-sume something—even ants must eat to survive—and most set some things aside, refrain from con-suming some things immediately, in order to havethem available for later use. The ratio betweenwhat persons consume and what they save de-pends on their individual time preferences.

Different people have different time preferencesand the same person has different time preferencesat different times. Those of us with a grasshopper-like time preference tend to value present goodsabove future goods; we will pay a premium toconsume today; we are apt to buy on credit be-cause we want a thing now, agreeing to pay laterwith interest. On the other hand, the "ants" amongus give more thought to tomorrow and place a rel-atively higher value on the feeling of security thatcomes with being prepared for "rainy days." Anant-like time preference plus respect for privateproperty has led many people to save with the re-sult that tremendous amounts of capitalist savingswere accumulated, especially during the last twocenturies. These capitalist savings provided theopportunity and the means for inventors to devel-op their ideas so that specialized and efficienttools, machinery, equipment and plants could beconstructed and ever larger and larger quantitiesof goods and services could be produced for peo-ple to consume, use and enjoy.

6. How are the savings of separate individualsassembled and combined to make large invest-ments and tremendous enterprises possible? If aman has an idea about how to produce some goodor service that calls for bigger and more complextools and equipment than he can make himself orafford to purchase, he will try to find others tocooperate with him. There are several ways theymay contribute. They may lend or rent him thenecessary materials and equipment. They may lendhim funds so he can buy or rent the needed factorsof production from someone else. They may be-come partners in the business, furnish a portion ofthe funds or other resources needed, with the un-derstanding that they will share, according to apreviously agreed upon arrangement, in any profitor loss the partnership makes. They may also con-tribute by furnishing funds to set up a company,with officers and employees to engage in a busi-ness as a "corporation."

NOTE: The legal technicalities of corporations are notof particular significance for this course. However, if

questions arise it should be helpful to know somethingabout them. A corporation is a specific legally definedform of enterprise that makes it possible to embarkon a project and to continue operating as an entityeven if one or all of the persons putting up the originalfunds should die or sell their interest in die enterpriseto someone else. The specific rules and regulationscontrolling the operations of corporations are deter-mined by law and so have varied from time to timeand from place to place—since the earliest corpora-tions were set up in Ancient Rome.

The major reason for establishing corporations isto make it possible to undertake projects that re-quire large sums of money and so need to attractfunds from many individual savers and investors.Any individual who buys a share in a corporationacquires some of its stock and becomes a "share-holder," i.e., a part owner in the business. Underour laws today, an individual who buys a "share"of stock in a corporation receives a "Certificate ofOwnership," giving his name, the date of hisacquisition and the extent of his interest in thatcompany. As a part owner of the company he re-ceives a share of any profit or loss the corporationmakes. He may sell or transfer his interest in thefirm to another person. In that case the rights andobligations, to the extent of the interest indicatedon the "Certificate," go with it.

The various stock exchanges in the world wereestablished as meeting places, i.e., markets, wheresavers seeking investment opportunities andproducers looking for funds could come togetherfor the purpose of trading with one another. Thefamous New York Stock Exchange was started in1792 when a few businessmen began gatheringregularly under a certain cottonwood tree on WallStreet to buy and sell securities. The spot came tobe recognized as a "market" where companystocks could be traded. From that small beginninggrew the mighty New York Stock Exchange(NYSE) which now (March 1975) lists shares ofstock in close to 1750 different corporations.

A brief discussion of stock markets will help pre-pare for Unit 8, "The Entrepreneur and the Profitand Loss System" and Unit 11, "Competition, 'BigBusiness' and Monopoly." The important thing toemphasize in this Unit is that the stock market isa means for assembling savings, which permit thedevelopment of more and better tools which, inturn, make it possible to increase production fur-ther. Here are the most significant points:

a. The stock market is a natural and logical out-come of the cooperation of savers, each actingpurposively to attain various personal, sub-

7. SAVINGS. TOOLS AND PRODUCTION 65

jective, goals. They found they could pool theirsavings with the savings of many other individ-uals and so invest larger sums and engage inbigger enterprises than could any single saveralone or even in combination with several as-sociates.

b. A stock market, like any market (Unit 5) is ameeting place where owners of something tosell may expect to encounter potential buyers.

c. The commodities traded on a stock market areshares, portions or fragments of specific busi-ness firms. A person who buys a share of a com-pany's stock has actually bought a share in itsownership. Thus, every stockholder is a partowner of the company whose stock he owns,entitled to a proportionate share of the firm'sprofits (if any) and responsible for bearing asimilar share of any loss it may make.

d. Modern stock markets transact tremendousvolumes of business daily, arranging for thetransfer of millions of shares of stock in manythousands of companies. Enterprises that han-dle so many transactions every day try to takeadvantage of any tools available to make theirwork easier. As a result the various stock ex-changes in the country now use complicatedelectric and electronic machines and computersto record sales and purchases and to calculateincome, outgo, commissions, fees, etc. Thecomplexity of such "automated" equipmentmay make a stock market's operations appearcomplicated, but it doesn't alter its basic char-acter as a meeting place of individuals whoown something and individuals who are think-ing of buying. Their electronic computers aremerely tools, complicated ones to be sure,which enable them to handle many transac-tions promptly.

e. Practically every stock exchange today is sub-ject to many governmental controls and regu-lations. The Securities and Exchange Commis-sion, for instance, is concerned almost exclu-sively with stock market transactions. This in-tervention of government may hamper themaking of stock offers, sales and purchases.However, it does not affect the basic purposeof the stock market. The important thing toemphasize is that a stock market is a special-ized market, where buyers and sellers maymeet; it permits the savings of many personsto be assembled and invested, so that even avery small saver may become a part owner inthe largest of corporations.

Stock exchanges develop as a logical attempt tofacilitate the performance of businesses which be-come very large, with millions of dollars in assets.The total investment involved in the operations ofa single large-scale enterprise may become sogreat that no one man, or even group of men, hasaccess to sufficient funds to finance it. Its assetsmay then be divided into small portions, each thenbeing offered as a "share of stock" to anyone in-terested. Our economy is so large and there are somany companies with an interest in finding buy-ers for "shares" in their firms, that these sharesare marketed by organizations that do nothing butarrange for the trading of such shares. The NewYork Stock Exchange, often spoken of as "the bigboard" is the world's largest. The other majorstock exchanges in this country and abroad are:

AmericanMidwestPacific CoastPhil.-Balt.-Wash.BostonNationalDetroitTorontoMontrealBuenos Aires

TokyoSydneyJohannesburgLondonParisBrusselsZurichAmsterdamFrankfurtMilan

Some companies, usually smaller ones that donot satisfy the requirements imposed by the var-ious stock exchanges for being listed on their"board," may also offer stock to the public. Suchsales are listed and traded by brokers over thecounter.

7. Before leaving this Unit, it might be well tocite specific examples of the way capitalist savingsare used to manufacture complex tools and equip-ment and employed in several branches of pro-duction. The essay, "I, Pencil" might be a goodplace to start. Call attention to the many toolsmentioned there which are used to make an ordi-nary pencil—coal and iron mines, steel saws, axesand motors, logging camps, lumber mills, facto-ries, steamships, trucks, and so on almost ad in-finitum—a\\ of which require the previous accumu-lation of both "rainy day savings" and "capitalistsavings" so that the tools, machines and factoriesneeded to produce these tools, machines and fac-tories could first be manufactured. Tracing a pen-cil back to its source—geographically and histor-ically—would be similar to trying to decide wheth-

6 6 FREE MARKET ECONOMICS: A SYLLABUS

er the hen or the egg came first, except for thefact that the logic of economic theory permits usto trace the creation of a pencil and of all its com-ponent parts to their sources—the ideas of actingindividuals. An idea sparked every one of the manysteps involved. Then other ideas motivated otherpersons to refrain from consuming all they pro-duced, accumulate savings and apply a portionto developing tools so that in time the productionof pencils became a reality.

Another industry in which capitalist savings andtools have led to dramatic and easily demon-strated improvements is transportation. Until fair-ly recent times, travel was so difficult and tiringthat few people ventured away from their nativevillages. Only the young and hardy traveled veryfar afield. It was a long and gruelling journey forthe Crusaders to reach Palestine (c.600-1300 A.D.)across Europe on foot or horseback, or sailing theMediterranean, and countless thousands died enroute. It took tremendous courage for Columbus toventure across the vast Atlantic for long weeksof time with only sails and the wind to rely on,no engine to drive his tiny ships along in the eventof storm or calm.

The Polish astronomer Copernicus (1473-1543)traveled several hundred miles to Italy as a youngman of 23, remaining there for five or six years tostudy without once returning home for a visit.Martin Luther (1483-1546) was quite a travelerfor his day. He visited many towns, ofttimes travel-ing on foot several hundred miles from the Univer-sity of Wittenberg where he taught and preached.

George Washington rode up and down the east-ern seaboard on horseback. The miles that couldbe covered then in one day's journey betweendawn and dusk, when the roads were poorly laidout, narrow and rutted or muddy, were very few ascompared with those one can now travel easily ina day. Thus Washington had to spend many nightson the road and slept in a great many differenthouses between Boston and his home in Virginia,a distance that jet planes can now cover in aboutan hour.

In the summer of 1776, with the question of thiscountry's independence hanging in the balance,Delegate Thomas McKean of Delaware sent amessenger by horseback (no telegraph, telephoneor radio then) to Dover, Delaware—about 70 milesaway—urging his colleague Caesar Rodney to cometo Philadelphia immediately for the vote on in-dependence. Delegate Rodney rode horsebackthrough a storm all that night, but he reached

Philadelphia in time to vote for immediate action.That same distance from Dover, Delaware, toPhiladelphia may now be covered easily by auto-mobile in about an hour, riding smoothly onbroad superhighways.

Before the development of trains, cars andplanes, travel by water was the smoothest, quick-est and easiest way to ship goods and people.Yet before the steam engine was adapted toboats, even water travel was often slow and un-certain. When the land west of the Alleghenies wasopened to settlers, the Ohio River became a majorhighway to the frontier. Merchants, settlers andother travelers sailed down the river at a leisurelypace on flatboats or barges. But returning thesecraft upstream was slow and wearisome. Withoutmotor power these vessels had to be rowed orpoled laboriously foot by foot. "A boat or cargo of10 to 40 tons, and a crew of 8 to 20 men did well toaverage 6 miles per day upstream." (Carlyle R.Buley. The Old Northwest. 2 vols. Bloomington:University of Indiana, 1950. Vol. I, p. 413.) Withthe advent of steamboats, ships were soon averag-ing the same number of miles upstream per hour asthey had formerly made in a day!

It was the increase in capitalist savings whichpermitted the improvement of tools—in this lastcase the introduction of the steamboat—and maderemarkable advances in transportation possible.And it is thanks also to the capitalist savings ofpast generations that we are able to travel soeasily today in comfortable automobiles andspeedy jet planes. Tremendous accumulations ofcapital are needed to back up every form of trans-portation we now enjoy. A single journey involvesa complicated array of capital set aside from ear-lier production in the form of mines, shipping fa-cilities, factories, universities, research laborator-ies, etc. And if orbital or rocket flights into spaceshould become routine, additional quantities ofcapitalist savings will have to be accumulated—out of the production of individuals, which they donot consume at the time but set aside to be usedlater to further production.


CAPITALIST SAVINGSCONSUMERS' GOODSCONSUMPTIONCORPORATIONFACTORS OF PRODUCTION


INTEREST, INTEREST RATEINVEST, INVESTMENTMARKETPRODUCERS' GOODSPRODUCTION"RAINY DAY" (OR PLAIN) SAVINGS"ROUND-ABOUT" METHODS OF PRODUCTIONSAVINGSAVINGSSTOCK EXCHANGETIME PREFERENCETOOL

RECOMMENDED READINGS

More advanced materials are indicated by an asterisk (*)

Articles

In the BASIC READER:19. "Letter to His Grandson," Fred I. Kent20. "Technological Status," John W. Campbell

21. "Where Karl Marx Went Wrong," Samuel B.Pettengill

22. "The Great Mistake of Karl Marx," Benjamin F.Fairless

23. "The Role of Savings," Brian Summers"Tools," Jasper E. Crane"The Liberation of Women," Bettina Bien Greaves"Industrialism: Friend or Foe?" V. Orval Watts"The Economic Role of Saving and Capital

24.25.26.

*27.Goods," Ludwig von Mises

76. "How to End Poverty," Dean Russell

Additional Titles:"Thrift: Prerequisite of Economic Progress,'Sennholz—in The Freeman, March 1964

Books

Hans F.

Bastiat, Frederic. Economic Harmonies (Van Nostrand,1964; FEE, 1968). Chapter 7, "Capital"

'Mises, Ludwig von. Human Action (Yale, 1949/1963;Regnery, 1966). Chapter XVIII, Sections 3, 4 and 5 oncapital goods

Smith, Adam. The Wealth of Nations (1776). Many edi-tions. Book II, Chapters I and III

8. THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM


1. To call attention to the inevitability of changein the world, have each student recall majorchanges affecting his or her personal life and fam-ily since the start of their respective careers inschool. In other words, ask each to list significantchanges since they were five or six years old.Remind them that the world holds over two billionpersons, each of whom is also always facing andtrying to cope with changes from time to time.Here are the types of events they will probablymention:

a. Changes affecting members of their family—births, marriages, deaths, etc.

b. Residential movesc. Parental changes in occupationd. Shifts in personal ideas, values, activities, in-

terests, friends, jobs, purchases, etc., due togrowing up, growing bigger and making dif-ferent personal contacts

e. Substantial acquisitions, losses, accidents,thefts, etc. of automobiles, furniture, appliancesor other belongings

f. Neighborhood changes—homes, stores, offices,other buildings or highways newly constructedor demolished

g. Changes affecting the student and his familydue to news events, world affairs, acts of na-ture (fire, flood, earthquake, etc.)

2. Have the students read at least the first fewpages of Percy L. Greaves, Jr.'s "Why Specula-tors?" (Reading No. 34). Then discuss the threecategories of purposive human actions—(a) gam-bling, (b) scientific and (c) speculative. Everyconscious action a person takes is of one of thesethree types. Have each student name at least oneaction he has taken of each type:

a. As a gambler—when he could know nothing inadvance of the results of the action exceptthat he had some chance to win or lose. It isgambling to play the lottery, bet on the spin of

a roulette wheel or on the toss of a coin.b. As a scientist—when he could know in advance

the results to expect from his action. A personacts as a scientist when he performs a mechan-ical act according to established procedures.He acts scientifically when he turns the key tostart his automobile engine, steps on the gas,releases the brake, sets it in motion and steersit in a specific direction. He acts scientificallywhen he bakes a cake according to a provenrecipe or moves a pencil across paper to make aline. In each case he knows in advance whatthe consequences of his action will be.

c. As a speculator—when he could have only par-tial knowledge and understanding on which tobase his decision and action. A person acts asa speculator when he makes the decision wheth-er or not, and also when, where, how and why,he will act—be it to drive a car, bake a cake,or draw lines on paper. A person is acting asa speculator also when he relies on anotherperson to respond in a certain way under cer-tain conditions.

3. As we have seen, changes are continuallytaking place in the lives of every one of us. Eachof us is always on the lookout for new ideas whichmay be helpful in adjusting to these changes.Every one of us acts on such new ideas every dayin the attempt to cope with changes affecting ourown personal lives. Inventors try to develop theirnew ideas into tools or new techniques. Producerslook for new ideas enabling them to offer consum-ers better, cheaper, or better-and-cheaper, goodsand services. Public relations men and advertisingagencies try to take advantage of new ideas in an-nouncing innovations to the world. New inven-tions, new commodities and new services are oftendescribed in newspapers and magazines. Radioand TV ads frequently offer new goods or ser-vices, new combinations of goods and related ser-vices or special new prices for goods and servicesalready on the market. New products, new pro-

68

8. THE ENTREPRENEUR AND THE PROFIT AND LOSS SYSTEM 69

duction techniques and new distribution methodsare often discussed in corporation annual reports.Bartons, Business Week, Fortune and The WallStreet Journal also print frequent articles on in-dustrial innovations. Once the students are alert-ed to look for such items they will see them oftenin newspapers, magazines and TV ads. If somestudents started files on new businesses, productsor inventions—as suggested in Unit 1—they mayalready have a collection of such clippings.

4. It was suggested in Unit 1 that the studentsmight interview the owners or officials of somelocal business. Perhaps they encountered somewho were articulate and who would be willing todiscuss their business ventures with the class. If so,here are several questions to ask which will helpto make the discussion pertinent:

a. What factors had to be taken into considera-tion before deciding to go into business locally?Why was their particular type of enterprise se-lected? What investigations were made, if any, asto the potential market for goods or services to beproduced, the availability of raw materials andsuitable workers, and/or means of transport forbringing in needed supplies and shipping out thefinished products?

b. Where did they locate the materials, tools,machines and equipment needed for the business?How were potential costs estimated? Were largesums of capital required to get started and to tidethem over the early months and years of opera-tions until a clientele could be developed? Didthey use their own savings? Or did they borrow—from friends, other savers or banks? Were theirearly estimates of costs accurate? If not, why not?Did outside factors upset their calculations?

c. Were governmental rules or regulations (fed-eral, state or local) significant factors in the de-cision as to what, where and when to go into busi-ness? Were any permits or licenses needed? Howdid government regulations affect their operationsand income? Must they still cope with govern-mental red tape, inspections and other federal,state and/or local restrictions? Have new andhigher taxes been levied since they started in busi-ness? What effect has inflation had on the firm'soperations?

d. Is their money income greater, about thesame, or less, than they could earn as employeeselsewhere, or by investing their savings in a bank,corporation stocks or bonds? Does the enterpriseyield its owner/entrepreneur or manager a "psy-chic profit" in addition to any money income

earned because he or she is "boss" and more orless runs the show, so to speak—subject of courseto the sovereignty of consumers?

5. Students who have read books about individ-ual entrepreneurs or business firms might turn intheir reviews at this time and/or report to the en-tire class. If they read or discuss their reviews inclass, everyone would learn something about sev-eral different enterprises. Each student reviewershould be asked to explain (a) why his or her par-ticular entrepreneur was not satisfied, (b) whatideas they had for improving their respectivesituations, (c) why they thought their ideas wouldhelp, (d) how they succeeded, if they did, in ac-complishing their goals. Ask each student to men-tion especially whether or not his or her entre-preneur had to accumulate savings or borrow be-fore embarking on any particular projects. Did theentrepreneurs encounter obstacles? Were theyfinally successful in overcoming them, avoidinglosses and eventually making profits?

6. Did any students in the class take part in theJunior Achievement program? If so, they mighttell of their experiences. How did they get the ideafor their enterprise, obtain raw materials, toolsand workers, cope with problems that arose in thecourse of production, find customers and succeedin competing for sales on the market? Did theywind up with profit or loss? What mistakes, if any,do they believe they made? What would they dodifferently another time?

7. If the students have received their annual re-ports from the companies to which they wrote (assuggested in Unit 7), ask them to look in theirrespective reports for answers to the followingquestions:

a. What products does their company produce?b. To whom does it try to sell—individuals or

firms?c. What raw materials and factors of production

does it use?d. Can they discover from the report where—in

this country or abroad—the suppliers of theseraw materials and factors of production arelocated?

e. What can they learn from the company's reportabout where its money came from and how itwas used to carry out its operations, during theprevious year?

The teacher will find help in interpreting a typ-ical annual report in the text which follows.


8. This Unit discusses not only "entrepreneurial(business) profit," the excess of an enterprise'smoney income over outgo, but also "psychic prof-it," the subjective or psychological gain from anaction. Psychic profit depends on the personal(subjective) values of the individual actor. Psychicprofit is the extra value of something over andabove the value to the person involved of whathe gave in trade. One student might enjoy a rockconcert so much that it seemed worth more thanthe value to him or her of the money he or shepaid for the ticket—the extra value was a sourceof psychic profit. Another student may have wonan award for athletic prowess—the pleasure, senseof pride and recognition it brought were sources ofpsychic profit, having nothing to do with money.Still other students, who spent summer vacationson the road or in Europe, may have exciting mem-ories, memories more valuable to them than thevalue to them of the money spent. These memoriesare sources of psychic profit. Psychic profit is notfor sale, and it cannot be tabulated or measured.To demonstrate psychic profit to the student, askeach to write a short paper, or tell the class about,some personal experience that furnished pleasureor enjoyment over and above the student's sub-jective (personal) valuation of the money spenton the activity, event or purchase.

9. The automobile industry in the United Statesfurnishes an excellent example of the role of "con-sumer sovereignty" in directing entrepreneurialactivities and determining profits (or losses). Stu-dents interested in cars might study the history ofthe industry, looking for evidence of the "econom-ic power" of consumers. Special attention shouldbe called to the fact that purchases and refusalsto purchase on the part of consumers—each de-ciding in the light of conditions and availablealternatives—were responsible, for instance, for thefollowing:

a. the failure in the early decades of this centuryof dozens of small automobile manufacturers,each of which was producing its own make ofcar

b. the gradual concentration of automobile pro-duction in the hands of a few large firms whowere able to take advantage of mass-productionassembly line techniques to reduce unit costsand so earn higher profits per sale

c. huge "box office receipts" and therefore prof-its for Henry Ford when he developed and soldthousands of his inexpensive but sturdy ModelT's

d. higher wages on factory jobs to induce manyworkers to leave the farms and permit auto-mobile manufacturers to increase output tokeep up with consumer demand

e. losses for the Ford Company in the 1920'swhen it resisted new consumer demands formore luxurious cars than its Model T and againin the 1950's when it misjudged consumer de-mand for large cars and introduced the Edsel

f. pressure on U. S. manufacturers in the 1960'sto introduce small economy cars in the attemptto maintain sales in competition with smallforeign-make autos

g. shutting down in 1974-1975 of many automo-bile plants when the prospects for selling theirfuture output at prices which would cover pro-duction costs seemed slim.

EXPLANATORY TEXT

So far the class has covered several basic eco-nomic concepts—purposive human action and per-sonal (subjective) values (Unit 3), private prop-erty, specialization and exchange (Unit 4), the wayall individuals are interconnected through the mar-ket (Unit 5) and how each of us helps to deter-mine prices (Unit 6). The class has also learnedhow some people, if not prevented from owningand accumulating private property, will start sav-ing for "rainy days" which then enables inventorsand producers to develop tools and machines touse in increasing production (Unit 7). This Unitdeals with the reasons certain processes are pre-ferred to others, who makes production decisions,what influences their choices, why productiontakes place as it does and why some things areproduced and not others.

1. What are the different categories of actions?When an individual acts in the attempt to accom-plish his most urgent goal of the moment, he or shemay know a great deal, very little or practicallynothing about the results his action will have.Thus, purposive human actions may be classifiedaccording to the information available to the in-dividual actor. From this point of view, three dif-ferent types of action may be recognized:

a. Scientific actions are based on known facts,proven knowledge, experience or experiments.Persons act as scientists when they know inadvance the results an action will produce. Ifthey lack sufficient knowledge, or make mis-


takes, the results of their actions will not bethose expected. But the fault would then reston human ignorance or error, not on the sci-entific method. The more people can learnabout the universe, the laws of the physicalsciences, cause and effect, the more successfulthey may be in acting as scientists. It is a sci-entific action to carry out a mechanical actionaccording to proven techniques. For instance,a person acts as a scientist when he follows thecorrect method to start an automobile andputs the car in motion in a certain direction. Aperson who bakes a cake according to a provenrecipe is acting scientifically. A man whomanufactures a product—combining raw mate-rials and labor in such a way as to obtainknown results—is also acting as a scientist. Ascientific action is an action, the consequencesof which—barring accidents, ignorance and hu-man error—may be known in advance

b. Gambling is an action about which nothingcan be known in advance as to the resultsexpected except that the person who gambleshas certain chances of winning or losing. Noamount of study, experiment or reasoning willimprove the odds of a pure gamble. The resultsof gambling depend on chance alone. A personacts as a gambler if he bets on a lottery, thetoss of a coin or the spin of a roulette wheel. Itshould be noted that most persons who buystock on the market or bet on horse races arenot merely gamblers but speculators, at leastinsofar as they do not select shares of stock orrace horse blindly, but try first to learn some-thing about the potentials of the corporationor horse and jockey, as the case may be

c. Speculations are based on partial knowledgeand understanding as to what the results willbe. All entrepreneurial decision-making actionsare speculations. As a matter of fact, mostpurposive human actions are speculative, atleast in part. On the one hand, few apparentlyscientific actions can be carried on, in thischanging world, under such precisely con-trolled conditions that their exact results maybe scientifically predicted. On the other hand,few persons are anxious to engage very oftenin really pure gambling; if a person wants to beat all successful in accomplishing any specificgoal, he cannot permit his plans to depend onchance alone. Thus, everyone tries to find outas much as possible about the results an actionis likely to have under the circumstances. In-

evitably many factors will remain unknown,some even unknowable, making the outcome ofan action somewhat uncertain. Thus most pur-posive choices, decisions and actions are spec-ulative in character. Driving a car, baking acake or manufacturing may be scientific inthemselves but deciding whether or not to drive,bake or manufacture is in each case a spec-ulation. Once that first decision is made, stillfurther speculations are called for as to when,where and how to drive the car, bake acake or manufacture a product. A farmer spec-ulates on the weather and the potential marketfor his crop when it ripens, etc. A young manspeculates if he invites his girl friend for a ride;he cannot predict the outcome on the basis ofhis technical skill in driving nor on his under-standing of her interests and character. Theyoung lady also speculates if she accepts hisinvitation—on the basis of her knowledge of hisdriving skill, her understanding of his views,motives, etc. Many unknowable factors mayalter the results of their speculations—the be-havior of other motorists, possible mechanicalfailures, weather, his reaction to her, her re-sponses to him, etc.

Speculators try to use all the scientific knowl-edge available to them in a situation, as a toolto facilitate their speculations. But no amount ofscience can ever reveal the future. Thus, aspointed out above, almost every action involvessome uncertainty. We must frequently make de-cisions on the basis of partial knowledge. In thissense, every one of us is a speculator when weact and make decisions. Hence, economics maybe said simply to be the study of speculationsand their consequences.

2. How does change affect the purposive actionsof individuals? The goal of acting men, as wehave seen, is to solve as best they can the "econom-ic problem" (Unit 4). They seek to satisfy as manyof their wants as possible within the limits of theirabilities, energies, time and other available re-sources. The fact that it is possible to bring aboutchanges enables people to make plans and to act(Unit 2). However, changes often complicate a sit-uation, upset plans already made and may eventurn an action intended to help into a catastrophe.Thus, in everything we do we must always try totake into consideration changes which may occurin the future, as well as changes which occurredin the past.


Conditions in the physical world are never static.Changes are always taking place—from night today, summer to winter, calm to storm, heat tocold, drought to flood, and so on. In addition tochanges brought about by such natural causes,countless other changes are taking place at everymoment throughout the world as a result of theconscious and purposive actions of men. Peoplealter the face of the earth by cutting down sometrees for firewood, paper pulp and lumber, andplanting other trees for purposes of landscapingand to harvest as a resource for production inthe future. They blast rocks, drill holes and levelmountains to extract building blocks, gravel, petro-leum, coal, iron, etc. They build highways, dams,canals, automobiles, private homes, stores, apart-ments, skyscrapers, and so on. They are continual-ly planting, harvesting, tearing down, building up,transforming and moving physical things around.

People are also always changing their ideas,concepts, philosophies and values. Their knowl-edge and understanding vary. As a result, theirpurposes and goals are forever shifting too. Intrying to satisfy their various personal (subjective)values, therefore, every one of us must always dealwith changeable and ever-changing factors.

Actions taken in the attempt to cope with physi-cal changes and shifting ideas are necessarily al-ways based on partial knowledge only. Thus theyare speculations and the acting individuals arespeculators. Speculators, as distinguished fromgamblers, have some knowledge on which to basetheir actions. They use whatever pertinent scien-tific and historical information is available. Theytry to learn what they can by observing, studyingand analyzing past experiences. They use reason,logic and psychology to try to interpret and under-stand the present situation and to anticipate asbest they can the changes likely to occur in thefuture. But the future remains unknown and un-knowable. Thus, a speculative action, by definitioncan never be a "scientific action." Every one of usis a speculator in the sense that we make decisions,take actions and run certain risks in the hope ofcoping with changes while trying to accomplishspecific ends and anticipate the likely results ofour speculations.

In the field of economics, speculators are oftencalled "entrepreneurs." Entrepreneurs in thissense are the persons responsible for productiondecisions. They undertake speculative projects atsome risk to themselves in the attempt to serveconsumers through the market. Their special role

is to try to cope with past changes affecting themarket and bring about other changes, so as tocounteract the undesirable effects of past changesand avoid possible harm from future changes.Thus, entrepreneurs are continually juggling, ad-justing, adapting and rearranging factors of pro-duction, goods and services, in the hope of im-proving conditions. When they succeed they con-tribute to solving the "economic problem" byhelping to reduce the gap between what we haveand what we want.

3. Just what do entrepreneurs do? The word"entrepreneur" is French. Translated literally itmeans "under-taker," i.e., someone who under-takes a project. Thus entrepreneurs are idea menand decision makers. We are all entrepreneurs inthe sense that we all have ideas, make decisionsand undertake projects whenever we act. How-ever, when most people think of entrepreneursthey have in mind persons acting in a more limitedcapacity—in business and on the market. The chiefrole of such producer-entrepreneurs is to speculateon the basis of knowledge and resources availableto them in the attempt to cope with ever-chang-ing market conditions so as to supply consumerswith the various things they want.

Every action starts with an idea. Also, as wehave seen, every action involves change. Both as(a) idea men and (b) decision makers, entrepre-neurs are deeply concerned with change. Not onlydo previous changes make actions appear desirablebut also the purpose of every action is to effectfurther change. To entrepreneurs as idea men,past changes are data, data which they "feed"into their "mental computers," their minds, in thesearch for new ideas which may result in improve-ments. As decision makers, entrepreneurs spec-ulate. They make plans, take steps to carry outtheir ideas and bring about new changes whichthey hope will make things better.

Entrepreneurs often make long-term plans to becarried out, step by step, over extensive periodsof time. They must always try to be realistic andto consider things the way they are. They con-sider the world as a tremendous "smorgasbord"of various raw materials, semi-finished factors ofproduction and products, completed consumers'goods, data, technological knowledge and varioustypes of available workers. The countless physicalthings in existence at any instant are inert andlifeless without any meaning unless and until in-dividual acting human beings with ideas, valuesand goals discover ways to use them.


The economist, Israel Kirzner, has described thiscomplex of goods and services as it exists in theworld at any instant as a "half-baked cake." Somethings exist as original raw materials, untouchedby human hands. Some have been moved or par-tially transformed from their natural state. Somehave become "semi-produced" factors of produc-tion or products. Some are now "idle resources,"having been fabricated for a special purpose andthen discarded as mistaken or worthless, or atleast not expected to be valuable enough to futureconsumers to warrant completion. Some thingswhich were formerly valued have been physicallydamaged (by fire or flood, for instance) or ren-dered less valuable on the market than formerlydue to shifts in ideas, consumer demands, tech-nology and production. Still others are consideredcompleted products and are up for sale on themarket. The role of the entrepreneur in the econ-omy is to consider this "half-baked cake" or"smorgasbord" of miscellany and to use it as besthe can to serve consumers.

Entrepreneurs speculate. They seek to reassem-ble and rearrange what they consider usable in the"smorgasbord" or "half-baked cake" of existinggoods and services, to adjust and adapt things tosuit future conditions better than they otherwisewould. They try to salvage what they can fromexisting materials and factors of production, shiftthem to more urgent uses, insofar as they may be"convertible" or "semi-convertible," so as to createnew and different goods and services in the hopeof developing things of greater value to con-sumers on the market. Thus, entrepreneurs arealways looking for clues as to what products con-sumers will be wanting in the future.

Entrepreneurs watch for changes that may beoccurring, or expected to occur as a result ofnatural as well as market phenomena. All suchchanges affect available supplies, the ideas peo-ple hold, their values, knowledge, wants, ends and,thus, prices and production also. Entrepreneursthen speculate, in the light of these changes andtheir anticipations of the future. They look for op-portunities to buy, transport, transform, processand offer on the market goods and services thatwill please consumers better than other products.They speculate by trying to discover supplies ofraw materials, factors of production and laborthat may be relatively cheap to purchase in theirpresent state, but which may be transformed intonew products and transported to new locationsso that they will be more highly valued.

4. How are entrepreneurs rewarded (penalized)for their success (failure) in adjusting to change?

The noted Classical economist Adam Smith*wrote that businessmen did not have to be toldwhat to produce. They were led, he said, as if"by an invisible hand." Here is the quotation incontext:

But it is only for the sake of profit that any manemploys a capital in the support of industry; and hewill always, therefore, endeavor to employ it in thesupport of that industry of which the produce islikely to be of the greatest value, or to exchange forthe greatest quantity either of money or of othergoods. . . . He generally, indeed, neither intends topromote the public interest, nor knows how much heis promoting it. By . . . directing that industry in sucha manner as its produce may be of the greatest value,he intends only his own gain, and he is in this, as inmany other cases, led by an invisible hand to promotean end which was no part of his intention. Nor is italways the worse for the society that it was no part ofit. By pursuing his own interest he frequently pro-motes that of the society more effectually than whenhe really intends to promote it.The Wealth of Nations (Random House, Modern Li-

brary Giant Edition, 1937), p. 423

In the broadest sense of the word, profit is sim-ply the gain derived from an action, a speculation.Thus, every one of us always aims at profits. Prof-it—or its opposite, loss—is a psychic, or mental,phenomenon. The person who acts decides on thebasis of his or her own personal (subjective) val-ues and goals whether an action was a success orfailure, as compared with available alternatives.Psychic profit may stem from reducing some dis-satisfaction or "felt uneasiness," or from accom-plishing a positive goal. Psychic profit is the extrabonus value of something one receives in tradeover and above the value to the trader of what wasgiven in exchange.

Producer-entrepreneurs, like everyone else,speculate in the hope of gaining psychic profitsand avoiding psychic losses. However, to stay inbusiness over an extended period of time, entre-preneurs must also take in money from their cus-tomers—at least enough to cover all expenses. Todetermine monetary or entrepreneurial (business)profit or loss, entrepreneurs calculate the totalmoney cost of producing and/or reproducing anitem and subtract them from the enterprise's total

•Adam Smith (1723-1790) was perhaps the first to developeconomics, or political economy, as an intellectual discipline.For more on the significance of his work, see Unit 13.


money income. To earn an entrepreneurial prof-it, money income must exceed money outgo. Anyexcess of money income over outgo is monetaryor entrepreneurial (business) profit.

The more popular a product is with consumers,the greater will be its producer's "gate" or "boxoffice receipts," and the better will be his or herchances for entrepreneurial profit. The drive forentrepreneurial profit, therefore, pressures pro-ducers into trying to please consumers. Thus, en-trepreneurs are always eager for any clues theymay glean by observing the behavior of consumers.

In a free market, consumers are sovereign. Asproducer-marionettes, entrepreneurs dance onstrings, so to speak, at the direction of consumer-puppeteers whose purchases and refusals to pur-chase indicate likely ways to earn entrepreneurial(business) profits. But consumers can be mightyfickle. Their ideas, like everything else in theworld, are always changing. As situations change,so do their ideas, values, needs and buying habits.They will purchase a particular good or serviceonly so long as they continue to consider it usefulfrom their respective personal (subjective) pointsof view. As soon as they learn of something better,cheaper, or better-and-cheaper for their purposes—all things considered—they change their buyinghabits. They may reject further purchases of thingsthey had been buying, switch to entirely differentproducts, buy more of some things, less of others,make purchases more or less frequently and/oreconomize in line with the old New England max-im:

Use it upWear it outMake it doGo without.

Entrepreneurs are always trying to adjustthrough the market to changes that occur—goodones and bad ones alike. If they earn profits inthe process of making adjustments, they are help-ing others. For instance, if property is destroyed—as it frequently is by fire, flood, earthquake, etc.—some entrepreneurs may try to fill the gap. Entre-preneurs who manufacture such items as bricksand steel beams, will be eager to increase ship-ments into the stricken area in the hope of profit.No one need order them to do so; their desirefor profit guides them. But the result of their ef-forts is to better satisfy consumer needs and im-prove the situations of people in the devastatedareas who want to repair buildings and highways.Whether they profit (or lose) from their enter-

prise will depend on their success (or failure) inpleasing consumers. Only if buyers are ready topay higher prices than the entrepreneurs spent inproducing and offering the bricks and steel beamson the market will the entrepreneurs earn profits.

Take another example. Suppose a chemist an-nounces a new medicine expected to destroy acommon virus. Surely consumers would buy it ifit were available, they knew about it and were con-vinced it would be effective. Should an entrepre-neur decide that many people would find the newmedicine helpful and buy it if they could, he maytry to speculate in its production. He must then ex-plore ways to manufacture this new chemicalcompound at costs below the price he expects con-sumers will be ready to pay for it. He must searchfor relatively inexpensive sources of chemicals,plant equipment, machinery, containers and work-ers. To obtain the needed materials, he will have tooffer high enough prices to induce their presentowners to sell to him. To persuade the workershe needs to shift to his employment, he will have tooffer them opportunities they prefer to their pres-ent occupations. Then he must master the manu-facturing process and tell potential buyers aboutthe new medicine and its healing powers. Hischance for profit starts with persuading buyers totry it. If the new medicine helps these new cus-tomers they will benefit almost immediately, butthe entrepreneur will profit only if he continues tosatisfy many customers again and again, so as tocover his initial investment, production costs, andthen some. If the costs of supplying this newproduct to the market are more than customerswill pay for it or if the producer/entrepreneur failsto please enough customers, the speculation willresult in entrepreneurial losses. Shifts in consumerpurchases are "grist for the mill" of entrepre-neurial decisions and the source of their profit orloss.

The opportunities to earn huge "gates" or "boxoffice receipts" that come with fame and popular-ity have attracted thousands to compete in thefields of sports and entertainment. Some few havemade the "Big Time." Many more have failed. Assoon as one star athlete or performer falls frompublic favor, newcomers are ready to take overthe leading roles. The situation in production issimilar. Many strive for the generous entrepre-neurial profits with which consumers reward theirfavorites, but only a few ever reach the top. Thosewho succeed in business remain at the top only solong as they adapt successfully to the constantly


shifting whims of consumers and retain their favorby satisfactorily supplying some of their variouswants.

5. How do consumers exercise their sovereigntyon the market? On a free market where individ-uals are in a position to seek their own personal(subjective) values and goals, they give profits tothe producers of the products they want most anddeny profits to others whose products they reject.The largest "gates" or "box office receipts" andthus the best chances for profit go to the producerswhose products are most popular. If their salesdecline, however, so will their "gate" or "box of-fice receipts" and also their chances of profit.Thus each of us, as a consumer, influences pro-duction to some extent by expressing our own per-sonal (subjective) values through our purchasesand refusals to purchase products on the market:

. . . the market with its prices is the steering mech-anism of the free enterprise system. . . . The onlyforces determining the continually fluctuating stateof the market are the value judgments of the variousindividuals and their actions as directed by thesevalue judgments. The ultimate factor in the marketis the striving of each man to satisfy his needs andwants in the best possible way. Supremacy of themarket is tantamount to the supremacy of the con-sumers. By their buying, and by their abstention frombuying, the consumers determine not only the pricestructure, but no less what should be produced andin what quantity and quality and by whom. They de-termine each entrepreneur's profit or loss, and there-by who should own the capital and run the plants.They make poor men rich and rich men poor. Theprofit system is essentially production for use, as prof-its can be earned only by success in supplying con-sumers in the best and cheapest way with the com-modities they want to use.Ludwig von Mises, Planning For Freedom (Libertar-

ian Press, 1952/1962/1974), pp. 15 and 73

Profits come and go, reflecting consumer de-mand. No entrepreneur, no matter how successfulhe or she may have been in the past, can retainwealth on a free market unless the goods or ser-vices he or she produces stay in favor with con-sumers. No one can compel consumers to buy theirproducts on a free market. Even big steel mag-nates, automobile manufacturers or "chocolatekings" dangle like marionettes while consumerspull the strings:

A "chocolate king" has no power over consumers,his patrons. He provides them with chocolate of thebest possible quality and at the cheapest price. Hedoes not rule the consumers, he serves them. Theconsumers are not tied to him. They are free to stoppatronizing his shops. He loses his "kingdom" if the

consumers prefer to spend their pennies elsewhere.Nor does he "rule" his workers. He hires their ser-vices by paying them precisely that amount whichthe consumers are ready to restore to him in buyingthe product.Ludwig von Mises, Human Action (3rd ed., Regnery,

1966), p. 272

Entrepreneurial profits are not mark-ups addedto costs for the benefit of producers. Profits areindications that entrepreneurs have producedsomething consumers valued more than the totalcost of supplying it to the market. Consumers arealways weighing the relative importance to themof the various personal (subjective) values, wants,goals and other opportunities. By their purchasesand refusals to purchase, they signal entrepreneursas to what they, as consumers, want more easilyaccessible. They help entrepreneurs decide how tospeculate, what to produce and how to produce it.If the entrepreneurs succeed in producing thingsconsumers value highly out of less valued re-sources and factors of production, the differencebetween their relatively low costs of productionand the relatively high prices satisfied customerspay for their product will swell the size of their"gate" or "box office receipts" and provide themwith entrepreneurial profits. How much profit anentrepreneur will earn and for how long will de-pend on the whims of consumers. The momentconsumers change their minds, so do their buyingpatterns change. Thus entrepreneurs earn profitsonly so long and insofar as they anticipate con-sumer wants correctly and furnish them withthings they want to have and to use.

NOTE: Incidentally, this understanding of the sover-eignty of consumers reveals the error in the Com-munist slogan calling for "production for use and notfor profit." In a market economy, the two are pre-cisely the same. When consumer purchases and re-fusals to purchase determine profits and also, as aresult, the pattern of production, production for profitmust be production for use also—and vice versa. Thedesire of entrepreneurs to avoid entrepreneurial lossesand to earn profits by serving consumers assures (a)that "production for profit" will be useful to consum-ers and (b) that "production for use" will be prof-itable to entrepreneurs.

6. Is there a limit to the profit an entrepreneurcan earn in a free market economy? There aretwo possible answers to this question. In one sense,there is no limit to the profit an entrepreneur mayearn on a free market. But in another sense, thereare very definite limits in the real world to theprofit any entrepreneur CAN earn. The sky may be


the limit as far as the profit he may receive fromhis "gate" or "box office receipts"—so long as hecontinues to have ideas, make decisions, act andoffer on the market goods or services consumerswant which he can produce for less than consum-ers are willing to pay. But the ability of any singleentrepreneur to do this consistently over an ex-tended period of time and to keep on steadilyearning profits is very definitely limited by: (a)his fallibility as a human being, (b) potential com-petition from other entrepreneurs and (c) con-sumer sovereignty.

The possibility of unlimited, permanent and in-creasingly rising profits is unrealistic, for there is acontinual tendency for profits to disappear in thereal world. Once an entrepreneur finds a way tomake a profit and expands production, his effortsto buy more materials and tools and to hire moreworkers tend to raise their value on the marketand thus their prices and his costs of production.Moreover, if competition is open and free andthere are no restrictions or barriers to prevent new-comers from entering the field, an entrepreneur'svery success is likely to make his situation moreprecarious by attracting competition. The newerentrepreneurs will try to offer something similarat a lower price, or something they hope potentialcustomers will consider better at the same price,or something they hope consumers will recognizeas both better and cheaper. Thus consumers soonbenefit. But the greater numbers of entrepreneursseeking to produce and offer similar goods or serv-ices (a) intensify competition for customers and(b) tend to increase production costs for all com-peting producers including the pioneering entre-preneur. It becomes more difficult for any of themto continue producing as cheaply and earning thesame relatively high profits as before.

Consumers are quick to switch to differentgoods and services the moment they discoversomething they consider better, cheaper, or better-and-cheaper than what entrepreneurs had pre-viously been offering them on the market. Theirfickleness, their changeability and the frequencywith which they alter their ideas, wants and valuesincrease the uncertainty with which entrepreneursmust cope and further limit the chances of en-trepreneurs for continuous profits. Thus, consum-ers play the decisive role in determining an en-trepreneur's "gate" or "box office receipts."There may be no ceiling on the entrepreneurialprofit a successful entrepreneur may earn in a freemarket economy, if he keeps on satisfying consum-

ers and producing the goods and services theywant for less than they are willing to pay. But inreal life, under free and open competition, entre-preneurial profits are subject to strict limitations—limitations imposed by (a) the human fallibilityof a specific entrepreneur, (b) the likelihood ofnew entrepreneurs coming into the field and (c)consumer sovereignty.

Every entrepreneur must always do his best tokeep abreast of changes and new developments.No matter how thoroughly familiar he may bewith the technology of his production process orhow well he understands the vicissitudes of themarket at the time, sooner or later unanticipatedchanges will occur restricting the chances of theless energetic and less far-sighted entrepreneur inthe competition for customers. The momentan entrepreneur relaxes his efforts, makes a mis-take, miscalculates and fails to satisfy consumersas well as before, his profits will start to decline.If he fails to earn enough to cover expenses, hemay in time have to go out of business completely.

7. What information about a corporations en-trepreneurial activities and its profits (or losses)may be found in a typical annual report? Mostcorporations with offices in this country are re-quired by law to publish annual reports, disclosingcertain financial data. Most corporations also in-clude in their annual reports additional statisticsand textual material to keep their stockholders,each of whom is a part owner in the company,advised of the firm's products, output, sales, re-search, competition, plans, future prospects, andso on, Compare and contrast the information of-fered in the annual reports of several differentfirms—the various types of statistical data, themanner in which they are presented, as well asthe textual material describing the corporation'sactivities.

Each student should examine the annual reporthe receives for evidence of the entrepreneurialactivities described in this Unit. Look for specificexamples of (a) new ideas the firm is developing,(b) to adjust, adapt or rearrange the ingredients ofthe existing "half-baked cake," (c) so as to copewith changes that occurred in the past, (d) bringabout further changes (e) reduce their costs of pro-duction (f) increase their sales and the size of their"gate" or "box office receipts," (g) improve mar-ket conditions, and thus, hopefully, (h) yield entre-preneurial profits. What goods and services doeseach corporation produce? Where does it get itsraw materials? Does it do research to develop new


ideas? What kinds of tools, machines, plants andequipment are needed for its production? Whencecome the savings it invests? Does the annual re-port mention plans for converting some factors ofproduction to different uses from those originallyintended? Does it reveal anything about the cor-poration's employees? What types of specializedworkers does it hire? Does the corporation have todeal with unions? How have government rulings,regulations, controls, taxes and inflation affectedthe company's operations? Does the annual reportindicate that the corporation has been flexible inadjusting to changes and shifts in consumer de-mands? Did the corporation earn an entrepreneur-ial profit during the last year? If it suffered losses,are these explained as the result of unforeseenchanges or uncertainties? Does the corporationhave plans which it hopes will yield profits in thefuture?

Each student should also analyze the statisticsin his annual report. One of the basic tables in acorporation's annual report is the "balance sheet"showing the firm's assets, normally appearing onthe left hand side of the page, and its liabilitiesand net worth at the right, all as of a specific date.The entries on a balance sheet represent estimatedmarket values in terms of money. The itemsprinted in annual reports are usually simplified in-to several broad categories. The list of assetsshows the firm's total holdings in the form ofcash, securities, accounts receivable, property ofvarious kinds (land, equipment, buildings, etc.)and inventories of other items. On the right handside are shown the firm's liabilities—notes, debts,accounts payable, taxes due, and so on—as well asthe firm's net worth, i.e., the difference (plusor minus) between total assets and total liabilities.The corporation's net worth is equal to the equityof all stockholders, i.e., the estimated money valueof the shares they own.

Many firms supplement the simplified balancesheet published in their annual report with de-tailed notes about individual entries. Considerableinformation may be found here concerning thebusiness of the corporation and the raw materials,tools, equipment, plants, land, etc., in its inven-tories. Various other financial reports are alsofrequently included. Perhaps the most helpful forunderstanding a firm's activities is the "operatingstatement," itemizing total money income (bysource) and total money outgo (by purpose) duringa definite period of time. Some firms also reportearnings and holdings over several years to show

changes that have taken place in their operations.Some firms include diagrams to help stockholdersvisualize the corporation's financial situation. Forinstance, total assets, liabilities and net worth maybe portrayed in pie-shaped diagrams, with eachtype of asset or liability represented as a segment,reflecting the relationship it bears to the total"pie." Other charts might give total money in-come, or outgo, over a period of time, so thatthe proportion received from, or spent on, eachoperation may be seen at a glance.

The students should be encouraged to studytheir annual reports carefully. By examining thestatistics, tables and charts, they will be able tolearn quite a bit about the entrepreneurial roleof their particular firm, its success (or failure) incoping with change, rearranging the goods andservices available at various prices so as to im-prove conditions by providing consumers withthings they consider better, cheaper, or better-and-cheaper than what they had before.

SUMMARY

The world is an economic smorgasbord, a hodge-podge of natural resources semi-produced and pro-duced factors of production, some more, some lessconvertible than others. The countless physicalthings in existence at any given moment are inertand lifeless without any meaning or value unlessand until individual acting human beings withideas, values and goals recognize uses for them.It is acting, thinking, reasoning persons who givemeaning and value to physical objects.

As consumers we determine the prices at whichgoods and services will be traded and help entre-preneurs to recognize where the chances are bestfor making sales, for expanding their "gate" or"box office receipts" and thus for earning profits.

The goal of every entrepreneur is to conceive ofsome way to provide consumers with somethinghe can produce for less than they will be willingand able to pay for it. Once he believes he hassuch an idea, he makes plans and takes actionsover a period of time. He searches for the rawmaterials and factors of production he will needamong the goods and services currently availableon the economic smorgasbord. He tries to ac-quire these ingredients at prices below the valueshe expects them to have later, after he has reas-sembled, transformed and/or transported them to


make the new product he plans to offer consumerson the market. As a result of the fact that suchentrepreneurial ideas, plans and actions are al-ways taking place, the whole economy is in a stateof continual flux.

The purpose of every entrepreneurial idea is al-ways to try to make a profit by adjusting, adaptingand producing changes in the existing complex ofgoods and services so as to bring about improve-ments and, thus, to serve consumers better. Spark-ed by the hope of profits over many years, entre-preneurs have developed ideas for using avail-able materials and labor, made plans, speculatedand taken actions to bring about countless big andlittle changes. Some produced what consumerswanted and, as a result, earned profits. For var-ious reasons, others wasted factors of productionand so incurred losses. Gradually in this way,step-by-step, the purposive actions and choices ofunnumbered individuals transformed the world'snatural resources from the wilderness it was just afew centuries ago into the amazing smorgasbordof material goods and services that exist today.The ingredients of the economic "half-baked cake"at any instant are always the products of theworld's resources plus changes due to naturalcauses as well as those arising out of the purposiveefforts of all entrepreneurs in the past and ofindividual choices.

GLOSSARY WORDS(For definitions, see GLOSSARY, pp. 223ff.

ASSETSBALANCE SHEETCONSUMER SOVEREIGNTYCONVERTIBLE FACTOR OF

PRODUCTIONENTREPRENEURENTREPRENEURIAL PROFITEQUITY

GAMBLING"IDLE RESOURCES"INCONVERTIBLE FACTOR OF

PRODUCTIONLIABILITIESLossNET WORTHOPERATING STATEMENTPROFITPSYCHIC PROFITSCIENTIFIC ACTIONSPECULATION

RECOMMENDED READINGSMore advanced materials are indicated by an asterisk(*)

Articles

In the BASIC READER:19. "Letter to His Grandson," Fred I. Kent28. "If Men Were Free to Try," John C. Sparks29. "For the Good of Others," Leonard E. Read30. "Food From Thought," Charles W. Williams31. "Windfall Profits," Robert G. Anderson

*32. "The Elite Under Capitalism," Ludwig vonMises

°33. "Profits," Hans F. Sennholz°34. "Why Speculators?" Percy L. Greaves, Jr.

Additional titles:"Those Fellows in Black Hats: The Speculators,"

John A. Sparks—in The Freeman, August 1974

Books

Chamberlain, John. The Enterprising Americans (Har-per & Row, 1963/1974)

Hazlitt, Henry. Economics in One Lesson (Harper, 1946;2nd ed., MacFadden, 1962; Manor Books, 1973).Chapter 22, "The Function of Profits."

Mises, Ludwig von. Bureaucracy (Yale, 1944; ArlingtonHouse, 1970)

* Human Action (Yale, 1949/1963; Regnery,1966). See Chapter XV, Sections 8-10 on profit andloss

.. Planning for Freedom (Libertarian Press,1952/1962/1974). Essay IX, "Profit and Loss."

Read, Leonard E. Deeper Than You Think (FEE, 1967).Chapter X, "What Shall it Profit a Man?"

9. LABOR, WAGES AND EMPLOYMENT


1. Repetition is essential in teaching—as anyteacher well knows. These catchy phrases, used sofar in this SYLLABUS, bear constant repeating to re-view the significant economic concepts they de-scribe:

ARMCHAIR METHOD-the method of devel-oping theories through the use of deduction.Economists adopt the "armchair method" whenthey think, reason and use logic to explain the ac-tions of individuals on the basis of a priori assump-tions (Unit 2).

MICRO-ECONOMIC APPROACH—studyingindividual economic activities—instead of massphenomena, totals, aggregates or collectives—interms of the individual units responsible. Economicphenomena are explained as the results of count-less individual actions taken by specific individualswho have preferences, felt-uneasinesses, valuesand goals, individuals who think, reason, believeand act (Unit 2).

SURJECTIVE (PERSONAL) VALUES-valueswhich depend on the ideas of the individual mak-ing the evaluations (Unit 3).

VALUE SCALE—the order or arrangement (con-scious or unconscious) in which every individual, ata particular place and time, ranks or grades his orher own subjective (personal) values or goals ac-cording to their importance to him or her (Unit 3).

FELT UNEASINESS—the subjective (personal)feeling of discomfort, distress or dissatisfactionwith things as they are which spurs each of us onto try to improve the situation in some way (Unit3).

ECONOMIC PRORLEM—the conflict whicharises because "our eyes are bigger than our stom-achs," because each of us wishes for lots more thanwe can possibly ever have, acquire or expect toaccomplish within the limited time, energy, knowl-edge, resources and wealth available to us in asingle lifetime (Unit 4).

AUCTION—everything offered on the market isup for bids as if at an auction. Every potential trad-er (buyer and seller) is always weighing the prosand cons of bidding or refusing to bid, buying orrefusing to buy, specific units of certain goodsand/or services at various prices (Unit 6).

MARGINAL UNIT—the last unit of a good orservice which a person considers worthwhileacquiring under the circumstances. The service orsatisfaction provided by the marginal unit is its"marginal utility" (Unit 6).

ANT TIME PREFERENCE—the desire to re-frain from consuming everything in the present soas to set something aside for tomorrow. Personswith the time preference of Aesop's ant save somethings in the attempt to prepare for the future(Unit 7).

GRASSHOPPER TIME PREFERENCE—thedesire to consume or spend everything in the pres-ent, to eat, drink and be merry today, giving littleor no thought to tomorrow (Unit 7).

RAINY DAY SAVINGS-stocks of consumergoods set aside for a "rainy day" or an emergency(Unit 7).

CAPITALIST SAVINGS—stocks of raw mate-rials, tools and/or other factors of production ac-cumulated so as to be able to produce more and/ormore easily in the future (Unit 7).

CONSUMER SOVEREIGNTY—the "economicpower" of consumers to direct production. Likepuppeteers, the consumers "pull strings" by mak-ing purchases and refusing to make purchases,thus telling entrepreneurs, the producer-marion-ettes, what, where, when and how to produce (Unit8).

GATE OR ROX OFFICE RECEIPTS—themeans by which customers may reward produc-ers who supply them with things they want. Thegreater a producer's gate or box office receipts,the better his chance for a profit (Units 6 & 8).

2. To demonstrate that the wages paid for aservice, labor or work, are prices, exchange ratios,

79


determined just as are prices of goods or commod-ities, the teacher might hold another fictitiousclassroom auction similar to those described inUnit 6. In this instance the teacher will play therole of a potential employer, planning to invest ina particular enterprise and seeking to hire a num-ber of high school students for temporary summerjobs or for regular work after graduation. In select-ing the enterprise, consider the interests, aptitudesand probable expectations of the students in thisparticular class. The entrepreneurial proposalshould be fairly realistic so that students can vis-ualize themselves as potential candidates for thejobs to be auctioned off. See the several sugges-tions below. The teacher should outline in con-siderable detail the fictitious entrepreneurial proj-ect he or she contemplates for this purpose, ex-plain the reason for the enterprise and describethe good or service it will be producing as wellas the tasks expected of each employee—hours ofwork, working conditions, etc. Write on the black-board for all to see while the auction is in processthe most important features of each enterprise andthe jobs that are up for bid.

The teacher, acting in the role of the fictitiousentrepreneur, must try to anticipate the futuremarket for the good or service the enterprise willbe supplying and budget a certain amount eachweek to pay these particular workers. In real life,this amount would of course depend on the boxoffice receipts expected from customers in ex-change for the services the workers would be ren-dering. For the sake of this classroom activity,however, this figure must be arbitrarily selected.To simplify the calculation, the teacher might mul-tiply mentally the approximate average weeklywage students are likely to ask for the jobs up forauction by half the number of students in the class.Use the product of these two figures as one week'sbudgeted allowance. For instance, if it is expectedthat a high school student would be willing to startat $80 per week as a salesclerk in the enterprisedescribed and there are 30 students in the class,multiply $80 by 15, and announce $1,200 as theceiling you, the teacher acting as entrepreneur, be-lieve you are justified in spending for hiring sales-clerks. This figure, representing your weekly bud-get for this purpose, should also be noted on theblackboard before the bidding starts.

NOTE: In real life, entrepreneurs start their calcula-tions by trying to anticipate future consumer wants,potential costs and expected box office receipts. Theyestimate the number of workers of various types they

will need and the cost of hiring them on the basis ofthe wages they expect they will have to pay. They mayvery likely try to discover the wages established in themarket in the very recent past for similar jobs by pre-vious employer-employee auctions. However, suchcurrent or "going" wage rates are useful only insofaras they furnish clues or hints as to what entrepreneursmay have to pay employees to work for them in thenear future. The purpose of employer-employee auc-tions is to establish new market wage rates, in the lightof anticipated market conditions, suitable for partic-ular jobs in a particular enterprise at a particular timeand place in the future. In real life, entrepreneursbudget their available savings as best they can tocover all anticipated expenses—for plant, equipment,materials, promotion, etc., as well as wages—tryingalways to remain flexible enough to adjust to changesthat may occur However, in this fictitious classroomauction, the budget for hiring workers must be setarbitrarily. Hence the suggestion that it be establishedas outlined—on the basis of class size and anticipatedwage demands of the students.

Here are several suggested fictitious enterprises,each with a number of potential job openings forwhich students may bid:

a. The teacher is presumed to be a businessmanwho has just leased a small or medium-sized storein a new shopping center and needs salesclerks.They need not have had any special previous expe-rience, but they should be neat, careful, reliableand willing to learn. Salesclerks must be able tostand on their feet a good part of the day. The storeis to remain open Mondays, Tuesdays, Wednesdaysand Saturdays 9:00 AM to 6:00 PM, Thursdays andFridays, 9:00 AM to 9:00 PM. Each salesclerk isexpected to work 40 hours a week. Evening andSaturday hours will vary from week to week. Therewill be time off for lunches, suppers and coffeebreaks, when relief salesclerks take over for reg-ular salesclerks. There will be opportunities for ad-vancement for any salesclerk who proves capableand is interested in a future with the company.

b. The teacher plays the role of the spokesmanfor a young couple operating two adjoining sum-mer camps in the nearby mountains, one camp forboys 6-12 years old and the other for girls of thesame age. The camp owners are looking for coun-sellors for the ten weeks from the middle of June tothe end of August. Each counsellor will sleep in atent with a group of boys, or girls. Simple but nour-ishing meals will be furnished, of course. The twocamps and their counsellors will eat in a commondining room, cooperate on several activities every-day and have a joint outing or social affair everySaturday afternoon. Counsellors at either campwill have, in effect, a fully-paid, healthy, outdoor

9. LABOR, WAGES AND EMPLOYMENT 81

summer vacation, and frequent opportunities toride horseback, swim or play tennis.

c. The teacher pretends to be a state highwayemployee, hiring men and women to collect tollson a nearby super-highway. Each will have towork 40 hours/week on a rotating schedule, takingturns at the various overlapping shifts—7:00 AM to3:00 PM, 11:00 AM to 7:00 PM, 4:00 PM to 12:00midnight, and 12:00 midnight to 8:00 AM. Thework will not be hard or strenuous but many per-sons might consider it monotonous. The toll collec-tors will be able to sit or stand, as they wish intheir booths, protected from the elements to someextent but not completely sealed off from the ef-fects of strong wind or rain and extreme heat orcold. To qualify for such a job a person should bein fairly good health.

d. The teacher plays the role of an employee inthe personnel office for Disneyland (California) orDisney World (Florida) who is anxious to hire anumber of young people as guides, chauffeurs orguards. Those hired for these jobs would have topay their own transportation to and from theirhome and place of work. No room and board is in-cluded in the weekly pay. Employee cafeterias areclose at hand where they can eat lunches and sup-pers inexpensively. These jobs require personswho like people as individuals and enjoy beingamong crowds.

e. The teacher pretends to be the manager of asummer beach or mountain resort hotel/motel whois looking for young people to work as waiters andwaitresses. The hotel and its location should be de-scribed in some detail. Transportation to and fromthe resort area will be paid by the company.Waiters and waitresses will be housed in dormi-tory-like facilities. Board will be provided. Theactual weekly cash salaries will be fairly low be-cause transportation, board and room are fur-nished. Also waiters and waitresses can expect tipsranging from about $50 to $100 per week. Waitersand waitresses will have to be on duty at meal-times, but they should have considerable oppor-tunity to use the various sport and recreational fa-cilities available.

f. The teacher announces that he/she is hiringemployees for a new, or expanding grocery storeor supermarket in the vicinity of the high school.There is need for inventory or stock clerks, check-out boys and girls, packers and so on. The hourswill be somewhat flexible. The work will be steadyand the jobs could prove permanent. However, ap-plications are also welcome from students seeking

part-time or temporary summer work only.g. The teacher presumes to be the agent for a

market research firm, looking for young people toconduct telephone or door-to-door surveys duringthe summer months. The teacher should describein some detail the type of information to be col-lected, the product or products with which the sur-veys are concerned, the neighborhoods to be visit-ed, if the canvas is to be door-to-door, the hours,whether part-time or full-time, and so on.

h. Teachers in rural areas may describe them-selves as employers or agents for employers look-ing for young people to fill various jobs at localfarms, canning plants, road work, constructionjobs, garages, summer resorts, and so on, depend-ing on local conditions. In any case, the teachershould try to describe the jobs in sufficient detailfor the students to decide whether or not they areinterested in applying.

Once the teacher has described the fictional en-terprise, its weekly budget for wages and the spe-cific jobs to be filled—noting the major points onthe blackboard—each student should write on apiece of paper, for his eyes only, the lowest weeklywage or salary he would be willing to accept for theparticular kind of work involved. Some studentsmay already have plans to travel or study in thesummer and would not be willing to take one of thejobs described except for a tremendous sum ofmoney. Others might be interested only if theywere to receive a higher wage than most other stu-dents would ask, to make up for its lack of appealto them. Some students might be very anxious tofind a job, any job, and so would be willing to ac-cept a relatively low salary. Still others might con-sider the jobs described desirable, even interesting,glamorous or "fun," in which case they would bewilling to work for very little cash per week. In anycase, each student should weigh in his or her mindthe present situation, their various interests,wishes and alternatives for work, study, travel orvacation during the coming months, writing downthe least they would ask per week for that partic-ular job.

After each student has written down the mini-mal weekly wage he or she would be willing to ac-cept, the bidding can begin. The teacher, as poten-tial entrepreneur, will want to hire as many em-ployees as possible within the allotted budget.Start the bidding low, asking how many studentswould be willing to take one of the jobs describedat $30, $40, $50 per week. Point out that no onewill be hired below the market wage, determined


by the outcome of the auction. Thus, willingnessto work at a low wage doesnt mean one will haveto work for less than others hired for the same orsimilar jobs. Make sure the students clearly under-stand that:

(1) the purpose of the auction is to find the mar-ket wage, the wage which will be paid all personshired for the particular jobs described

(2) those who would have been willing to workfor less than the market wage, i.e., the wage em-ployer and would-be employees finally agree upon,will actually be receiving a sort of "profit" or bonusover and above what they would have been willingto work for in that job.

Jobs offering room and board will probably gofor less cash money per week than jobs withoutsuch "fringes." In any event, as the bidding pro-ceeds, ask all students who would be willing to ac-cept the job described at the weekly salary thenbeing offered, to stand or raise their hands. At eachstage in the auction, the teacher, or a student vol-unteer, should count the number of "job appli-cants," figure all costs of hiring them at that par-ticular salary, and write that sum on the board.The "auction" should continue, the weekly salaryoffered being upped bit by bit, until the productof the number of students applying, times the sal-ary then being offered, is equal to or just belowthe budgeted allowance. The cost of transporta-tion and/or board and room, if included in the offerto employees, must also be figured and added tothe cash wages being offered. See pp. 84-85 forpossible formats to record the bidding.

At the conclusion of this job auction, remind thestudents that everyone will gain to some extent asa result of the entrepreneur's hiring workers:

(a) the entrepreneur, who now has employees tohelp him/her carry out the proposed project, thusfurnishing a chance for profit

(b) the new employees, each of whom believesaccepting the job described at the salary offeredis more desirable from his or her own subjective(personal) point of view—considering all the cir-cumstances—than any other alternative available

(c) potential consumers who, if the entrepre-neur's plans work out well, will have additionalopportunities they wouldn't have had otherwise toacquire the goods and services the entrepreneurwill be offering.

Insofar as the decisions of would-be entrepre-neur and would-be employees are voluntary and donot turn out to be wrong, everyone gains as a re-

sult. For a detailed list of the specific ways such ajob auction helps everyone concerned, see the EX-PLANATORY TEXT of this Unit, pp. 90-91.

NOTE: TO compare the determination of marketwages and prices, see Unit 6. What is said there aboutprices applies to wages also. The entrepreneur-em-ployer buys hours of work with the pay he offers sothat he is in effect selling money for services. Employ-ees sell their own time and effort for so much moneyand thus they are, in effect, buying money with theirlabor.

3. After determining the wages to be paid andthe maximum number of employees that could behired within the fictional enterprise's weekly bud-get and after explaining the advantages to begained from employer-employee bargaining, theteacher should exclaim: "Oh my goodness! We for-got to figure the various payroll deductions—for in-come taxes, social security, and the like. All thesemust come out of your pay. They will reduce your'take-home pay' and thus your income, so you maynot still be willing to work for the wage we agreedto, less these deductions. But these taxes are costsof my hiring you. I must add them, in my calcula-tions, to the cash I pay you and deduct the totalfrom my allotted weekly budget for paying work-ers."

Then ask each student to figure what the weeklytake-home pay would be for each worker who hadostensibly been hired through the job auction.Here are the deductions which must be made:

a. SOCIAL SECURITY (OASDI + hospital insurance)Employers share, which must be paid out ofthe sum budgeted for salaries. (Although notofficially a deduction from salary, it is a cost tothe employer of hiring a worker.) 5.85%

(due to rise in 1978 to 6.05%)Employee's share, to be deducted from weeklypaycheck 5.85%

(due to rise in 1978 to 6.05%)

b. INCOME TAXES [Federal, State & City](approx.) 20%

If the students have access to Weekly Withhold-ing Tax Tables [Federal, State and, when applic-able, City] listing taxes to be withheld accordingto salary and number of tax exemptions claimed,they may figure these deductions precisely. Other-wise let them use 20% as a rough estimate of thetotal average income taxes a single self-supportingperson of high school age would have to pay onthe salary he or she would probably earn.


C. COMPULSORY UNEMPLOYMENT INSURANCE, UNIONDUES checked off if any

After the students have made the necessary cal-culations to figure these deductions, ask howmany, who had been willing to take the jobsoffered at the wages previously determined, willstill want the job at this reduced take-home pay.Fewer students will want these jobs at the lowerincomes they actually yield after deducting taxes.Yet the limit imposed by the weekly budget forpaying workers makes it impossible for the teach-er-entrepreneur to offer higher gross salaries toretain the same number of workers who had pre-viously agreed to work. When the students have re-considered their decisions as to whether or not toaccept the jobs described at the reduced net take-home pay, point out:

(1) Taxes are a cost of doing business(2) Irrespective of who mails the check in pay-

ment of a tax, the taxpayer must obtain themoney from someone—from his employeesby paying them less than he otherwise could,or from his customers by charging themmore. [If an entrepreneur believes that hewill not be able to hire the workers he needsfor less money or sell enough of his produc-tion to consumers at higher prices, he willreconsider whether or not to start or con-tinue in operation. In any case, if he canavoid it, he will not long pay the tax out ofhis own pocket]

(3) Therefore, the higher taxes are, otherthings being equal, the more enterprises willbe hampered and cut back

(4) With enterprises hampered, the jobs avail-able to would-be workers will be fewer and/or less productive

(5) With enterprises hampered and workers em-ployed in less productive tasks, there will beless production than there would have beenof the goods and services consumers wantmost

(6) With less production of goods and servicesavailable, living standards will tend to belower than they would otherwise have been.

4. In the course of this discussion, point out tothe students that taxes to support a government,which really protects lives, property and individualrights, are necessary costs of doing business. Taxesbecome a burden on enterprise and productionwhen they are taken to pay for government con-

trols, regulations, subsidies to some at the expenseof others, projects that private persons would orcould undertake themselves if government did notpre-empt the field, projects that consumerswouldn't voluntarily pay for if they had the choice,and bureaucratic waste and inefficiency.

5. If the students have access to old newspaperfiles—either at a local newspaper office or in alibrary, perhaps on microfilm—ask one or several ofthem to study classified ads of some years back. Acomparison of old Help Wanted columns withthose which currently appear in the papers mightinterest the rest of the class. Ask the students re-porting to note what changes have taken placeover the years in the businesses in operation in thecommunity, the types of jobs advertised, the spe-cialized skills required, the specific worker qual-ifications mentioned, hiring methods (whether di-rect or through employment agencies), commutingdistances involved, wage offers, and so on.

6. If time permits, one of the readings for thisUnit could be assigned to every student to sum-marize in a brief resume or synopsis. Or the stu-dents might read and review one of the books onthis Unit's list of RECOMMENDED READINGS.

7. If it seems appropriate, have the students re-search some aspect of the labor question. Thereshould be adequate reference material on thesesubjects in your school or local library, especiallyif me books on this Unit's list of RECOMMENDED

READINGS are included. The books dealing witheconomic history, especially the development ofthe factory system during the "Industrial Revolu-tion" should be pertinent. See Unit 15's RECOM-

MENDED READINGS (pp. 212-213). Biographies,autobiographies, as well as books and encyclo-pedia articles about specific industries or productsshould also be helpful. Here are several suitabletopics to suggest:

a. The lot of the working man and his family be-fore the "Industrial Revolution"—living standards,working conditions, production methods—in agri-culture, industry, construction, trade, commerce,etc. (For information about the lives of ordinaryseamen in the 17th-19th centuries, for instance,see accounts of long sea voyages and explorations.What kind of work did farmers and other laborershave to do before production became mechanized?What kinds of homes did their families live in?Describe the apprenticeship system. And so on.)

b. The development of factories, the use of toolsand the division of labor made possible by in-


creased savings and investment. Perhaps each stu-dent could report on a specific industry, comparingthe work of a single employee over the years—asAdam Smith did with respect to pin-making(Chapter I in his The Wealth of Nations).

c. The history of labor laws and labor (trade)unions. (Most encyclopedias have articles on leg-islation in the field of labor and unions. The U. S.

Department of Labor also up-dates and publishesfrom time to time a chronology of "ImportantEvents in American Labor History." Your Con-gressman may be able to tell you how to order acopy.)

d. A description of some local factory, mention-ing specialized jobs of individual workers, toolsused, output and working conditions.

SUGGESTED FORMAT FOR NOTING RESULTSOF

CLASSROOM JOB AUCTIONFictitious proposal for hiring waiters and

waitresses for a summer resort hotel/motelActivity 2(e)

Maximum weekly budget (calculated by multiplying approximate cost anticipated peremployee hired at $100, i.e., $60 weekly pay in cash + $40 weekly allowance for trans-portation, board and room, by 15, half the number of students presumed to be in theclass—$1,500

Extra costs per week per employee*BOARD & ROOM (estimated)—$35

No. of students TRANSPORTATION ($50 roundbidding at each Cash salary/week* trip spread over 10-weekweekly salary* (TIPS NOT INCLUDED) summer season)—$5 TOTAL

5 $50 $40 $ 4506 55 40 570

10 60 40 1,00015 65 40 1,575

NOTE: At this point in the bidding, the teacher in the role of entrepreneur should pointout that the sum budgeted for waiters and waitresses has been topped by $75. Severaloptions are open to the entrepreneur in such a case. He may try to eliminate one of the15 applicants for any of several reasons—relative immaturity or inexperience, lack ofphysical stamina or enthusiasm, and so on. Or he might try to economize elsewhere, per-haps by hiring a bus to transport all employees together rather than paying each in cashfor his/her anticipated out-of-pocket transportation expenses to and from the resort area.In any event, the teacher should remind the class once more at this point that every en-trepreneur is always trying to juggle his expenses and budget so as to be able to offer hispotential customers the best combination of goods and/or services at the best possibleprice. He is always weighing the relative importance to his enterprise of every unit ofexpenditure, weeding out any unit which is less valuable in his view than what it costshim to retain it. The more successful he is at improving his product while reducing hisexpenses, the better his chances are for increasing his box office receipts and profits.

"The figures given in these columns are purely hypothetical, chosen somewhat arbitrarily to illus-trate the way such a fictitious auction might proceed in the classroom and be written up on theblackboard.


SUGGESTED FORMAT FOR NOTING RESULTSOF

CLASSROOM JOR AUCTIONFictitious proposal for hiring grocery clerks

Activity 2(f)

Maximum sum budgeted weekly (calculated by multiplying the average anticipated wageper week, $80 by 15, half the number of students)—$1,200

TOTAL$ 0

55180210600720850

1,0801,425

N.B. After reaching this point in the bidding, the teacher should call attention to the factthat the budget allowance would be exceeded if 15 grocery clerks were hired at$95/week. Unless the manager had some new reasons for being more optimistic abouthis future prospects, his potential box office receipts, than he had been when planning hisbudget, he would probably hire only 12 employees in this case—at $90/week. It is pos-sible, of course, that offering each potential grocery clerk an extra dollar or so might in-duce a 13th student to apply for a job, but otherwise under the conditions described hewould have to get along with only 12 grocery clerks.

No. of students biddingfor jobs at variousweekly salaries*

013389

101215

Weekly salariesoffered

$505560707580859095

*The supposed number of students shown here as willing to work at each of the various weeklysalaries mentioned are hypothetical only, to illustrate the use of this format for keeping track ofthe results of such an auction. The bidding will vary from time to time, place to place and even class toclass.

EXPLANATORY TEXT

This Unit deals with labor from three points ofview—(1) economic, (2) historical and (3) legisla-tive. The economic approach explains what laboris, why people labor and how their labor is re-warded by the payment of wages determinedthrough the market. The historical approach de-scribes and explains some changes over the yearsin the type of work done by individual workers,their productivity, earning power and working con-ditions. The third approach, legislative, discussesthe situation of individual workers today, affectedas it has been by laws concerning employer-em-ployee dealings and legally-privileged labor (trade)unions.

1. What is labor? Labor, in the usual meaningof the word, is what people do—not because it is

the one thing in the world they like to do most ofall—but because, in spite of its relatively less ap-peal, they find it the most suitable way to accom-plish what they really want, to acquire the variousgoods and services they need to survive and wouldlike to have to make their respective lives moreenjoyable. Labor is rarely considered desirable forits own sake. People seldom work just for the funof it.

As has been pointed out many times over in thisSYLLABUS, each of us has many goals, values, needsand wants. At any instant we are always aiming atwhat we consider most urgent. But few of thethings we want in life are free; in economic termsthey are considered economic goods, not freegoods. We can no more get them by wishing thancan beggars get horses to ride. The students shouldappreciate the description of this dilemma as it was


supposedly stated by the Chinese philosopher,Confucius (550/551 B.C.-478 B.C.):

Man with mouth openMust wait long timeFor roast duck to fly in.

To accomplish most of our goals, values, needsand wants, to acquire economic goods we must putforth some effort, effort which may not be muchfun, which may even be downright unpleasant andwhich may interfere with or, at best, postpone ourdoing the other things we like—pursuing other in-terests, relaxing, having fun, and so on. In econom-ics, this necessary effort, which is not an end in andof itself but which is adopted as a means to otherends, is known as "labor" or "work." Labor orwork seems worthwhile to a person only if it ap-pears to be the best possible way to accomplishwhat he or she really wants most. Therefore, laboror work is not a goal in itself, but a means to anend and, thus, a factor of production.

2. Why do people work? Briefly, becauseworking helps them accomplish what they wantmost. This doesn't mean necessarily that peoplelike to work, that they enjoy every minute on thejob, but only that under certain circumstancesthey prefer working to any other alternative. Laborusually seems desirable only because the workerexpects it to help him or her accomplish othergoals. Any enjoyment they get from labor is al-ways relative. The real choice a person faces at anymoment, therefore, is between (a) working to getthe things he or she can gain by work or laboronly or (b) not working and going without them.

Most labor, whether a person is working for him-self or for someone else, causes a certain amount oftedium, discomfort, inconvenience, annoyance,boredom or dissatisfaction. When a person is ac-tually working he or she is, at the very least, pre-cluded from doing things he or she would prefer tobe doing at that particular time. Economists callthe tedium or dissatisfaction caused by work the"disutility of labor." People labor or work, there-fore, in spite of the various disadvantages or dis-utility it brings about, because working seems tobe the best, the easiest and the quickest way toaccomplish their various goals.

No one devotes 100% of his or her time to laboror work. Most people alternate between workingand not working, spending some portion of eachday, week, month or year working and other por-tions sleeping, eating, relaxing, playing and pur-suing their individual interests. They will keep on

working only so long as it seems worthwhile, onlyso long as the gains anticipated from labor aremore than enough to make up for the disutilityincurred. If for some reason the benefits expecteddo not seem to justify the effort required, workersmay slow down on the job, do no more than ab-solutely necessary, sabotage the project theywere hired to do, work fewer hours or give upworking entirely. People cannot be forced to workwith enthusiasm and energy. They work with a willonly when they are persuaded it is in their own bestinterests. When they work it is evidence that theylook on labor, in spite of its disutility, as the mostsuitable action they can take at the time—all thingsconsidered—to satisfy their various wants and toimprove their respective situations as they viewthem.

3. In a division of labor market economy, every-one "takes in everybody else's laundry" so tospeak. Why will people work, in spite of the dis-utility of labor, for the benefit of others whom theydont even know? It is not difficult to understandthat a person would be ready to ignore the dis-utility of labor to produce the food, clothing andshelter he or she wants for him/herself and his/herimmediate family. A Robinson Crusoe, all alone onan isolated island, knows that his very survival de-pends on his personal efforts. If he wants to live,he will consider the labor involved in foraging,hunting or growing food well worth the effort. Ifhe wants to keep warm, dry and safe, he will wantto work to construct a shelter against the elementsand other dangers and to make garments for him-self. If, as and when he succeeds, his reward is di-rect and obvious—his own survival and whatevercomforts he provides for himself.

In a complex market economy, however, mostpeople produce things other people want. The re-ward for their labor is indirect, reaching them by aseemingly circuitous route through the market. Yetthe success of our complex market economy de-pends on motivating people to produce by just such"indirect" rewards. Almost every one of us todayproduces primarily for others. In return for our pro-duction of the things other people want, we re-ceive from countless other producers—through acomplex arrangement of market exchanges—themany things we want to use and consume our-selves. Practically no person, family or communityis self-sufficient nowadays—as Robinson Crusoewas by necessity. We all satisfy—with varying de-grees of success—our own needs and wants throughthe market by helping others to satisfy theirs.


Remember, the things people do voluntarily al-ways reflect what they want to do most, given thecircumstances, the limitations imposed by nature,their own abilities and knowledge and the otherpersons around them. This means we all "take ineach other's washing" precisely because we allexpect to find ourselves better off as a result. Wework to produce things for other people becausethat seems best at the moment from our respectiveviewpoints.

In a market economy, we work for money wages—not because we want the money for itself alone—but because we want things money will buy. It iseasier, simpler, quicker and more efficient to ex-change the money we earn, by working in a partic-ular job, for the things we want than it is to pro-duce them ourselves. Thus, working at variousspecialized tasks in return for pay is the most di-rect way—under the circumstances—to get thethings we and our families consume. Some produc-ers in the modern economy—farmers, bakers, ga-rage mechanics, etc.—may use and consume direct-ly a small proportion of their own output. But manyworkers consume only the products of the labor ofothers and nothing at all that they produce them-selves. A criminal lawyer, for instance, an unmar-ried male truckdriver for a women's clothing firm,

a non-smoker on a cigarette factory assembly line,etc., consume none of their own output directly.The miner in Sri Lanka (formerly Ceylon), whodigs graphite used in making pencils, may neversee a finished pencil at all. Yet such persons, eventhough they consume no part of the finished goodsto which they contribute directly, are still able toobtain various things they need and want for theirdaily living—by exchanging their own outputthrough the market.

To illustrate the widespread interdependence ofworkers throughout our division of labor marketeconomy, discuss several specific industries withthe class, the many kinds of specialized labor eachrequires and the consumers who eventually buyand consume the final products. Point out that con-sumers frequently buy and use products to the pro-duction of which they contribute nothing at alldirectly. Yet they are able to pay for these consum-ers' goods and, in the process, reward the workerswho produced them—each in proportion to his orher particular contribution to the finished good orservice—with the earnings received for their ownparticular contributions in helping to produceother goods and services. List on the blackboardthree columns—(1) industry, (2) specialized em-ployees, (3) purchaser of the final product:

Industry1. apartment house

construction

2. automobilemanufacture

Specialized employeesneeded

architects; builders; foremen; steam shoveland dump truck drivers; plumbers; brick-layers; riveters; painters; etc.

machine tool operators; assembly line work-ers; secretaries; typists; foremen; mechan-ics. Also all jobs involved in producing auto-mobile parts, the factory, as well as relateditems such as gasoline, drive-ins, highways,etc.

Purchaser who ultimatelypays the workers when he

buys the final producttenants—store clerks, sports reporters, textilemanufacturers, cab drivers, etc.—whose workis not connected at all with construction.

purchasers of automobiles and trucks forpleasure & business.

everyone who buys merchandise which isshipped by truck, etc.

Another way to demonstrate the dependence of every specialized worker on consumers who actuallypay their wages, as they buy the finished goods and services, is to list on the blackboard the special-ties of various students' parents, the final product to which each contributes, and the consumers whoultimately buy it. For instance:

Type ofemployment

1. shoe store clerk2. assembly line

worker in bakery3. bulldozer operator

in lumber camp4. truck driver for

chemical firm

Specialized taskperformed

sellingmixing dough

clearing roads &moving logsdrives a truck

Finalproduct

sale of shoesloaves of bread

paper pulp, boardlumberchemical fertilizersfor farmers

Ultimateconsumer

purchasers of shoespurchasers of bread

newspaper readershome ownersconsumers of foodgrown on farms


The important point to stress at this stage is thatin a complex market economy the reward to aworker for his labor comes to him indirectly—fromthe final consumer of the products his labor helpsto make. Employers are merely middle-men. Theyare entrepreneurs—idea men, decision makers andrisk takers—who hire workers at a certain wage orsalary in the hope that together they will be able toproduce something consumers will want to pur-chase and whose costs consumers will pay. Em-ployers must advance the funds to pay their work-ers, in anticipation that the gate or box office re-ceipts from sales of the finished products will cov-er, or exceed, all costs. When their entrepreneurialcalculations prove correct, the process benefitseveryone concerned. Consumers gain the advan-tages to be derived from the final product. Employ-ers who succeed in recouping their costs, justifytheir investment and find it worthwhile, perhapseven profitable, to stay in operation. The workersthen have relatively secure jobs and may continueas employees, transforming their labor into pur-chasing power to obtain the goods and servicesthey and their families need and want to consume.

4. Why can most workers today enjoy higher liv-ing standards—more material goods, more hours forleisure, cultural pursuits and fun as well as longervacations—than their ancestors could without hav-ing to work harder or longer and, perhaps, noteven as hard or as long? The reason is simply thatthere are more things being produced, so that thereare more goods and services available to be sharedamong the individual workers who contribute totheir production. There are two reasons why this isthe case. Most workers today can produce morethan their ancestors could in the same or less timebecause: (a) their work is more highly specialized—big undertakings are broken down into many rel-atively simple tasks, permitting exchange on awider scale in a more highly developed marketeconomy (Units 4 and 5); (b) they are helped byhaving more efficient tools to use, thanks to in-creased savings and investment which enable in-ventors and entrepreneurs to develop and producemore and better tools, machines and productionmethods (Unit 7).

Adam Smith's description of the advantages ofspecialization and of the division of labor in in-creasing the "dexterity" and thus the output of in-dividual workers in making pins is a classic. Thefirst three chapters of The Wealth of Nations,where he deals with the division of labor are wellworth having the students read and discuss in the

classroom. It is certainly true, as he points out, thatspecialization helps to improve a worker's profici-ency and thus his or her output. However, noamount of increased dexterity in performing asingle task such as digging and shoveling earth, forinstance, will enable a man using a simple spade orshovel, to approach the greater productivity of aperson using modern sophisticated earth-movingequipment. Nor can any hand seamstress or stock-ing knitter ever expect to improve her efficiency atsewing or knitting enough to compete with thespeed of sewing or knitting machines. The vast in-crease in productivity and production that hastaken place throughout the world in the last twocenturies has been due, therefore, to the use ofmore and better tools.

It certainly seems obvious, as Dean Russellstates in "How to End Poverty" (Reading No. 76),

Other things being equal, a man with a wheelbarrowand shovel can move more dirt from 'hither to yon'than can a man using only his hands. That is, a manwith a machine can produce more than a man withouta machine; or, capital formation increases produc-tion.

It is possible to improve one's living standardssomewhat with primitive handicraft methods—byworking harder, longer, more efficiently and/or byupgrading the quality of the final product. How-ever, when most people throughout the country ortrading area are able to enjoy higher living stan-dards, this must mean that there has been a wide-spread increase in the quantity and quality of con-sumers' goods available. The operator of modernsophisticated earth-moving equipment can digdeeper, lift greater loads of earth farther and in ashorter time than if he were digging with a simpleshovel or spade. His labor as a bulldozer operator ismore efficient, more productive and relativelymore valuable to consumers than the sweating,back-breaking, physical toil of a manual laborerwho digs with a hand shovel or spade, no matterhow skillful a mover of earth he may be. A factoryworker who operates a modern sewing or knittingmachine can stitch up hundreds of dresses, pairs ofblue jeans, socks or pantyhose in the same time itwould have taken to sew or knit a single garment byhand. Thus, generally speaking, people today havemore material goods and services, as well as moretime for fun, leisure and cultural pursuits, thantheir ancestors did because most workers now pro-duce more of more value to consumers in relativelyshorter periods of time—thanks to the use in pro-


duction of the more efficient tools and machinesmade possible by capitalist savings.

Capitalist savings in the form of tools and ma-chines arise, as explained in Unit 7, only after somerainy-day savings have been accumulated andmade available to persons with ideas—inventorsand entrepreneurs—who sooner or later developnew schemes, new labor-saving devices and newtechniques for improving or increasing produc-tion. However, in this Unit, we are concerned pri-marily with how this increased production finds itsway through the market, not only to the savers, in-ventors and entrepreneurs who helped make thetools and machines possible but also to all the vari-ous workers who use the new tools and machinesto produce increased quantities of the new prod-ucts.

5. How is each individual worker rewardedthrough the market in proportion to the relativeimportance of his/her personal contributions? Inother words, how is a specific wage determined?Wages are exchange ratios between units of moneyand units of labor. Thus, wages are prices paid forlabor and like the prices of anything on the market,they are determined through countless pricing auc-tions. Wages arise out of the bidding and com-petition of buyers (would-be employers looking forlabor to buy) and sellers (would-be employeeswith hours of labor to sell), each of whom ispursuing personal goals in response to personal(subjective) values. Just as there are upper andlower limits to the prices at which any particu-lar item will be traded at a particular time andplace (see the explanation of the "law of price"in Unit 6, pp. 52-53), so are there upper and low-er limits to the wages which will, and can, be paidfor units of any particular kind of labor at a par-ticular time and place.

A worker's wage depends, as should be evidentby now, on what consumers will pay for his or heroutput—as determined through many "auctions"among consumers bidding for goods and servicesand among employers competing for workers.Would-be employers, like potential consumers,break their decisions into "bite-sized pieces." Theyconsider separately every unit of labor or everyindividual worker and speculate on the specificadvantages, under given circumstances, of hiring,or refusing to hire, one more or one less worker.Will the contribution of a particular person to thefinal product, under the circumstances, make itworthwhile to hire him? Will consumers payenough for what he contributes to the product

to cover the full costs of his employment? Boehm-Bawerk's concise statement about the market val-ue of commodities applies to units of labor as well:

For actually the whole theory of subjective valueis nothing but an extended selection as to how muchdepends upon a good in terms of promotion of ourwell-being. [Italics added]

Value and Price (1960 ed., p. 136; 1973 ed., p. 20)

Thus, the wage paid any worker, in open com-petition on the market, for a particular amount ofa particular kind of labor depends upon what thatparticular worker actually contributes to the well-being of consumers—as valued by the consumersthemselves. Workers who contribute as much ormore in the eyes of consumers than the cost oftheir employment are above the "margin," that in-visible dividing line, and will be hired; those whoseproduction is not expected to equal or exceed whatthey will cost an employer are "sub-marginal"and will not be hired. It's as simple as that.

Entrepreneurs may not, therefore, and in factcannot, pay a worker more than consumers will re-imburse them for that worker's share in the finalproduct. At the same time, however, that worker'swage must always be more than enough to compen-sate him or her for the disutility of labor, i.e.,all the inconvenience and discomfort of having towork rather than being free to do what he or shewould prefer. The money wages must be highenough and working conditions pleasant enough toinduce the required number of workers, with thespecial characteristics and skills needed in the en-terprise, to prefer the jobs being offered to otheralternatives. The wage for any job, therefore,must fall within certain limits. It must be highenough to attract the needed employees and yet itmust be no more than the value consumers placeon the worker's output. Like any other price,therefore, the wage an entrepreneur can affordto pay workers—and will have to pay them if heexpects to attract and hold employees—depends inthe final analysis on the actual gate or box officereceipts the enterprise earns on the market. In thelast analysis wages depend on consumer sov-ereignty.

Differences in pay for different jobs are ex-plained not only as reflections of the value con-sumers place on the contributions of different work-ers to the final product, but also on the scar-city of qualified workers relative to the demandfor their contributions. Employers must offergreater inducements to attract workers whoseknowledge, abilities, skills, experiences and contri-


butions are more important to an enterprise and,at the same time, scarce relative to demandthan they will to obtain less crucial workers. Ap-plicants who are qualified, or who may qualify,to perform more routine, simpler tasks, are muchmore numerous relative to the number of openingsthan are those with special skills. The greater thescarcity of anything relative to the demand for it,the more valuable it will be and the higher theprice it will command on the market. For instance,competition is always keen among the many appli-cants for the relatively few "glamor jobs" in theworld. Job-seekers envision little or no disutility oflabor in work that offers chances for fame, fortuneand/or exceptional "fringe benefits." As a result,the more exciting occupations usually attract somany more applicants than there are openings thatcandidates vie with one another to display extra-ordinary qualifications and often agree to workvery long hours at very low pay.

The classroom labor auctions should help todemonstrate how the wage for any specific job isdetermined by the relative abundance or scar-city of qualified applicants for that job. Upon com-pletion of the auction, the teacher may find it help-ful to discuss the theory of wages by stressing thefollowing points in sequence:

a. Everyone—would-be employer and job-seekeralike—was bidding in the attempt to improve hisor her situation as he or she saw it under thegiven circumstances

b. Everyone bid according to his or her own per-sonal (subjective) scale of values

c. Would-be employers looking for workers on thefree market do not consider workers en masse,but individually, weighing at each instance therelative advantages of hiring one more, or oneless, person

d. Would-be workers looking for jobs do not con-sider work in the abstract but weigh the prosand cons of the specific opportunity offered ata particular time and place relative to those ofother specific alternatives

e. If neither would-be employer nor job-seekermakes a mistake in judgment or in anticipatingtheir future wants, they both expect to be betteroff than they would have been otherwise as aresult of their voluntary agreement

f. Barring force, fraud, violence and error, thereis a tendency on the market for jobs to be of-fered to, and held by, those who want themmost

g. No one who voluntarily takes one of the jobs ex-pects to receive less, and he may very likely re-ceive more, than enough to compensate himfor the disutility he believes the labor, underthe given circumstances, will entail

h. No one who hires a worker voluntarily is forcedto pay more, and he may very likely pay less,than the value he expects to derive from thelabor he will be receiving

i. Those who do not accept jobs, those who con-tinue in their present occupations or pursuepreviously-made plans, do so because they con-sider these more advantageous to them underthe circumstances, than taking one of the newjobs offered

j. Insistence by any would-be worker on wagerates higher than those established on the mar-ket—whether due to error, ignorance, stub-bornness or outside interference (by minimumwage laws, for instance)—means that personwill not be hired for that job at that time

k. Persistence by any would-be employer in offer-ing wage rates lower than those established onthe market—whether due to error, ignorance,stubborness or outside interference—means thatwould-be employer will not find workers will-ing to become his employees under those condi-tions

1. However, barring force, fraud or human error,there is a tendency on the free market for every-one who is willing to work at market wages tofind employment he considers suitable, in viewof all available alternatives

m. Thus, everyone tends to gain as a result of vol-untary labor agreements on a free market. Bothwould-be employer and job seeker judge thespecific situation to the best of their abilities-comparing all other opportunities with that of-fered by hiring (or refusing to hire) a particularworker, or by accepting (or rejecting) a partic-ular job. The employer hires and the employeeaccepts a specific job because the terms agreedupon seem better to both than any alternativeopen to either. At the same time, those who re-ject a specific job do not consider the net in-come enough to compensate for its disutility oflabor or the other opportunities lost

n. The market wage for a certain quantity andquality of labor, while necessarily acceptableto both employer and employee involved, ul-timately depends on the personal (subjective)values of consumers and the prices they willpay for it in the final product. A would-be em-


ployer will offer higher wages to workerswhose production he expects to contributemore to the well-being of consumers and hisgate or box office receipts than he will to thosehe expects to contribute less

o. The wage paid on the free market for any par-ticular kind of labor, therefore, conforms to"economic law." It is forced by consumer sov-ereignty, competition and the pricing processto fall within certain limits determined by sup-ply and demand. These two factors (supply anddemand) rest in turn on the personal (subjec-tive) values of consumers at the margin—i.e.,the invisible dividing line between those whobuy and those who refuse to buy the goods andservices produced and offered on the market bythe specific employers and employees con-cerned.

6. / / a workers wage depends on the value toconsumers of what he produces, it would seem thata person who operated a modern mass produc-tion machine would earn much more than one whoworked with simple hand tools—a pencil or a ham-mer or a pair of scissors. Does he? If not, why not?The productivity of some workers is increased tre-mendously by tools and machines. Other workersperform specialized tasks that cannot be sub-stantially improved or speeded up by using me-chanical, mass production equipment. Yet some-how their wages must be related through the mar-ket. The earnings of a bulldozer operator on a high-way construction job who moves thousands ofcubic feet of earth in a day are not necessarilymuch more than those of another man on thatsame construction job who smooths the earth witha hand rake in preparation for pouring blacktop.The operator of a sewing machine who stitcheshundreds of garments daily does not receiveseveral hundred times the pay of the seamstresswho adds finishing touches by hand to a relativelyfew garments each day. The wages of a barber,file clerk or typist are usually not much, if any, lessthan those of persons who operate complex com-puters or huge mass production machines that"perform difficult tasks accurately and quickly. Al-though workers throughout the entire economytoday have higher living standards than their an-cestors did because of the increased productivityof modern efficient tools and machines, the wageof a particular worker does not relate specificallyto his total output with the aid of the tools he uses.His specific wage is related, through competition,

to the wages of all other persons throughout theeconomy who are capable of, and might becomeavailable for, the work he is doing. The opportunityfor workers to move from job to job, from industryto industry, from employment to unemploymentand vice versa provides employers with a "pool" ofpotentially willing and qualified workers. The op-portunity for employers to seek workers whereverthey may be found helps keep the wages for com-parable labor comparable throughout the econo-my.

The market economy may be likened to a com-plex grid or network of interconnecting and inter-related phenomena (Unit 5). If there is free andopen competition, the give-and-take, push-and-pull of acting individuals connected with the mar-ket—with the purchasers of final products "pullingthe strings"—permits employers and would-be em-ployers to bid so as to attract qualified workers andwould-be workers from their present occupationsinto those enterprises where they are wanted andneeded most. Wages and working conditions offer-ed will adjust. Consider barbers and hairstylists,for instance. When men and women wear longhair and don't care to have it shaped or styled byprofessionals, fewer barbers and hairdressers arecalled for and their numbers per thousand of thepopulation will decline. But if fashions change,men and/or women who prefer to have their hairspecially cut, shaped or curled will have to payrelatively higher prices for this service to inducemore persons who know how, or will learn, to stylehair to enter that profession. Persons currently un-employed or "between jobs," or young people em-barking on new careers may decide to becomebarbers and hairdressers. Factory employees andconstruction workers may shift to barbering if theyfind it congenial or lucrative enough to justifychanging occupations. In this way, consumer pur-chases and refusals to purchase forge interconnect-ing links throughout the ever-shifting labor mar-ket, among employers, employees and the unem-ployed. Persons shift from employment to unem-ployment and back to employment again, transferfrom job to job, back and forth across professionaland industrial lines, according to their personalsituations, inclinations, prevailing market condi-tions and relative wages offered in jobs for whichthey may qualify. The labor market's continualstate of flux, tends to make the wages offeredworkers with similar skills and aptitudes more orless comparable throughout the entire economy.

7. What is the role of labor unions in the labor


market today? How do they influence employmentand wages? Time and energy are scarce. Thus itis a human characteristic to want to conserve them.It is not surprising, therefore, that people oftencooperate or join together in groups or societies inthe hope of attaining more easily some commongoals. Women organize; men set up business asso-ciations; religious persons establish churches;workers combine to form labor unions; and so on.Cooperation of this kind is natural, desirable andeffective for attaining certain ends, so long as theseorganizations remain voluntary, respect the rightsof individuals and reject the use of force or threatof force as a means for acquiring members, fundsand conducting their activities. As has been point-ed out time and again in the course of this SYL-LABUS, open competition on the market helps toassure that the supply of and demand for anything—commodities, services, workers, jobs, etc.—will al-ways tend to be equal—if no interferences in theform of force, fraud, violence or threat thereofoccur. Free and open competition tends to checkthe accumulation of excessive power in the handsof any single person, firm, group, association, so-ciety, union or faction. However, the "balancewheel" of competition may be sabotaged if notcompletely destroyed by the intervention of forceor threat of force.

Many organizations start on a completely volun-tary basis only to reject voluntarism later, espe-cially if they find they may enjoy benefits from theuse of force or coercion in the form of govern-ment-granted legal privileges. At times certainemployers have obtained special favors—tariffs orimport quotas, monopoly franchises, governmentcontracts, subsidies, price supports, low interestrates, the right of eminent domain, etc.—whichgave them special advantages over competitors.At other times, officially recognized organizationsof workers have obtained various government-granted favors. Labor unions were originally volun-tary organizations. Workers combined and coop-erated for common goals, with the general sanctionof the courts and judges. Law Professor SylvesterPetro speaks of the early unions in this way:

The vast mass of authoritative judicial opinion fromthe second half of the nineteenth century establishesbeyond any doubt the common law's acceptance of theright of workers to organize and to take peaceable,nonfraudulent, and noncoercive concerted action inpursuit of higher wages. The legal rules were largelythose which a logical application of free-market prin-ciples would require. Employers had a right to freeaccess to the labor market. All workers had a right to

join or refuse to join unions, to apply for work at wagessatisfactory to themselves; to refuse to apply for work,or to cease work, individually or in concert, whenwages were unsatisfactory. No one had the right to usefraud or force against others in the exercise of thesevarious rights.So, where workers were dissatisfied with their wages,they had a common-law right to cease work in concert.But they violated the law if they used force or fraud toprevent other workers from seeking the jobs they va-cated. For such forcible prevention negated the rightof employers to seek other workers, and the right ofother workers to seek employment.

The Labor Policy of the Free Society(Ronald Day Co., 1957, p. 193)

In recent decades, our federal government haspassed many laws granting special privileges tocertain labor unions and their members. Some ofthese laws have attempted to create jobs by usingtax funds to finance public works, stimulate indus-tries in "depressed" and "disaster" areas, etc. Min-imum wage laws have been enacted in the beliefthat they help raise the wages of the less capableworkers. Other laws have tried to raise the wagesof some workers by reducing the number of per-sons competing for the jobs. For instance, unem-ployment payments and welfare benefits, militaryservice obligations, immigration quotas, SocialSecurity payments to oldsters, and so on, havetaken many persons off the labor market. As aresult, these programs have helped to raise thewages of remaining job-holders—and at the sametime also, don't forget, they have raised the taxesthose job-holders must pay. State and local lawsas well as judicial decisions have had similar ef-fects by restricting "child labor" and compellingmany young people, who would have liked to work,to attend school. Among the most valuable legalprivileges granted favored workers have been (a)the right of "recognized" unions to represent allworkers in certain categories during labor nego-tiations and (b) the opportunity of persons whohad been working for a firm to strike and to picketand thus effectively to keep others from beinghired for the jobs whose terms and conditions thestrikers are rejecting.

Labor unions have been singled out time andagain for special legislative treatment. Such lawshelp only a relatively small number of workers, theprivileged union members. However, to understandthe economic situation of individual workers today,it is essential to know something about the lawsdealing with unions, wages, conditions of employ-ment and business. It might be well for the stu-


dents to read the articles on labor unions in theBASIC READER and perhaps also one of the short-er books on this Unit's list of RECOMMENDED READ-INGS. Here are a few of the major landmarks infederal legislation which have had considerable ef-fect on the situation of workers in this country:

1890—Sherman Anti-Trust Act, prohibiting anyrestraint on interstate commerce in theform of an agreement, contract, or trust.

1908—The Supreme Court held (Loewe v. Law-lor) that the Sherman Anti-Trust Act ap-plied to workers' strikes and boycotts.The U. S. Supreme Court in various de-cisions (1898-1917) approved the right ofthe several States to regulate the numberof hours per day a worker could work incertain industries, the age below whichchildren could not work in some jobs, andconditions under which women could andcould not be employed.

1913—Department of Labor established "to fos-ter, promote and develop the welfare ofthe wage earners of the United States, toimprove their working conditions, and toadvance the opportunities for profitableemployment."

1914—Clayton Act, Section 6, provided that"nothing contained in the Anti-Trust lawsshall be construed to forbid the existenceand operations of labor organizations."Yet the Supreme Court continued to ruleas it had before, against labor unions ifit considered their actions "in restraint oftrade."

1932—Norris-LaGuardia Anti-Injunction Act,prohibiting federal courts from issuinginjunctions in labor disputes, effectivelyfreeing labor unions from Anti-Trust re-strictions. This Act also formally ex-pressed government policy as in favor oforganized labor and outlawed "yellow-dog" contracts, that is contracts whichspecified as a condition of employmentthat workers not join unions.

1933—National Industrial Recovery Act, provid-ing general regulation of all industries.Section 7a concerned labor unions andexpressly granted workers the right "toorganize." However, the NIRA was de-clared unconstitutional by the SupremeCourt on May 27, 1935.

1935—National Labor Relations (Wagner) Act,based on Section 7a of the NIRA, guar-anteed workers the right to organize andto elect representatives for collective bar-gaining. It set up the National Labor Re-lations Board (NLRB). It also restrictedthe freedom of employers by prohibitingcertain rather vaguely defined "unfairlabor practices," leaving their determina-tion to the NLRB.

1938—First federal minimum wage established.Under the Fair Labor Standards Act, theminimum wage in certain types of jobswas set at 25<P per hour. This minimumhas since been raised several times untilit is now (1975) $1.80 to $2.10 per hourin the various types of covered employ-ment, with further increases scheduledfor 1976 and 1977.

1947—Labor-Management Relations (Taft-Hart-ley) Act, passed June 23, 1947, over Pres-ident Truman's veto, replaced the Wag-ner (1935) Act. This act was intended toeliminate some "unfair practices" on thepart of labor organizations, picket-line orstrike violence and threats to workers soas to win their support for union activ-ities. The Taft-Hartley Act outlawedclosed shops requiring union membershipof workers before hiring, although it per-mitted union shops requiring that non-union workers hired become union mem-bers within 30 days or relinquish theirjobs. Officials of NLRB-recognized un-ions had the right under this law to serveas exclusive bargaining agents in labornegotiations.

Section 14b of the Taft-Hartley Actpermitted the states to enact "right-to-work" laws—and many have. The intent ofsuch laws is to make open shops virtuallycompulsory. Employees should not bemade to join or promise not to join a unionas a condition of employment. Thus, hir-ing contracts which discriminate on thebasis of union status are usually forbiddenor declared unenforceable.

1948+—Various federal, state and local laws andregulations imposed to assure "fair em-ployment practices," protect "civil rights"and prohibit employers from discriminat-ing among workers on certain grounds-race, religion, sex, age, etc. Yet their ef-


feet has been to require the employers af-fected to discriminate on precisely thesegrounds—to record this information onemployee files and to institute quotas forhiring representatives of the various mi-norities. As a result employment andwage decisions are often made now, noton market criteria, but on the basis ofrace, religion and the like.

1959—Labor Management Reporting Disclosure(Landrum-Griffin) Act passed by Con-gress, intended to alleviate certain unionabuses by bringing them to public notice.

1971+—A wage-price freeze (announced August1971, expired 1973) later modified to al-low certain wage and price increases.Price and wage controls, even the possi-bility of new or altered price and/or wagecontrols, add substantially to the uncer-tainties entrepreneurs must consider intheir calculations.

In addition to these various government pro-grams granting legal privileges to organized laborunion officials and delegating substantial powerover labor negotiations to the National Labor Rela-tions Board (NLRB), many laws have been enactedto regulate employer-employee relations on con-veyances engaged in "interstate commerce"—rail-roads, trucks, busses, planes, etc. The first suchlaw was enacted in 1888, "to facilitate the peacefulsettlement of labor disputes" in the railroad in-dustry. Most wages and hours in "interstate com-merce"—the definition of which has been substan-tially expanded over the years to include practical-ly all industry within the country—are now, in ef-fect, under federal control.

8. Why are many would-be workers sometimesunemployed? Something should be said aboutthe cause of unemployment—both voluntary andinvoluntary. The reasons for unemployment cannotbe analyzed without considering wage rates. Asshown by the classroom auctions, there is a tend-ency on a free market for everyone to find workwho is willing to accept the market wage for hislabor. Applicants for jobs who ask more than themarket wage for certain jobs will not be hired forthose jobs at that time and place. However, byturning down specific jobs at the market wages forthose jobs, individuals show their preferences; un-der the circumstances they prefer to do somethingelse. They are not involuntarily unemployed. Theymay not want to work so long, so hard, at that loca-

tion or at that kind of job. They may be waiting—perhaps in vain—for something better to turn up,something they expect to be more fun or moreprofitable. They may want to loaf, study or travelfor a while. Of course, they may decide later theywere wrong; they may wish they had not rejectedwork they could have done or jobs they could havehad. But whatever their reasons for turning downparticular jobs, if the choice was theirs, their "un-employment" is voluntary, not involuntary.

In the real world of change and fallible humanbeings, there will always be some involuntary un-employment, caused by unanticipated changes,lack of knowledge and human error. Some peoplewill always be between jobs or out of work involun-tarily as a result of conditions they could not antic-ipate or prevent or because of changes due to theirown or someone else's actions. Many things maydisrupt a person's plans—(a) accidents, (b) acts ofnature, (c) the actions of others, (d) the passage oftime, (e) personal mistakes in judgment, etc. Theeffects of changes may be compounded still furtherby human error or ignorance. If a business firm'sgate or box office receipts decline for any reason-mistakes in managerial judgment, the introductionof competing products, changes in productionmethods, or sources of supplies or raw materials—itmay have to curtail operations or go out of businessentirely. All such changes can cause unemploy-ment. However, entrepreneurs are always trying tocope with such changes affecting the ideas, actionsand plans of many persons. Some companies willexpand as a result, others will contract and stillothers will be compelled to go out of business. Inthe wake of such changes, some workers mustshift jobs, perhaps moving to other fields of pro-duction, maybe to other geographical locations.Thus, even on a free market, some persons will al-ways be out of work and looking for employment.When workers and employers remain flexible,however, and anxious to minimize or avoid lossesby adjusting as soon as possible, no individualworker need endure involuntary unemployment forlong. If competition on the market is free and open,some entrepreneurs sooner or later will try out newideas in the attempt to supply consumers withsomething better, cheaper or better-and-cheaper.This will call for hiring workers. Thus, changesmay reduce the need for workers in some fields ofproduction, but in a free market economy new em-ployment opportunities will open up jobs in otherareas. Workers forced out of firms that go undershould soon find other employment. Barring force,


fraud, human error and ignorance, therefore, peo-ple change their plans relatively quickly on the freemarket and adapt to new conditions. Those whoare willing to work for the wages established onthe market under the new conditions will find em-ployment again before long. Once more they willbe in a position to earn money for themselves'bycontributing to the production of goods and ser-vices for others.

9. Why then are some people who would like towork sometimes faced with the prospect of long-term involuntary unemployment? Real wagerates, i.e., the total cost of hiring workers, are cru-cial. The wages paid individuals on the market areinfluenced not only by the ideas, choices and ac-tions of other persons. Many non-market phenom-ena also affect the cost of hiring workers. Themany laws and regulations, which hamper individ-uals in making choices add uncertainties to busi-ness speculations and increase the costs of produc-tion. Such government interventions inevitably re-quire many producers to curtail their operations.This reduces total production and the number ofworkers needed. Then many would-be workers canno longer find suitable employment and must re-main involuntarily unemployed for indefinite pe-riods of time. With less produced, the marketprices per unit of the fewer goods available on themarket tend to rise and consumers must restricttheir purchases and get along with less. As pricesand wages are then no longer determined in freeand open competition, market forces no longer op-erate to make the number of workers and the num-ber of jobs at market wages come out even. Entre-preneurial plans must be shifted because of thelegal restrictions and production must be divertedfrom trying to satisfy the most urgent demands ofconsumers into channels which do not violate gov-ernment regulations.

Government exaggerates and prolongs involun-tary unemployment in many ways. Some tax lawshamper businesses, add to costs and prevent themfrom profiting to the full extent of their success insatisfying consumers. As a result, their gate or boxoffice receipts decline and they are unable to save,invest and expand as they otherwise could havein response to consumer demand. Various "protec-tive" laws—tariffs which raise the prices of certainpotentially competitive foreign goods on the U.S.domestic market, quotas which reduce or stop im-ports, subsidies or licenses to favored businesses,etc.—keep some high cost firms in operation in de-fiance of consumer wishes. Other laws prevent

employers from paying more than, or less than,certain wage rates, restrict competition, compelthem to bargain with certain employees or repre-sentatives of certain recognized unions only, pre-cluding other would-be workers from applying forjobs or would-be employers from hiring them ifthey did. Still other laws dampen the incentive ofmany to work by providing "relief" to those whoare unemployed.

The classroom labor auctions should demon-strate how non-market interventions tend to raisecosts and reduce employment. Almost any currentnews story about labor problems offers an oppor-tunity for the students to discuss or report on theeffects of specific government interventions onwages, employment and production. For instance:

a. The addition, or repeal, of a tax on salaries—By increasing (or reducing) the cost of employ-ing each worker, an employer would be able toemploy fewer (or more) workers

b. An increase in the minimum w a g e -Anyone whose contribution to the final productwas considered less valuable to the employerthan the newly decreed minimum wage wouldhave to be fired, or asked to work surreptitious-ly at a lower rate. The employer might have tocurtail his operations—or seek more savings,diverting them from other uses, to invest in newmachinery to do the work mechanically withfewer, but more skilled and higher paid oper-ators

c. A strike of all workers in a firm, forcing it toclose for a time and then to yield to union de-mands for higher wages for all workers—The effects of such coercive strikes on produc-tion, number of workers, wages, profits, sav-ings, as well as future savings, investments andemployment, are explained in some detail inPercy L. Greaves, Jr.'s "How Wages are Deter-mined" (Reading No. 37)

d. A change in the income tax laws that increases(or reduces) the sums persons are able to saveand invest per year—Increased savings and investments help to in-crease production, employment and the earn-ings of workers. The effect of reduced savingswill be felt in future years, when fewer workerscan be hired because investments in the form ofproduction facilities had to be restricted. Thefuture prospects for the production of energy-natural gas, oil and electricity, especially—havebeen seriously harmed by government actions


that have limited profit opportunities in thoseindustries

e. A ceiling placed on wage boosts for workers insome industries, at a time when governmentpolicies are leading to increases in the quantityof money so that prices generally are rising—Because they cannot raise salaries, employersin those industries are hampered in retainingtheir most valuable workers or in bidding fornew ones. Thus they are hindered in expandingor improving production to suit consumers. Em-ployers and employees, discouraged at theirpoor prospects, will gradually shift to otherindustries that are not under controls, perhapsprecisely because their output was not con-sidered so essential. Thus controls tend to dis-tort prices, defy consumer wishes and discour-age urgently wanted production.

SUMMARY

As pointed out earlier, the purpose of this Unithas been to deal with "labor, wages and employ-ment" from three points of view:

1. economic—to show how wages, i.e., the pricesin money terms paid for specific units of labor, areactually determined in the course of many "auc-tions" on the market by the bidding and competi-tion of countless acting individuals, each seekingto attain his various ends

2. historical—to show the effects over the yearsof more specialization, division of labor and the useof more efficient tools and machines provided byincreased capitalist savings and investments

3. legislative—to show how the natural inclina-tion of individuals to combine and cooperate forcommon goals—in the case of workers—has beenespecially aided and abetted by government, withthe result that organizations of workers, laborunions, now enjoy a privileged position with pow-ers denied to voluntary organizations.

This SYLLABUS is devoted primarily to presentingeconomic theories which explain the actions of in-dividuals in seeking to attain their various ends bypeaceful means. The important conclusion to belearned from studying economic principles is thatpersons can accomplish more of their goals, moreeasily, more quickly and more successfully whengovernment protects lives and property, settles dis-putes that the individuals concerned cannot re-

solve peacefully and assures freedom for every cit-izen to pursue his or her own personal interests asbest he or she can by voluntary means withoutusing force or threat of force to interfere with theequal rights of others to do the same. However,governments today are no longer limited to fur-nishing equal protection under law to every citizen..They intervene actively in the economy to alterconditions in directions of their choosing. Thus, itis important to understand something about to-day's hampered market economy. As a conse-quence, most Units in the SYLLABUS present notonly basic economics, but also introduce some ofthe problems that arise when individuals are ham-pered—whether by other individuals or by govern-ment officials—in peacefully trying to attain theirvarious goals.


CAPITALIST SAVINGSCLOSED SHOPCOLLECTIVE BARGAININGCONSUMER SOVEREIGNTYDISUTILITY OF LABOREMPLOYEEEMPLOYER"INDUSTRIAL REVOLUTION""INTERSTATE COMMERCE"LABORLABOR (TRADE) UNIONMARGINAL WORKERMARKET ECONOMYOPEN SHOPPICKETS, PICKETING, PICKET LINES"RIGHT-TO-WORK" LAWSSTRIKEUNION SHOPWAGE, WAGE RATES"YELLOW-DOG" CONTRACT


Articles

In the BASIC READER:35. "Bargaining," Paul L. Poirot36. "Collective Bargaining Wrong in Principle," John

W. Scoville*37. "How Wages are Determined," Percy L. Greaves,

Jr.38. "Jobs For All," Percy L. Greaves, Jr.

•39. "Wages and Productivity," W. Marshall Curtiss•40. "Competition, Monopoly and the Role of Gov-

ernment," Sylvester Petro


•41. "The Economics and Politics of MY JOB," Lud-wig von Mises

•64. "Marx's View of the Division of Labor," GaryNorth

76. "How to End Poverty," Dean Russell•78. "Facts About the Industrial Revolution,'" Lud-

wig von Mises

Books

Carson, Clarence B. Throttling the Railroads (LibertyFund, 1971; copies distributed by FEE). Chapter 9

Cooley, Oscar W. Paying Men NOT to Work (CaxtonPrinters, 1964)

* Greaves, Percy L., Jr. Is Further Intervention a Curefor Prior Intervention? (FEE, 1956)

Hazlitt, Henry. Economics in One Lesson (Harper,1946; 2nd ed., MacFadden, 1962; Manor Books,1973). Chapters 7, 8, 9, 10, 19, 20 and 21

* The Failure of the "New Economics" (VanNostrand, 1959; Arlington House, 1973)

'Mises, Ludwig von. Human Action (Yale, 1949/1963;Regnery, 1966). Chapter XXI

Petro, Sylvester. The Kohler Strike (Regnery, 1961;Western Islands, 1965)

*Velasco, Gustavo R. Labor Legislation from an Eco-nomic Point of View (Liberty Fund, 1973)

10. MONEY, CREDIT AND BANKING:BARTER VS. MONETARY TRANSACTIONS


1. As an introduction to this Unit and as achange of pace, it might be desirable—if funds areavailable for the purchase of a film strip—to show"Understanding Inflation" by Henry Hazlitt, econo-mist, and George Koether, writer-producer. Thisfilm strip, prepared for showing on a Dukane Pro-jector, has sound accompaniment and lasts 20minutes. For prices write to: B. G. Koether Asso-ciates, Box 1419, Bridgeport, Conn. 06601.

2. To help the students understand barter, holda sort of trade fair or market in the classroom.Name a certain day as "Swap Day." Ask eachstudent to bring to school on that occasion one orseveral items, large or small, which they would bewilling to part with if they could swap it for some-thing else they wanted. The students may bringanything they would like to trade, such as extraball-point or felt-tip pens, unappreciated gifts, abattery radio no longer needed, last year's text-book or an old novel, a sweater that is too large ortoo small, an old beat-up frisbie, a guitar no onein the family wants, a game left over from child-hood, and so on. Caution the students that theitem(s) they offer to swap must be their own per-sonal property, things they are free to dispose of.

When the class assembles on Swap Day, haveeach student show the thing, or things, he is offer-ing. Then, let the members of the class mix andmingle, to higgle and haggle with one another.Remind them that all trades consummated at theclassroom trade fair will be "for real." Assure thestudents, however, that no one is forced to barter.Exchanges are to be made only when both stu-dents concerned in a trade are persuaded thatwhat they will receive in the barter is somethingthey really want more than what they will be re-linquishing to make the trade. All trades must bebarter transactions—commodity for commodityonly—no dickering or bargaining in money allowed.

Trades can be carried out, of course, only whentwo parties, each with something to offer that the

other prefers to what he has, actually succeed indiscovering each other. It may be that no tradeswill result. Perhaps no student will be willing topart with the item he offers for what another iswilling to give for it in exchange. For instance, agirl whose ballpoint pen one of the boys wantsmay not be interested in the particular necktiehe is willing to give for it in trade. She would bewilling to take his old battery radio, but he valuesthat more than her ball-point pen and refuses totrade. Perhaps these two potential traders can finda third student who wants the necktie and has ascarf the girl would like. The girl can then give thepen to the boy with the scarf who, as a result, willbe able to trade the pen for the necktie he wants.

When all the barter transactions possible underthe conditions prevailing in this particular class-room market have been concluded, explain thepurpose of barter, its advantages and disadvan-tages (see p. 107).

3. A few days after Swap Day, announce a sec-ond trade fair, a sort of "White Elephant Sale."Have the students bring to class, as they did forSwap Day, one or several items they no longerwant or need. They may even offer once more thesame items they tried to barter earlier but kept be-cause they could find no one with anything suit-able to give in trade who wanted them. Studentsat this "White Elephant Sale" may either barteror offer money. Bargaining on money terms maytake some higgling and haggling, but the studentswill probably discover it is easier to arrange tradessatisfactory to both parties if they need not belimited to trading directly commodity for com-modity, but have the option of trading in units ofa "medium of exchange," money. For an explana-tion of the advantages over barter of trading formoney, see p. 107.

4. A "White Elephant Sale" could be held on aschool-wide basis to raise funds for a class orschool project. The economics class should solicitfrom the entire student body "white elephants,"objects from garages and attics that students and

98

10. MONEY, CREDIT AND BANKING 99

their families no longer want. The economics stu-dents should make all arrangements, being re-sponsible for setting up displays and pricing eachitem as they would at a church fair or barn sale.In the beginning allow no higgling or bargainingamong the students; have the objects priced asthey would be in a store—for the buyers to accept orreject as they choose. After a certain time whenthe bulk of the initial sales have been concluded,the students should re-price the remaining items,reducing their prices in the hope of attracting somebuyers who refused to purchase at the originalprices.

Having to cut prices to make sales will provideanother opportunity to point out that any fair ormarket is a complex of many auctions—betweenowners, who would like to sell if the price is right,and potential customers. The sellers set askingprices for the various goods and commodities; po-tential buyers purchase these items at the pricesasked, or refuse to purchase them as they see fit,each in accord with his subjective (personal) scaleof values. The "law of price," defined in Unit 6,explains every trade completed in this "White Ele-phant Sale" just as it does any other voluntarytransaction. Having to reduce the prices of someitems to complete sales also illustrates the fallacyin the idea of "administered prices." Just because aseller names the sum of money he would like to re-ceive for an item doesn't mean he can "administer"or fix any price he chooses. If his asking price ismore than potential customers will pay, he has noability under free enterprise to make them pay it.If he wants to sell, he must reduce his asking priceto a more realistic figure, until some customer isready to pay it.

5. One extremely important point to be ex-plained in this Unit is that almost everyone wants acash holding, some cash money on hand at alltimes. A second extremely important thesis of thisUnit is that an individual's desire for cash holding(a) is limited—no one, except perhaps a miser,wants to accumulate an unlimited amount ofmoney for its own sake; (b) varies according to theparticular time, place, situation and personal cir-cumstances. A cash holding is a necessity and/or aconvenience for most people—they want cash onhand so as to be prepared when expenses arise.Few people want to hold large sums of cash moneyfor very long. To bring these two truths home tothe students, ask each to make a list of what he orshe would do with a half-million dollar "windfall,"should they win a lottery or inherit that sum un-

expectedly from a distant uncle. How much wouldthey spend on various items? How much wouldthey save, invest or bank? How much cash wouldthey actually keep in their pockets? Discuss theirlists in the classroom, drawing attention to thefollowing points:

a. the aims and goals of different students varywidely

b. they all have different scales of values (Unit 3)c. they all have different time preferences (Unit 7)d. everyone retained some cash for daily spending,

but their cash holdings are small relative totheir half-million dollar "windfall"

e. although almost everyone would be pleasedwith a half-million dollar "windfall," prac-tically no one wants to keep that much moneyas cash—few persons want money for itselfalone; they want money only for what it canbuy, i.e., for its purchasing power

f. money, therefore, is a means (medium) formaking trades (exchanges). Thus money is a"medium of exchange," a "trading commod-ity" which helps people obtain what they reallywant.

6. Start a collection of coins in the classroom, sothe students may examine and compare the var-ious denominations and types currently in circula-tion in this country. If any students have a fewpieces of old or foreign money at home, perhapsthey would bring them to class so the others maysee and compare them with modern U. S. coins.There are many inexpensive books on U. S. coinsand coin collecting that describe changes over theyears in coin denominations, designs, etc. Howmany differences can the students spot in current-ly used coins—design, color, make-up, mint marks(S for San Francisco, D for Denver, P for Philadel-phia), and so on.

NOTE: Due to defense needs during World War II, themetals which had been used in minting coins becamemore valuable for industrial uses than in coins. Pro-ducers of munitions and other commodities requir-ing copper, for instance, bid higher prices for thatmetal in market "auctions" than government mintswould or could. So the formulae of alloys used inpennies and nickels were changed. Industrial de-mands have also raised the price of silver on the mar-ket in recent years. As a result, government reducedthe amount of silver in monetary alloys and in 1965substituted cupro-nickel "sandwich" coins for silverones. Silver dollars no longer circulate as money atall and even the new sandwich-type Eisenhower dol-lars are rarely found outside coin collections. Silverhalf dollars too have become so valuable to producers


for their silver and so popular with coin collectors thatthey are practically never used as money. Even thesandwich-type 50<P pieces rarely stay in circulationvery long. For amplification of the reason why metalliccoins disappear from circulation during an inflation,see the text that follows and definition of "Gresh-am's law" in the GLOSSARY.

7. Ask the students to examine and comparevarious types and denominations of paper money.

See the notation across the top of the face of eachbill. Silver Certificates were not printed after 1963,and U. S. Notes are rare. Thus, unless some stu-dents have samples of old types of paper money,they are not likely to locate any but Federal Re-serve Notes.

Discuss the information revealed by the variousnumbers and letters appearing on both sides of aFederal Reserve Note. See the following diagram.

There have been three kinds of paper money in recent years—designated on the face of each bill at the top,and also by the color of the seal at the right:

Green Seal and Serial numbers—Federal Reserve NotesBlue Seal and Serial numbers—Silver CertificatesRed Seal and Serial numbers—U. S. Notes

The large letter in the black seal at the left of FederalReserve Notes, as well as the initial letter in the serialnumbers printed in ink, indicate the Federal ReserveDistrict as follows:

A—BostonB —New YorkC—PhiladelphiaD—ClevelandE —RichmondF —Atlanta

G—ChicagoH—St. LouisI —MinneapolisJ —Kansas CityK— DallasL—San Francisco

The large numbers in the corners show the number ofdollars, the note's "denomination."

The four middle-sized numbers indicate the FederalReserve District issuing the particular notes: 1 corre-sponding with A (Boston); 2 with B (New York) and soon, down to 12 which corresponds with L (San Fran-cisco). Some Federal Reserve Notes have a small star(in place of a letter) in front of the serial numbers, in-dicating that these particular notes replaced notes muti-lated in printing.

BOOOOOOOOCTREASURER OF THE

U.S. (SIGNATURE)

\

BOOOOOOOOC

WASHINGTON, D.C.

O F000

SERIESDATE SECRETARY OF THE

TREASURY Z

(SIGNATURE)

small letter indicates theposition of this particularnote occupied on the platefrom which it was printed.

The signatures on the notes changevvhen ad-ministrative Treasury officials change

The Series date remainsThe same until a majorchange is made in plate design. When smallchanges are made, such as a signature change,a letter is added to the Series date, or a newletter substituted for the previous one.

This small letter refers to theposition of this particularnote on the plate from whichit was printed. The smallernumbers following indicateplate number.

REVERSE SIDE: The phrase "In God We Trust" was first printed on Federal Reserve Notes in 1957 (Series 1957),and then in 1962 on some of Series 1935. The only number on the back of a note, other than its dollar denomination, isa small number in the lower right hand corner, the plate number from which that note's back was printed.


Have the students compile as complete a list as they can of the persons whose portraits appear on the frontof each denomination of our paper money, and of the engravings that appear on the reverse. This list is forthe teacher's reference:

Denomination

$1.002.005.00

10.0020.0050.00

100.00500.00

1,000.005,000.00

10,000.00100,000.00

Portrait on Face (obverse)

George WashingtonThomas JeffersonAbraham LincolnAlexander HamiltonAndrew JacksonUlysses S. GrantBenjamin FranklinWilliam McKinley\Grover Cleveland 1James Madison >Salmon P. Chase IWoodrow Wilson 1

Engraving on Back (reverse

Great Seal of the United StatesSigning of Decl. of Indep.Lincoln MemorialU. S. Treasury BuildingWhite HouseU. S. CapitolIndependence Hall

Ornate denominationalengravings

8. Now we come to banking. The theory of bank-ing is very simple. Banks are either (a) warehousesfor money deposited with them for safekeeping or(b) money lenders. When these two functions arecombined, as they are today in our Federal ReserveSystem, the situation can become very compli-cated. Most publications of the Federal Reserveand of the larger commercial banks are prettytechnical. However, the teacher should have someof their regular bulletins and newsletters avail-able to students for reference—as suggested inthe Introduction—including some of those the"Fed" has published especially for classroom use.Copies of these may usually be obtained in quan-tities sufficient for every student to have his ownto read, study and discuss. Here are the names ofseveral banks that have issued such releases de-scribing banking operations. The titles of the moredifficult ones are marked with an asterisk^*):

Federal Reserve Bank of Philadelphia, Depart-ment of Bank and Public Relations, Philadel-phia, Pennsylvania 19101

Fifty Years of the Federal Reserve ActThe Four Hats of the Federal Reserve

* Guide to Interpreting Federal Reserve Reports"Introduction to the Federal Reserve System"Monetary Policy: Decision-Making, Tools, and

ObjectivesFederal Reserve Bank of New York, Public

Information Department, 33 Liberty Street, NewYork, New York 10045

Key to the Gold Vault"Money and Economic BalanceFederal Reserve Bank of Chicago, Research

Department, P. O. Box 834, Chicago, Illinois60690"Modern Money Mechanics

9. Perhaps an official of a local bank would bewilling to visit the class to explain his bank'soperations. The students should learn somethingabout the mechanics of personal banking, the dif-ferent kinds of accounts (checking and savings),how to make deposits and write checks, and themeaning of the numbers appearing on the face ofchecks. They should hear about safe deposit vaults.They should be told what banks do with funds de-posited with them, how they make loans and towhom they lend money. The students should alsolearn something about how banks keep records,arrange check clearings daily and how they shipmoney and checks, as required, from bank to bankand from one locality to another. Once they havesome understanding of the role and operations oflocal commercial banks they should be betterable to grasp the role of the Federal Reserve Sys-tem as banks where private commercial bankskeep their deposits.

10. Have one or several students, or perhaps theentire class working together, make a chart show-ing the changes over recent years in the moneystock and gold reserves. These figures are pub-lished regularly in the monthly Federal ReserveBulletin. The farther back they may be traced, toshow how "Fed" authorities have reacted to his-torical events and shifts in the gold supply—con-tracting or expanding the quantity of money asthey judged advisable—the more interesting such achart will become. However, statistical series andcompilations are altered from time to time so thatthe figures published are not always comparable.With respect to money stock, for instance, try tobe consistent. Use either estimates of M-l (cur-rency in circulation outside of banks + demand de-posits) or M-2 (which includes not only M-l but


also time deposits at commercial banks other thanlarge certificates of deposit—see Federal ReserveBulletin releases for details). And use either "Sea-sonally adjusted" or "Not seasonally adjusted"statistics. For further suggestions in this connec-tion, see pp. 119-120.

EXPLANATORY TEXT

This Unit treats money from two points of view.In the first place, it discusses monetary theory andexplains how money originated—through barter—asa readily-marketable commodity which became intime the generally accepted medium of exchange.In the second place, it describes the monetary sys-tem as it operates in this country, the coins andpaper money we use, as well as current bankingprocedures. It might help the students understandmoney and monetary theory to retrace from the apriori assumptions the steps in deductive logic de-veloped up to now in this SYLLABUS.

1. Is there something mysterious about money?Or is money the outcome of a simple logical de-velopment? Many people think money startedwhen governments passed laws decreeing some-thing to be money. Others believe money is socomplicated that it is almost mysterious. However,the clues to understanding money, its origin and itsimportance for economics are contained in the the-ories developed so far. The steps in logic, necessaryfor understanding monetary theory, are repeatedhere briefly:

UNIT 2-(l) We live and act in a world character-ized by:(a) Regularity—order, consistency(b) Logic—every person thinks and

reasons in the same way(c) Causality—one thing leads to an-

other(d) Time—there is always an interval

of time between cause and con-sequence

(e) Change—everything in the uni-verse is in flux and when menact they bring about furtherchanges

(f) Value—individuals have prefer-ences

(2) Everyone acts consciously, purpos-ively to attain various goals

UNIT 3-(3) Everyone arranges, ranks, grades hisvarious wants, goals, values on his orher subjective (personal) scale ofvalues, in the order of their relativeimportance

(4) Individuals act when they have(a) some felt uneasiness, feeling of

dissatisfaction(b) an idea concerning a better situa-

tion(c) the hope that action will improve

things(5) To act individuals need:

(a) a plan(b) time(c) resources—knowledge, energy,

raw materials, tools, etc.UNIT 4-(6) Each of us has many wants, needs,

wishes, goals(7) However, each of us has available

only a limited amount of time and re-sources (knowledge, energy, raw ma-terials, tools, etc.)

(8) Because of the gap between whatpeople want and what they have,everyone wants to use his resourcesas effectively as possible

(9) Individuals eventually recognize thatthey may accomplish more if theycooperate, divide the labor necessaryto produce and share the productswith the others who help

(10) As a result of the division of labor,individuals may specialize on thetasks they enjoy more and for whichthey are relatively better suited

(11) Individuals find it helpful to havesome things of their own, to use asthey wish for their own personal pur-poses. Thus, they seek to accumulateprivate property

(12) Individuals who own and controlsome private property are better pre-pared to pursue their various person-al goals than if they didn't have anyproperty at all at their disposal

(13) Individuals who own property maycooperate, specialize, produce andthen trade their output with one an-other

UNIT 5-(14) If people trade with one another vol-untarily it is because they expect to

10. MONEY, CREDIT AND BANKING 1 0 3

be better off as a result; they expectto receive in exchange somethingmore valuable to them under the cir-cumstances than what they give up toget it

(15) Thus, barring force, fraud and humanerror, voluntary exchanges benefitboth parties

UNIT 6-(16) As individuals meet to trade, eachcompares the relative value to him orher of specific units of the variousgoods and services they are offeringand being offered on the market

(17) Units of some goods and services aremore urgently wanted by many per-sons than are units of other things

(18) Individuals compete more energet-ically and offer higher inducementsto obtain units of those goods and ser-vices they value more relative to thesupply available than they do to ac-quire things they value less

(19) Thus, the exchange ratios (prices) ofdifferent items to units of money atdifferent times and places always re-flect the subjective (personal) valuesof the various individuals concerned,as they are expressed in bids or re-fusals to bid for specific units

(20) The relative exchange values on themarket of particular commoditiesmay be traced back in this way to thepossible advantages individuals ex-pect to derive from them at partic-ular times and places. In other wordsthe price of something on the marketdepends on the anticipated utility ofthe specific quantity or unit underconsideration.

With these 20 steps we have developed the logicof the economic theory formulated so far in thisSYLLABUS, based on the a priori assumption thatmen act purposively—within the limitations im-posed by the nature of the universe and society—in the attempt to relieve felt uneasinesses. Thislogic explains market prices as results of the ex-pressed preferences of individuals who trade or re-fuse to trade (Unit 6). This logic also explains sav-ings, tools and production (Unit 7), the entre-preneur and the profit and loss system (Unit 8) andlabor, wages and employment (Unit 9). In thisUnit, monetary theory is shown to rest simply on

following this reasoning a bit further. By theirpurposive choices and actions, individuals gradual-ly transform direct exchange or barter into indirectexchange whereby commodities are traded for a"medium of exchange" or money. The succeedingsteps in this logic follow and are more fully ex-plored in the course of this Unit:

(21) When a person offers some portionsof his or her private property oragrees to perform a service, in ex-change for something he or she wantsstill more, they may not be able tomake a trade because:(a) he or she may not find anyone

willing to offer in exchange theparticular things they want

(b) persons who happen to havewhat they want may not be will-ing to part with it for what he orshe has to offer

(c) the timing may be wrong—whentwo potential traders meet, oneor both may have changed theirminds, or the particular itemsthey might have traded may nolonger be available or suitablefor trading

(22) Then one day someone, who couldnot find anyone with the thing hewanted who was willing to acceptwhat he had to barter, must have hada bright idea. Why not trade what hehad for units of a third commodity?Even if that were not precisely whathe wanted for himself at the time, ifit were something many personswanted and frequently looked for onthe market, he would be in a betterposition for trading later than bykeeping what he had originally triedto barter

(23) It is generally easier to find a takerfor something that is urgently wantedby many people than it is to find buy-ers for items in less demand. So trad-ing a less urgently wanted item forsomething that is more urgentlywanted makes it easier to acquire atanother time what a person reallywants

(24) In this way, one commodity whichwas very useful and urgently wanted


by many people gradually becamemore and more widely traded and ac-cepted in exchange, until it was in de-mand not only because it was usefulin itself, but also because it could beused for trading

(25) As such a particularly desirable com-modity became generally accepted byalmost everyone, its new use in trad-ing, as a medium of exchange ormoney, made it even more urgentlywanted than ever before. This newdemand for it sharpened the compe-tition to obtain it on the market,raised the marginal utility of a singleunit, its exchange value (price), andmade it still easier to find personsready to accept it at any time in trade.

2. How did money arise historically from bar-ter? Men trade with one another, as we haveseen, out of their natural desire to improve theirrespective situations as they see them. They seekto exchange something they have for somethingelse they want more urgently. Trading appears tobe the quickest and easiest way, under the circum-stances, for them to relieve their various felt un-easinesses.

When two persons exchange directly, barteringcommodity-for-commodity (direct exchange), eachconsiders only the use value, the usefulness orutility to him or her personally of the goods theyare taking in trade. When it became difficult to ar-range a direct exchange transaction, it must haveoccurred to some traders, one-by-one, to considernot only the use value but also the saleability,marketability or exchange value of the things theymight take in trade. As a result of this new ap-proach, trading began to take on a different form.Direct exchange gradually faded out and indirectexchange was introduced step-by-step into thateconomy.

The distinction between direct exchange (barter)and indirect exchange rests on the intended use tobe made of the items exchanged. When a consum-ers' good, a commodity intended for use directly,is exchanged for another consumers' good, that isdirect exchange. WTien at least one of die twoitems traded is not a consumers' good, intended foruse by the recipient himself, but a commodity in-tended only for use in exchange later, to obtainthen some item to be consumed, that is an indirectexchange. The commodity used as the interme-

diary in such an indirect exchange is a "medium ofexchange," i.e. money.

Archaeologists and anthropologists have de-scribed barter and trade among primitive peoples.They have speculated as to how some individualtraders may have experimented with exchangingfor a third more marketable commodity, a rudi-mentary medium of exchange. Throughout the his-tory of man, many different commodities havebeen used at different times and places as media ofexchange. The teacher might challenge the stu-dents to list, perhaps on the blackboard, as manydifferent primitive moneys such as wampum andsea shells which they can find mentioned in variousreferences. Perhaps some students will have rela-tives or acquaintances who can tell of using cigar-ettes or nylon stockings as "money" in Europeafter World War II. Did the war-ravaged econo-mies of Korea and Vietnam produce similar com-modity moneys? This will be another opportunityfor the students to become familiar with researchmethods and library facilities. Ask them to cite thesource of their information in each case—a specificreference work, encyclopedia article, economic orhistory text or a personal friend or relative. To helpthe teacher, here are some of the items listed in the1906 Encyclopaedia Britannica article on "Money,"as media of exchange among "savage tribes andancient races":

skinsleather moneycattlesheepoxenslavescorn

maizeolive oilcoconutsteatobaccoornaments

haiqua-shellscowrieswhales' teethred feathersstonemineral productssalt

Carl Menger, the first "Austrian" economist toset forth clearly the theory of subjective value ormarginal utility, described the gradual shift—re-quiring no act on the part of governments—frombarter (direct exchange) to the use of money intransactions (indirect exchange). Here are a coupleof paragraphs from his book which may be worthdiscussing in the classroom.

As each economizing individual becomes increas-ingly more aware of his economic interest, he is led bythis interest, without any agreement, without legis-lative compulsion, and even without regard to the pub-lic interest, to give his commodities in exchange forother, more saleable, commodities, even if he doesnot need them for any immediate consumption pur-pose. . . .But the actual performance of exchange operations ofthis kind presupposes a knowledge of their interest on


the part of economizing individuals. For they must bewilling to accept in exchange for their commodities,because of its greater marketability, a good that isperhaps itself quite useless to them. This knowledgewill never be attained by all members of a people atthe same time. On the contrary, only a small numberof economizing individuals will at first recognize theadvantage accruing to them from the acceptance ofother, more saleable, commodities in exchange fortheir own whenever a direct exchange of their com-modities for the goods they wish to consume is impos-sible or highly uncertain. This advantage is independ-ent of a general acknowledgement of any one com-modity as money. For an exchange of this sort willalways, under any circumstances whatsoever, bring aneconomizing individual considerably nearer to hisfinal end, the acquisition of the goods he wishes toconsume. Since there is no better way in which mencan become enlightened about their economic inter-ests than by observation of the economic success ofthose who employ the correct means of achieving theirends, it is evident that nothing favored the rise ofmoney so much as the long-practiced, and economical-ly profitable, acceptance of eminently saleable com-modities in exchange for all others by the most dis-cerning and most capable economizing individuals. Inthis way, custom and practice contributed in no smalldegree to converting the commodities that were mostsaleable at a given time into commodities that cameto be accepted, not merely by many, but by all econo-mizing individuals in exchange for their own com-modities.Principles of Economics (Free Press of Glencoe/Macmillan, 1950), pp. 260-261

3. What is money? Briefly, money is a com-modity that people use to facilitate trade. That isall money is. Money is simply a commodity whichis used in trades as a medium of exchange.

We have seen how money arose out of barter.One by one, indirect exchanges supplanted directexchanges. A generally accepted medium of ex-change was introduced as an outcome of the samehuman trait to which Adam Smith attributed theorigin of the division of labor—man's natural"propensity to truck, barter and exchange."*

As a result of the transition from barter to trad-ing in money, one commodity which was alreadyconsidered desirable and useful—even if only forpurposes of ornamentation, ostentation or prestige—acquired an additional importance as a mediumof exchange or money. This new use by no meansreplaced or destroyed its pre-existing usefulness asa commodity. As a matter of fact, it was preciselythe pre-existing exceptional demand for that par-ticular commodity on the part of many personswhich first made people consider taking it in trade

0The Wealth of Nations, Chapter II, 1st paragraph

—everyone was fairly confident that it would beeasy for them later to find others who would alsobe willing to accept it in exchange. Thus, the par-ticular commodity selected acquires, on top of itsformer uses which remain, a new use as a "trad-ing commodity" or medium of exchange. Money,therefore, is a commodity, an especially desirableand easily marketable one to be sure, but never-theless money is simply a commodity, nothingmore than a commodity and nothing less than acommodity.

4. How is the value of a commodity affectedwhen it acquires a new use as a "trading com-modity"? The more useful a person expectssomething to be to him, other things being equal,the more eager he will be to hold on to the unitshe has and/or to bid more for additional units. Thedemand for each available unit, relative to the sup-ply available, will tend to rise as a result and so willthe price people pay per unit. Consequently, if peo-ple begin to use for trading a certain commoditywhich had previously been used for other purposesonly, its value on the market will rise. Let us reviewthe way this happens.

Assume that a commodity now being used asmoney was valued before for consumption only.Today it is valued also for exchange. More andmore people have discovered that by exchangingwhat they have for an easily marketable temporaryexpedient, a "trading commodity," they may ob-tain the various things they want more easily thanthey could expect to acquire them through barter.The suitability of this particular commodity fortrading further enhances its marketability, makingit even more desirable and acceptable to almosteveryone and, as a result, suitable as a medium ofexchange or money.

Trading will become easier, thanks to the rela-tive simplicity of arranging trades in terms of a"common denominator." The number and fre-quency of transactions may then be increased.With more and more monetary transactions takingplace, the demand for units of the "trading com-modity" tends to rise still further. Competitionpushes the market or exchange value of its margin-al units up higher, signalling everybody that thisparticular commodity is in great demand on themarket for purposes of trading. Most people willsoon discover that the increased competition forthis particular commodity has made it more expen-sive than before and they will try to use the avail-able stocks more sparingly for purposes other thantrading. At the same time its higher market value


spurs producers to try to increase its production.Of course, some persons will probably continue tohold substantial quantities of this trading com-modity for other purposes—personal enjoyment,ornamentation, gratification and prestige—in spiteof the increased market demand for it. But themajor purpose for which most people will want toacquire stocks of the commodity will be to keep in"cash holdings" to trade off later for consumers'goods as needed. Thus, individuals gradually shiftthe available supply of that commodity away fromits less urgent uses and channel an increasinglylarge percentage of it into the market as money.Even those persons who ostentatiously flaunt theirholdings of that commodity before others—as jew-elry made of feathers, wampum, gold, or in theform of silver spoons or plates—have in the backof their minds that these items are reserves thatcould be converted into money.

The experience of gold furnishes a specific illus-tration of how the stocks of a "trading commodity"are shifted through the market and so reserved forits very most urgent uses. Some of the students inthe class may have studied chemistry. If so, askthem to describe gold's physical characteristicsand list ways it could be used in industrial produc-tion. For instance, gold is a good conductor ofelectricity, its melting point (1063°C) is almostthat of copper and it may be drawn out easily intowire. Why then is gold not used in electrical wir-ing? Gold is heavy, highly resistant to corrosion,and strong when alloyed with other metals. Whythen is it not used in the foundations of buildings,wharves, bridges? Gold is malleable enough to befabricated into almost any shape and it is insolublein nitric, hydrochloric or sulfuric acids. Why thenare these acids not sold commercially in containersmade of gold? Perhaps students in the class canthink of other uses, such as paper weights, ash-trays or toys, for which gold, in view of its physicalproperties, would be suitable. Point out to the classthat in almost every one of these possible uses to-day other raw materials are used—not gold. Why?The clue to the answer rests on an understandingof the auction-like process by which goods and ser-vices are channelled by the market bidding of own-ers and would-be owners into those uses wherethey are expected to be most valuable.

Gold is still more valuable throughout the worldas a trading commodity than for almost any otherpurpose. Those persons who are most eager to ob-tain units of gold and who will bid the most for itare those who want to use it as money. As a result,

they outbid most everybody else who might wantgold for other purposes. Producers, dentists, jew-elers and so on are persuaded by the high price ofgold to use it only when no other less costly mate-rial can serve their purposes. Thus, the relativelystrong demand for gold as money helps to assureeverybody that the bulk of the gold in the worldwill be kept in reserve and made available for useas money when needed. Even gold jewelry is a po-tential reserve of monetary gold for it may be con-verted into money if need be.

5. List the relative advantages and disadvan-tages of direct and indirect exchange. Upon com-pleting either a direct or an indirect exchange—barring force, fraud and/or human error—both par-ties have traded something they had for somethingthey wanted more urgently. As a result of suchtransactions voluntarily agreed upon by the twotraders involved, therefore, goods and services arecontinually being shifted, step-by-step, from per-sons who value them less to persons who valuethem more. Through such a series of voluntary ex-changes, goods and services are transferred intothe hands of persons who expect to appreciatethem more fully and to devote them to more im-portant purposes. However, the difficulties of ar-ranging specific commodity-for-commodity bartertrades may make direct exchanges extremely timeconsuming and costly in terms of human energy.Thus, the possibility of trading goods and servicesfor a third commodity, a widely-accepted mediumof exchange, money, representing potential pur-chasing power that may be exchanged at a futuretime for an infinite variety of consumers' goods,makes trading much easier and simpler. The use ofmoney, therefore, makes it possible to completemore transactions in less time. Thus the introduc-tion of indirect exchange increases trade, expandsthe trading area, promotes greater specializationand division of labor and permits production to beincreased. A further advantage of making transac-tions in terms of money is that it allows traders tomake comparisons easily among many differentgoods and services in many different places through-out, the world. Buyers and sellers throughout thetrading area may calculate mentally by compar-ing everything with a single "common denomina-tor"—the generally accepted medium of exchange,money. In this way, entrepreneurs may plan enter-prises to be carried out over great distances andlong periods of time. Such economic calculationmakes it possible to accumulate capital savings,invest and undertake huge enterprises, increasing


DIRECT EXCHANGE(Barter)

If an individual (A) wants to obtain something by directexchange, he must:1) have, find or produce some good or service he can

offer in exchange;2) spend time and effort to search, perhaps traveling far

and wide, until he locates a potential seller (B) whoa. wants the particular good or service A is offeringb. at that particular timec. in that particular quantityd. of that precise quality; and

has available at the same timethe precise object(s) A seeksin a suitable quantityof suitable quality; and

i. has a scale of values which differs from A's in aspecial way. (B must value what A is offeringmore than the item B already has and A is seekingto obtain through barter);

3) higgle and bargain* over the terms of the trade, i.e.,the precise quantities and qualities of both commod-ities being considered for barter. (The time when twopersons happen to meet may be crucial for the suc-cess of a barter deal—some things such as a largecatch of fresh fish, soon deteriorate in value. Adjust-ing the size or quantity of the items being bartered isalso sometimes difficult—if a sword is considered toovaluable to exchange for a fishing net it would hardlyhelp either party to break the sword or melt it downto metal and offer to barter a half sword for one net);

4) exchange the two commodities.5) Without a widely used trading commodity, a "com-

mon denominator" with which all goods and servicesmay be compared, economic calculation is not pos-sible.

INDIRECT EXCHANGE(Monetary transactions)

If an individual (A) wants to obtain something by indi-rect exchange, he must:1) have, find or produce some good or service to ex-

change for money2) locate a potential seller (B) who

a. has the particular good or service A wants andb. is willing to part with itc. for the current medium of exchange, money;

3) both parties to a monetary transaction may higgleand bargain* over the terms of trade also but by of-fering money A's purchases become easier. To anyseller (B) the money received in trade represents po-tential consumers' goods of an infinite variety whichmay be obtained for money, more or less at will;

4) trade or refuse to trade;

5) economic calculation becomes possible as traderseverywhere may easily compare the relative marketvalues of different factors of production, labor andvarious finished goods and services in terms of a "com-mon denominator," money.

°It was Adam Smith who described this as the "higgling and bargaining of the market." (Op. cit., Chapter V, 4th paragraph)

still further capital accumulation, investment andproduction of the goods and services people wantmost.

6. How much money is needed to facilitatetrade? Almost everyone living in today's mone-tary economy wants to have some cash holding onhand at all times to meet necessary cash expenses.How large a cash holding anyone will have will de-pend on the particular person and the particularsituation. Every individual, business firm or otherlegal entity, each acting according to his ownbest judgment, in the light of his various goalsand values, decides how much cash money to keepon hand. Every one of us tries constantly to adjustthe size of his cash holding so as to be prepared forfuture contingencies. When we anticipate an in-creased need for cash, we try to increase our cashholdings—by withdrawing cash from savings, sell-ing something or doing work for an employer to

earn money. If a person's need for cash declines—for instance, if he should move from city to farm,walk to work instead of driving or riding a train orbus, carry sandwiches for lunch or grow some ofthe food he consumes in his own garden—he willvery soon reduce the amount of cash he carries inhis wallet. Few people want to keep more idlemoney on hand in their pockets and checking ac-counts than they expect to need in the near futureas cash or emergency reserves.

NOTE: The teacher might discuss at this time theideas the students had for using their $500,000 "wind-fall" (SUGGESTED ACTIVITY No. 5 of this Unit), the sizeof the cash holding each chose to keep on hand forready spending and their reasons for preferring otherthings to holding additional cash.

In a barter economy, would-be traders were at adisadvantage in not having any one commoditythey could use any time an opportunity arose to


trade for the specific goods they wanted. Once in-direct exchange prevailed, people could have avail-able at all times a certain amount of latent or"built-in" purchasing power in the form of money.By having some money on hand, a cash holding,they could be prepared for many contingencies.

Today, in our modern monetary economy, theneed for a cash holding of ready purchasing poweris more urgent than ever before in history. Prac-tically no family or community is self-sufficientnowadays. Practically everybody is now integratedinto the money economy—receiving payment inmoney for his labors and paying money out formost of the consumers' goods he wants. With acash holding of the proper size, the cash holder hassome assurance and peace of mind for he expectsto be able to purchase the consumers' goods hewants as need arises. Thus, a cash holding of reli-able purchasing power serves a necessary purposein a money economy. Exactly how large a cashholding any individual will want varies from per-son to person and from time to time—according toone's anticipated cash expenses, the date of his orher next pay check, alternate means of makingpayment and other prospective demands for cash.

The sum total of all the cash holdings of all theparticipants in a society, i.e., the total amount ofmoney being held by all individuals, businessesand other legal entities at any particular time witha view to handling their most pressing personaland business transactions, is the total quantity ofmoney in that economy. This amount of money—alllegally owned and included at every instant in thecash holding of some particular participant in thatsociety—is all the money there is in existence in thatsociety. Thus, the total quantity of money in circu-lation in an economy is always exactly equal to thetotal demand for cash on the part of all participantsin that society. This is not to say that every personin that society has as much money or purchasingpower as he or she would like to have, but onlythat in a free market economy, where people deter-mine for themselves within the limits of their per-sonal abilities and situations the size of their ownpersonal cash holdings, there is always "enough"money to satisfy all the demands for money on thepart of all participants in that society.

Every individual, business concern or other insti-tution in a free market society is actively interestedin maintaining a certain sum of money in their owncash holding. When not prevented from exercisingtheir own best judgment, everyone will see to itthat they hold on to the money they need most ur-

gently. Thus, every unit of money in a free marketsociety is being held in the cash holding of some-one who has made the conscious decision to hangon to that amount of money for some reason. Nomoney can "flow out" of such a society except asthe result of further conscious decisions on the partof various specific participants to reduce theirown personal cash holdings for some reason. Sucha free market economy need never fear an "out-flow" of all the money in circulation there, so that—barring force, fraud and/or human error—therewill always be "enough" money in such a societyfor persons and other entities to trade with oneanother and to satisfy their most urgent needs forcash.

7. How is the market value of money deter-mined? The market value of anything is ex-pressed in terms of what it can be exchanged foron the market. The market values of most goodsand services, i.e. what they may be traded for atany particular time and place, are usually ex-pressed in terms of money. The quantity of moneyfor which a particular item is exchanged upon aspecific occasion is its "price." However, to speakof a "price" for money, that is to refer to the quan-tity of money for which a quantity of money maybe exchanged, tells us nothing at all. We might aswell say—with apologies to Gertrude Stein—"Adollar is a dollar is a dollar." To be meaningful, thevalue of any monetary unit must be expressed interms of something else. Just as we express themarket value of goods and services in terms ofmoney, so we reverse the formula and express themarket value of money in terms of the other goodsand services for which it may be exchanged onthe market, i.e. for what it may be used to pur-chase. Thus, the market value of a unit of moneyis known as its "purchasing power."

The purchasing power of a unit of money is theoutcome of the exchange ratio between a unit ofmoney on the one side and an assortment of goodsand services on the other. It is determined on themarket by the choices, actions and preferences ex-pressed by actual and potential buyers and sellers.Every one of us acts, trades, exchanges things hehas when it seems advisable, in the attempt to ac-quire things he wants more urgently. At every stepof the way every one of us constantly weighs thepros and cons of continuing to hold the money wehave in our cash holdings or of disposing of some ofit to obtain something else.

Every one of us is at the same time weighing (a)


the advantages and disadvantages under the cir-cumstances of acquiring one more or one less coke,pizza slice, LP record, pair of blue jeans, stereo,camera, sports outfit or what-have-you, with (b)the pros and cons of decreasing our cash holdingsby the number of dollars required for such a pur-chase. Similarly, every potential seller is alwayscomparing the relative importance to him of (a)relinquishing one more or one less unit of what-ever he is offering on the market and (b) what heexpects to gain from the additional dollars hewould receive. Both buyers and sellers comparesimultaneously their respective needs and desiresfor cash holdings with their respective needs andwants for other things. In this way the prices ofspecific goods and services and the purchasingpower of units of money are determined at one andthe same time—by the continual push-and-pull,give-and-take, bid-and-ask of countless personsbuying and selling, or refusing to buy and sell.

There is a tendency in a money economy to thinkthat the only bidders at market auctions are thosewho are offering money to buy goods and services.People forget that the would-be sellers of goodsand services are also bidding—for money. On oneside of the auction, would-be purchasers are offer-ing units of money in the hope of acquiring certaingoods and services. On the other side, owners areoffering goods and services on various terms indifferent quantities and qualities in exchange formoney. Would-be buyers will bid higher dollarprices to obtain things they want very much. Sim-ilarly, when would-be sellers are eager to disposeof their possessions for dollars, they will lowertheir asking prices or offer more and/or betterquality goods and services for the same price.Thus, the market value, exchange ratio or purchas-ing power of a dollar fluctuates—in response to thebidding of the owners of dollars and of the would-be "buyers" of dollars—just as does the market val-ue, exchange ratio or price of anything else.

The greater the demand for any specific good,service or unit of money, relative to the quantityof each available on the market at any time, themore would-be buyers must bid to obtain a singleunit. Where there is free and open competition,those who want something most urgently will keepbidding more for it until those who want it lessurgently drop out of the "auction." Thus, a higherprice for a specific good or service is a reflectionof a shift in its supply/demand exchange ratio. Thecause of such a shift in relationships may be due to(a) changes in the supply of the specific good or

service involved or (b) changes in the demand forit. If the money prices of many, or even most, goodsand services have risen, it is not likely that the ex-planation will be found in shifts almost simultane-ously in the supply of, or demand for, all or mostgoods and services. The explanation for higherprices of almost everything must, therefore, besought on the money side of the exchange, i.e. inchanges in the supply of, or demand for, money.Generally higher prices inevitably reflect (a) an in-crease in the number of units of money availableon the market, (b) a drop in the demand by marketparticipants for units of money to be held in theircash holdings, or (c) both. In any event, generallyhigher prices are due to the fact that the value ofa single unit of money relative to other things, i.e.its purchasing power, has declined.

If the purchasing power of the dollar is expectedto rise, the demand for dollars will increase as peo-ple generally will be more eager to acquire dollarsto enlarge their cash holdings in anticipation ofbeing able to buy more goods and services of great-er value later with every dollar. If the purchasingpower of the dollar is expected to go down, peoplewill try to keep their cash holdings as low as pos-sible and to convert their money into other goods.In that case, the demand for units of money willdecline. As the expectations of individuals with re-spect to the future value of money become widerspread, they may have a spiralling effect on themarket value or purchasing power of the monetaryunit. Such widespread shifts in the demand formoney in a single direction usually have theirorigin in the artificial manipulation of the quantityof money—coin clipping, coin debasement, inflationand/or credit expansion—all to be treated below.Before discussing them however, it should beclearly understood that the value of the monetaryunit at any time and place depends on its exchangeratio to other things, its purchasing power, i.e. therelative value or utility of what it will buy on themarket.

To recapitulate, the market value of a unit ofmoney is derived from the value the individualsconcerned attach to the utility or usefulness of thegood or service of whatever that unit of money willexchange for on the market. The exchange ratio orpurchasing power of the monetary unit is deter-mined simultaneously with the determination ofthe prices of the various other goods and servicesbeing traded. The individuals concerned rank unitsof money on their personal (subjective) scales ofvalues along with everything else—bidding for


goods, services and/or money as they think best.A person who buys a portable TV, for instance, is"selling" a certain number of dollars for that ap-pliance and at the same time, on the other side ofthis exchange, the seller of the TV is "buying" aquantity of money with the TV he hands to hiscustomer. Thus the purchasing power of a unit ofmoney, like anything else, conforms to the law ofprice. It is a reflection of the number of units inexistence on the market, relative to the demand forthem on the part of the individuals concerned, eachof whom considers the relative service or utility heor she expects to derive from a unit of money onthe one hand and the particular good or servicethat monetary unit can command on the market.

8. What is government's responsibility with re-spect to money? In this Unit so far, money hasbeen described simply as a "trading commodity,"the most readily marketable commodity in aneconomy. It has been explained that money orig-inated out of barter as a result of the ideas,choices, actions and market transactions of indi-viduals. When individual traders began, one-by-one, to shift from direct to indirect exchange, theywere merely trying to simplify their own personaltrading activities. Yet in the process the most mar-ketable commodity in the economy graduallyevolved into a medium of exchange or money.

Misunderstandings may arise very easily overthe terms of a trade, even among very cautious andwell-meaning traders. The mere passage of time,before a contract agreed upon is fulfilled, can leadto problems. To prevent disputes over the termsof an exchange, therefore, two traders would oftenask a third party to witness their transactions, toexamine, weigh or measure the commodities beingtraded, so as to reassure both that neither was be-ing cheated. Quite often it was enough to consultanother private citizen, an unbiased witness, per-haps another merchant. However, if a serious dis-pute arose, a mutually recognized arbiter, a rep-resentative of government or a judge of some kind,would have to be consulted to settle the argument.If the delivery at a later date of a particularcommodity was called for, the judge might have torule as to whether the goods being tendered at thetime were sufficient and suitable to satisfy theterms of the contract. In the course of time, as aresult of adjudicating many such disputes, judges—and thus governments—were placed in the posi-tion of having to decide what was meant in variouscontracts by the term "money."

Whenever a trader bids for anything on the mar-ket, he wants to have a pretty good idea of thequality of what he will be getting. This is truewhether he is seeking a specific consumers' good,or money to use later in the purchase of consumers'goods. For instance, Indians who wanted to ex-change deer meat or moccasins for wampum, orvice versa, would try to check the quality of thedeer meat or moccasins and wampum to be surethey were not being cheated and that everythingwas as represented. When traders came to use theprecious metals as media of exchange, they had toweigh the gold, silver or copper being offered andsometimes even to test it to determine the percen-tage of these metals in the alloy and to make surethey were not being cheated. Then two or threethousand years ago, some individuals apparentlyconceived of the idea of casting the precious metalsinto rings, discs, oblongs or squares and stampingon each the fineness or quality of the alloy used. Iftraders trusted the stamper to be honest, they nolonger needed to test the metallic pieces they wereexchanging for purity, but only to weigh them. Thenext step in simplifying indirect exchanges camewhen the weight also was marked on each metallicpiece intended for use in exchange.

Private merchants, goldsmiths and jewelers, aswell as local princes and city governments wereamong the first to fabricate coins and mark onthem their weight and metallic content. Insofar astraders could rely on the markings on such coins,it became much easier for them to complete theirvarious transactions. However, the sizes, shapesand metallic content of these early coins oftenvaried so much as to be confusing. Also, not allcoin manufacturers were completely reliable.Traders still had to exercise due caution in distin-guishing between coins of various manufacture. Intime it became evident that transactions could bemade still simpler if the coins being used as moneycould be uniform and consistent in quality. In thecourse of this development, many governmentswere led eventually to specify the commoditywhich would be legally recognized within theirjurisdiction for use as money in the payment ofdebts. Thus, governments often declared some spe-cific commodity to be legitimate money or "legaltender." Anyone who settled debts in terms of thislegal tender was assured that his creditors couldnot dispute the payment. The decisions of judgesalso were made considerably easier by this devel-opment. To conclude that the monetary terms ofthe contract had been satisfied, they needed only


to determine then whether or not the money ten-dered in payment was in fact the proper sum of thegovernment's legal tender.

The theory behind legal tender laws was not topersuade or to compel people to take somethingthey didn't want to accept as money. The intent oflegal tender laws was merely to give legal statusto the commodity already selected as money bytraders through market transactions. However,with the introduction of legal tender laws, govern-ments inevitably came to have an increasingly sig-nificant influence on the commodity used asmoney in the market.

Many governments have misused the legal ten-der laws. They have frequently forced creditors toaccept at face value clipped or debased coins andpaper money as legal tender in payment of debts.Governments can certainly disrupt the market ser-iously by using force to compel traders to takepayment at face value in a depreciated moneythey would otherwise reject or accept only at a dis-count. It was in the attempt to prevent such abusesby the States that it was specified in our Consti-tution (Article I, Section 10) that "No Stateshall . . . make any Thing but gold and silver Coina Tender in Payment of Debts."

A government's apparent success in compellingtraders to deal in a deteriorating medium of ex-change temporarily does not mean it can succeedin doing this forever. Nor does it mean that thegovernment is actually determining what the mon-ey is in the market economy over which it has juris-diction. Don't let the students forget for a momentthat governments don't create money. The moneyin any market, at any place and time, is deter-mined as described here—by the actions and trans-actions of individual traders.

Judges and governments became involved withmoney in the course of their perfectly legitimateand proper role of trying to settle disputes, to de-fine and clarify the terms and intentions of the con-tracting parties who specified payment in money.They were not at first trying to pioneer new terri-tory. In defining money, they were simply attempt-ing to fulfill their responsibility of protecting anddefining individual rights and private propertyand to settle disputes among citizens by adjudicat-ing the terms of contracts. When governments pro-ceeded a step farther and enacted legal tenderlaws, they originally intended only to give sanctionto the commodity the market had selected asmoney so as to simplify the making of contracts.What the legal tender laws have permitted govern-

ments to do over and beyond this is another storywhich we shall be discussing next.

9. In what ways have governments influencedmoney and monetary transactions? In the courseof settling disputes among citizens, judges haveoften ruled on contracts being adjudicated as towhat constitutes money—in the light of the specificterms of the contracts, the intentions of the con-tracting parties, established traditions and general-ly accepted business practices. Over the centuries,however, many governments went beyond thisrelatively simple and limited task of settling spe-cific disputes and proceeded to define the legaltender monetary unit and then in time to becomeinvolved with banks and banking. Step by step, forone reason or another, on one excuse or another,they became deeply concerned with monetarytransactions, influencing decisively what was usedas money and so had to be accepted in trades.Here are some of the ways various governmentshave radically affected the character and use ofmoney:

a. To facilitate exchanges, some governments be-gan to mint coins from the raw metal

b. To further facilitate exchanges, some govern-ments began to standardize the issuing of coinsand to stamp them to indicate metallic contentand perhaps also weight

c. The edges of coins were often ridged to preventwear and tear and to make it difficult for per-sons to clip or shave stamped coins surrepti-tiously so as to produce new and perhaps small-er coins from the clippings or shavings

d. When it seemed especially inexpedient to levyhigher taxes, some governments clipped coinsthemselves to help cover their own expenses.They would accumulate or call in the metalliccoins, clip or shave them in size, melt the clip-pings and shape them into new smaller coins,all of which would then be stamped and markedas if they were of the same size and weight asthe previously circulating undipped coins. Thegovernments then forced the sellers of the var-ious goods and services they wanted to buy toaccept the old clipped coins and the smallernew coins as if they actually represented theunrealistic size and weight marked on them.This is coin clipping, a form of coin debase-ment

e. Another form of coin debasement was also usedat times by some governments to help covertheir expenses when they found it inexpedient


to levy higher taxes. They called in gold or sil-ver coins, melted them down, and then dilutedthe alloy of which they were made by addingsome less valuable metals so as to reduce thepercentage of the precious metals it contained.Coins were then cast from the new alloy, butthese new debased coins were stamped andmarked as if composed of the same high qualityalloy as that from which the previously-issuedcoins had been made

f. Many, perhaps most, governments have lawsdefining legal tender, the commodity or moneywhich persons must accept, when tendered, inpayment of a monetary debt. Legal tender laws,intended simply to describe the unit of moneywhich is legally recognized for the payment ofdebts, have frequently been used by govern-ments to serve their own purposes. Many timesthroughout history creditors have been re-quired to accept clipped or debased coins anddepreciated paper money as legal tender—often-times when tendered by the government itselfin payment of its own debts and expenses—asif they were full weight and full quality. Thus,legal tender laws have frequently led to severeeconomic losses for many persons, notablylenders and creditors whose assets are fixed interms of monetary units

g. In time, many traders developed the practice ofcompleting business transactions by transfer-ring bank "receipts" or banknotes, rather thantaking the time and trouble to redeem them forthe metallic money they represented. After theinvention of the printing press by Gutenberg(circa 1456), the production of banknotes be-came still easier than before. Eventually somebankers were tempted by these developmentsto start issuing more banknotes (promises topay) than they had gold or silver on deposit.Some governments became aware of such over-issues. To reassure savers that the banks, whosenotes were being used in trade, had adequatereserves to redeem them as promised, manygovernments passed laws to limit the over-issueof notes. In doing this, however, they actuallysanctioned the practice. By placing a legal limiton the over-issue of banknotes, governmentswere in effect granting banks the legal right toissue banknotes over and above the metallicmoney in their deposits—up to the limit speci-fied by law

h. As we shall discuss below, banks developed toserve two major functions—as warehouses and

as money lenders. Government officials recog-nized that banks might well be useful to themin this second capacity. If a government couldborrow whenever and as much as it wished, thiswould help solve its financial problems. Thus,most governments found ways to enable thebanks to lend them generous sums of money,even if new banknotes or credit had to be cre-ated for the purpose. The remainder of this Unitis devoted primarily to banks and banking, withspecial reference to related government inter-ventions.

10. How did banks develop as warehouses formoney? The storage of the precious metals andother moneys for safekeeping is one basic servicebanks perform, for which depositors are willing topay a fee. Banks developed several centuries ago,as the outcome of the actions and choices of count-less individuals, each seeking to do "his ownthing," i.e., to attain his own personal goals to thebest of his ability and means. As individuals trad-ed with one another to relieve felt uneasinesses,one-by-one, they gradually discovered that somegoods were more easily marketable than others.Then, step by step, some traders turned to arrang-ing transactions in terms of these more readilyexchangeable items. In time, one single commoditycame to be recognized as the most marketablething in that trading area. That one commodity——whether wampum, cattle, coconuts, shells,feathers, tobacco, gold, silver, or something else—became the generally accepted medium of ex-change.

Because of the difficulties and costs involved insafely warehousing a large stock of such a very de-sirable commodity as the medium of exchangemany persons who had accumulated wealth in thisform looked around for some place safer than theirown homes to store it until needed. Savers werefearful of possible theft if they kept on theirpremises large quantities of gold or silver jewelry,plate, coins or bullion. They often turned then torgold- or silversmiths, or traders in gold and silver,who were likely to have strong boxes or specially-built locked rooms or vaults with space they couldrent to other people for the storage of gold or sil-ver.

Goldsmiths who warehoused gold or silver forsomeone else would frequently write out receiptsin the name of the depositor, acknowledging theowner's right to claim his precious metals accord-ing to terms agreed upon between them. This re-


ceipt was a promissory note—note for short—i.e., anIOU or promise-to-pay a certain person a certainsum of gold or silver under certain conditions. Astime went by, the owners of gold who deposited itfor safekeeping with goldsmiths found they couldsave considerable time, trouble, expense and riskof loss or theft, if they didn't actually retrieve thegold itself from the warehouse for making pur-chases but could pay for things by handing overthe goldsmith's promissory note instead. The trans-fer of such a note to a third person had to be ac-knowledged and signed by the original gold owneror depositor, in whose name the gold had been de-posited and the receipt issued.

NOTE: Such transfers are similar to the endorsementsused nowadays on bank checks. When the payeenamed on the face of a check wishes the payer onwhose account the check is drawn to make paymentto a third person, he endorses it on the back as follows:

"Pay to ( Name of third party )"

and then signs his name indicating approval of thestatement appearing immediately above.

This would be a suitable time to explain to the classthe mechanics of banking, checking accounts andcheck-writing. Perhaps an official of a local bankcould visit the class as mentioned in SUGGESTED AC-TIVITY No. 9. If this is not possible, the teacher shouldat least explain how to write checks and endorse them.Point out the similarities and differences to be foundamong:

(a) Warehouse receipts for anything (gold, wheat,furniture, etc.)

(b) Banknotes, promissory notes or bank certif-icates which are redeemable in gold or silver

(c) A businessman's promissory note(d) A personal check drawn on a personal checking

account(e) Federal Reserve Notes currently in circulation

which are not redeemable in any tangible com-modity but which are declared by law to belegal tender (see the notation on the face ofeach F. R. Note).

With the increased use of notes replacing metal-lic money on the market, goldsmiths or other cus-todians of stocks of the precious metals being heldfor safekeeping on behalf of depositors made theirwarehouse receipts "Payable to Bearer," instead ofpayable to a specific depositor by name. Noteswhich were "Payable to Bearer" could be usedover and over again very easily in transactionswithout having to be endorsed, re-endorsed or re-turned for redemption to the bank of issue. If thebank of issue was considered reliable, traders wereusually confident that it could and would redeemits notes as agreed upon, so that most sellers werewilling to accept its notes in payment of debts. In

this way, banks as we know them today graduallyevolved from warehouses of money to banks ofissue whose "warehouse receipts" or banknotescame to be used in trade in place of the gold orsilver money on deposit for which the notes hadoriginally been issued.

11. How did banks develop as money lenders?The second major service banks perform for whichpeople are willing to pay is money lending.

Ever since people began trading with one an-other on the market there have been savers andborrowers (Unit 7). Every one of us at times followsthe practice of Aesop's ant and refrains from con-suming a part of what we produce in order to savefor "rainy days." At other times we adopt the waysof Aesop's grasshopper and consume practically allwe produce. These two different time preferencesare expressed alternately by everybody in varyingdegrees, depending on specific situations, ourvarious wants, goals, values and the relative ur-gency to each of us of consuming or refrainingfrom consumption today for the sake of tomorrow.WTien a person wants to consume or invest in pro-duction today more than he or she has availableat the time, he or she looks for savers who may bewilling to lend. As savers often kept their savingsin banks, it was logical for bankers to act as inter-mediaries between savers who were willing to lendand persons who wanted to borrow. A bankerwho succeeded in bringing together a would-belender and a would-be borrower and arranged aloan was performing a service that helped bothparties. It is not surprising, therefore, that bankswhich began as warehouses for the funds of saversfound it natural to serve as intermediaries betweensavers and lenders.

Whenever a banker received some gold, silveror other precious metals to store on behalf of some-one else, he would usually issue his IOU, promise-to-pay, or banknote, often made "Payable to theBearer." Each such note specified the sum depos-ited at the bank for safekeeping, for which it wouldbe redeemed as pledged. In time, as depositorsfound it increasingly convenient to use a bank'sIOUs or notes for making purchases and payingbills, they were less and less inclined to retrievetheir precious metals from the bank. Titleholdersto deposits could point out to potential sellers thata banknote, which could be redeemed at any timefor gold or silver, was really "as good as gold orsilver"—or even better because it was easier tocarry around and to use in trading. As a result ofthis development, the banknotes of banks con-


sidered financially reliable were often widely usedalmost as if they were media of exchange or realmoney, and the funds on deposit in such a bank'svault would remain there for long periods of timeuntouched.

This situation led bankers one by one to the con-clusion that it was unlikely that many of their de-positors would ask, at any one time, to retrievefrom their vaults large sums of metallic money.Some bankers reasoned, therefore, that it shouldbe fairly safe to lend out some of -the money lyingidle in their vaults which they had accepted fromdepositors for safekeeping. Eventually some ofthem decided to make a few loans. Their own sav-ings were very likely included, but the bulk of thesefunds came from the deposits of other persons, leftwith the bank for safekeeping and being held intrust for them.

A banker could arrange loans from the moneystored in his vaults in one of several ways:

a. He could consult his depositors, the savers, re-quest permission to lend some of their gold orsilver and agree to share with them any of theinterest income that resulted from the premiumborrowers repaid to the bank as lender, overand above the sum they had borrowed. Thebanker might well ask in exchange that the de-positors agree not to withdraw their gold or sil-ver for a certain time. Once the banker is as-sured that his depositors will no longer ask fortheir money "on demand," he can feel rela-tively safe in lending out a portion for limitedperiods of time. If the length of time for whichthe loans are made coincides with the time de-positors have agreed to leave their funds un-touched—and if all goes well—the borrowers willhave repaid their loans before the depositorsare once again entitled to claim their deposits

b. He could lend funds left with him for safekeep-ing without notifying the depositors. Few de-positors are likely to ask at the same time to re-trieve their entire deposits. As a result someless cautious or less scrupulous bankers riskedlending out at interest some of the funds depos-ited with them for safekeeping—without tellingtheir depositors anything about it. Althoughthis may seem relatively safe, any goldsmith,silversmith, dealer or banker who does so inev-itably runs some risk, takes a chance. He isoperating on the assumption that (1) his depos-itors will not ask for more money at any onetime than he then has on hand and (2) those to

whom he lends will repay their loans in full andin time for him to meet any demands on himfrom depositors. Such lending operations arebased on the theory that the banker will be ableto juggle his reserves successfully so that hewill be in a position at any time to satisfy theactual demands made on him by his creditorsfor funds. Even though he could not fulfill alloutstanding pledges at any one moment, he ex-pects to be able to do so in time—as his borrow-ers, one by one, repay their loans

c. He could make loans in the form of banknotesin excess of the funds he has on hand. Once abank's notes have become the accepted medi-um of exchange in an economy, that bank maymake loans in banknotes. In lieu of actuallylending out the precious metals in his vault, thebanker may then—if he chooses to risk increas-ing his obligations beyond his reserves—simplyissue additional banknotes to lend. Would-beborrowers, confident that they can use thesenotes to buy the things they want, will be will-ing to accept them. These new notes could bemade to look exactly like the old "warehousereceipts," which had been issued as evidence ofgold or silver deposited with the banker forsafekeeping. These new notes, like the pre-viously-issued ones, would represent the bank-er's IOUs, promises-to-pay certain sums of goldor silver to the bearer upon demand. Yet thesenew notes would not actually represent new de-posits warehoused in the bank's vault. There-fore, in issuing these new notes, the banker isreleasing more promises-to-pay than he canredeem at any one time; his reserves will thenconstitute only a fraction of the face value of hisoutstanding banknotes. With the issue of suchunbacked notes, bankers institute "fractionalreserve banking."

12. How has the development of fractional re-serve banking affected banking operations? In-creasingly throughout history, these two basicbanking functions—(a) the storage of depositors'money and (b) money lending—have become moreand more intertwined. The first step was for asingle bank to pool the deposits of its many cus-tomers so as to spread the risk and make it rela-tively safe to lend a portion of this large fund. Ifsuch a bank did this by issuing banknotes whichdid not represent gold and silver in its vaults butwhich it pledged to redeem at face value, as de-scribed in 11 (c) above, it was obviously no longer


solvent. It had issued more pledges, promised toredeem more IOUs, than it possibly could with itsfractional reserves. Yet everyone who held one ofthat bank's notes—those acquired as receipts foractual deposits of gold or silver or taken in tradedirectly or indirectly from such a depositor, as wellas those acquired when the bank issued additionalnotes in making purchases or loans—was entitledto call on the bank at any time to redeem them ingold or silver.

Over-issuing notes in this way was a lucrativebusiness—as long as all went well. It enabled thebank to receive interest payments on loans whichcost no more than the cost of printing new bank-notes or of keeping the records in granting expand-ed credit. But over-issuing notes and expandingcredit was very risky business! The bank's situa-tion was obviously untenable and anyone whoanalyzed the nature of the bank's operations wouldrealize this. A few of its more knowledgeable note-holders might well question the ability of the bankto redeem its notes as pledged and appear at thebank to ask that their notes be redeemed as prom-ised in gold or silver. As other noteholders becamesuspicious and one by one sought redemption, thatbank's situation became truly precarious. A "runon the bank" was inevitable as the news of thebank's over-extension spread farther and wider.Everyone with any of that bank's notes would then"run" to the bank in the hope of obtaining gold orsilver money for their notes before the bank's frac-tional reserves were exhausted. Like the game of"musical chairs," where there are never enoughchairs to go around, so is there never enough gold,silver or other metallic money to meet the demandwhen a banker has issued banknotes or creditwith a face value greater than that of the reservesin his vaults.

When a bank that has inflated the quantity ofbanknotes in circulation or expanded credit real-izes it no longer has sufficient gold, silver ormoney to redeem the pledges on all its notes, itmust declare bankruptcy and close its doors. Suchan inflation or credit expansion is the moderncounterpart of the ancient world's coin clipping orcoin debasement. Most bankers realize the risk inthe over-issue of notes and credit and try to pro-ceed with caution. They know that if they inflatebeyond what public opinion will tolerate, the gameof "musical banknotes" will begin, with everyonescrambling to redeem his notes as pledged at thebank. No banker dares to persist in such a riskypolicy without the protection of government.

When any business goes bankrupt and fails tofulfill its obligations in full, its creditors are hurt.The holders of a bank's notes are creditors of thatbank. If that bank goes bankrupt and fails to re-deem its notes as promised, everyone who holdsone of that bank's notes will inevitably suffer aloss. Every noteholder will be swindled when itbecomes impossible to exchange his notes for theprecious metals they were claimed to represent,notes that had been willingly taken in trade be-cause they were "as good as gold, or silver." Overthe years, banks have sought to avoid such unfor-tunate bankruptcies. Yet they have refused to giveup the principle of fractional reserve banking, de-spite the fact that it is inherently unstable and can-not be maintained indefinitely. Moreover, govern-ments have often actively encouraged them to con-tinue the lucrative business of printing new bank-notes or expanding credit to lend out at interest,over and above the face value of their reserves.

When a private bank ran into trouble as a resultof its over-issue of banknotes, several privatebanks often cooperated, pooled their resources andagreed to assist one another if one of the group wasthreatened by a "run" because it had gone too farin issuing banknotes. The next step was for all thebanks in a country to cooperate, so as to make theresources of all available to help any one whichmight be in financial trouble. Then governmentsbegan to enter the picture. In the attempt to pre-vent noteholders from being fleeced as a result oftaking notes in good faith which later prove worth-less, many governments sought to regulate andcontrol the over-issue of notes. They have oftenspecified by law the reserves a bank must hold inits vaults to back up a certain number of notes.They have also frequently limited the privilege ofissuing banknotes, granting that privilege to onesingle bank only, the central bank of issue, anddeclaring the banknotes of that central bank to belegal tender "for all debts, public and private."

NOTE: Call attention to the statement printed onevery U. S. Federal Reserve Note concerning its statusas legal tender. This would be a good time to study allthe numbers and letters on our dollar bills, the Fed-eral Reserve Notes now in daily use in this country.The large letter in the seal and the four middle-sizednumbers (not those indicating the denomination ofeach note) refer to the specific Federal Reserve Bankby which that particular note was issued, where thereserves for that particular note are held, and to whichthat particular note must eventually be returned. Seethe diagram on page 100. Originally (until 1934) theFederal Reserve Bank of issue was obliged to redeem


its notes upon request in gold or "lawful money."Silver Certificates (none issued since 1963 when theOne Dollar Silver Certificates were discontinued)were also, in effect, redeemable "warehouse receipts"for silver. See, for instance, the specific wording onU. S. paper currency of forty or more years ago—inmuseums, collections, or in book illustrations of oldU. S. paper money—and on recent Federal ReserveNotes which no longer represent promises to pay any-thing.

13. Describe the history of banking in theUnited States, the Federal Reserve System and itsoperation. Over the centuries bankers have con-tinued to follow the practice of fractional reservebanking begun by the early goldsmiths—poolingthe deposits of all their customers and using thosefunds as reserves to back up the issue of addi-tional banknotes and/or bank loans. So long asthe nominal value of a bank's fractional reservesrepresented a substantial portion of the face valueof its outstanding notes, its noteholders were notlikely to doubt the bank's ability to redeem them aspromised. However, whenever a bank exceeded itscustomary limits in the over-issue of banknotes,some depositors were likely to question its finan-cial reliability. If many came to doubt its solvencyand asked to withdraw their deposits, that wouldprecipitate a "run on the bank," the game of "mu-sical banknotes" which signals the depreciation ofthe bank's notes and the failure of the bank itself.The history of banks and banking in the UnitedStates as well as in the rest of the world is reallylittle more than an account of alternating (a) infla-tions or credit expansions—usually ventured onlywith some encouragement by governments—and(b) deflations or credit contractions—brought onwhen some bank and/or government officials,fearing the government-privileged bank's frac-tional reserves had sunk so low that it would notbe able to fulfill its obligations and redeem itsnotes, called a halt to further expansion.

NOTE: A banker who issues more banknotes and/orcredit on the basis of lower fractional reserves thanhis contemporaries consider adequate is often de-scribed as a "wildcat" banker. One theory traces thisnickname to the inclination of unscrupulous bankersto locate their banks in the wilds, where wildcatsabounded, to discourage depositors from calling towithdraw their savings.

The practice of fractional reserve banking, theover-issue of notes and of loans, creates a shaky"house of cards," an inverted pyramid of largequantities of notes resting on a narrow base, itsfractional reserves. When the practice becomes

widespread, the day of reckoning may bring aboutthe collapse of many banks, resulting in a largescale monetary crisis or financial panic. In the at-tempt to alleviate the effects of financial panics,governments have often come to the aid of banksthat have been bankrupted in this way. As a matterof fact, governments have helped out so frequentlyin this country and elsewhere that few bankershave learned the lesson their experiences mighthave taught them concerning the risks inherent infractional reserve banking.

Our state and federal governments have oftensanctioned and actively encouraged the banks toissue notes and loans on the basis of fractionalreserves. Then when banks have over-extendedthemselves and gone bankrupt governments havetaken steps to suspend specie (gold or silver) pay-ments, i.e., to relieve the banks of the obligation ofredeeming their notes as promised and to arrangefor them to settle their debts by making only par-tial payments to creditors. As a result of govern-ment actions of this type, the banks themselveshave not had to pay the full costs of making theover-issue of notes and loans a regular practice. Abank's creditors including its noteholders, who arepaid only in part if at all, and the country's tax-payers, who contribute to the government's sub-sidy to the bankrupt bank, are forced to share thebank's losses.

Because of such intermittent interference bygovernment in the affairs of banks in this country,few banks, if any, have operated for long on con-sistent free market principles. Sooner or later—with the sanction if not the active encouragementof government—they have embarked once moreupon fractional reserve banking, which is bound tolead them to over-issue notes and to over-extendcredit. A financial crisis of some kind then becomesinevitable when they must finally face reality.

Several monetary panics—each due to economicdistortion and mal-investment as a result of theover-issue of banknotes and/or the over-extensionof credit on the part of a number of banks—oc-curred in the 19th century. Note that the depres-sion of the 1930's also as well as more recent re-cessions have been caused by similar practices.The immediate pressure for national banking re-form which led to our Federal Reserve Systemgrew out of the Panic of 1907. Many banks in thiscountry had again expanded credit considerablymore than their assets warranted. Some of the larg-est New York banks especially, associated withstock market investors and speculators, had


promised to pay more than they could deliver.When banks in other parts of this country and inEurope began to question their solvency, the NewYork banks were called on to pay their debts andredeem their pledges. This resulted, as we wouldexpect, in a game of "musical banknotes" whichdisclosed the gap between their fractional re-serves and their outstanding obligations. The out-come was that many banks were forced to closetheir doors.

The Panic of 1907 was more severe than anyprevious monetary crisis because the world marketeconomy was more integrated than ever before inhistory. By 1907, New York City had become animportant financial center. The division of laborwas practically worldwide. The activities of indi-vidual producers and traders throughout the worldwere then more thoroughly enmeshed and inter-twined than they ever had been, and relatively few-er people were living as self-sufficient family unitsoutside the market economy. Thus when manybanks in this country had expanded credit consid-erably more than their assets warranted and it wasdiscovered that several New York banks were un-able to pay their debts as promised, the repercus-sions were felt far and wide.

After several years of study and investigation byCongressmen, economic professors, bankers andbusinessmen, several proposals for new bankinglegislation were made. In 1913, the Act establish-ing our Federal Reserve System was passed andsigned into law. The Federal Reserve System wasbased on the principle of fractional reserve bank-ing and it embodied several measures specificallyintended to safeguard its member banks frombankruptcy while still permitting them to expandtheir issue of notes and credit. Its major goal wasto provide an "elastic currency," which could beexpanded and contracted to meet the "needs ofbusiness."

Primarily because there had been widespreaddistrust of centralized authority in this country,our Federal Reserve System was not set up in thetraditional European central bank pattern. For ad-ministrative purposes, the "Fed" was made up oftwelve Federal Reserve Banks, each in its ownseparate Federal Reserve District (see the map onthe inside back cover of each month's Federal Re-serve Bulletin) and each with jurisdiction over thebanks within its District which became members inthe system. The activities of all twelve Federal Re-serve Banks are overseen and coordinated by apresidentially-appointed Board of Governors.

Many, if not most, of the private commercialbanks in all twelve districts have chosen to join theFederal Reserve System. Every member bank isrequired to keep on deposit with the Federal Re-serve Bank in its District a certain "required re-serve," representing a specified fraction (71/2% to16V2% as of July 31, 1976, depending on the suminvolved) of the total amount of deposits it has fromits customers. With its fractional reserve on depositwith the "Fed," a member bank is then permittedand encouraged to lend, spend or invest the bal-ance of its funds, so long as it does not violate the"Fed's" rulings. Thus Federal Reserve legislationspecifically provides that each member bank poolthe deposits of its customers and then spend, lendor invest the major portion—after depositing asmall fraction of the total as "reserves" at its bank,the "Fed" located in its District. As a result, theoutstanding obligations of every member bank—to its depositors and other creditors—far exceed thetotal cash it has on hand at any moment. The mem-ber banks operate on the assumption that theirdepositors will not all want to withdraw their en-tire deposits at the same time. From this they con-clude that they can safely make loans and expandcredit—beyond the sum of their deposits—so long as.they stay within the legal limits set by the "Fed"and maintain at their Federal Reserve Bank thefractional reserves required. As a matter of fact,many people now actually believe that it is eco-nomically desirable for the member banks to ex-pand credit on the basis of their fractional reserves,by making cheap and easy loans to their customers,subject only to "Fed" supervision.

The commercial banks that belong to the Fed-eral Reserve System are not the only ones to ex-pand credit on the basis of fractional reserves. Thetwelve Federal Reserve Banks themselves also en-gage in fractional reserve banking. Each FederalReserve Bank acts as the bank, or depository forthe "required reserves" of all the member banksin its District. Each Federal Reserve Bank is per-mitted to issue notes and loans, provided it main-tains a certain fraction of the total as reserves—inthe form of gold, gold certificates (i.e., "warehousereceipts" for gold on deposit in the U.S. Treasury),government bonds and certain types of IOUs rep-resenting businessmen's promises-to-pay. Theexact percentage of each type of asset required,or considered "eligible," as backing for FederalReserve Notes has been changed from time to timesince the System was established. Until June 1945,each Federal Reserve Bank was required to hold


gold or gold certificates representing at least 35%of its deposits and at least 40% of the face value ofall Federal Reserve Notes it issued. When this re-striction proved too severe to permit the amount ofinflation or expansion government officials consid-ered necessary during World War II, the amount ofgold reserves required was reduced to 25%, onlyto be repealed entirely as of March 18, 1968. Sincethat date, not even the smallest fraction of gold re-mains in reserve as backing for our dollars, theFederal Reserve Notes which the government hasdecreed to be legal tender money. Although U. S.citizens may legally hold gold coins and gold bul-lion once more as of December 31, 1974, thisright does not affect our paper dollars—they are stillmerely paper money, decreed to be legal tender,without any direct tie to gold or any other metaland not redeemable in anything except other papercurrency.

The Federal Reserve System, as it now operates,is the product of several major legislative acts,amendments and numerous rulings by "Fed" offi-cials. Established to provide an "elastic currency,"which could be expanded and contracted withincertain limits to suit the "needs of business," theSystem has maneuvered primarily by (a) changingfractional reserve requirements from time to time,raising or lowering the percentage member banksmust pay to discount "eligible" business IOUs forcash or credit at their Federal Reserve Bank, (b)creating funds to lend the U. S. government in re-turn for its IOUs (bonds), (c) buying or selling gov-

ernment bonds on the open market. Although theoriginal intent was to provide for downward aswell as upward flexibility in the quantity of money,the general trend over the decades has been to in-crease it. This continual increase in the moneystock has been made possible by legally reducingand diluting the fractional reserves required forexpansion, by eliminating the requirement for anyand all gold or silver reserves and by sanctioningand encouraging easier and cheaper credit to bor-rowers.

NOTE: The latest statistics available on money stock,gold stock, member bank reserve requirements, and soon, are published each month in the Federal ReserveBulletin. Information can also be found there as towhen and how member bank reserves and discountrates have been changed from time to time. Some stu-dents might be interested in charting changes thathave occurred over several years in the money stockand gold stock. The two sets of figures may easily beshown as two lines on the same chart. The farther backthey may be traced and compared, the more interest-ing such a chart will be and the more obvious it willbecome that the money stock has risen and theamount of gold on which Federal Reserve Notes andcredit are based is infinitesimal—and since 1968 non-existent. To help students do the research for such achart, a few significant dates and figures are shown onthe following pages.

Incidentally, the "Fed's" monetary statistics wereagain revised slightly at the end of 1974—after thesecharts were completed—and monthly data were recal-culated on the new basis back to January 1968. Thus,M-l and M-2 statistics reported here may not pre-cisely match those in the "Fed's" post-1974 releases.


Federal Reserve Act

U. S. in World War I

Stock market crash

Banks closed by proclamation

Gold payment clauses inprivate contracts out-lawed and U. S. citizensprohibited from owningmonetary gold

Gold stock revaluedafter devaluation ofU.S. dollar (from 25.8grains of gold to 15.5/21grains). Effective January1934, 1 oz. of gold = $35

U. S. in World War II

Gold reserve requirementson notes and depositsreduced to 25$

Start of Federal Reservestatistics on moneystock (seasonally adjusted)**

U. S. involved in Korea

DATE19131914 (June 30)

Feb. 1917-Nov. 19181919 (June 30)1922 (June 30)1927 (June 30)1929 (June 30)

1929 (October)1930 (June 30)1932 (June 30)

1933 (March 6)

1933 (June 5)

1934 (Jan. 31)

1934 (June 30)1935 (December)1938 (December)1939 (December)

Dec. 1941-Aug. 19451944 (December)

1945 (June 12)

1946

1947

June 1950-July 19531950 (December)1955 (December)

1959 (December)1961 (December)

GOLD STOCK*(in billions)

$ 1.890

3.1133.7844.5874.324

4.5353.918

7.438

7.85610.12514.51222.737

20.619

22.754

22.70621.753

19.50716.889

MONEY STOCK (in billions)Gold, coins + notes

$ 3.798

7.6888.2768.6678.538

8.3069.004

With the retirement of gold coins and gold certif-icates from circulation, the Federal Reserve revisedsome monetary statistics

Currencyoutside of banks

+ demand deposits

$ 17.470 (Dec. 3.1, 1933)

26.60031.76148.607

90.435

113,597

117.670133.300

(seasonally adjusted)144.824150.578

*Gold stock valued as follows:1913-1933—1 oz. of gold = $20.671934-April 1972-1 oz. of gold = $35.00May 1972-September 1973—1 oz. of gold = $38.00As of October 18, 1973-1 oz. of gold = $42.22

''Seasonal adjustments are made to even out the effects of exceptional month-to-month changes. Except as noted, when only sea-sonally adjusted figures were available, we have tried to avoid using "adjusted" statistics in these Tables.


MONEY STOCK (in billions)M-l M-2 (M-l + time deposits

Currency at commercial banks other

DATE

Start of additional seriesof statistics on moneystock (not seasonallyadjusted) August 1962

Repeal of 25$ gold reserverequirement for FederalReserve Notes anddeposits (March 18, L968)

President Nixon announced(August 15, 1971) thatU. S. would release nomore gold to foreigngovernments or foreigncentral banks; goldsales discontinued (untilresumption, January 1975)

President Nixon announced(December 18, 1971) an8.5$ devaluation of U. S.dollar. Effective May 8,1972, $38 = 1 oz. gold

President Nixon announced(February 12, 1973) newratio of U. S. dollar togold-$42.22 = 1 oz.

1964 (December)1965 (December)1966 (December)1967

1968 (December)1969 (December)1970 (December)

1971 (December 1)

1972 (December)

1973 (December)1974 (December)

GOLD STOCK0

(in billions)

$15,40013.799

12.436

10.36711.105°°

10.132

10.487

11.65211.652

outside of banks+ demand deposits

This statistical seriesretitled "M-l" in 1971,was revised and fig-ured on the new basisback to 1947

S 160.5168.0171.7186.9

207.6214.7227.6

263.0

279.1292.2

than large Certificatesof Deposit)

This statistical series (M-2), started 1971, was fig-ured back to January 1964

$273.8298.1314.0349.7

387.0396.8430.0

530.7

577.3619.4

December 31, 1974—Legal right of U. S. citizens to own gold coins and gold bullion restored.January 1975—Sales of gold from U. S. government holdings resumed.

°Gold stock valued as follows:1913-1933-1 oz. of gold = $20.671934-April 1972-1 oz. of gold = $35.00May 1972-September 1973—1 oz. of gold = $38.00As of October 18, 1973—1 oz. of gold = $42.22

*°After January 1970, some of the Federal Reserve statistics on "gold reserves" includesome quantities of Special Drawing Rights (SDRs).


14. What is the economic basis of interest andhow are interest rates determined in a free market?Interest is an economic phenomenon which tracesback to the fact that actions take time and that peo-ple have time preferences.

NOTE: The whole subject of interest theory is morecomplicated than need be explained in a high schooleconomics course. However, the teacher should beready to refer any exceptionally alert students whoare interested in this subject to the advanced readingsrecommended at the close of this Unit. There they willfind a discussion of the three component factors thatdetermine the market rate of interest on loans:

a. originary interest, based on time preference.When people have a choice they prefer thingsnow rather than later. Time preference is alle-gorized in several familiar proverbs, "A bird inthe hand is worth two in a bush," "Eat, drinkand be merry, for tomorrow we die," etc. Inother words, time preference is a consequenceof the fact that life is uncertain, no one canknow what the future will bring, so most ac-tions a person takes reflect a preference forimmediate, over postponed or delayed, satis-factions

b. the risk factor involved in the specific projectconcerned. Is the investment likely to succeed?Will the producer make a profit? Is the borrow-er responsible and expected to pay his debts asdue?

c. the price premium, based on any general shiftin prices anticipated. Does it seem likely orprobable that the quantity of money in circula-tion will increase (or decrease)—due to the ac-tions of gold or silver miners, government de-crees or the banks—so as to alter the marketvalue or purchasing power of the monetaryunit. In other words, are dollar prices expectedto be higher in the future when the loan isscheduled for repayment because each dollar isrelatively less valuable and it takes more ofthem to purchase the same thing? If so a lenderwill insist that a "positive price premium" beincluded in the rate of interest to compensatefor the anticipated loss in the dollar's purchas-ing power during the period of the loan timewhen he foregoes the use of his money. Or willthe purchasing power of the dollar improve bythe time the loan is repaid so that money priceswill be lower then and the dollars used to repaythe loan will buy more? If so, a lender will beready to accept a lower gross rate of interest,reduced by a "negative price premium" reflect-

ing the anticipated greater purchasing power ofthe dollar and generally lower prices.

For purposes of this SYLLABUS, it will suffice topoint out that—barring force, fraud or human error—the interest, or interest rate, any particular per-son pays on the free market to borrow a particularsum of money is determined by the same principlesas are involved in determining prices. Everyonewho has saved—i.e., accumulated a surplus by re-fraining from consuming his entire production—is apotential lender. Would-be borrowers competewith one another on the market for portions of theavailable savings just as would-be buyers competein pricing auctions for units of the goods and ser-vices available. Would-be borrowers bid for loansby offering the best terms they can afford and bytrying to reassure savers of their financial reliabil-ity. Savers who wish to lend or invest compete withother would-be lenders by offering the most favor-able terms possible to the most reliable would-beborrowers or those whose projects seem mostlikely to succeed. Such auctions among savers andwould-be borrowers are constantly taking place onthe market. The bidding continues until everyonewho wants to lend or borrow at the rate of interestfinally agreed upon finds a willing partner to thetrade. How much any particular person will bewilling to bid to borrow a particular sum of moneyat a particular time and place will depend on hissubjective (personal) values and his eagerness tohave these funds at his disposal right away. Howmuch he will have to offer to induce a particularsaver to part with this particular sum will be deter-mined by the bidding and competition in marketauctions of potential lenders (savers) and otherwould-be borrowers. The money borrowers paylenders, over and above the number of dollars theyborrow, is interest. Thus we may explain the de-termination of interest rates on a free market byadapting the same steps in logic used in describ-ing prices (Unit 6) and wage rates (Unit 9):

(1) Everyone—would-be lender and would-beborrower alike—bids in the attempt to im-prove his or her situation as he or she seesfit under the given circumstances

(2) Every would-be lender bids according to hisor her own personal time preference, as wellas his or her subjective (personal) scale ofvalues. So long as it seems advisable, awould-be lender will keep on offering bet-ter terms in the attempt to attract the most


reliable potential borrowers, so as to placehis savings where he thinks they will berelatively safe and paid back on time withinterest. Any would-be lender who wants toincrease his loans must necessarily reducethe interest rate he asks, offer easier repay-ment schedules or be willing to lend for risk-ier ventures

(3) Every would-be borrower looking for a loanconsiders the pros and cons of specific offers—the rate of interest asked, the time whenthe funds will be available, requested sched-ule for repayment, etc. So long as it seemsadvisable a would-be borrower will keep onraising his bid to potential lenders as muchas he can, so as to compete successfully withother borrowers and obtain the funds hewants. The more he wants to borrow thebetter terms or greater security he will haveto offer a lender. What any borrower willbe willing and able to pay will depend onhis or her time preference, as well as his orher subjective (personal) scale of values,other sources of funds and alternative activ-ities which could be undertaken with hisavailable time, energy and other resources

(4) No one who lends money voluntarily isforced to offer or to accept a lower interestrate, and he may very likely receive more,than the value he would expect from devot-ing his savings to other potential uses

(5) No one who borrows money voluntarily isforced to bid or to pay a higher rate of inter-est, and he may very likely pay less, thanthe value he places on having the amountof the loan made available to him immedi-ately, under the circumstances and termscalled for

(6) If neither lender nor borrower makes a mis-take in anticipating their immediate and fu-ture wants, they both expect to be better off—from the point of view of their respectivetime preferences and subjective (personal)values—as a result of making the loan, thanthey would otherwise have been

(7) Would-be lenders looking for borrowers onthe free market do not consider borrowersen masse, but individually, weighing at eachinstance the relative advantages of lendingmore, or less, money to the particular per-son or firm concerned for use on the specificproject proposed

(8) Those who neither lend nor borrow to un-

dertake new purchases or investments con-sider other pursuits more advantageous un-der the circumstances than it would havebeen to spend or invest more with the aid offunds loaned or borrowed

(9) Thus, barring force, fraud and human error,there is a tendency on the market for sav-ings to be held by, and/or offered as loansto, those who are most eager to acquirefunds and so bid for them most urgently

(10) Insistence by any would-be lender on inter-est rates higher than those established bythe bidding of would-be borrowers andlenders on the market—whether due to error,ignorance, stubbornness or outside interfer-ence (government-imposed, artificially low,ceilings on interest rates, for instance) willprevent that lender from lending funds atthat time.

(11) Insistence by any would-be borrower on lowinterest rates, below those established onthe market for projects and risks compar-able to his—whether due to error, ignorance,stubbornness or outside interference—pre-vents that would-be borrower from borrow-ing funds under those conditions

(12) However, barring force, fraud or human er-ror, there is a tendency on the free marketfor every would-be lender who is willing tolend at market interest rates, and for everywould-be borrower, who is willing to paymarket interest rates to borrow funds for hismost urgent purposes, to find loan oppor-tunities they consider suitable in view of allavailable alternatives

(13) Both would-be lender and borrower judgespecific situations to the best of their abil-ities—comparing all other opportunities withthat offered by lending (or refusing to lend)or by borrowing (or refusing to borrow), aparticular sum of money for a particularproject at a particular time and place. Thelender lends and the borrower borrows aspecific sum of money if, as and when theterms agreed upon seem better to both thandoes any alternative open to either. At thesame time, the lender or borrower who re-jects a specific loan does so because he doesnot consider the potential interest paymentssufficient to compensate him for the tem-porary transfer of savings and other oppor-tunities lost. Thus, voluntary loan agree-ments will be made on a free market only if,


as and when both parties concerned expectto gain as a result

(14) The gross market interest rate for a certainquantity of money, while necessarily accept-able to both lender and borrower involved,depends on supply and demand which, inturn, rest ultimately on the time preferencesand subjective values of the persons in-volved—all things considered

(15) The interest rate paid on the free market forany particular loan, therefore, conforms toeconomic law. It is forced by competitionamong would-be borrowers and lenders tofall within certain limits determined by thesupply of funds to be lent and the demandfor borrowed money, both of which may beexplained by referring to the time prefer-ences and the subjective values of the bor-rowers and lenders at the margin—i.e., theinvisible dividing line between those wholend (and borrow) and those who refuse tolend (and borrow) under the specific termsand conditions involved.

15. How have the "Fed's" operations affectedthe quantity of money and the purchasing powerof the dollar? The "Fed" has openly and franklyincreased the quantity of legal tender paper dollarsand credit significantly—and it continues to followessentially this same policy. This increase in thequantity of what we use as money necessarily al-ters the ratio of every single dollar to everythingelse. It leads to a decline in the relative value of adollar and in its anticipated purchasing power.

Every one of us bids at auction, so to speak, forall the various things we want—dollars, goods, ser-vices, etc.—seeking at every instant what we wantmost urgently and rejecting other opportunities. Inour minds, every one of us is always valuing every-thing, unit by unit. When the number of units avail-able of a thing is severely limited relative to thedemand for it, we do our best to economize, to de-vote each unit only to its very most important pur-pose. The value of a single unit in our minds, itsmarginal utility, is then very high. On the otherhand, when something is relatively plentiful, wecan afford to splurge a bit and use some units forless urgent purposes. The marginal utility of asingle unit is then lower and so is its value to eachof us personally. As a result, there will be less com-petition for each unit on the market and the priceat which it will be traded will be lower.

Units of money are similar in this respect. The

value of a single dollar bill like that of anythingelse depends on what it is exchangeable for, i.e.what it will purchase. When the number of dollarsis increased, relative to the quantity of otherthings, a single dollar no longer brings as much intrade as before. Its value on the market, its pur-chasing power, declines. Thus, the more dollarsthere are around, the less valuable each one will bein comparison with other things and the higher willbe the dollar prices we must pay—other things be-ing equal—for most of the things we purchase onthe market. The fact that prices of most things arehigher today than yesterday, last month or lastyear, is a reflection of the substantial increase inthe number of paper and credit dollars during re-cent years. It was this increase in the quantity ofmoney that caused the subsequent decline in valueof every single dollar in the eyes of traders and, asa result, the dollar's loss of purchasing power.

Paper dollars (Federal Reserve Notes) can be,and are, easily and cheaply printed. Bank creditalso can be, and is, very simply created merely bya bookkeeping entry. Gold and silver are not, andnever have been, so easy to produce. When thenumber of dollars in the form of paper notes andbank credit is increasing, while new gold and sil-ver coins are not being produced at all, or at leastnot at the same rate, the ratio between them shifts.Every gold or silver coin then becomes more val-uable to savers and manufacturers than their valuein exchange as legal tender, i.e. the nominal valueprinted on the face of each. Under these circum-stances, debtors will inevitably try to hold on toany gold or silver money in their possession and tosettle debts with the relatively more plentiful papernotes, decreed by government to be legal tenderat their face value. Similarly, creditors too, if of-fered a choice, will much prefer gold or silvermoney.

Then almost everyone, debtor and creditor alike,is anxious to hold onto any gold or silver moneythat comes his way and resists passing it along inlater trades. Then it will not be long before goldand silver coins will disappear completely from themarket to be concentrated in private hoards, coinbanks, and money collections. People will holdtheir gold and silver coins and use in paying theirdebts the relatively more plentiful and relativelymore easy-to-come-by legal tender paper money.Thus, the effect of the government's decree in mak-ing the relatively plentiful paper notes legal ten-der, which creditors must accept when tendered aspayment of a debt, is to compel debtors to accept


payment in a monetary unit that is depreciatingand to force gold and silver coins out of circulation.This phenomenon which was noted and describedby Sir Thomas Gresham (1519-1579) is known inhis honor as "Gresham's law." In popular terms,Gresham's law has been simplified to "Bad moneydrives out good"—i.e. "Bad money [money whichis less valuable on the market than its govern-ment-decreed legal tender value] drives out [ofcirculation] good money [money which peoplewant to hold onto because it is more valuable onthe market than its government-decreed legal ten-der value]."

Gresham's law explains why silver dollars andsilver 50C, 25<P, 10<P coins are seldom seen on themarket nowadays. Gresham's law is simply an ap-plication to money of the basic desire of individualsto economize, i.e., "to try to use the easiest, cheap-est and most effective means available to accom-plish one's ends or goals, all things considered." Inother words, if people have a choice of moneyswhen paying for a good or service, they will use themoney that is easiest and cheapest to come by,which will serve their purpose satisfactorily.

SUMMARY

To recapitulate once more, the most importantpoints made in this Unit are as follows:

1. Money originates on the market as an out-come of countless purposive actions on the part ofmany individuals, each seeking to improve his orher situation in accord with his or her own personalvalue scales

2. The commodity which becomes money is se-lected through the market because it is widely rec-ognized as the most readily marketable, saleable,exchangeable commodity within that trading area

3. When a commodity becomes money becauseit is generally accepted in trades by almost every-body, it helps tremendously in promoting in-creased specialization and trading

4. As a result of its new use as an aid to facilitat-ing trade, a commodity which becomes a market'smoney acquires an added value as a "trading com-modity" so that it is used more sparingly for otherpurposes

5. Banks and banknotes also originated as theoutcome of countless purposive actions on thepart of many individuals, each seeking to improve

his or her own situation in accord with his or herown personal value scales

6. Bankers learned in time that it was lucrative,if risky, to lend out at interest a portion of theirdepositors' money. So they pooled the funds leftwith them by depositors for safekeeping and beganto inflate or expand credit to some extent by issu-ing new banknotes on the basis of fractional re-serves. Most bankers realized this practice wasrisky, that it held the threat of a "run on the bank"and possible bankruptcy. However, some govern-ments wanted to borrow from the banks at lowinterest rates themselves, or wanted their politicalfavorites to be able to borrow, so they intervenedat this point to sanction and even to encourageexpansion on the part of certain banks, by declar-ing their banknotes to be legal tender and offeringassistance if they over-expanded. If they had nothad such help, the expanding banks would havebeen bound to fail sooner or later. Thus, extendedperiods of serious inflation and credit expansionare possible only because of government interfer-ence with money, credit and banking

7. Time and again, governments have favoredcertain banks and bankers to the detriment of theirdepositors—by failing to enforce the contracts sav-ers had made with banks where they depositedfunds for safekeeping

8. Government-sanctioned and/or government-encouraged inflation and credit expansion are thecause of higher prices. They also lead in time toserious economic distortions and mal-investments,which inevitably result in widespread economiclosses, "runaway" or hyper-inflation, political con-trols and/or economic collapse and depression. Fora more detailed explanation of the many repercus-sions of government intervention with money,credit and banking, see especially the referencescited on this Unit's list of RECOMMENDED READ-INGS

9. It is to the credit of Jean Baptiste Say (Read-ing No. 63) that he recognized early in the 19thcentury that there could be no such thing as a gen-eral "scarcity" of money on a free market. Thepurchasing power of the monetary unit is alwaysbeing adjusted, thanks to the bidding of consum-ers at "auctions," so that prices fluctuate to makethe quantity of money suffice for the purchase ofthe goods and services available

10. There is nothing mysterious about money.Money is simply a "trading commodity," i.e., amedium of exchange. Almost everyone wants tohave some money on hand at all times, a cash


holding. The total money stock in an economy atany time is merely the sum of all such cash hold-ings.

NOTE: This Unit, perhaps more than any other in theSYLLABUS, raises very difficult questions, the answersto which are beyond the scope of this SYLLABUS. There-fore, the list of RECOMMENDED READINGS attachedhas been amplified by a third set of "Supplementary(Advanced) References." These additional titles ex-plore in more detail the complex aspects of money,credit and banking and explain the role of govern-ment's monetary manipulations in causing inflation,credit expansion and the alternating economic boomsand busts characteristic of the trade or business"cycle." The teacher may refer to these books, ofcourse, or recommend them to questioning young-sters.


BANKNOTEBANKS, BANKINGBARTERCASH HOLDINGCENTRAL BANK OF ISSUECOIN CLIPPING or

COIN DEBASEMENTCREDIT EXPANSIONDIRECT EXCHANGEECONOMIC CALCULATIONECONOMIZEENTREPRENEURIAL PROFITFEDERAL RESERVE SYSTEMFRACTIONAL RESERVE BANKINGGOLDGRESHAM'S LAWINDIRECT EXCHANGEINFLATIONINTEREST, INTEREST RATELEGAL TENDERMARGINMARGINAL UTILITYMEDIUM OF EXCHANGEMONEYMONEY STOCKPROMISSORY NOTEPURCHASING POWERSAVINGSSPECIE

TIME PREFERENCE"WILDCAT" BANKING

RECOMMENDED READINGSMore advanced materials are indicated by an asterisk(°)

Articles

In the BASIC READER:42. "Million Dollar Dream," Employers' Assn. of Chi-

cago

•43. "Not Worth a Continental," Pelatiah Webster°44. "The Value of Money," Hans F. Sennholz•45. "The Gold Problem," Ludwig von Mises*46. "How Much Money?" Percy L. Greaves, Jr.•47. "Back to Gold?" Henry Hazlitt48. "Eternal Love," Lawrence Noonan

•63. "Of the Demand or Market for Products," JeanBaptiste Say

Additional titles:•"The American Economy is NOT Depression-proof,"

Hans F. Sennholz—in The Freeman, November1972

•"The Federal Reserve System," Hans F. Sennholz—in The Freeman, April 1972

•"The Future of the Dollar," Henry Hazlitt—in TheFreeman, January 1974

"The Gold Standard: A Standard for Freedom," PaulStevens—in The Freeman, January 1975

°"How NOT to Advocate a Gold Standard," PaulStevens—in The Freeman, August 1973

•"Lower Interest Rates by Law," Percy L. Greaves, Jr.—in The Freeman, December 1974

"No Shortage of Gold," Hans F. Sennholz—in TheFreeman, September 1973

"You Cannot Trust Governments with Your Money,"Henry Hazlitt—in The Freeman, July 1974

Books

Curley, Charles. The Coming Profit in Gold (BantamBooks, 1974)

•Greaves, Percy L., Jr. Understanding the Dollar Crisis(Western Islands, 1973) Chapters V, VI, and VII

Hazlitt, Henry. What You Should Know About Infla-tion (Van Nostrand, 1960/1965; Funk & Wagnalls,1968)

Rothbard, Murray N. What Has Government Done toOur Money? (Rampart College, 1964/1974)

White, Andrew Dickson. Fiat Money Inflation inFrance (1912) Many reprints

"Supplementary (Advanced) ReferencesAnderson, Benjamin M. Economics and the Public

Welfare: Financial and Economic History of theUnited States, 1914-1946 (Van Nostrand, 1949/1959/1963)

Bagehot, Walter. Lombard Street: A Description of theMoney Market (1873) Many editions. Paperback pub-lished by Richard D. Irwin, 1962

Menger, Carl. Principles of Economics. From the Ger-man, 1871. (Free Press of Glencoe/Macmillan, 1950).Chapter VIII, "The Theory of Money."

Mises, Ludwig von. Human Action (Yale, 1949/1963;Regnery, 1966). Chapters XVII-XX

The Theory of Money and Credit (JonathanCape, 1934; Yale, 1952; FEE, 1971)

Rothbard, Murray N. America's Great Depression(Van Nostrand, 1963; Nash Pub., 1972)

11. COMPETITION, "BIG BUSINESS/' AND MONOPOLY


1. A field trip to a large industrial plant or factorywould be a good introduction to this Unit. Such avisit could help to dramatize the tremendousamount of savings and investment in plant andequipment necessary for any modern large-scaleindustry. In the course of the field trip, call atten-tion also to the importance of the division of laborand cooperation as indicated by the company's re-liance on workers with highly specialized tools andskills. The students should learn something aboutthe history of the firm visited, how it developedfrom the idea of an entrepreneur who thought hecould produce something consumers wanted. Thisis true also of every component part of the plantvisited. Every structure on its premises, every pieceof equipment and also every productive process ituses are all outcomes of many ideas on the partof many persons, each of whom was trying to fillsome entrepreneur's need for construction mate-rials, tools or improved production methods so asto serve consumers better. As a result of countlesslittle changes made from time to time to improvethe firm's existing structures, tools and methods,the modern industrial plant the class visits finallyassumed its present form.

2. A visit to a local stock exchange or broker'soffice—as suggested in Unit 7—might be scheduledin conjunction with this Unit. The relationship be-tween stock market speculation and large-scaleindustrial development is explained in the follow-ing pages.

3. As suggested in Unit 7, each student shouldbring to class for analysis and discussion the cor-poration's Annual Report he or she requested.

4. In preparation for winding up the stock mar-ket project described in Unit 7—whether shareswere actually purchased by the class or hypothet-ical speculations made by each student—all invest-ment accounts, brokerage records and graphsshould be brought up to date. When preparingtheir statements, the students may follow the

simple format suggested in Unit 7, page 57. Themarket values of all stocks should be figured as ifsold at the closing price per share on the final dayallowed for class trading. Allowances should bemade for any brokerage fees, transaction chargesand taxes due on earnings or gains in the value ofstocks. If class time permits these projects may becontinued until the end of the term, but this willbe the last opportunity in the course to deal in anydetail with the stock market. Some recognitionmight be given the student whose investmentsproved most successful.

5. The students might discuss and comparetheir respective experiences in making speculativeinvestments. Here are several questions to pose forclass discussion:

a. Did some of the stocks "purchased" by the stu-dents gain or lose dramatically in value on thestock market during the period concerned? Dis-cuss possible reasons for any such marked pricechanges.

b. During this time, did some companies an-nounce, or pay, dividends to stockholders ofrecord as of a certain date? Were these div-idends anticipated? Or were they unexpected?Did some companies announce that an antic-ipated dividend would not be paid? Did any ofthese announcements noticeably affect theprice per share of the company's stock?

c. Did any of the companies, whose stock students"purchased," merge, combine, or take overother firms during the period of time con-cerned?

d. Did any news accounts or rumors about any stu-dents' companies appear in the press duringthis period? If so, did these reports noticeablyinfluence the market price of the company'sstock?

e. Did any of the companies involved in the stu-dents' speculations give stock dividends orsplit? How did this affect their market pricesper share?

126

11. COMPETITION, "BIG BUSINESS," AND MONOPOLY 127

f. Were any of the students' companies involvedin a proxy fight during this time? If so, the stu-dents should read all they can find about thecontroversy to try to understand what it means.

g. Were charges made by the government againstany of the firms whose stock students had "pur-chased"? If so, what agency of the governmentwas involved? What was the firm accused of?What was the outcome?

6. If teacher, student or class has assembledfiles of newspaper clippings concerning businessfirms, they may be exhibited and discussed at thistime. Perhaps some could be displayed on bul-letin boards. Separate them into two groups—thosedealing with various entrepreneurial activities andthose concerning government interventions withspecific business firms. Arrange them by com-panies also, or categories. Bulletin board exhibitsmight be used to illustrate how business firms planfor expansion, improve production methods, com-pete in different markets, introduce new products,change advertisement techniques, and so on. Otherdisplays could be made up of news stories concern-ing government controls and regulations, legalcharges made against firms for alleged violationsof laws or rulings relating to advertising, competi-tion, labelling, pricing, hiring, firing, etc.

7. Students who have read biographies of busi-nessmen or of business firms and have not re-ported on them earlier might do so now.

8. In connection with this Unit it would be help-ful to have an official of a large firm address theclass, preferably someone from a firm whose stockis listed on the market. If the speaker is open tosuggestions, the teacher might suggest he or shediscuss the firm's sources of funds, stock offeringsand stockholders, its use of advertising, its majorcompetitors, its labor relations, its dealings withgovernment, etc. as well as its products, methodsof production and channels of distribution. If thespeaker can bring copies of an Annual Report orProspectus to class for discussion, so much the bet-ter.

9. "Big business" and advertising are blamed,often without cause, for many economic inequities.One of the major goals of the SYLLABUS has been toexplain that business firms may succeed and ex-pand on a free market only by pleasing many cus-tomers better than their competitors. In this Unitwe shall see that advertising is an essential step inaccomplishing this. To succeed a businessmanmust make sure his potential customers know

about his good or service. See Professor Kirzner'sexplanation of advertising as a necessary part ofproduction (Reading No. 54). Professor Kirznerpoints out in that article that a gas station owner'stask is not just to have gas or information avail-able, but "to supply gas-which-is-known-about."Ask each student to describe one or several adsthat actually introduced him to a product so as topersuade him or her to make a specific purchase.It might have been a store display, an outdoor bill-board, a sign or movie marquee, a TV spot, a print-ed newspaper or magazine ad, a mailed advertise-ment or a special coupon offering several cents offthe regular price of an item. Perhaps some stu-dents will recall having made a purchase becauseof a friend's experience, suggestion or advice.Businessmen consider such "word-of-mouth adver-tising" especially valuable. However, "word-of-mouth advertising" cannot be purchased directlybut can only be earned by providing a productwhich is so good as to make "satisfied customers"tell others about it. In any event, some form of ad-vertising is necessary for the entrepreneur to trans-form his ideas, raw materials and labor into a fin-ished product in the hands of a final customer.

10. As a further aid to understanding stock mar-ket transactions, see a recent Daily Report of theNew York Stock Exchange and compare the infor-mation it reveals with that explained below and inUnit 7, pp. 58-61.

EXPLANATION OF A DAILY REPORTOF

NEW YORK STOCK EXCHANGETRANSACTIONS

Compare the excerpt below from the Daily Re-port of New York Stock Exchange Transactions forFebruary 27,1975 (reproduced here from The NewYork Times of the following day) with that forDecember 4, 1974, reprinted in Unit 7 (p. 59).Here are two points to note:

1. Stock market prices generally have risen sinceDecember 4. Note the rising line on the "12-Month Trend, Weekly Close" chart as well asthe upward trend of high, low and closingprices charted in the upper half of the middlecolumn.

2. The total daily volume of sales on the NYSEwas generally heavier during the first fewmonths of 1975 than in the last quarter of 1974.


THE NEW YORK TIMES, FRIDAY, FEBRUARY 28. 1975

New York Stock Exchange Transactions1974-75 StocKs and Div Srfles Net

High Low In Dollars F E '00s High Low Last Chg

II-1.ir«31f>V i13'#4:i4

w15''t2 *

24is

1034/4

29Vt

23 " i12''*32-V<

22H17 V,25 H*"t

12912S

2240

416 ' t

13

3 0 ' :?8'«

2SV;

IV.

10

7'-4

70

2'?6' 4

29 v8

IP,,3H

23

1 1 '.'41$'/4

IVt6 ' t

3'/i27V411' j22?18

12in.

2'/418Vj13

7

A-B-Abbt t b 112 16ACF In 2.60 8Acme Clev 6AdmDg 04*AdmE* ./7eAdms MiilisAddressogAdvlnv 26eAetnaLf 1.08AetnaLf pf 2Ahmans 20Aileen IncAirPrd 20bAircolnc .90AJ IndustryAK/ona 1.20Ala Gas 1.18AlaP pf8.28AlaP pf8.16Alaska tntrsAlbanvln .60AlbertoC .36Albertsn .60AlcanAI 1 20AlcoStd .48AlconLb .24Alexdrs .10eAlison MtgAllegCp .4SeAllgLud 1.60AllgLud pf 3AllgPw 1.52AllenGrp .40AlldCh 1.80AlldMnt .54AlldProd 1AlldStr 1.50Alld SupmktAllisChal .AllrtAut .56Alpha PI .72Alcoa 1.34AmalSug 3aAmax 1 75Amax pfS.2SAMBAC .50Amcord .24Amerce 1.20A Hess 30bA Hes pf3.5OAAirFilt .44Am AirlinA Baker .20A Brnds 268AmBdcst .80A Can 2.20aA Can pfi.75AmCen MtgA Cham 1.20A Cvan 1.50AmDistii SOADisTel 52AmDualVtADul pf.84aAmEIPw 2A Family .24AmFin .20AGIBd 1.98*AGerCv KM

THURSDAY. FEBRUARY ?.', 19'5Year to Date

Sales Wed. Year Ago' ' "" • » »*^r-j. • cat n u u 1V/") 1Q7JU,«0.000 1S.7W.000 13,680.000 &3«.889,304 606.294.419

NEW YORKSTOCK EXCHANGECOMPOSITE INDEX

— HIGH

2 2 V 4 . . . . . .3'/t

12Vj 4- '/417 +• >/4S'/j— V,4'/4 4- V.

23 -- v,

10>4

Stocks and Div. Sales NetIn Dollars P/E 100s High Low Last Chg

DrPepor .30OomcM 80aDonnelly >6DoricCp 20DorOhv 10*Dorscv 10Dover 1 20DowCn 1 40DPF-" IncDravo 160Drfsser 1.40Dres pf 7.20Drssr pfB 2

Bd 1 44Dreyfus 55eDuk Pw 1 40Duke p(8 20DunBrad .96Duplan CPduPont 5.5OeduPnt pf4.50duPnt pf3.5ODuqLt 1.72DuqLt 4pf 2DuqL p«2.75

Y'j Oymoln .40

E—13 EaqlP 1.04b7 EascoCp .50

Ea«;1Air Lin12' j E^stGs .45e8 RastUtl 1.50

57-Vi EasKd 1.56a

?O 100 11'WU 59 52 '-•*IS 12 23 Vi

c> T> 12'4S 10 /••'•H 15 :, »/ j 35 <

11 4 ' 0 fctt'*19 j 46 31 .

9 m 47 V;11 4950 43'4

8 15V,

1 1.1 5 :/48 219 13r«

*80 8318 6* 26i»

10 1'4

35'4*8'.-v

47

12 451. . i. . 1

6 105 151

.. . Z330 22

.. . Z300 274 7 7̂»

2fe''»

6 1 •

'4715H22

17 20%14 11

>1 28'-^3 12'/4

22 993 86**

20H 20'i11 It41.4 4V4

?7 27V4

12Mi 12'/«84 Va 85H

tcnl in 38fckrdJk .30Eckd NC .28EdisBro 1.48EC&G 12

r4 Elect Assoc10' ;• E-DS 5£.e

IS 29 22'4 ?U/417 1045 21-Va 18^«8 24 10^17 4

17

2711 "4

22V4+-18̂ « 21V»—10^ 10*Vt-27 27iiv$ i n ( -

•\V. 1 V . --

Mosf Acf/ve StocksThursday, February 27, 1975

Company Volume

Ryder Sys 311,800Ford Mot 170,000USLIFECpColum Pic;StdOUlndAMedicorpKresge SS ..Sony Corp

168,900148,900140,900123,700117,300117,200

Polaroid 113,700TwentCent 113,500EckerdJk 104,500ITEImperl 100,900East Kodak 99,300

Last

32'/2

/43%

223/48»/2

2195/s

21V,18

Net Cnng.

+ y%+ VA

1•

. . . , .

12-MONTH TRENDWEEKLY CLOSE

I [ j ; _.

• ' I . I .

. _ . .--I

—i -_-.. —

—r- -1-- - !—}-

{— 4-

Comwlth OUAll Rich.

96,00095,700 83

Unless otherwise noted, rates of dividends in the-foregoing table are annual disbursements based on thelast quarterly or semi-annual declaration. Special orextra dividends or payments not, designated as regulararc identified in the following footnotes.

a Also extra or extras b-Annuai rate plus stockdividend, c Liquidating dividend. e-Dedared or paid inpreceding 12 months, h Declared or paid after stock'dividend or split UP. k-Declared or paid this year, anaccumulative issue with dividends in arrears. n-Newissue. o-Paid this vear, dividend omitted, deferred or 10action taken at last dividend meeting, r-pecfared or paidin preceding 12 months plus stock dividend. t-Paid instock m preceding 12 months, estimated c tsh value on

] ex-dividend or ex distribution date.eld-Called. x-Ex dividend v-Ex dividen'. and sales irt

'lull x-dis-Ex distribution xr-Ex r igr^ xw-Without• warrants. ww-With warrants wd-When distributed.wi-When issued. nd-Next day delivery.

under the Bankruptcy Act, or securities assumed bv suchcompanies. fn-Foreign issue subject to ir.'ereitequalization tax

Year's high and low range doej not include changes i tlateM day's tradinq

z-Sales in full.Where a split or stock dividend amounting to ?5 p«»r i»nt

or more has been paid the year's high low range anddividend are shown for the new stock onlv.

Copyright 1975 by The New York Times Company. Reprinted by pern

11. COMPETITION, "BIG BUSINESS/' AND MONOPOLY 129

The 35 million share day, February 13, 1975—35,160,000 shares were actually traded—was anall-time high as of that date.

Eastman Kodak—Thursday, February 27, 1975:For the sake of a more precise analysis, comparethe December 4, 1974 listing described on p. 60.Columns 1 and 2 report the 1974-1975 high($117.50) and low ($57,625) prices. The high listedon December 4 had not been surpassed, but a newlow was posted after that date. (Note that columns1 and 2 are revised each year, after several monthshave passed, reverting to the calendar year basis.Thus Daily Reports appearing later in the yearshould be expected to show the high and low pricesfor the previous months of the calendar year only.)No comment needed on column 3, listing companyname and annual dividend. The new higher P/Eratio (column 4) reflects the change in the rela-tionship of earnings to the day's higher closingprice. The higher price of the stock means that theearnings are lower in comparison—l/22nd insteadof l/17th of the price of a single share. Thus theyield on his money to an investor who bought East-man Kodak stock at the February 27 price wouldbe lower than if he had bought on December 4.Sales of Eastman Kodak's stock (column 5)—993round lots of 100 shares, i.e., 99,300 shares in a i l -again place it among the day's "Most ActiveStocks." Columns 6, 7, 8 and 9 show the prices pershare at which Eastman Kodak's stock traded—thehigh, 86 3/8 ($86,375), low, 84 5/8 ($84,625) andclosing 85 3/8 ($85,375), down 1/8 (12.5<P) fromthe previous day's closing price.

The eternal goal of stockbrokers and stock in-vestors, to be able to forecast future stock prices,is really "an impossible dream." Nevertheless,stock market statisticians compile many statisticalseries and develop many charts with the hope inmind that the more they can know about past stockprices and past trends, the better able they will beto anticipate what will happen to stock prices inthe future.

The three small graphs with the NYSE Reports(pp. 59 & 128) are such attempts. The students maynotice three similar graphs—the widely-known"Dow Jones Averages"—printed each day in TheWall Street Journal These three charts are basedon daily prices of three Dow Jones selected listsof 65 stocks in three different categories—30 indus-trials, 20 transportation and 15 utilities. The DowJones index of industrials, started in 1884 with 12

stocks, revised and up-dated from time to timesince, is followed by many persons looking forclues as to how to invest. However, statistics arealways based on historical data. They tell us onlywhat happened in the past and reveal nothingabout the future or about when trends will change.Moreover, the potential investor's interest is in thefuture prospects of specific firms, not the futuretrend in statistical aggregates. A change in theprice for the stock of a particular company reallytells something about the anticipation of investorsas to the economic prospects of that particularfirm. Generally higher prices, however, usually re-flect only an increase in the number of dollars incirculation and/or going into the market and re-veal nothing about specific investment opportuni-ties. It may be of casual interest to note that theDow Jones index of "industrials" topped 1,000—reaching a peak of 1,051.70 on January 11, 1973—then declined to its recent low of 584.56 on Octo-ber 4, 1974. For the individual investor, however,the important thing is the ancitipated prospects ofthe specific corporation whose individual shares ofstock he owns or is considering buying or selling.

The students should remain alert to note changesthat may be made from time to time in reportingNYSE transactions and also to compare its DailyReports with those of other Exchanges appearingin local newspapers.

Let the students analyze a few more stock list-ings also, compare the different prices at whichshares of a specific company's stock are sold at dif-ferent times and speculate as to the reasons forthese fluctuations. A firm's stock will rise (fall) inprice if its prospects in the eyes of investors andpotential investors seem rosy (poor). An announce-ment of a new product that promises to be popularwith consumers and/or a report of unexpectedlyhigher earnings over the past year or quartermay send a company's stock up on the market. Onthe other hand, the price of a company's stock isapt to drop as the result of an announcement ofpoor sales and/or lower-than-anticipated earn-ings for the previous year or quarter. Any setbackin a company's fortunes is likely to have similareffects—labor problems, miscalculations on thepart of management, loss of overseas plants, de-clining sales, etc.

Stock prices of many or most companies may risein anticipation of inflation, leading investors andwould-be investors to offer more than they other-wise would for a share of stock and present stock-


holders to insist on higher prices before they con-sent to sell. Declining prices for many or moststocks on the stock market may be the result ofwidespread economic hardship, uncertainty, an-ticipated tax increases and the threat of new gov-ernment controls and/or regulations. Charts andstatistics tend to reflect these general influencesby making it appear that shares of stock traded onthe market are all rising or falling more or less inunison. In actual fact, however, some stocks riseevery day and others decline—the fate of any par-ticular stock depending on the views of investorsas to the success or failure of its managers to an-ticipate correctly market conditions, the wants ofconsumers and to respond to the general influ-ences mentioned above that affect all economicactivity to various degrees.

EXPLANATORY TEXT

This Unit relies heavily on the theories devel-oped previously in this SYLLABUS, especially inUnits 6, "Prices, Pricings," 7, "Savings, Tools andProduction," and 8, "The Entrepreneur and theProfit and Loss System." Thus the teacher mightlike to review those three Units briefly, or at leastreview their final summarizing paragraphs and thedefinitions of their glossary words.

In this Unit we shall be dealing primarily with"big" business firms—how they became "big,"what limits there are, if any, on the size of a firmand whether "bigness" brings advantages or dis-advantages to either business firms or consumers.We shall consider "big business" from three differ-ent viewpoints—historical, economic and legal.First, the historical development over many yearsof large-scale industries is discussed—mass produc-tion assembly line techniques, automation, etc.Then, secondly, the economics of large-scale pro-duction is analyzed—the role of consumer sov-ereignty, the importance of competition, the partplayed by advertising and the meaning of monop-oly. Then in the final sections of this Unit, mentionis made of some of the more important laws whichaffect business size, efficiency, production andconsumption.

The principal point stressed here is that the suc-cess of any large corporation in a free marketeconomy is the outcome of (a) the ideas and initia-tive of entrepreneurs, (b) profits (or losses) madeon the market in free and open competition withother producers who were also trying to please

consumers, (c) consumer sovereignty, choices andpurchases, (d) personal savings and investments,(e) many changes, adaptations and adjustmentsover years in the attempt to better satisfy con-sumers. If the students gain nothing else from thisUnit, they should at least learn that "big business"may become "big" in a free market economy onlyif it successfully and repeatedly serves many con-sumers. Moreover, customers and workers in a freemarket are not helpless pawns of "big business."Rather the situation is the other way round; large-scale enterprises can stay in business and earnprofits only if they retain the approval of many cus-tomers and continue to furnish them with thingsthey want to have and to use. The situation is dif-ferent, however, when business firms owe theirvery existence, size and success to governmentsubsidy or special privilege; the consumers thenare no longer sovereign.

1. How did today's large corporations becomelarge? Young people are inclined to think thatthe institutions they come to know always wereand forever will be more or less as they are. Smallday-to-day changes in their personal lives may beaccepted as natural but the institutions of theoutside world are thought to have existed and areexpected to continue more or less the same almostindefinitely. This is especially true when it comesto very large business firms. Almost everyone as-sumes that such large and well-established firmsas GM, GE, U. S. Steel, IBM, Xerox and Sears Roe-buck have always been around and that they willlast forever. Hardly anybody can conceive of theworld without them. Yet there was a time whenthey didn't exist. Every one of these big corpora-tions had a beginning some time in the past andundoubtedly someday each of them will have anend.

The opportunity to experiment on the basis ofnew ideas is the essence of capitalism. Only in acapitalistic society where individuals may ac-cumulate private property can they use it freelyas they wish, take risks and try out new things inthe hope of making profits. Every business comesinto existence as a result of some venturesomeentrepreneur's idea. However, an idea alone is notenough to assure success, not even if the entre-preneur persuades investors to invest their savingsin his venture. A business venture will be able tosucceed, make profits and expand only if, as andwhen it serves consumers. To succeed, an entre-preneur's output must be something consumers


want and will purchase in sufficient quantities andat high enough prices to more than cover the fullcosts of producing and offering the finished itemson the market. Only then can a businessman beginto accumulate something extra, "plow it back"into the enterprise, expand production, and en-large his operations. In a free market the signif-icant difference between a big business and a smallone is simply that a big one has satisfied moreconsumers than a small one. To produce on a largescale a "big business" therefore must operate on amass production basis.

NOTE: It should help the students understand howand why "big businesses" become "big" if they learnsomething about the beginnings and gradual expan-sions of several large companies. It always takes (a)an idea, (b) time, (c) savings, (d) investment, (e) ef-fort, (f) the successful anticipation of consumer wants,for any business firm to become a large-scale pro-ducer in the first place and to continue in large-scaleproduction—as he must to maintain his position ofimportance on the market in competition with otherproducers. Perhaps each student could research andreport to the class on a different industry or firm.Countless books and encyclopedia articles deal withsuch histories. Books, articles and pictures describingvarious inventions, the development of mass produc-tion methods, new industrial techniques, automationand even those describing new selling and advertis-ing techniques will help to show what is required toexpand the production and the market for a good orservice.

In the minds of many people the automobile in-dustry has come to symbolize mass production,automation and "monopoly." As a result the auto-mobile industry is an especially good illustration touse in explaining how large-scale enterprises de-velop from small ones. Then too, a great deal hasbeen written about it. Almost any library should beable to supply several books about the industry,many of them liberally illustrated, as well as anumber of biographies of automobile producers.

Dozens, perhaps more, small automobile manu-facturing firms were started, each by some hopefulentrepreneur. Some of these early companiesfailed, others merged and still others sold out tomore successful competitors. It would be revealingmerely to have the students list the names of asmany different cars as possible which have beenproduced over the years. Perhaps the class couldconstruct an exhibit with pictures of old automo-biles, listing their names and manufacturers. Orbuild a "family tree" of the industry. Today's "BigFour"—General Motors, Ford, Chrysler Corpora-tion and American Motors—were formed by the

coming together in one way or another of manysmaller firms. However, the automobile industrycontinues in flux. The "Big Four" must still com-pete vigorously—against each other, against small-er, foreign and/or potential automobile manu-facturers, and also against all producers of othermeans of transport as well as against the producersof all goods and services potential customers mightprefer to buy with their money.

Today's large-scale, specialized industrial struc-tures gradually evolved from simpler and smallerenterprises of yesteryear. Every modern tool ormachine—the computer, bulldozer, oil tanker, radio,TV, toaster-oven, snowmobile, camera, tape deck,or what-have-you—has also evolved over decades,perhaps even centuries, from early models thatnow seem antiquated, inefficient and crude. Astudy of former types and models will show thatevery modern implement is the product of count-less minor changes made from time to time. Nosharp line can be drawn between old-style prod-ucts, cars for instance, and modern ones. One byone, minor changes were made in the automobilesbeing produced as researchers, inventors and pro-ducers kept trying to find ways to improve theircars and manufacturing methods, introducingmass production and automation so as to keepcosts of production down and compete more suc-cessfully on the market. In this way, step-by-step,today's comfortable and efficient automobiles,complex machines, home appliances, modernplants, large corporations, and so on, evolved fromtheir cruder, less efficient and less sophisticatedpredecessors.

2. Why are some businesses able to make profitsand expand, while others suffer losses and fail?Every entrepreneur is always spurred on by thehope that his particular idea or innovation will helpto persuade consumers that his particular productis more desirable than that of his competitors. Ifit does he has a chance to earn a profit. As an ex-ample let's stick with automobiles. If an entrepre-neur helps to make a car that customers considereasier and/or cheaper to operate, more attractiveto look at and more desirable to own than themodels of his competitors, he will be able to sellmore of them than he could have otherwise. Withhigher sales his gross receipts will rise and hischances of profit improve. It was in this way, step-by-step, that the Big Four gradually came to dom-inate the automobile industry in this country. Theirsuccess, generally speaking, was due simply to theusefulness and popularity of their cars. At the


prices at which they were offered, their automo-biles were so popular with buyers that their salesexpanded, they took in huge "gates" or "box officereceipts" as a result, which they used to plow backinto the business to expand production.

In the final analysis, the present size of the BigFour, their earnings, profits and tremendous in-vestments in plants, tools and supplies were allmade possible by the dollars received from count-less automobile buyers who preferred to purchasetheir cars to using that same amount of money foranything else. Remember, these automobile com-panies earned profits only because they weremanufacturing cars in large numbers that manypersons purchased because they wanted to usethem! Should consumers refuse to buy so many oftheir cars in the future for any reason—because ofeconomic hardship, the high price of gasoline, irri-tation at new government-required safety devices,etc.—the situation of the Big Four automobilemanufacturers could become precarious, theirprofits vanish and their plants have to close down.No firm, no matter how large or how long it hasbeen in successful operation, can remain impervi-ous to shifts in consumer buying.

In communities where cars are commonplace,the teacher might poll the students, asking themake and manufacture of the cars they and theirfamilies own. Remind the students that every oneof them who bought a car contributed in part tothe profit, if any, earned by its manufacturer—whether one of the Big Four, a foreign companyor a small machine shop producing custom-mademodels. This will give the teacher an opportunityto point out that it is only the popularity of themost widely-driven cars—Fords, Chevrolets, Plym-ouths, American's Gremlins or Hornets, Volks,Toyotas—that enables their producers to sell themin large numbers, have a chance to earn a profitand expand. For many years the Big Four were themost successful. However, their foreign compet-itors are becoming increasingly skillful at makingcars many U. S. customers want to buy and use.In any event, one thing is certain. On a free market,the companies that make the biggest profits mustbe efficient and successful at satisfying many cus-tomers over and over again.

It is a firm's customers, the individuals who buya firm's products voluntarily, who are responsiblefor its "gate" or "box office receipts." Every po-tential purchaser of a firm's good or service rea-sons, thinks and acts individually. Each does as hethinks best under the circumstances, in the hope of

relieving some "felt uneasiness," attaining hismost urgent goal of the moment, and satisfyinghis subjective (personal) value scales. Only if afirm sells its product to many customers will thefew pennies or dollars received from each add upto the substantial sums it will need to become andremain a "big business." Consumer sovereignty isresponsible for determining not only which com-panies will survive but also which ones will suc-ceed enough to expand. Like the "chocolate king"mentioned by the late Professor Ludwig von Mises,even large-scale entrepreneurs are subservient tothe wishes of consumers:

The consumers patronize those shops in which theycan buy what they want at the cheapest price. Theirbuying and their abstention from buying decides whoshould own and run the plants and the farms. Theymake poor people rich and rich people poor. They de-termine precisely what should be produced, in whatquality, and in what quantities. They are mercilessbosses, full of whims and fancies, changeable and un-predictable. For them nothing counts other than theirown satisfaction. They do not care a whit for pastmerit and vested interests. If something is offered tothem that they like better or that is cheaper, theydesert their old purveyors. In their capacity as buyersand consumers they are hard-hearted and callous,without consideration for other people.

Human Action (3rd ed., 1966), p. 270

3. What business firms are the largest in theworld? There are several ways to estimate andcompare the sizes of different companies—on thebasis of estimated money value of production,sales, invested capital, profits or gross incomeminus all expenses. Company to company com-parisons are difficult at best because differentfirms follow different procedures in accountingand reporting. However, Fortune Magazine pub-lishes lists each year of the business firms it con-siders the world's largest in several categories. Bystudying Fortune's lists over the years it becomesapparent that a firm's "gate" or "box office re-ceipts" vary from year to year, so that its positionon one of these lists may shift. Some firms rise,others decline, still others disappear from theselists completely after a time, while newcomers ap-pear to take their places. Here are the categoriesof large business firms listed by Fortune more orless regularly in their May, June and July issues:

500 largest U. S. industrial firms2nd 500 largest U. S. industrial firms50 largest U. S. commercial banking companies50 largest U. S. diversified financial companies50 largest U. S. life insurance companies50 largest U. S. retailing companies

11 . COMPETITION, 'BIG BUSINESS," AND MONOPOLY 133

50 largest U.S. transportation companies50 largest U. S. utilities.

The several hundred largest foreign firms arelisted in the August issues of Fortune.

If the class has access to several years of FortuneMagazine, students might check a number of dif-ferent companies to note name changes, mergers,shifts in position on the list, value of assets, sales,capital invested, number of employees, profits, etc.Occasionally, a company's total sales may entitleit to a listing by Fortune even though its recent"gate" or "box office receipts" were insufficientto cover all its costs so that its operations failed toearn a profit for a year or so.

NOTE: Parentheses around a figure on an accountingstatement normally indicate a negative figure, a loss,rather than a plus, or profit.

The footnotes on Fortune's lists furnish addi-tional information about specific companies. Notall of those on the Fortune lists are privately ownedand operated. Some are owned, in part or in full,by government. Some may enjoy special govern-ment privileges or protection, giving them a com-petitive advantage so that they are private in nameonly, their sales not all being purely voluntary butcoerced to some extent. However, that is anotherstory—to be taken up in Unit 14. The fact remainsthat insofar as these companies produce and sellgoods and services in free and open competition ina market economy, their very rating as among theworld's largest producers is evidence that theyhave served customers in large numbers. Theyhave all earned their positions of prominence byfurnishing goods and/or services through the mar-ket to many persons who wanted them for use orenjoyment.

4. How does a business firm attract the cus-tomers it needs to support its large-scale produc-tion? When a businessman, large or small, pro-duces a good or service, his work is only partlydone. It is not enough just to make something. Hisjob also includes seeing to it that his output actual-ly reaches persons who want to buy it in order tohave it and use it. Unless he succeeds in gettinghis product into the hands of consumers eventual-ly, he is not accomplishing his purpose for goinginto business in the first place and will have noreason to keep on producing for the market.Therefore, any businessman who wants to stay inoperation must make sure that potential buyersknow about his product. Potential customers mustnot only learn it is available but they must also be

told enough about it so they can decide whetheror not they want it urgently enough to buy it atthe price being asked. Potential customers mustbe persuaded to spend some of their cash holdingsto purchase the particular good or service in ques-tion voluntarily, rather than to use that sum ofmoney for anything else. If an item will not be sold,there is no reason for producing it for the marketin the first place. This means that telling potentialcustomers about goods or services which are avail-able and persuading them to buy are essentialstages in production for the market.

NOTE: See the GLOSSARY definition of production as"the process of combining raw materials, labor andother factors of production or producers' goods . . . soas to create goods and/or services consumers want. . . any process which helps a product reach the finalconsumer." This means that raw materials and labormust be transformed into finished goods ready forconsumption. Discuss what "ready for consumption"means. Food is not "ready for consumption" until it isprepared and dished onto plates to be eaten; sham-poos are not "ready for consumption" until they areavailable at home, unwrapped and ready to use; anautomobile is not "ready for consumption" until thesales contract is signed, the car with gas in its tankdelivered and its keys handed over to the new ownerso he can drive it away.

Making something physically is only a part ofthe production process. Every action that helps inany way to place something in the hands of finalconsumers and make it "ready for consumption"is a necessary step in its production. Obviously,therefore, publicizing or furnishing informationabout a good or service—i.e., advertising—is a nec-essary and "productive" activity. Thus the cost ofadvertising must be recognized as one of the es-sential costs of producing something and advertis-ing cannot be considered separately as an "unpro-ductive" activity. Without advertising in one formor another there could be no mass production as weknow it today.

5. Why do we have the kind of ads we do? Itis seldom easy for a business firm to attract theattention of a sufficient number of potential buyersfor his good or service. People are often busy, dis-tracted, absentminded, intent on work or play.They may fail to see, hear or note much of what isgoing on around them unless it actually intrudes ontheir thoughts and actions. They are frequentlysurrounded by all kinds of product advertisements.Thus, to be effective an ad must be startling andstriking enough to attract the attention of substan-


tial numbers of potential customers, in competitionwith the many other activities, duties, products andads bidding for their time and money. Consumerprejudice, apathy, lethargy, tradition and customare serious obstacles in the path of entrepreneurswho want to sell their products. As a result, entre-preneurs, through their advertisers, do their best topique the curiosity and enthusiasm of potentialcustomers and to make it as easy as possible tofind, buy, try and use their particular product. Ona free market, producers must try to persuade—theycannot coerce—potential customers to buy a spe-cific good or service.

Once entrepreneurs have conceived of an idea,produced something which they hope will pleaseconsumers, explained why its purchase would be tothe advantage of customers, how it should help re-move some "felt uneasiness," further a potentialcustomer's particular goal or contribute to somesubjective (personal) value, they must keep ondoing this day after day to stay in operation. One-shot sales are not enough to maintain the tremen-dous "gates" or "box office receipts" a modernmass production enterprise needs yearly, monthly,even daily. Most businesses need to have manycustomers buy their products many times over.Hence, the tremendous sums spent on advertisingcampaigns, the serious efforts devoted to tryingto develop original, dramatic and effective adsand the wide variety of gimmicks used to attractbuyers—coupons, free samples, contests, bonusoffers, special prices, etc.

Many people criticize advertisers for the kinds ofads they produce. Styles in ads change, just as dostyles in dress, drama, literature or recreation. Oldstyle ads now seem quaint, subdued and low-keyedin tone. They would hardly be noticed in competi-tion with the kind of ads that are prevalent now.It is today's noisy, flashy, brightly-colored, dra-matic advertisements that have given advertisersand New York City's Madison Avenue, wheremany have their offices, a reputation for high-pressure tactics and poor taste. Yet such ads reflectthe times, current fads and fashions. The severecompetition on the market, among producers andadvertisers in trying to attract potential customers,helps to explain, if not to excuse, Madison Av-enue's actions. Today's ads must be loud, strident,blatant, shocking or clever to attract attention inthe modern world where every one is constantlybeing bombarded by ads for many products fromevery direction—billboards, signs, posters, radio,TV, newspapers and magazines.

NOTE: The students might be interested in compil-ing an exhibit of ads and advertising gimmicks, oldand new. Reproductions of old ads frequently appearin books, posters or articles about advertising. See alsooffset reproductions of old mail order catalogs and ofmagazines and newspapers of 50 or 100 years ago.

The test of an ad's effectiveness lies in the salesit produces. Only if an ad promotes enough sales tocover its full cost does it contribute to productionand earn its sponsors the opportunity to continuein business. When it comes to influencing the typesof ads that will prevail, consumers are sovereignon a free market, just as they are in determiningthe goods and services that will be produced. Theymay show their respect or contempt for an ad justas they may for a product, by purchasing or refus-ing to purchase the good or service it advertises.On a free market where opportunities and alterna-tives abound, no consumer is compelled to buy anyparticular product. No amount of advertising canmake him buy something if he is persuaded it isnot to his advantage. Sooner or later the advertis-ers responsible will notice the effects of consumersovereignty. If their ads earn consumer approvaland result in sales of the products they advertise,they will be able to expand; if their ads and theproducts advertised prove unpopular with con-sumers, their insufficient "gate" or "box office re-ceipts" will compel them to bow to consumer sov-ereignty and change their methods of advertisingor go out of business.

It is often thought that the only way consumershear about available goods and services is throughcommercial advertising. However, one of the mosteffective ways to learn of products is through pri-vate conversation and personal recommendation.Such "word-of-mouth advertising" cannot be pur-chased directly. A producer can only try to offer aproduct that is good enough to satisfy consumers.If he succeeds, favorable "word-of-mouth advertis-ing" will be his reward and will help to increasesales. If his product displeases customers for anyreason, "word-of-mouth criticism" can destroy hisenterprise very quickly.

NOTE: The students might discuss some specific pur-chases of their own, made as a result of "word-of-mouth advertising," i.e. on the personal recommenda-tion of a friend or relative—a snack at a certain pizzaparlor, a new cold remedy, a ticket to a popular movie,a special LP recording, a particular brand of beer oreven a choice of college. Ask the students to read Bur-ton Rascoe's "The Cow in the Apartment" (ReadingNo. 49) and discuss the role of advertising as pre-sented there. For a more thorough understanding of


the economics of advertising, see Israel Kirzner's "Ad-vertising" (Reading No. 54).

6. Where does a "big business" obtain the fundsto finance its production? Every businessmanhopes eventually to pay for all labor, tools, ma-chines, supplies, plants and the other goods andservices used in his operations out of his "gate" or"box office receipts." However, many of thesecosts must be paid even before the firm can sellenough of its output to pay them all, perhaps evenbefore it starts producing anything at all. Thus, abusinessman must have access to some funds of hisown, or someone else's, to pay all necessary ex-penses before his enterprise starts yielding any in-come. Therefore, every business firm relies to someextent on someone's accumulated savings—rainy-day savings and/or capitalist savings. These sav-ings come necessarily from earlier production. Inthe past, someone must have produced more thanhe consumed and saved the balance.

Savers may use their savings in one of two waysto help themselves and yet, at the same time, tohelp business firms. They may (a) lend or (b) in-vest:

a. A saver may lend his savings to someone whowants to borrow. A saver who lends agrees toforego the use of certain funds for a definiteperiod of time so as to let a borrower use them—in return for a promise to repay that sum, at theend of the term involved, plus interest, i.e. acertain agreed-upon additional fee or a certainpercentage or rate per month or year. The writ-ten promise to repay the borrowed money to thelender is an IOU, known more formally as a"promissory note" or "bond."

b. A saver may become an entrepreneur himself,speculating and investing his savings in a busi-ness that he or someone else operates. As anentrepreneur he could become the sole ownerof a business, or a partial owner, sharing therisk with other partial owners if the businesssuffers losses but also sharing with them anygain, i.e. entrepreneurial profit, if it succeeds.If the saver is not interested in engaging inbusiness himself or in becoming a part ownerof an enterprise operated by friends or ac-quaintances, he may buy portions of one or sev-eral large companies whose shares are avail-able on the market—i.e. he may buy shares ofstock in a corporation. If the class purchased ashare or two of stock through an adult or an in-vestment club—as suggested in Unit 7—it actual-

ly bought part ownership in a particular firm,acquired a financial interest in its plant andproduction, sharing with all other partial own-ers the opportunity for entrepreneurial profitas well as the risk of loss.

One lesson of this SYLLABUS is that whenever twoor more persons exchange one thing for somethingelse they constitute a market. Thus markets areinevitable outgrowths of the conscious actions ofindividuals, in a society where there is cooperation,private property and specialization. There aremany markets in the world. On some, a wide vari-ety of items are traded. Other markets are highlyspecialized, having available for exchange onlylimited kinds of goods or services. For example, agrocery store is a specialized market for foods andhousehold supplies. Restaurants and pizza parlorsare other specialized markets. Many jewelry trad-ers have shops in one city block in New York Citythus forming a specialty market for would-be buy-ers and sellers of jewels. And so on. Among thelargest specialized markets in the world are stockmarkets, or stock exchanges where shares of stockin large companies or corporations are traded.

Shares of stock in many, if not most, large cor-porations are bought and sold on one or more ofthe large specialized markets or stock exchangeslocated in many of the major cities of the world(Unit 7). Savers who wish to invest their savings inbusiness ventures go to a stock exchange and sobusinessmen go there too in their search for sav-ings to finance new or expanding operations. Astock exchange, therefore, is a meeting place, mar-ket or auction where would-be investors and entre-preneurs trade shares of stock in specific firms,each on the basis of his subjective (personal) val-ues and anticipations. By having the mechanics oftheir trades handled through a stock exchange, itbecomes possible for the savings of many individ-uals to be pooled and invested in business enter-prises.

7. How are stock exchanges organized? Thelargest stock exchange in the world is the NewYork Stock Exchange (NYSE), sometimes calledthe "Big Board," which lists (as of March 1975)about 1,750 different companies. The precise num-ber of firms listed for trading on the Exchangevaries from time to time as new ones are acceptedfor listing and/or old ones drop off, merge, etc.About 12-20 million shares of stock are tradeddaily on an "average" day on the "Big Board"—a35 million share day is exceptional! The short New


York City street where the NYSE has its head-quarters, Wall Street, has become practically syn-onymous with "high finance," "big business" andstock market speculations.

Stock exchanges are cooperative ventures, mem-bership associations. To become a member of anexchange, a brokerage firm must buy a "seat."Prices for "seats" vary from time to time and fromexchange to exchange, depending on the bids andasks of potential buyers and sellers, each based onthe anticipated value to the trader of the oppor-tunities offered by a "seat." Since 1950, the priceof a NYSE "seat" has ranged from $46,000 to$515,000.

A stock exchange, therefore, is an association ofstockbroker firms. Each member firm employshighly specialized salesmen or customers' men,who act as middlemen or agents for would-bebuyers and/or would-be sellers of stock. The role ofa customers' man is to try to find customers forshares of stock in the companies listed on the ex-change to which his firm belongs. Many becomeexperts on specific commodities, industries or com-panies. Brokers arrange sales on a commissionbasis and handle the details of trades among sav-ers who would like to invest in business firms,business firms looking for funds, or anyone want-ing to buy or sell shares of stock in companies list-ed for trading on the stock exchange to which theybelong. If the students have visited the facilities ofa local stock exchange, a broker's office, or heard atalk by someone connected with a stock market,they will have some familiarity with its role andmechanical procedures. Refer also to the excerptsfrom NYSE Daily Reports, pp. 58-61 and pp. 127-129.

When planning their investment portfolios inconnection with Unit 7, some students may havenoticed the symbol "pf" beside some stock listingson Daily Stock Exchange Reports. Some firms is-sue two different kinds of stock—common and pre-ferred. The symbol "pf" designates preferred, ascontrasted with common, stock. Preferred stockusually pays fixed dividends. It also enjoys a fa-vored position as compared with common stock ifthe issuing company should be liquidated. Theclaims of the owners of preferred stock are thenconsidered ahead of those of the holders of com-mon stock, just after those of the firm's bond-holders and other creditors. Owners of commonstock share a greater risk in the event of the firm'sfinancial loss or bankruptcy. But by the same tokenthe owners of common stock have a chance of

greater reward if the company prospers.Before leaving this discussion, mention should

be made of the Securities and Exchange Commis-sion. The SEC is an administrative agency of theU. S. Government. It was set up in response tolegislation of 1933, 1934 and later amendments,"to protect the interests of the public investorsagainst malpractices." In the attempt to do this,the SEC regulates and controls corporations andbrokerage firms dealing on the securities market.Its rulings have a profound effect on stock markettransactions, business financing, investment andthe prices paid for stocks and bonds. The SEC re-quires companies selling stocks, borrowing fundson the market, merging with or taking over otherfirms, etc., to register, file periodic reports, andissue detailed information in advance concerningscheduled financial operations. The SEC restrictsthe sale of stocks in some instances and limitstheir purchase for speculation by company offi-cials or "insiders." It also prescribes certain stand-ards, procedures and commissions for brokeragefirms in selling stocks and bonds to the public andin recording and accounting for such transactions.

NOTE: In the course of this discussion of stock ex-changes, keep in mind always their extreme impor-tance in (a) permitting the savings of many individualsto be pooled so that gigantic enterprises, producinglarge quantities of goods and services for many cus-tomers, can be financed and (b) providing the mech-anism for small savers to become capitalists and in-vestors and thus to have a chance to attain financialindependence. Anything that restricts and hampersthis outcome of voluntary cooperation in any wayhinders production and makes it harder and more ex-pensive for people to obtain the various consumers'goods they want.

8. Does "bigness" in business, in itself, consti-tute a threat to the market? One of the most im-portant points developed so far in this SYLLABUS isthat the size of any business on a free market is areflection of its "gate" or "box office receipts."Any large firm must necessarily produce on alarge scale for many customers. Thus, inevitably,any enterprise that becomes a large-scale producermust have contributed substantially to the eco-nomic well-being of many persons, each of whomvoluntarily purchased some of the firm's output.

No firm can ever grow any bigger on a freemarket than consumer sovereignty allows. Compe-tition sees to that. If a producer tries to increasehis income by raising the prices he asks for hisproducts substantially above their cost of produc-tion, new entrepreneurs, willing and able to pro-


duce and sell the same or similar items for less, willappear sooner or later and his customers will thenstart to desert him. Similarly, if a producer tries toexpand by increasing his take at the expense of hisworkers or suppliers—refusing to pay them the fullmarket value of their labor or materials—his work-ers and suppliers too will leave him. No one willvoluntarily submit to such "exploitation" on thefree market—and no one has to. Employees whoconsider their wages less than they could earnelsewhere for similar work will "goof off" or"gold-brick" on the job to reduce their output towhat they consider more consistent with the wagesthey are being paid. Or they will look for differentjobs at better wage rates. If suppliers do not con-sider adequate the prices paid for the goods theyprovide, they will furnish poorer quality mer-chandise and/or look for other potential buyers.As a result, the quantity and/or quality of the out-put of producers who try to cut costs too much willdecline, so that their sales will drop—unless anduntil they pay market wages that suit their work-ers and market prices that satisfy their suppliers.

On the free market, no business firm, large orsmall, can ignore potential competition and con-sumer sovereignty in setting prices and wages. Theprices a company charges for its products cannotbe "administered" in the sense that it may setthem as high as it would like and still find custom-ers. Nor are employers in a position to "adminis-ter" the wages they pay employees or the pricesthey pay suppliers for the factors of productionthey provide. Free market prices are arrived atthrough the countless auctions that are always go-ing on. Everyone concerned is always reviewinghis/her respective situation and bidding or refus-ing to bid for units of specific items, in line withhis/her changing wants, values, ends, goals and in-terests in life. When each would-be employer, em-ployee, supplier and consumer is free to buy, or re-fuse to buy, as he wishes at any moment, in re-sponse to his own personal (subjective) scale ofvalues, market prices that tend to satisfy every-one emerge, as everyone continually adjusts hisactions according to his best judgment in the hopeof accomplishing his most urgent wants and goalsmore easily and more promptly.

Every individual customer of a "big business"voluntarily elects to buy, or not to buy, a specificunit of the good or service offered, at a specifictime and place. In making an actual purchase,every customer shows a preference—on the basisof his own personal, subjective scale of values

and marginal utility—for the particular item(s) heis acquiring—over and above any other possibleuse he or she could have made of the sum of moneyinvolved. If a transaction is truly voluntary on bothsides, if neither party uses force, fraud or legalprivilege to prevent other would-be buyers andsellers from competing, both expect to be betteroff as a result of the trade than they would havebeen otherwise. And both of them will be—unlessor until changes occur to alter their goals and sub-jective (personal) values.

The bids and asks of potential buyers and sell-ers, each in response to his or her own scale ofvalues at the time, reflect their relative eagernessto trade. In conformity with the law of price, there-fore, the free market price for any item traded at aparticular time and place must always fall withincertain upper and lower margins, permittingeveryone concerned to be satisfied. On a free mar-ket, therefore, a "big business" has no special pow-er to make people buy its output, to force them topay more for something than they consider justi-fied, or to impose its will on employees or sup-pliers. Every party to a voluntary market trans-action must be pleased—in the light of all circum-stances—time, place and subjective (personal)values. Otherwise there will be no trade. Thus, a"big business" is just as dependent on consumersovereignty as a small one—perhaps more so, for itneeds larger "gates" or "box office receipts,"hence bigger sales, and so must please, and keepon pleasing, more customers to stay in operationthen small ones do.

To cover costs and then perhaps to earn an entre-preneurial profit also, any business must competesuccessfully with all other would-be sellers for thedollars and cents of consumers. Business firms,large and small, must be ready to adapt at any timeto new conditions that arise, as the wants of con-sumers shift. On a free market none can remainaloof from the need to serve consumers. Those thatexpand are those which have succeeded in keepingtheir costs from rising and, at the same time, havebest pleased large numbers of customers. Thanksto having anticipated the wants of consumers bet-ter than their competitors, thanks also to largeaccumulations of savings, modern technology,tools and machines, automation, assembly linetechniques, efficient means of transportation, massmedia of communication and advertising far andwide, large-scale enterprises are in a position toproduce on a mass production basis to satisfy thewants and needs of many customers. "Bigness" in


business, therefore, is never a threat on a free mar-ket. Rather the very "bigness" of a business enter-prise is proof of past service.

NOTE: The students should be able to name manylarge firms whose "bigness" is easily explained by thepopularity of the things they produce. This should fur-ther emphasize the basic thesis that the success andsize of a business enterprise on a free market econo-my, where there is free and open competition, is areflection of the satisfaction it gives consumers, asshown by its "gate" or "box office receipts." Thesubject of monopoly, however, introduces an area ofeconomic activity where consumers are not alwayscompletely sovereign. The purpose of the remainderof this Unit is to explain that:

a. Monopoly, in itself, is not bad. As a matter offact, monopoly is inherent in the nature ofthings, for everybody is a monopolist with "ex-clusive control" of his time, energy, propertyand the space he actually occupies at any mo-ment

b. Such natural monopolists constitute little or nothreat to consumer sovereignty, for they faceconstant competition from all other natural mo-nopolists and so must be responsive to thewishes of consumers in order to succeed. Onlyin very rare instances may a natural monopolistviolate consumer sovereignty by charging con-sumers higher-than-market prices

c. A second type of monopoly, a government-created or government-protected monopoly,constitutes a much more serious threat to con-sumer sovereignty. Such a legal monopoly en-joys a privileged position, sheltered from po-tential competitors. Thus legal monopolies mayfrequently ignore the wishes of consumers andviolate consumer sovereignty

d. The procedure by which legal monopolies maydeny consumer sovereignty with relative im-punity is to restrict their production and askhigher-than-market monopoly prices for theirlimited output. They are able to obtain monop-oly prices for their production and reap monop-oly gains only if consumers want what theyproduce so urgently that they are ready andwilling "to pay ransom," so to speak for thefewer units available. // this concept of monop-oly price and monopoly gain seems too compli-cated for presentation to the entire class, it maybe skipped completely or assigned for extra-curricular study only by the more exceptionalstudents. The most important point to stressabout monopoly is that there are two forms—"natural" and "legal."

9. What about monopoly? According to dic-tionary definitions, monopoly means the "exclu-sive control" of the supply of something—a specificgood or service—at a given place and time. By thisdefinition, monopoly is extremely widespread,even in a free market economy. Every one has sucha market monopoly of his or her own particulartime, labor, services, property and production. Youare a monopolist. I am a monopolist. So is everyteacher in the school, every corner delicatessenowner in town, every garage mechanic and everynewspaper delivery boy. Each of us alone exercises"exclusive control" over his or her own personaltime, labor, belongings and money. Each of us isfree to decide whether or not to offer services forhire, property for sale, or money in trade. Such amonopoly is a natural phenomenon, inherent in thenature of the universe.

Obviously, such a natural monopoly gives nospecial advantage. The natural monopolist is sel-dom in a position to reap a special monopoly gainby charging higher-than-market prices for hisgoods or higher-than-market wages for his ser-vices. His goods and services face competitionfrom all other natural monopolists. For instance,high school students may be monopolists in thissense; that is, they exercise "exclusive control"over the disposition of their own personal time andlabor. Yet every high school student who has everlooked for a job will realize full well that he can-not make a potential employer pay whatever hewants. If he asks potential employers for a higherwage than that for which other equally-qualifiedpersons are willing to do the same work, he will bepromptly passed over in their favor. (A review ofthe job auctions described in Unit 9 should re-mind the students how wages are determined bycompetition among would-be job holders and po-tential employers.) No matter that each student en-joys a "natural" monopoly, he will never be volun-tarily paid higher wages than an employer is readyand willing to offer him. Nor can an employer,whose enterprise is a monopoly in this sense, i.e.,he exercises "exclusive control" over the supply ofjobs at his particular location, exploit workers bycompelling them to work for him at lower-than-market wage rates. Monopoly per se has little eco-nomic significance, precisely because every one isa monopolist in this sense. Thus a natural monop-oly, in itself, grants no special power to exploitothers through the market.

There are some rare situations, however, whenhaving a natural monopoly of this type does have


economic significance. Under certain circum-stances, even when no force, fraud or legal priv-ilege is involved, a natural monopolist may be ableto ask and receive monopoly prices for his output,prices above those that would prevail under freeand open competition. In that case, a natural mo-nopolist may reap a special monopoly gain.

To illustrate, let's consider a corner delicatessen.The owner enjoys a monopoly at his particular lo-cation, a "space monopoly" so to speak. Yet hav-ing this monopoly does not give him the power toexploit his customers. If he asks prices for candybars and sandwiches that seem "too high" in theopinion of persons who might become customers,he cannot make them pay. They have several op-tions. They can refuse to buy at all; they can walkor drive to more distant stores; they can try tobargain; or, if other shops are closed at the time,they can wait for them to open and then plan aheadanother time so as to have ample food on hand tolast until other stores are open. However, the deli-catessen owner may sell some candy bars andsandwiches at his higher asking prices—to personswho are ready and willing to pay extra for conveni-ence and availability at odd times of the day ornight. The higher asking prices will inevitably re-duce his sales—and probably also, although notnecessarily, his box office receipts. But it is con-ceivable that by trial, error or happenchance hewill earn a greater net return on the fewer itemssold at monopoly prices, than he would have re-ceived from selling a greater quantity at lower,competitive, market prices. Any such extra incomeis a monopoly gain. Only occasionally can a "nat-ural" monopolist reap monopoly gain in this way,by selling fewer items at higher prices. In most in-stances the net income of a business drops with adecline in total sales. Only if customers want themonopolist's output urgently enough to pay thehigher asking prices for his merchandise in suffi-cient quantities will he have a chance—althougheven then no guarantee—of earning a monopolygain.

Dictionaries give several definitions of monop-oly. At least one definition is bound to include theidea that monopoly is connected with legal priv-ileges or government protection. In other words, inaddition to "natural" monopolies, there are also"legal" monopolies. For all practical purposes,only "legal" monopolies, which depend to some ex-tent on special government-granted privilege, haveany real economic significance.

10. How do "legal" monopolies differ from

"naturaV monopolies? A legal monopoly is shel-tered from competition by government. The pro-tection from competition enjoyed by a legal mo-nopoly distinguishes it very sharply from the nat-ural monopoly that you and I each have over ourown personal time, labor, location and property. Alegal monopoly's potential competition is reducedby legally restricting or hampering freedom of en-try in some way into its particular field of produc-tion. As a result, the possessor of a legal monopolycan afford to be relatively indifferent to consumersovereignty. Its managers need not worry verymuch about cutting production costs, improvingtheir product, trying to reduce prices and/or seek-ing to satisfy customers better than would-be com-petitors might.

Whereas the ability to profit from a natural mo-nopoly is always limited by what the natural mo-nopolist can persuade employers and customers tooffer voluntarily in exchange, legal monopolieshave the power of government force on their side,helping to prevent competition and so to raisetheir selling prices. Because entry into their fieldof production is restricted, they may often disre-gard the wishes of consumers. A monopolist whoenjoys legal protection may limit production andcharge higher-than-market prices without enticingadditional competitors to enter production—aswould be the case on a free market where the an-ticipation of a substantial spread between produc-tion costs and potential box office receipts wouldbe enough to signal new entrepreneurs to enter thefield. Legally-protected monopolists, therefore,face relatively little risk of loss of sales and incomedue to charging higher-than-market prices. Inso-far as potential competitors are hampered in enter-ing this business or profession the legal monopolistenjoys a special government-granted privilege.

The history of legal monopolies is a long one.Throughout the ages, many governments havegranted special privileges to specific individuals,giving them a legal monopoly to produce or sell acertain item in a particular community. This prac-tice was especially common in the England ofElizabeth I. Her government often granted legalmonopolies naming certain craftsmen and mer-chants as the only persons entitled to produce orsell such items as starch, playing cards, wine, to-bacco or salt. Although production methods havechanged drastically since then, many legal mo-nopolies exist today. For instance, the producer ofany economic good who is required to be licensedby government—national, state or local—is pro-


tected to some extent from competition. As an in-dication of the many ways our governments pro-tect producers from potential competition, thuscreating various forms of legal monopoly, here isa list of several:

a. Tariffs on imported goods make foreign im-ports more expensive and thus protect U. S.manufacturers from the competition of produc-ers in other countries

b. Import quotas on certain items restrict thequantity that may be brought into the country,protecting domestic producers to that extentfrom foreign competitors and making it easierfor U. S. concerns to sell their output at higherprices

c. State or city licenses required to practice manyprofessions—law, medicine, pharmacology,hairdressing, real estate sales, plumbing, elec-trical installation and repairs, taxi service, etc.—reduce the number of persons legally quali-fied to serve consumers in these areas

d. Public transportation companies may be givenspecial permission or franchises to operate in acommunity and so are assured that other con-cerns will not be allowed to compete in offeringtransportation along the same routes

e. Interstate air carriers must be licensed by theU. S. government's Civil Aeronautics Boardand no other commercial airlines may competewithout obtaining similar CAB approval

f. Government-prescribed standards for food anddrugs sold in certain markets help to protectestablished enterprises by making the "free-dom of entry" by producers of new productslegally difficult if not impossible

g. Strict building codes hinder the introduction ofnew construction techniques, giving producersof approved building materials a legal monop-oly of sorts

h. The grant of the power of eminent domain tocertain public utilities gives them a "legal" mo-nopoly, protected from the competition of otherpotential suppliers who might have tried tocompete in the areas served

i. Low-cost government loans give the borrowersa special advantage

j. To broadcast, a radio or TV station must havea government license, granted by the FederalCommunications Commission. Once acquired,such a license grants a legal monopoly for a cer-tain number of years, protecting the licensedstation from competition by restricting the en-

try of would-be broadcasters who have not ob-tained legal authorization

k. Securities and Exchange Commission regula-tions and rulings favor large well-establishedcorporations by making it much more compli-cated than it would otherwise be for new cor-porations to qualify for a listing on a stock ex-change where they could sell stock and thuscompete for the savings of would-be investors

1. The countless rulings and regulations withwhich a business firm must comply and theendless forms it must file in order to conformwith the requirements of governmental agen-cies such as the NLRB, Social Security, stateand local employment offices, etc., are makingit more and more difficult and costly for newfirms to come into existence. Insofar as "free-dom of entry" is hampered or discouraged, ex-isting concerns enjoy a legally-pro tected, if nota government-granted monopoly that helps tosafeguard their position from potential com-petition, and permits them to ignore the wishesof consumers and consumer sovereignty as theycould not afford to do if competition were com-pletely free and open.

11. Just how does a legal monopoly help the mo-nopolist at the expense of consumers? The grantof a legal monopoly protects the privileged personor firm from competition. It often permits them tomaintain their income and perhaps even to reapan additional monopoly gain by making consumerspay dearly for each unit of production. Thanks totheir privileged position, they may ask an espe-cially high, legally-sanctioned, "ransom" price, soto speak, for each unit of their output sold. To un-derstand the economics of this practice, two ques-tions must be raised:

a. Will consumers be ready and willing to pay thismonopoly price? The answer to this questiondepends on the urgency of their demand forunits of the particular item being offered

b. Will the legal monopolist be able to earn a high-er net income by selling fewer units at highermonopoly prices than he could by selling agreater number at lower, competitive prices?No one can ever be certain what will be theanswer to this question. That will depend onwhether the monopoly gain on the fewer unitssold at monopoly prices is more than the net re-turn would have been from selling a greaternumber of units at competitive market prices.A seller can, of course, count the sales he makes


at one price under certain conditions and figurehis net return over costs. But he can never re-produce precisely the same situation again toconduct a "controlled experiment"—as physicalscientists do in the laboratory—to determinehow many units he could have sold under thosesame circumstances, and how much his netreturn would have been, if he had asked a dif-ferent price. Thus, the monopolist can only cal-culate and experiment in the attempt to esti-mate whether the extra monopoly gain, if any,from selling fewer units at the monopoly pricewill more than compensate for the "gate" or"box office receipts" he could have had by sell-ing a greater number of units at prices con-sumers would have agreed to in free and openpricing auctions.

To explain why a monopoly gain is possible un-der some circumstances, we must understand"elasticity of demand." In economic terminology,elasticity of demand reflects the relative urgency ofconsumers to acquire a particular item—as theirurgency is affected by price. Demand is said to be"elastic" if (a) an increase in price of an item leadsto a decrease in the number of units purchased or(b) a decrease in its price results in increasedsales. Thus, elasticity of demand depends on thesensitivity of consumers to price. The more re-sponsive consumers are to changes in the price ofan item, the more "elastic" their demand is con-sidered to be. For instance, the demand of mostconsumers for vacation trips and costume jewelryis usually quite elastic. If the price of either is in-creased, demand is likely to go down considerablyas many consumers will be apt to curtail their con-sumption substantially.

On the other hand, if consumers are expected tobuy essentially the same quantity of something, ir-respective of its unit price, their demand for thatparticular item at that specific time and place is de-scribed as relatively "inelastic." If a monopolist isto reap a monopoly gain—if he is to increase his netincome by selling fewer units of a good or serviceat a higher price—the demand for it must be some-what inelastic. The urgency of consumers to ac-quire individual units of his output must remainsufficiently firm, in the face of a rise in its price, tofurnish him a higher return from fewer sales thanhe would have received from making more sales atthe market price. To illustrate inelastic demand,economists often refer to the demand of consum-ers for pounds of salt or gallons of drinking water.

A change in the price of either of these will havelittle effect on sales. Few persons will consumemuch more salt or drinking water if their price isreduced, or much less if it is raised. Because theelasticity of demand for the products of a naturalmonopoly rarely fits this pattern—consumers usual-ly have access to many alternatives, other poten-tial sources, substitutes and choices—few naturalmonopolists are in a position to earn monopolygains. Thus, it is primarily only legal monopolists,whose production is protected from competition,limiting the alternatives open and pressuring con-sumers to buy the monopolist's product irrespec-tive of its price, who are in a position to ignore con-sumer sovereignty, obtain monopoly prices andreap monopoly gains.

12. What about duopolies? Oligopolies? Car-tels? Conglomerates? A duopoly, or oligopoly, isan arrangement based on a tacit, or explicit, un-derstanding among two, or several, firms or corpo-rations who, taken together, control the total sup-ply of a specific good or service. It is held that theseparate firms try to act in unison—as if they werea single entity, a monopoly under one management—restrict total output to raise unit prices and so tocharge monopoly prices, in anticipation of reapingmonopoly gains. Nothing need be added here tothe above discussion of monopoly price or monop-oly gain. The significant feature of any such vol-untary duopoly, or oligopoly, is that it will not en-dure for long. The pressure on the part of each par-ticipating company to compete, in the attempt toimprove each company's own situation, is inherentin the very nature of private enterprise. The desireto compete remains so strong among privately-owned and separately-operated firms—even ifthey have agreed to act in unison in the belief thattheir interests were identical—that no arrangementwhich runs counter to this competitive drive canlast for very long. Sooner or later, one of the par-ties to a duopolistic, or oligopolistic, understand-ing will become dissatisfied with its share of thereduced output and income. When that timecomes, if the participating firms have retainedlegal and financial independence, one of them willbe tempted to pull out, or to violate the under-standing by trying secretly to increase its outputand/or undercut the tacitly or explicitly agreed-upon selling prices, in the hope of improving itsown profits. In either case, the ability of the duop-oly, or oligopoly, to restrict production and tocharge monopoly prices will then be at an end.


Cartels are legal monopolies created by the for-mal combination of several firms engaged in thesame branch of production—with the sanction andsupport of government. A cartel which embracesall the domestic producers of an item can safely re-strict production and charge monopoly prices be-cause government is protecting it from competi-tion. Perhaps the most prevalent protectionistmeasures are high tariffs and rigid quotas on im-ports. Protectionism of this type effectively keepsforeign goods from competing freely on the domes-tic market. When government has adopted such apolicy in favor of domestic producers, the manag-ers of a protected cartel can practically ignorepotential competition from abroad. They may thenact as if they really were a single monopolisticfirm—restricting production, raising prices on thedomestic market, "dumping" abroad (i.e., sellingoverseas at lower-than-market prices) any sur-pluses, allocating its limited production among themore efficient plants of its member firms, closingdown those that are less economical and reimburs-ing their owners out of the monopoly gains re-ceived from selling fewer units at monopoly pricesin the protected domestic market. The very cre-ation of a cartel is an outcome of government pro-tection. No cartel can survive without governmentprotection. The loss of its government protectionmust bring an end to the cartel itself.

A conglomerate is a legal and financial entitymade up of several companies, a combination un-der one single overall management, of severalbusinesses, formerly separate and independent.The subsidiaries of a conglomerate may frequentlybe widely scattered geographically and engaged inextremely diversified activities. When one com-pany purchases or merges with another engaged ina different field of production, a conglomerate is"born." It may be formed for economic reasons—to branch out, diversify or spread its risks, in thehope of serving consumers better and thus in-creasing its chance of profit. However, one of themajor reasons for the increase in the number ofconglomerates in recent years has little or nothingto do with serving consumers. The increase in con-glomerates may be traced to legal, rather than tomarket, considerations. Certain provisions of ourtax laws have made the conglomerate structure fi-nancially worthwhile, contributing to the increasedpopularity of this particular form of business. As aresult, conglomerates, formed for the tax savingsinvolved, are "legally" protected insofar as tax

legislation offers them certain financial advan-tages not available to other business structures.

13. How has government tried to discouragemonopoly, prevent restraint of trade, and assurecompetition? In the decades following the CivilWar, tremendous fortunes were accumulated inthis country, by a number of successful entrepre-neurs in several industries—shipping, railroads,steel, real estate, finance, merchandising, etc. Thisis not especially surprising, as production in theUnited States was expanding by leaps and boundsat that time, thanks in large part to the initiativeand activities of entrepreneurs. In the relativelyfree enterprise climate of that time, anyone witha new idea was free to try it out—using his ownsavings or those of any financial backers he couldfind. Many opportunities for profit were open topersons who were willing to work hard and long,who would save a part of their earnings and whohad the wit to anticipate correctly what consum-ers wanted.

The vast majority of the prominent capitalists ofthat period undoubtedly made real contributions tothis country's industrial development, economicexpansion and the living standards of the people.Nevertheless, many people became concerned overthe concentration of so much "economic power" inthe hands of a relatively few businessmen. Theirwealth provoked enmity, resentment, envy andcriticism. Many people believed that individualswho accumulated such vast fortunes must haveused unfair tactics, engaged in "cutthroat" compe-tition and exploited employees and customers. Itwas claimed that by forming trusts they had beenable to use force, or threat of force, to impose theirwill on others, thus acting in restraint of trade. Asa result, pressures began to build for political ac-tion to curb the activities of such successful busi-nessmen, industrial tycoons, "economic royalists"or "robber barons" as they were called.

Beginning in 1887, with the establishment of theInterstate Commerce Commission (ICC), a wholebody of laws has been created in the attempt tocontrol and regulate business activities in thiscountry. To explore such antitrust legislation in de-tail is beyond the scope of this SYLLABUS. Howeverif a few students are interested in this subject, assome may well be, refer them to the pertinent ref-erences on the attached list of RECOMMENDEDREADINGS. A report, written or oral, on this formof government intervention, would fit in well withUnits 14 or 15. The major laws which have been


enacted in the general area of antitrust legislationare listed here for reference:

1887—Interstate Commerce Commission, creat-ed by the Act to Regulate Commerce.This Act, since expanded, was aimedoriginally at controlling common carriersengaged in transporting passengers byrail and/or by water

1890—Sherman Antitrust Act passed, prohibit-ing all contracts, combinations and con-spiracies "in restraint of trade," as wellas all "monopolies" and "attempts to mo-nopolize." The difficulty of defining pre-cisely the technical terms used in this Actand others in this general area—such as"monopoly" and "restraint of trade"—has resulted in confusing and contradic-tory rulings. After all, if every one has amonopoly of his own output—in the sensedescribed above in answer to questionNo. 9—how can an Act which outlaws mo-nopoly be enforced?

1914—The Federal Trade Commission was cre-ated, with the power to investigate thepractices of corporations, except banksand common carriers regulated by otherlegislation, and to prevent "unfair" meth-ods of competition

1914—The Clayton Act, passed, prohibiting"price discrimination," purchases ofstock in competing corporations when theeffect may be "to substantially lessencompetition"

1934—Securities and Exchange Commission es-tablished "to protect the interests of thepublic and investors against malpracticesin the securities and financial markets."Issuers of securities making public offer-ings are required to file registration state-ments. Also required to register with theSEC are the national stock exchanges,brokers, dealers and national associationsof such brokers and dealers, etc. TheCommission has the power to make ruleswith respect to short sales, stabilizing,floor trading, specialists' and odd-lotdealers' activities, excessive trading byexchange members, minimum margin re-quirements, and so on

1936—"Fair trade" laws, the Robinson-PatmanAct prohibiting price discrimination in fa-

1937 vor of large buyers, supplemented (1937)

by an Act permitting states to enact lawsauthorizing manufacturers to fix resale

1952 prices and, by amendment (1952), to en-force them even among retailers who hadno such agreements with manufacturers.Competition, especially through "dis-count stores," led many firms to abandonprice maintenance, some states, and thenthe U. S. Congress, to repeal "fair trade"nationwide, effective in early 1976.

This list is by no means exhaustive. These basicActs have been amended and revised over theyears and many more laws to regulate and controlin some respect the activities of businessmen havebeen enacted. The courts have ruled also manytimes, not always with clarity, in the attempt todevelop reasonable and consistent interpretationsof the technical terms used in the laws. This Unit'slist of RECOMMENDED READINGS includes severalreferences which fill in some gaps in this briefdiscussion of antitrust legislation.

Perhaps a fitting way to wind up this Unit is withanother passage from Ludwig von Mises, whichcompares the market economy favorably withdemocracy:

With every penny spent the consumers determinethe direction of all production processes and the de-tails of the organization of all business activities. Thisstate of affairs has been described by calling the mar-ket a democracy in which every penny gives a rightto cast a ballot. It would be more correct to say that ademocratic constitution is a scheme to assign to thecitizens in the conduct of government the same su-premacy the market economy gives them in theircapacity as consumers. However, the comparison isimperfect. In the political democracy only the votescast for the majority candidate or the majority planare effective in shaping the course of affairs. The votespolled by the minority do not directly influence pol-icies. But on the market no vote is cast in vain. Everypenny spent has the power to work upon the produc-tion processes. The publishers cater not only to themajority by publishing detective stories, but also tothe minority reading lyrical poetry and philosophicaltracts. The bakeries bake bread not only for healthypeople, but also for the sick on special diets. The deci-sion of a consumer is carried into effect with the fullmomentum he gives it through his readiness to spenda definite amount of money.

It is true, in the market the various consumers havenot the same voting right. The rich cast more votesthan the poorer citizens. But this inequality is itselfthe outcome of a previous voting process. To be rich,in a pure market economy, is the outcome of success infilling best the demands of the consumers. A wealthyman can preserve his wealth only by continuing toserve the consumers in the most efficient way.

Human Action (3rd ed., Regnery, 1966), p. 271


UNIT 11 GLOSSARY WORDS(For definitions, see GLOSSARY, pp. 223ff.)

"ADMINISTERED PRICE"ADVERTISINGANTITRUST LEGISLATIONAUTOMATIONBONDCAPITALISMCAPITALIST SAVINGSCARTELCOMPETITIONCONGLOMERATECONSUMER SOVEREIGNTYCORPORATION"CUTTHROAT" COMPETITIONDUOPOLY or OLIGOPOLYELASTICITY OF DEMANDENTREPRENEURFREE MARKETINTEREST, INTEREST RATELossMADISON AVENUEMASS PRODUCTIONMONOPOLY, MONOPOLISTMONOPOLY PRICE, MONOPOLY GAINPRODUCERS' POLICYPRODUCTIONPROFITPROMISSORY NOTEPROTECTIONISMPURCHASING POWERRESTRAINT OF TRADE"ROBBER BARONS"SAVINGSSTOCK, COMMON and PREFERREDTRUSTWALL STREET

RECOMMENDED READINGSMore advanced materials indicated by an asterisk (*)

Articles

In the BASIC READER:21. "Where Karl Marx Went Wrong," Samuel B.

Pettengill

22. "The Great Mistake of Karl Marx," Benjamin F.Fairless

"Industrialism: Friend or Foe?" V. Orval Watts"The Economic Role of Saving and Capital

Goods," Ludwig von Mises"The Elite Under Capitalism," Ludwig von Mises"Profits," Hans F. Sennholz"Why Speculators?" Percy L. Greaves, Jr.

°40. "Competition, Monopoly and the Role of Gov-ernment," Sylvester Petro

49. "The Cow in the Apartment," Burton Rascoe"Freedom to Shop Around," Hart Buck"Six Misconceptions about Consumer Welfare,"

Joel Dean"Is Economic Freedom Possible?" Benjamin A.

Rogge"The Phantom Called 'Monopoly'," Hans F.

Sennholz"Advertising," Israel M. Kirzner

26.*27.

*32.•33.•34.

50.51.

52.

'53.

'54.

Additional titles:"Antitrust and the Fear of Bigness," Harold M. Flem-

ing—in The Freeman, June 1967"Antitrust 'Humbug'," Harold M. Fleming—in The

Freeman, May 1967"The Economic-power Syndrome," Sylvester Petro—

in The Freeman, April 1972"The Purposes of Antitrust," Harold M. Fleming—in

The Freeman, April 1967"The Ugly Market: Why Capitalism is Hated, Feared

and Despised," Israel M. Kirzner—in The Freeman,December 1974

Books

Chamberlain, John. The Enterprising Americans(Harper & Row, 1963/1974)

Fleming, Harold M. Ten Thousand Commandments:A Story of the Antitrust Laws (Prentice-Hall, 1951;Arno Press, 1971)

* Mises, Ludwig von. Bureaucracy (Yale, 1944; Arling-ton House, 1969). Chapters I, IV and VI

* Planning for Freedom (Libertarian Press,1952, 1962, 1974). See "Profit and Loss."

12. INTERREGIONAL TRADE


1. Here are four quotations, one or all of which theteacher might write on the blackboard for the stu-dents to refer to from time to time in the course ofthis Unit:

The real gain of foreign trade to any country lies notin its exports but in its imports.

Henry Hazlitt, Economics in One Lesson (2nd ed.,MacFadden, 1962), p. 63

The inhabitants of the Swiss Jura prefer to manu-facture watches instead of growing wheat. Watchmak-ing is for them the cheapest way to acquire wheat. Onthe other hand the growing of wheat is the cheapestway for the Canadian farmer to acquire watches. Thefact that the inhabitants of the Jura do not growwheat and the Canadians do not manufacture watchesis not more worthy of notice than the fact that tailorsdo not make their shoes and shoemakers do not maketheir clothes.

Ludwig von Mises, Human Action (3rd ed.,Regnery, 1966), p. 395

When the baker provides the dentist with bread andthe dentist relieves the baker's toothache, neither thebaker nor the dentist is harmed. It is wrong to con-sider such an exchange of services and the pillage ofthe baker's shop by armed gangsters as two manifes-tations of the same thing. Foreign trade differs fromdomestic trade only in so far as goods and services areexchanged beyond the borderlines separating the ter-ritories of two sovereign nations.

Ludwig von Mises, Human Action (3rd ed.,Regnery, 1966), p. 666

"If goods do not cross frontiers, armies will."Anonymous

2. Ask the students to re-read "I, Pencil" byLeonard E. Read (Reading No. 15). Call specialattention to the widely separated geographicalareas from which the raw materials used in asimple lead pencil must be assembled. Not onlyare some of them shipped many thousands of mileswithin the U. S. to the pencil factory in Pennysl-vania, but some of a pencil's component parts aremade from raw materials extracted in far distantcountries. An exhibit might be constructed todramatize the widely separated areas that contrib-

ute to the manufacture of a simple pencil. Mount amap on the bulletin board and note on the map, byposting labels, flags or parts of pencils at the loca-tions where the various components originated.

3. If such widespread interpersonal cooperationis required to produce simple lead pencils, morecomplicated items undoubtedly call for many moreparts produced from raw materials assembled fromeven greater areas over even more intricate net-works of trade. One or several students might talkwith representatives of a local factory, plant orstore to find out as much as possible about thesources from which it obtains the various rawmaterials, parts or commodities it purchases toassemble, fabricate or sell. Detailed research alongthese lines could produce the kind of informationabout a local product that Mr. Read compiled onpencils. Reports of such interviews might be pre-sented to the class, outlined on a world map orillustrated by diagram on the bulletin board.

4. Mount on the classroom bulletin board or in theschool corridor a large map of the world or of theUnited States or distribute small outline maps toevery student. Then ask the students to lookaround at home or in local stores for various itemsproduced in other parts of the world or fabricatedfrom parts or raw materials that came from afar.Challenge the students to find "imports" from asmany different countries or states as possible.Have the students note on the outline maps theplaces where the various items originated—usingpins or flags on a large bulletin board map, wordsor numbers keyed to footnotes on small individualmaps. Or prepare an exhibit to illustrate interre-gional trade, with actual objects, miniature copiesor pictures of imports, each tied with a ribbon ortape tacked to the map at the place from which itcame. Refer students to atlases, encyclopedias andeconomic geographies for suggestions. For what-ever help it may be to the teacher, here is a list ofthe items—one from each of our 50 states andPuerto Rico—which U. S. Secretary of TreasuryGeorge P. Schultz placed in the "market basket"

145


he presented (June 23, 1973) to USSR's ForeignTrade Minister Nikolai S. Patolichev:

Alabama—peanut butterAlaska—crabArkansas—mineral waterArizona—datesCalifornia—wineColorado—apricotsConnecticut— cheeseDelaware—oystersFlorida—orangesGeorgia—pecansHawaii—pineappleIdaho—potatoesIllinois—beef brisketsIndiana—hamIowa—cerealKansas—whole wheat breadKentucky—bourbonLouisiana—sugar caneMaine—clam chowderMaryland—chickenMassachusetts—Boston baked beans, clamsMichigan—strawberriesMinnesota—cheeseMississippi—cottonMissouri—cornMontana—barleyNebraska—cornNevada—beefNew Hampshire—cheeseNew Jersey—asparagusNew Mexico—sorghumNew York—champagneNorth Carolina—tobacco, cigarsNorth Dakota—flaxOhio—cornOklahoma—mung beansOregon—salmonPennsylvania—cheeseRhode Island—strawberriesSouth Carolina—riceSouth Dakota—chickenTennessee—sour mash whiskeyTexas—beef brisketsUtah—cherriesVermont—maple syrupVirginia—hamWashington—applesWest Virginia—cheeseWisconsin—cheeseWyoming—sugar beetsPuerto Rico—rum

5. If the class has access to an August issue ofFortune Magazine, see its list of large foreign in-dustrial firms. Many of the firms will be recognizedas producers of familiar consumer products—Royal/Dutch Shell, for instance, Toyota Motors,Bayer, Sony, etc. Ask the students to look for ad-vertisements of such foreign-based firms, also ar-

ticles about them in newspapers and magazines.Then have the students check local stores for prod-ucts of these firms to see how many different for-eign companies they can find represented. Exhib-its, notebooks, files, lists, etc., may be built on thetheme of foreign producers and their products.

6. If one or several students can visit an export-ing company or a local plant which distributes itsoutput far and wide, have them ask about the itemsit sells, how they are transported, where and howthey are sold, by whom they are consumed andhow payment is made by the foreign purchasers,how it is returned to this country, and eventually,reaches the local exporting business firm. Thisshould include acquiring some familiarity with thedefinitions and abbreviations of technical termsused in international trade—ASP (American sellingprice), B/L (bill of lading), CAF (cost and freight,no insurance included), CIF (cost, insurance,freight), FAS (free alongside), FOB (free onboard), TSUS (tariff schedule of the UnitedStates), etc. Once again, the routes traveled by anexported product and by the payment for it as ittravels back to this country from the buyer abroadmay be illustrated on maps.

7. The U.S. government now influences interna-tional trade in many ways. Some laws hamper im-ports by imposing tariffs, quotas and other restric-tions. Other laws have been enacted in the attemptto promote exports—by negotiating trade agree-ments and promoting foreign trade—by subsidizingshipping and the export of certain items. Ask oneor several students to write to their Congressman,or to the Department of Commerce (Domestic andInternational Business, Main Commerce Building,Washington, D.C. 20230) for information on U. S.foreign trade policy to share with the others in theclass.

8. Any student reports prepared on the historyof trading routes, in line with SUGGESTED ACTIVITYNo. 3, Unit 5, may be turned in or presented to theclass at this time—or later in conjunction with Unit15, if that seems preferable.

9. Call the students' attention to various ex-amples of government intervention that affect in-terregional trade. They should notice referencesconcerning such interferences in the daily press,economic newsletters and business journals. As aguide to the teacher, see the list of federal, stateand local government actions of this type and theireffects on interregional transactions—paragraphs 5and 6 of this Unit.

12. INTERREGIONAL TRADE 147

EXPLANATORY TEXT

In this Unit, we shall be dealing with tradeamong individuals in different parts of the world.Trade itself is an outgrowth of the concepts dis-cussed in Units 2, 3, 4, 5 and 6. Thus, before con-sidering the intricacies of interregional trade, weshall review the most important ideas dealt withthere in order to explain the nature and the role oftrade itself. Then we shall consider interregionaltrade, trade among individuals in different parts ofthe world. Interregional trade will be treated pri-marily as an economic phenomenon, i.e., as a "nat-ural" outcome of the purposive actions of individ-uals in the pursuit of their various goals.

If time and student interest permit, the teachermay "enrich" this Unit by introducing discussionsand research projects on the historical develop-ment of interregional trade over the centuries—from its very simple beginnings down to the large-scale complex intermeshed transactions of today—and the technology of modern commerce and ship-ping. The remainder of the Unit deals with inter-regional trade as it is conducted in the world to-day, the interdependence of people, as a result ofhighly developed interregional trading throughoutthe world and the impact of government on trade.

1. How does trade originate? As pointed out inUnit 2, economics is the study of the conscious,purposive actions of individuals. Every one of usacts purposively, doing what seems best at the timeto accomplish our own personal aims, ends, goals,values. At times we act alone; at other times wecooperate. A trade or exchange of commodities isone possible consequence of action and coopera-tion on the part of two individuals, as each personseeks to attain his/her various goals, as each seeksto "do his own thing." In the process, as each per-son trades to satisfy his own wants he necessarilycontributes to the welfare of others. To acquire thethings he wants he must offer others somethingthey want in order to persuade them to part withtheir goods or services.

NOTE: Perhaps it should be emphasized here againthat economics is the study of peaceful and voluntaryhuman actions only. The use of force or threat of force—interpersonal or international—lies outside the fieldof economics, except as such activities influence theideas, choices and actions of individuals trying to copewith the problems they cause.

When an individual acts, he must always takeinto consideration the nature of the universe. Thus

every conscious, purposive, human action is pred-icated on the six fundamental a priori categoriesset forth in Unit 2—(1) regularity, (2) logic, (3)causality, (4) time, (5) change, (6) value. Everyaction a person takes on the basis of these six apriori categories is an attempt to adapt and adjustavailable resources as well as possible to serve aperson's various purposes, wants and needs.

Whenever a person acts, he is making an ex-change or a trade—of one situation for another, ofone thing for another, of one good or service foranother—in the hope of improving his situation. Asexplained in Unit 4, any exchange or trade is anoffshoot of the fact that there is, or has been, a cer-tain amount of division of labor or specialization.Without such specialization, the idea that it mightbe worthwhile to trade could not even arise. An-other requirement for an exchange or trade to takeplace is private property. For a person to tradesomething he must have effective control over it;he must have the right to dispose of it as hechooses. It would be helpful to review once morethe discussion of these concepts in Unit 4.

Yet even these—division of labor or specializa-tion and the right to private property—are notenough to bring about a trade. There is still a fur-ther prerequisite. The potential parties to a trademust expect to be better off as a result of the ex-change than they would otherwise have been. Theactions a person takes and the trades and ex-changes he makes depend on his subjective (per-sonal) values. As we have seen, people act on thebasis of their ideas. Any trade depends on the ideasof both parties as to the relative importance of thespecific quantities or units of the certain goods orservices involved at a particular time and place.

The subjective values of different individuals forspecific units of various goods and services are dif-ferent and ever-changing. This fact makes volun-tary exchanges both possible and—barring force,fraud and human error—mutually advantageous forboth parties to every such transaction. The oppor-tunity for gains—monetary and/or subjective orpsychic—helps potential traders recognize when itis worthwhile for them to trade with one another.

NOTE: A brief review here of Units 3, 5 and 6 withspecial attention to subjective value, scales of valueand the role they play in prices, social cooperation,the market economy and production, might be helpful.See also the GLOSSARY definitions of "Profit" and"Psychic Profit."

2. Why do persons trade with other persons inother parts of the world? People trade with one


another for one reason only—to get something theywant which they couldn't have had at all withouttrading, or at least could not have had as cheaply.The reason for trading remains the same whethertwo traders live next door to one another, acrosstown, many miles away, or even on different sidesof national borders. Both parties to an exchangeare seeking specific quantities of some good or ser-vice which they (a) couldn't produce or obtainthemselves at all or (b) at least couldn't produce orobtain otherwise without putting forth more time,effort and/or money than the value to them ofWhat they must now give in exchange plus thevalue to them of the additional time, effort and/ormoney it takes to make the trade.

Every person contemplating a trade considersthe relative value to him/her of the specific unitsinvolved. Don't let the students forget that tradesare always of specific units at a specific time andplace. Individuals are always comparing in theirminds the relative values or utilities to them of thespecific units of a good or service they will be relin-quishing, with the utility they expect to derive fromthe various units of things they will be receivingin exchange. If both traders expect to gain some-thing they value more than what they must give inexchange, they will trade. But trading will ceasewhen the utility to either trader of what he or sheexpects to receive has fallen below that invisibleline, the margin that divides in a person's mindthe values worth striving for from those that arenot.

Every person has many different and ever-shift-ing subjective (personal) values as well as variedand ever-changing value scales. When individualsdiscover that their personal values differ from thevalues of other persons in such a way that theydovetail, gains may be made by exchanging spe-cific units of certain goods or services for others.For instance, assume that A values a unit of Xmore than a certain quantity of Z. B's values aredifferent; B values Z more than X. Then it is obvi-ous that A and B could gain by trading. A wouldbe willing to give up Z for X. Similarly B would bewilling to give up X for Z. In any society, even verysmall ones, many such mutually beneficial trans-actions may be carried out precisely because every-one in the world has different subjective (person-al) values—if individuals are free to look around,investigate, experiment and take advantage of thetrading opportunities they discover. The infinitevariety of contrasting, yet dovetailing, values andvalue scales among the world's 2+ billion persons,

makes it possible for them to arrange countlessvoluntary, often extremely complex trades everyday throughout the world—to the mutual benefit ofboth parties to every such transaction. The devel-opment of trade over large geographical areas andamong increasing numbers of persons is simply anoutgrowth of the fact that individuals place differ-ent subjective (personal) values on specific units ofthe same items and have different wants from oneanother. Their subjective values must, of course, besufficiently different to spark the idea of exchang-ing and to make taking the time and trouble totrade seem worthwhile. When a voluntary tradehas taken place, that is evidence that both partiesexpected to receive something on which theyplaced a higher value, in exchange for somethingthey valued less. A completed transaction alsoproves that the two traders considered trading tobe the easiest, quickest and/or cheapest way tosatisfy some one of their respective subjective (per-sonal) values.

3. How do the many different transactions (pur-chases and sales) undertaken by separate individ-uals result in the complex integrated worldwidemarket of interregional trade? An individualtrades with someone else, as we have seen (a)when he considers it to his advantage and (b)when he can find someone else whose subjective(personal) values dovetail so that he too considersit advantageous to trade. As many such separatetransactions accumulate, the units of goods andservices traded mount up. As the number of trans-actions increase and the geographical area overwhich goods and services are exchanged is en-larged, the conscious purposive actions of individ-uals become intertwined step-by-step, intermeshedand integrated into an ever larger and larger mar-ket. The "cobweb-like" pattern of interregionaltrade at any moment in time is simply the outcomeof countless such separate exchanges, each under-taken in the past by individuals, hoping and ex-pecting to improve their own personal situations asbest they could. Like "the mighty ocean" and "thepleasant land," the world market is simply theproduct of many distinct and separate, yet inter-related and mutually interdependent, transactions:

Little drops of water,Little grains of sandMake the mighty oceanAnd the pleasant land.

("Little Things" by Julia Fletcher Carney)

Every single step in a complex interregionaltrade—from an individual's personal production in


his own home town, shipping it out to a near ordistant land and exchanging it for something tobring back home again—is a separate transaction,a simple trade of specific units of goods, servicesand/or money for one another, decided upon bythe individual traders involved in each specifictransaction. Interregional trade appears compli-cated only because so many interrelated tradesmust take place in sequence, frequently on a largescale and often over wide geographical areas,long periods of time, to complete a circle of ex-changes. Nevertheless, each mutually interdepend-ent trade is made separately on consideration ofits own merits only. In time, as a result of countlesssequences of exchanges local individuals may ob-tain the many things they want in their own hometown, more easily and cheaply than they couldproduce them locally, acquire them by travelingfar and wide to purchase them or even arrange tobarter directly for them by offering their own spe-cialized labor or output.

4. How does each of us actually compensateother producers, shippers and suppliers for theircontributions to the goods and services that cometo our local market? Every one of us relies to aconsiderable extent on the efforts of many otherpersons in various parts of the world to providethings we use and consume that we could not ob-tain locally at all, or at least could not obtain aseasily or as cheaply as we can get them elsewhere.The easiest and cheapest way to acquire these vari-ous things we want from abroad is to producethings other people want that may reach themthrough the market. We pay for the things thatcome into our own community from other parts ofthe world by helping to produce goods or servicesthat enter the world market economy and, sooner

or later, directly or indirectly, help to provide oursuppliers with things they want. What we producemay be transported directly to persons in othergeographical areas of the world, or it may be con-sumed or used locally by someone who producessomething that is shipped directly or indirectly topersons abroad. A farm worker, for instance, mayhelp to produce wheat which is shipped directly toEngland or Switzerland. Or the wheat he helps toproduce may be baked into bread locally, con-sumed by a truck driver who transports gasoline toDetroit where it is bought by a worker in a factorymaking tractors which are sold abroad. In anyevent, every one of us who buys and consumesthings that come from abroad pay for them withour own production—by producing things otherpeople want to have, to use and/or to consume.

We pay for the output of other persons whichreaches us from different parts of the world withour own production. In the quotation cited abovein SUGGESTED ACTIVITY No. 1, Professor Misesdescribed very simply the advantages of inter-regional trade when he said that "Watchmaking isfor [the Swiss] the cheapest way to acquire [Ca-nadian] wheat." The Swiss pay for the wheat theyneed for bread by making watches that are pur-chased by persons in many parts of the world, notonly in Canada. The purchaser of a Swiss watch inthe United States may have received the money heused to pay for it from his employer, who paid himfor helping to make machinery that was sold to aHong Kong manufacturer of electronic parts thatwere shipped, in turn, to Canadian wheat farmersin exchange for money. Thus, by a sequence ofexchanges, each considered on its own individualmerits, the circle of trade is complete. The pathgoods and money follow in interregional transac-tions may be diagrammed as follows:

Machinerymanufactured

in the U. S.

Watches madein Switzerland

Electronic partsproduced inHong Kong


The goods shown here are being transportedclockwise, the money in the opposite direction.Most interregional transactions would be muchmore complicated to diagram than these. However,this illustrates the most important point to stress inthe classroom, namely that, sooner or later, di-rectly or indirectly, we always pay for the goodsand services we consume with our own production,whatever that may be.

Most of us pay for the things we want withmoney received in wages or salaries from our em-ployer. He, in turn, has received the money he paysus—which tends to equal the value his customersplace on our respective contributions to the prod-ucts we help him produce—from his customers ashis "gate" or "box office receipts." To barterthe specific good and service we are producinglocally for the various things we want from allover the world would not only be extremely time-consuming and complicated but virtually impos-sible. The use of money simplifies these transac-tions. Money is tremendously important, impera-tive, vitally necessary for the carrying out of inter-regional transactions involving countless interper-sonal exchanges over large geographical areas.However, the use of money as an intermediarydoesn't alter the fact that we pay with our ownproduction for the many things we consume,whether they are produced ajt home or abroad.

When we produce something others want andare willing to pay for, we are creating our own pur-chasing power. This becomes evident when wemay use what we have produced to purchase some-thing we want which was produced by someoneelse. Their willingness to accept our output in trade—and our eagerness to acquire theirs—is proof thatpurchasing power comes from production. Themore anyone can contribute to what others want,therefore, the more purchasing power a person willbe able to acquire. In other words, in an economywhere specialization and the division of labor aredeveloped, the output of a specialized worker be-comes purchasing power for the many things hewants to consume as it is traded on the worldmarket to other persons who want it. By producinggoods and services to be distributed and sold toothers throughout the world, therefore, every pro-ducer creates his own purchasing power. At thesame time he creates a demand for the productionof others. This great economic truth, the "law ofmarkets," was recognized and explained (ReadingNo. 63) by Jean Baptiste Say (1767-1832). As aresult, every one of us is spurred on—by our own

personal desire to consume—to produce goods andservices for the consumption of others at home aswell as throughout the world.

NOTE: Every student in the class probably uses andconsumes many items produced in other parts of theworld, near and far, or made from raw materials thatcome from abroad. The lists of imports and sources ofraw materials which the students may have compiledin connection with this Unit's SUGGESTED ACTIVITIES2, 3 and 4, should help to reveal the economic inter-dependence of peoples throughout the country and theworld.

5. What are the differences, if any, betweentrading among next door neighbors or with personsacross the street, across town, across the state,across state lines and across national borders?Whether something is produced within a commu-nity or brought from somewhere else to be soldthere makes no difference as far as the consumeris concerned. Consumers are interested primarilyin obtaining, as easily and as cheaply as possible,the things they want most urgently. People fromdifferent geographical locations trade with oneanother simply because interregional trading ap-pears to be easier and cheaper for obtaining thevarious things they want than producing them athome or seeking them from nearby neighbors.

NOTE: In considering interregional trade, it is impor-tant to stress the thesis to which we have referredagain and again in this SYLLABUS: TO understand andexplain any economic phenomenon, break it down intothe specific units of which it is composed. The unitsinvolved in any interpersonal transaction—(a) the in-dividuals who are doing the trading, (b) the variousideas and values that spur them to trade, (c) the par-ticular units of the specific goods and services thateach potential trader is evaluating and comparingwith a view to exchange.

Every person is constantly weighing in his ownmind the relative advantages of trading or not trad-ing. Anything that adds to the difficulties of sup-plying something to a market tends to raise theprice an entrepreneur must ask for it and consum-ers will have to pay for it—if that enterprise is tocover costs and stay in operation. Anything thathelps to make that something easier and cheaperto produce will tend to lower its price on the mar-ket. Bringing an item to market from another geo-graphical area may add to its relative productioncost—especially if it is expensive to ship—but moreimportantly, the opening of interregional trade of-fers an opportunity to reduce production costs. In-terregional trade permits increased division of la-bor and specialization and the concentration of


large-scale enterprises in those geographical areaswhich are best suited and most richly endowedfor their purposes and where the least expensiveand most suitable workers are available. Thus, in-terregional trade helps to direct production toplaces where it is most economical.

The distance something travels to reach con-sumers is irrelevant to them. The important thingin their minds is whether or not it serves their pur-pose at a cost they are willing and able to pay. Theadvantages and savings to be derived from spe-cialization often make the bringing of goods andservices into a community from far away theeasiest and cheapest way to get them. Things asheavy as a grand piano or as fragile and delicateas artificial flowers may quite possibly be producedabroad and shipped half way around the world,ofttimes by air, and still sell for less than it wouldhave cost to produce them at any location closerto their markets. The principal advantage of inter-regional trade, therefore, is that it opens up an op-portunity to carry on more specialized productionon a larger scale in the geographical areas mostsuitable for the purpose. Thus, interregional tradehelps to make production more economical andgoods and services more readily available. In afree market economy, there is no difference in the-ory between trade among next door neighbors andtrade among persons at opposite ends of the earth.The only question is whether or not the customerswant the goods and services in question enough, ata particular place and time, to pay the prices beingasked by their owners.

In his book, Socialism (Jonathan Cape, 1951/1969), Professor Ludwig von Mises expressed thisthesis as follows:

If trade were completely free, production wouldonly take place under the most suitable conditions.Raw materials would be produced in those partswhich, taking everything into account, would yield thehighest product. Manufacture would be localizedwhere the transport charges, including those neces-sary to place the commodities in the hands of the ulti-mate consumer, were at a minimum. . . . Under Cap-italism, frontiers would be without significance. Tradewould flow over them unhindered. They would pro-hibit neither the movement of the most suitable pro-ducers towards immobile means of production, northe investment of mobile means of production in themost suitable places. Ownership of the means ofproduction would be independent of citizenship. For-eign investment would be as easy as investment athome. (pp. 227-235)

It is easy to understand that interregional tradewould be worthwhile if everything were produced

under absolutely optimum conditions, where itcould be made cheapest and best by workers whoseaptitudes and training in each field were tops.Canadian wheat farming and Swiss watchmakingapproach that ideal. Yet it could very well be thata factory could be built in the midst of the Cana-dian wheat belt where still better and cheaperwatches could be made than in Switzerland. Eventhough Canadians might be able to out-producethe Swiss in both fields of production—growingwheat and making watches—the super-superiorityof the Canadian climate and soil gives them arelatively greater comparative advantage as wheatfarmers. Specializing in the field in which they areNumber One, thanks to their resources and skills,yields them relatively more purchasing power thanif they used some of their time, energy and rawmaterials in somewhat less productive enterprisessuch as watchmaking.

David Ricardo, the noted economist of the Clas-sical School, was the first to explain the pattern ofinternational trade in terms of "comparative ad-vantage." Ricardo pointed out (Reading No. 57)that trade among specialized producers was stillworthwhile, even if the potential productivity ofone producer might be greater in every field ofproduction than the productivity of any and everyother single producer. By purchasing or importingitems which are relatively difficult and expensiveto produce at home it becomes possible for everyproducer to specialize in the particular field of pro-duction which yields him the very most in the wayof goods and purchasing power. In other words, bybuying some things, each of us is able to concen-trate in the particular field in which we enjoy thegreatest comparative advantage.

In a worldwide free market economy, therewould be no difference in theory between tradingwithin a small geographical area and trading overgreat distances. However, in the world in whichwe live, there are significant differences in practicedue to man-made distinctions. If units of goods,services and/or money are transferred from ageographical region under the jurisdiction of onegovernment to a region under another govern-ment's jurisdiction, there may be substantial dif-ferences in costs and ease of trading. The acts anddecrees of local state and/or national governmentsmay foster local interregional transactions andhamper those that involve more than one govern-mental jurisdiction. Legal actions may lead tosharp differences between domestic transactionsand trade across political boundaries.


Any government—local, state, federal or regional(such as NATO or the European Common Market)—may influence interregional trade in several ways.The government of the region where a good orservice is originated, the government of the placeto which it is shipped to be sold, as well as any gov-ernment having jurisdiction over its shipper and/or over the route it is shipped, may interfere toaffect prices, production and/or exchanges. One orall governments may levy taxes at one or severalstages in production. One or all governments mayregulate, control or limit production at any stepalong the way—from the processing of the neededraw materials down to the sale of the final productto consumers. One or all governments may offerspecial aids or subsidies to stimulate the produc-tion of certain goods or the performance of certainservices. At the instant any government takessuch an action—to tax, regulate or subsidize certainsteps in production and trade—it creates a distinc-tion between (a) local interpersonal transactionsand (b) trades with and among persons outside itsjurisdiction.

NOTE: The main emphasis of this Unit, as through-out the SYLLABUS, is on economic theory, in this casethe theory of interregional trade. However, if time per-mits, the students should learn something about themore important government actions which affect in-terregional trade.

Legal and political factors may alter the patternof production and trade in many ways. Certain ac-tivities may be encouraged, others discouraged.However, trade and production still tend to gravi-tate to those geographical regions where they en-joy a relative or comparative advantage, in thelight of the new situation. But when governmentsinterfere, economic considerations will no longerbe controlling. Political and legal factors must alsobe considered then in estimating production costsand potential markets. People will continue totrade with one another, of course, so long as it isallowed and so long as it appears worthwhile.However, the pattern of production and channelsof trade will be significantly affected in variousways.

To determine whether or not a specific law orregulation introduces non-economic factors whichaffect interpersonal transactions so as to createdistinctions between domestic and internationaltrade, analyze its effect on the prices and suppliesof specific goods and services. Does it contain pro-visions that create artificial (non-economic) differ-ences between the prices and supplies of some

good and/or service (a) within and (b) beyond thegovernment's jurisdiction? If so, then sooner orlater such government actions will lead to distinc-tions between domestic trade, i.e. interregionaltrade within the area of a government's jurisdic-tion, and interregional trade which takes placeinto, out of, and across the borders of a nation,state or some other governmental jurisdiction. Thisis the criterion used here for determining whichgovernment actions affect interregional trade.

Prevent and/or discourage imports:Taxes on imported goods (tariffs), ofttimes to

protect infant industriesProhibitions against certain imports (embargoes)Legislation urging, or requiring, purchasers to

patronize domestic or local producers, i.e., to"buy American"

Limitations on the amount of specific itemswhich may be imported (quotas)

Legal "escape clauses," calling for tariffs or quo-tas to be imposed at some specific "perilpoint," when the administrators of the law de-termine that domestic producers are econom-ically threatened by imports from abroad

"Anti-dumping" legislation, i.e., prohibition ofdumping or below-cost selling of importedgoods

Restriction of imports which may hamper na-tional defense

Requirement of a special license or govern-ment-approval—by Food and Drug Administra-tion, sanitation or health inspectors, etc.—tosell within a geographical area

An inflation which is not recognized in officialforeign exchange ratios, a monetary unit (theU. S. dollar, British pound, Italian lira, etc.) re-maining legally over-valued in terms of othercurrencies; foreigners will not want to ex-change goods, services or money for a moneywhich the market values below its legal or of-ficial exchange rate

Limitations on, or control, of the amount of for-eign moneys (foreign exchange) traders mayacquire

Encourage imports:Government subsidies to importersGovernment subsidies to foreign producers, i.e.,

foreign aidTariff reductions on some or all imports from all

other countries or from only certain specified"most favored nations"

Price and wage controls—production declines be-


cause domestic sales become less and lessprofitable so consumers come to rely more andmore on imports

Prevent and/or discourage exports:Limitation of exports, i.e., export quotasProhibition (embargo) of exportsRequirement of government license or special

permission to export certain itemsSpecial taxes on exportsThreat of confiscation or expropriation of capital

invested abroadTaxation of income received from capital invest-

ed abroadEncourage exports:

Subsidies to encourage production for exportSubsidies to finance exhibits by domestic pro-

ducers at foreign trade fairsGovernment loans to exporters at lower-than-

market interest ratesGovernment grants or loans to foreign govern-

ments (foreign aid) to help finance their im-ports from the country supplying the funds

Government-financed insurance of foreign in-vestments

Relaxation of antitrust provisions to permit sev-eral U.S. firms to combine for purposes of for-eign trade

Government tax havens and free portsAn inflation which is recognized by international

traders but which has not yet had its full im-pact on prices within the country—foreign trad-ers will be eager to exchange their currenciesand goods for money which the market valuesmore than its legal or official exchange rate,whether U. S. dollars, German Marks or Swissfrancs, or for goods which are priced in thosecurrencies below their world-market values

Raise production costs—making it more difficult tocompete on world markets, thus discouragingexports indirectly:High taxes to finance such government pro-

grams as Social Security, unemploymentcompensation, relief, welfare

Local sales and business taxesLocal regulation of wages, hours, working condi-

tionsRestrictions on the mobility of workers and

would-be workersGovernment-required approval and inspection

of production facilities and outputGovernment-required licenses or authorization

to go into business as a producer, dealer, mer-chant

The need to comply with complex, time-con-suming and costly bureaucratic red tape

Threat of antitrust prosecution which may ham-per economies of large-scale production andmerchandising

6. What is government policy—federal, state,local—concerning interregional trade? The legalbasis for action on the part of the U.S. governmentconcerning interregional trade stems from author-ity granted by our Constitution. Several provisions(Article I, Section 8, paragraph 3; Section 9, para-graphs 5 and 6; Section 10, paragraphs 1 and 2)were intended to prevent the erection of trade bar-riers by the states, within the nation's borders, andso to assure domestic free trade. Other provisionsof the Constitution (Article I, Section 8, para-graphs 1 and 3) refer to the powers of Congressrespecting foreign trade. Thus the national gov-ernment has developed two different classes oftrade legislation—(a) that relating to "interstatecommerce," i.e., trades among the several states,and (b) that involving trade into, out of, and acrossthe nation's borders.

The economics of interregional trade rests on thebasic principle of human action, namely the driveon the part of individuals to relieve felt uneasi-nesses. If they are not prevented from doing so,the inhabitants of one geographical location willexchange goods, services and/or money with in-dividuals in other geographical regions—wheneverthey consider trading to be of mutual advantage.No act of any government can ever negate thatprinciple. However, government laws, orders, de-crees and rulings can profoundly affect the alter-natives available to would-be traders and, thus,their choices and actions.

Prior to World War I, the principal way the U. S.government influenced international trade wasthrough the enactment of tariff legislation. As amatter of fact, the first revenue bill passed (1789)by the very first U.S. Congress called for tariffs oncertain imports. Any tariff will alter selling pricesto some extent. However, the rate of tariff leviedmakes a big difference. A low tariff may not pre-sent a serious obstacle to importing; foreign goodsmay still be able to compete on the domestic mar-ket, will continue to come into the country and tar-iffs on them will be paid, yielding an income to thegovernment. A high tariff, on the other hand, mayreduce imports so much that fewer or no foreigngoods can be sold in the domestic market. Thus, ahigh tariff doesn't necessarily mean more revenue

1 5 4 FREE MARKET ECONOMICS: A SYLLABUS

to the government. A high tariff could reduce gov-ernment revenue from imports, or eliminate it en-tirely. At the same time, by effectively protectingdomestic producers of competitive products fromforeign imports, a high tariff gives local businessesa tremendous advantage in selling on the domesticmarket. The major controversy over trade policythroughout this country's first 100-150 years,therefore, was between advocates of a relativelylow tariff "for revenue only" and those whowanted higher tariffs "for protection."

Since World War I, the U. S. government hastaken a much more active role in trying to regulateand control interregional trade. As a guide to theteacher, here is a list of the more important lawsand types of laws enacted at various governmentlevels, which have been responsible for shaping (a)international, (b) interstate, and (c) intrastatetrade policies in recent decades. This list points upthe major developments only. To include everylaw and every revision of the laws affecting inter-regional trade would be impossible.

a. International:1918—Webb-Pomerene Act—In order to promote

exports, this legislation exempted U. S.firms from antitrust prosecution undercertain circumstances, permitting themto form combinations to engage in for-eign trade

1921—Anti-Dumping Act—Condemned importsbrought into the U. S. at "less than nor-mal value," which was defined as lessthan their market price at home

1922—Tariff Act of 1922—Introduced the policyof offering to make mutual tariff reduc-tions among "most favored nations"

1930—Tariff Act (Hawley-Smoot)—Increasedtariffs on many imported items, and re-quired country of origin to be shown onall imports

1933—Buy American Act—When making pur-chases with federal funds, governmentagencies were required to give prefer-ence to domestic producers, primarilyfrom depressed areas, unless the prices ofcomparable imports were substantiallyless than those of U. S. manufactureditems. How much below U. S. prices im-ports would have to be before federalfunds could be used to buy them insteadof products of U. S. manufactory was leftto executive or administrative decision.

Ban on the export of gold and on the own-ership and use within the country of mon-etary gold by U. S. citizens. This is onlyone of many acts on the part of the fed-eral government which has significantlyaffected international transactions interms of money

1934—Reciprocal Trade Agreement ActExport-Import Bank—Set up to makeloans in order to promote imports and ex-ports

World War II—Many laws were enacted to facil-itate trade, to provide materiel and loansto the Allies and to prevent trade thatmight give aid or comfort to the enemies

1945—Foreign Aid—Several programs enactedto provide grants, loans and gifts toother nations in the form of credit, ma-chinery and surplus farm productsEstablishment of the International Bankfor Reconstruction and Finance (WorldBank) and the International MonetaryFund

1947—General Agreement on Trade and Tariffs(GATT)—This agreement provides theframework within which member govern-ments carry on discussions for the pur-pose of liberalizing trade. It aimed to re-duce import quotas (quantity restrictions)on imports but it retains a provision per-mitting governments to apply for relieffrom injurious imports when a domesticindustry faces economic losses due to for-eign competitors

1948—Export controls for the sake of nationalsecurity, restricting trade that might aidSoviet aggressive expansion

1950—Embargo on exports to Communist China1955—Restrictions on the importation of goods

which might adversely affect nationalsecurity

1956—Customs Simplification Act1960—Embargo of all exports to Cuba except

foods and medicines1961—Foreign Assistance Act—A reorganization

of the International Cooperation Admin-istration (ICA) and the DevelopmentLoan Fund (DLF) as the Agency for In-ternational Development (AID)

1962—Trade Expansion Act—Passed upon therecommendation of President Kennedy,intended to reduce tariffs and increase in-ternational trade


1966—Export Control Act—Liberalized tradewith Eastern Europe and the USSR

1969-1971—Step-by-step removal of 1950 em-bargo on trade and travel with Commu-nist China

International Commodity Agreements—For years,governments have tried to "stabilize" certainworld commodity prices. As early as 1925, in thecase of sugar, 1926, in the case of steel, attemptswere made to regulate prices and quantitiestraded. Other commodities covered by similaragreements have been cocoa, coffee, cotton, rub-ber, tea, tin and wheat.

b. Interstate:It is impossible to list every act of the federalgovernment which has had some influence oninterregional transactions that take place withinthe nation's borders but across state lines. Per-haps the first major intervention of this type wasthe establishment of the Interstate CommerceCommission in 1887. Since then numerous fed-eral laws have been passed and countless fed-eral agencies have been established to regulateand control "interstate commerce." There is, ofcourse, no need to go into these details. How-ever, the teacher should call attention to the factthat as a result of various federal governmentinterventions, officials in Washington exercise aprofound influence on the economy. To give anidea of the extent of federal influence on pro-duction and interregional trade, here are some ofthe more important federal government inter-ventions which have affected production andtrade and which have led to increases and de-creases in the relative scarcity of certain goodsand services in some parts of the country andthus to higher or lower prices for various goodsand services. See a recent U.S. Government Or-ganization Manual for information on the legis-lative history of any specific federal agency.Regulation of interstate transport carriersRegulation of "labor-management" relations,

wages, hours and working conditions in busi-ness firms engaged in "interstate commerce"

Subsidies to states and local governments oragencies for specific purposes such as the con-struction of schools, libraries, housing, post of-fices, highways, airports, canals, dams, pow-er projects

Programs for slum clearance or urban renewalRelief to economically depressed areasAid to disaster areas

Farm price supports, crop insurance, and pay-ments for soil bank, reclamation and/or con-servation

Grants for research and developmentWelfare and reliefLoans at below-market interest rates to certain

borrowers, small business firms (SBA), ruralusers of electricity (RE A), homeowners(FHA), etc.

Government-financed production of arms andmilitary materiel

Government payments to certain individuals-veterans, unemployed, oldsters, dependents,disabled, students on scholarships, etc.

c. Intrastate:In spite of the constitutional provisions made inArticle I, Sections 9 and 10, intended to assurefreedom of trade among the several states withinthe country, many obstacles to domestic trans-actions have developed. State and local laws,statutes, regulations and ordinances have led tomany differences in prices for the same good orservice in different localities. For instance, lawsrestricting the hours when stores may open forbusiness can encourage sales and shopping incommunities permitting evening and weekendbusiness while making it relatively more expen-sive to operate in other localities. Preventing thesale of certain goods across state lines—for in-stance grapefruits or tomatoes below certainweights or sizes—may make "sub-standard"fruits and vegetables cheaper within a state'sborders while tending to raise the out-of-stateprices of the larger fruits and vegetables. Amongstate and local restrictions that alter the pricesat which goods and services are traded are stateand local sales taxes, quality controls on pro-duce (milk, for instance) shipped into or out ofan area, compulsory sanitation and safety in-spections, licensing requirements, building re-strictions, zoning ordinances, limitations onhours for conducting certain businesses, max-imum size and tonnage allowances for trucks,and so on. How much class time, if any, may bespent on a discussion of local trade barriers willdepend on the situation. However, the teachershould at least mention the fact that governmentactions at the state and local levels also affectinterregional prices, sales, purchases and trans-actions.

7. What are the leading problems raised in re-cent discussions of international trade? As we


have seen in the course of this Unit, individualstrade voluntarily across national borders for thesame reason they trade with other persons at anytime or place—next door, across town, from onegeographical area to another. They are seeking torelieve some felt uneasiness; they hope to acquiresome good or service they want that they couldn'thave at all, or couldn't get any other way as well,as cheaply or as easily. This insight is derived froman understanding of subjective (personal) valueand the theories of human action, choice and mar-ginal utility. Barring force, fraud or human error,both parties gain from a voluntary transaction.Placing obstacles in the path of voluntary trans-actions, therefore, only tends to make it more diffi-cult if not impossible for individuals to help them-selves. In spite of this lesson to be learned from thelogic of modern economics, however, many per-sons fail to comprehend its implications.

Many people today believe as the Mercantilistsdid in the 17th century, that only the seller of agood or service benefits from trade, to the dis-advantage of the buyer. It is held that the sellerreceives money in exchange which makes him rich-er, while the buyer has to pay money out, whichpresumably makes him poorer. There are two fal-lacies here. Both may be proven wrong by reason-ing logically from the six basic a priori categoriesand the nature of human action.

The first error is in claiming that one party gainsfrom a voluntary trade while the other party loses.Barring miscalculations, both parties gain. Individ-ual values and value scales differ. Two personstrade only if, as and when their values and valuescales dovetail so that both expect to receive in ex-change something that they value more than theyvalue whatever they give in trade. When they tradevoluntarily it is always in anticipation of relievingsome felt uneasiness and thus of improving theirrespective situations.

The second fallacy implied above is that onlymoney is wealth, that only the person who givesgoods or services in exchange for money gains,while the other person, who pays money out to ob-tain goods and services, is poorer as a result of atrade. Yet the fact is that when money is taken inexchange, it is only a temporary makeshift, so tospeak, on the road to the final goal of consumption.The value of money stems only from its being amedium of exchange, something which may betraded later, more or less at will, for other thingsto use and consume. The ultimate purpose of anyvoluntary trade is to obtain goods and services to

consume. Adam Smith said it as follows: "Con-sumption is the sole end and purpose of all pro-duction." (The Wealth of Nations, Book IV, Chap-ter VIII. Modern Library ed., p. 625). Thus, ac-quiring money is only an intermediate step in ob-taining other goods and services to use, consumeand enjoy.

These two Mercantilist fallacies linger on today.They are partially responsible for foreign aid andother subsidies to foster exports of goods and ser-vices, as well as for protective tariffs, import em-bargoes, quotas and various other measures de-signed to preserve domestic markets for domesticproducers. These two Mercantilist fallacies havecontributed to the complex of government inter-ventions listed above following Question No. 5 ofthis Unit. The Mercantilist philosophy prevailswidely today because people do not realize thatany voluntary trade—whether sale or purchase, im-port or export—benefits both parties.

Before leaving this analysis of the issues cur-rently influencing trade policy, a few commentsshould be made of the terms "balance of trade"and "balance of payments." Most discussions ofinternational trade in recent years have been dom-inated by the concern that a nation should have a"favorable" balance of trade and a "favorable"balance of payments. These two terms come to usfrom old Mercantilist fallacies which have survivedfor several centuries.

a. Balance of trade: It was a Mercantilist ideathat the citizens of a nation are better off if its tradeon net balance in the world market consists of ex-porting goods and services and importing money.Inherent in any such doctrine is the thesis that thecountry, the nation, is a separate entity, with in-terests and goals as a unit over and above the in-terests and goals of the individual citizens. Thisis macro-economic thinking. The idea that the bal-ance of trade is important belongs to macro-eco-nomics. It ignores individuals and the nature ofhuman action. It fails to recognize that individualstrade voluntarily across national borders, as theydo at any time or place, only if it seems in their self-interest. Due to lack of economic understanding, itfails to note that behind every individual tradethere is a conscious decision, a purpose, an idea,goals and values.

To analyze the balance of trade doctrine it is wellto use the same technique used in analyzing othereconomic concepts—breaking it down into its com-ponent parts, the individuals who are trading andtheir separate individual transactions. It becomes


easier to understand a nation's balance of trade ifwe consider first an individual's personal balanceof trade. When a person is working for wages orselling a good or service for money, his temporarybalance of trade—in the terminology of the Mer-cantilists—is "favorable." If a person accumulatesfunds over a period of time, in anticipation of alarge expenditure, his balance of trade will appear"favorable" in the Mercantilist view, so long as hisdaily cash income exceeds his daily cash outgo.When he spends the money he has earned or savedfor anything, no matter how urgently he wants it—whether food, clothing, shelter, fun or a luxuryitem—Mercantilists would bemoan his balance oftrade, saying it was "unfavorable." No matter howeager he is to acquire what he buys with his sav-ings—be it a new motorcycle, a second-hand car,a stereo tape deck, college tuition, a necessarymedical operation, an airplane ticket, or whatever—Mercantilists consider his balance of trade duringthe period of time when his money expendituresexceed his money income, "unfavorable." Thus, inMercantilist terminology, an individual's net bal-ance of trade will be "favorable" at times, "unfav-orable" at others. From the individual's viewpoint,however, it is immaterial whether his balance oftrade is "favorable" or "unfavorable." If his bal-ance of trade is the outcome of his subjective (per-sonal) values and preferences and his voluntarily-made individual choices and actions, it is theproduct of his attempts to relieve as best he can hispersonal felt uneasiness at any moment.

A nation's balance of trade is simply a compos-ite of the balances of trades of all persons livingwithin its borders. Just as the market economy wasdemonstrated to be a composite of countless inter-personal transactions and agreements (Unit 5)and the price of any specific item at a particulartime and place was shown to be the outcome ofcountless individual value judgments, choices andactions (Unit 6), so is a country's balance of tradeduring any specific period of time, the product ofthe balances of trade of all individuals involved—"favorable" at times, "unfavorable" at others.

b. Balance of payments: A nation's balance ofpayments, like its balance of trade, is a composite,the sum of the separate net balances of paymentsof all the individuals involved. As currently used indiscussions of international trade, a nation's bal-ance of payments is a balance sheet recording itstransactions during a certain time. It reveals thenet flow of cash into, or out of, a country duringthat period of time. A country's balance of pay-

ments is referred to as "favorable," if it shows anet inflow of cash, or as "unfavorable," if cash isflowing out on net. Yet this is a misuse of terms, asanyone who understands something about ac-counting procedures and statements of accountswill recognize. Every statement of accounts alwaysshows a balance between debits and credits. Bal-ances of payments, therefore, always balance.Every net debit on a balance sheet, personal ornational, will always be balanced by credits ofsome kind—or vice versa.

Thus a nation's balance of payments, like all theindividual balances of payments from which it iscomposed, will always be in balance. Gifts of cash,foreign aid, unpaid loans, tourist spending abroad,etc., will be balanced on the statement by creditsof some kind, good will, IOUs, income from foreigninvestments, or some such. Thus, it means little tospeak of a "favorable" or an "unfavorable" bal-ance of payments.

SUMMARY

The principles of international trade are thesame as those involved in any interpersonal trans-action. Individuals will exchange specific units ofa good, service and/or money with one anotherwhen both parties expect to benefit. Barring force,fraud and human error, therefore, trades which arevoluntarily agreed upon are advantageous for bothof the traders concerned. Any outside factor whichprevents or hinders voluntary transactions canonly make trade and production more difficult,more time-consuming and more expensive, to thedetriment of all individuals concerned. Many, if notmost of the government programs now in forcethat affect international trade fall in this categoryof disruptors of peaceful and voluntary trans-actions.

The current concern for having "favorable"balances of trade and balances of payments isfounded on Mercantilist fallacies. If the flow ofcash, in or out of a country, is the consequence ofvoluntarily-made, uncoerced, personal, individualchoices and preferences, one-way traffic in eitherdirection for goods and services or money willnever last for long. Trade is always a two-way af-fair. The ultimate goal of any transaction is alwaysto acquire goods and services for use and consump-tion. This brings us back to Henry Hazlitt's quota-tion at the start of this Unit:

The real gain of foreign trade to any country liesnot in its exports but in its imports.


Voluntary, interregional trade is an outcome ofconscious, purposive human action, interpersonalcooperation, specialization and division of labor.Voluntary, interregional trade is one of the mostimportant means for increasing production andimproving the living standards of every one, espe-cially the poor, the handicapped and the least cap-able.


BALANCE OF PAYMENTSBALANCE OF TRADEBALANCE SHEETCOMPARATIVE ADVANTAGECOOPERATIONDIVISION OF LABORDUMPINGDUTYEMBARGOEXCHANGEEXPORTFOREIGN EXCHANGEFREE PORTFREE TRADEIMPORTINFANT INDUSTRYMACRO-ECONOMICSMARGINMERCANTILISMMOST FAVORED NATIONSMULTINATIONAL CORPORATIONNON-TARIFF BARRIERSPROTECTIONISMQUOTASPECIALIZATIONTARIFFTRADE


More advanced materials are indicated by an asterisk (°)

Articles

In the BASIC READER:15. "I, Pencil," Leonard E. Read55. "The Candlemakers' Petition," Frederic Bastiat

56. "Free Trade: Domestic/Foreign," Dean Russell*57. "On Foreign Trade," David Ricardo°58. "Foreign Investment vs. Foreign Aid," Henry

Hazlitt°59. "Restrictions on International Trade," W. M.

Curtiss°60. "The Failure of International Commodity Agree-

ments," Karl Brandt

Additional Titles:"The Multinational Corporation," Mark Peterson—in

The Freeman, January 1974

Books

Bastiat, Frederic. Economic Sophisms (Van Nos-trand, 1964; FEE, 1968)

Carson, Clarence B. Throttling the Railroads (LibertyFund,1971)

Curtiss, W. M. The Tariff Idea (FEE, 1953/1962)Fleming, Harold M. States, Contracts and Progress:

Dynamics of International Wealth (Oceana Publica-tions, 1960/1966)

Hazlitt, Henry. Economics in One Lesson (Harper,1946; 2nd ed., MacFadden, 1962; Manor Books,1973). Chapters 11 and 12

°Mises, Ludwig von. The Free and Prosperous Com-monwealth (Van Nostrand, 1962). Chapter 3

Polo, Marco. The Travels of Marco Polo (c. 1300).Many editions

Smith, Adam. The Wealth of Nations (1776). Manyeditions. Book IV

See also: Miscellaneous references in local librariesdealing with specific phases in the history of trade—thePhoenicians, the spice trade, the impact of the Crusadeson European imports, medieval trade fairs and markets,itinerant peddlers, explorations in search of new traderoutes, the era of the clipper ships, the opening of theWestern United States to Eastern markets thanks tosteamboats on the Mississippi and cross-country trains,the increased use of airplanes for shipping, etc.

POSTSCRIPT (November 1976): The longstanding dominance ofSwiss watches on world markets, accepted without question when thisUnit was written, has since been seriously threatened. Accurate andinexpensive digital watches, developed as a spin-off of computer sci-ence and electronics, have challenged the pre-eminence of Swisswatchmakers, making obsolete their traditional skills and tools. Thisshift in interregional specialization illustrates how changes in trade takeplace as entrepreneurs innovate, if they are free to do so, in the attemptto satisfy consumers better.

PART III

HISTORICAL AND POLITICALASPECTS

13. HISTORY OF ECONOMIC THOUGHT


1. It should be helpful to have each student con-struct a "family tree" of the men who contributedto developing the major economic ideas presentedin this SYLLABUS. See the chart on pp. 162-163.Have each student draw his or her own skeletonoutline, or have copies mimeographed or dittoed inquantity. If the teacher has an overhead projector,he or she can make a transparency of the skeletonoutline and fill it in during the class lecture as thevarious men, economic "schools" of thought andtheir interrelationships are discussed. The studentscan then write in the pertinent names on theiroutline drawings as the teacher talks.

2. Students who wrote term papers on specificeconomists or theoretical schools of economicsmight turn them in at this time. Perhaps a fewcould be read aloud and discussed in the classroom.This assignment should be made early in thecourse to allow time for research. Have each stu-dent clear his or her topic with you as teacher tomake sure they select an economist or "school"on which sufficient material will be available.To encourage the use of libraries and referencematerials, ask each student to consult five specificsources as a minimum and to list these sourcesas the paper's bibliography. Conventional encyclo-pedias usually include short bibliographies at theclose of any major article, so encyclopedia articlesare good places to start such research.

3. Exceptional students with some imaginationand research ingenuity might compile an anthol-ogy of excerpts from the writings of old-timeeconomists which deal with problems similar tothose facing the world today—inflation, shortages,government controls, etc. Or quotations from theirworks could be used as the basis for composinga mock "newspaper." Its headlines might read, forinstance, "Economist discusses proposals for newpublic works," and the article that followed couldquote a Keynes' statement in favor of governmentspending to promote economic prosperity. Another

article might purport to be a news story on priceand wage controls, citing Adam Smith's recom-mendations for free market prices even when thereare shortages due to war or famine (see "Dearth"in the index to Smith's The Wealth of Nations). Orone of Bastiat's satires could be used to expose thefallacy of imposing tariffs on imported oil. A stu-dent reporter could relate an imagined interviewwith Plato, Smith or Bastiat as to the role of anoverall planner or the "invisible hand" in directingthe provisioning of Paris, New York, or Dallas, forinstance. Such a project should help the studentsrealize that problems similar to those we facetoday have arisen before and that most of the in-terventionist solutions now being proposed havebeen made many times before.

4. If class interest warrants it, students whohave researched the theories of particular econo-mists in depth might take part in a round tablediscussion, each speaking as if he or she were theperson whose ideas they had studied. The formatsof TV interviews or panel discussions could beadopted. Some students would then play the role ofguest economists or "experts," others the parts ofreporters or journalists asking questions. The ques-tioners would also have to familiarize themselveswith the theories of the men they were interview-ing, so as to pose suitable questions on pertinenteconomic issues and various government programs.

EXPLANATORY TEXT

This Unit is supplementary to a basic course oneconomic principles, for the most important the-ories of human action have been covered in thepreceding Units. However, if time permits it wouldbe helpful, even in an introductory course, to in-clude some mention of the historical developmentof a few of the major economic theories. Or thematerial in this Unit might be used as the basis fora second economics course, possibly even ex-panded into a full semester by making full use ofthe references in its fairly ample list of RECOM-

MENDED READINGS.

161


DATES

Greek & Roman Empires(c. 332 BC-476 AD)

Middle AgesFeudalism (c. 476-1492)

Renaissance(14th-16th centuries)

Reformation(16th & 17th centuries)

EQUALITY IN EXCHANGE IDEA

"JUST PRICE" IDEA(SCHOLASTICISM)

NATIONAL INTEREST" IDEA(MERCANTILISM)

NATURAL ORDER" IDEA(PHYSIOCRACY)

Enlightenment(18th century)

'Industrial Revolution"(c. 1750-1850)

CLASSICAL SCHOOL

COST OF PRODUCTIONVALUE THEORY

19th century

VALUE IN USE(UTILITY)

LABOR THEORY OF VALUE"IRON LAW" OF WAGES

20th century

SOCIALISM

COMMUNISM

IDEA

SUBJECTIVE VALUE THEORYMARGINAL UTILITY

WELFAREECONOMICS

ECONOMICPLANNING

KEYNESIANISlVI

MATHEMATICALSTATISTICALHISTORICALAPPROACH

NEO-CLASSICAL

CHICAGOSCHOOL

CAPITALISMLAISSEZ-FAIRE

AUSTRIANSCHOOL

13. HISTORY OF ECONOMIC THOUGHT 163

MAJOR ECONOMIC THEORIES AND LEADING THEORETICIANS

Creek and Roman EmpiresEquality in exchange ideaSocrates (470P-399 B.C.)Plato (427P-347 B.C.)Aristotle (384-322 B.C.)

Middle Ages, FeudalismScholasticism and the "just price" idea

Thomas Aquinas (1225-1274)

Renaissance & ReformationMercantilism and the "national interest" idea

Thomas Mun (1571-1641)Jean Baptiste Colbert (1619-1683)Sir William Petty (1623-1687)Sir Dudley North (1641-1691)John Law (1671-1729)Richard Cantillon (1680-1734)

Period of the EnlightenmentPhysiocracy and the "natural order" idea

John Locke (1632-1704)Francois Quesnay (1694-1774)Jacques Turgot (1727-1781)

Classical SchoolDavid Hume (1711-1776)Adam Smith (1723-1790)Thomas Malthus (1766-1834)David Ricardo (1772-1823)John Stuart Mill (1806-1873)

"Industrial Revolution"Cost-of-production value theory Value in use, utility idea

Comte Henri de Saint-Simon (1760-1825) Jeremy Bentham (1748-1832)Jean Charles L. Sismonde de Sismondi (1773-1842) Jean Baptiste Say (1767-1832)Pierre-Joseph Proudhon (1809-1865) Frederic Bastiat (1801-1850)

Hermann Heinrich Gossen (1810-1858)

19th centuryLabor theory of value and the "iron law" Subjective value theory, marginal utility

of wages •Le'on Walras (1834-1910)Karl Marx (1818-1883) "William Stanley Jevons (1835-1882)Ferdinand Lassalle (1825-1864) 0Carl Menger (1840-1921)

20th centuryNikolai Vladimir Ilich Lenin (1870-1924) Alfred Marshall (1842-1924)John Maynard Keynes (1883-1946) Philip Wicksteed (1844-1927)

John Bates Clark (1847-1938)°Eugen von Boehm-Bawerk (1851-1914)Irving Fisher (1867-1947)

°Ludwig von Mises (1881-1973)

'Principal contributors to the subjective value, marginal utility, theory


This Unit is necessarily a much abbreviated his-tory of only a very few of the more importanteconomic theories and doctrines. The selection foremphasis of one or several of the most importantideas for which an individual or a "school" has be-come known is not intended to imply that thoseearly thinkers were narrow or single-minded—theirviews were just as varied and complex as are thoseof individuals today. Thus there was considerablymore variety of views and difference of opinionsamong the adherents of the various economic"schools" of thought than one might conclude fromthis simplified history. However, it should sufficeas an introduction to the historical development ofa few of the more significant economic concepts.Moreover, studying the history of ideas offers onemore opportunity to explain that all knowledgeand the entire history of the world are products ofthe ideas and actions of separate and unique in-dividuals. At the same time, the students shouldrecognize in the theories of early thinkers thesources of some of the currently widespread eco-nomic fallacies.

1. What basic economic questions have chal-lenged thinkers throughout the ages? Ever sincemen began to notice some regularity and order ininterpersonal arrangements, they have sought toexplain (a) the origin of market values and (b) thereasons why economic production and trade pro-ceeded in a more or less orderly fashion withoutany overall direct or conscious supervision. Thetentative early answers posed to these questionscontained gaps and inconsistencies. Not until theend of the last century were thinkers and philos-ophers successful in answering them satisfac-torily. About 1870, a few pioneering intellectualsexplained in detail for the first time how marketprices are derived from the subjective (personal)values of individuals. This insight also furnishedthe further understanding necessary for solving thesecond enigma. Production and trade too are ex-plained by the subjective (personal) values ofindividuals. Producers and traders in a marketeconomy look continually for guidance to the ac-tions individuals are taking on the basis of theirpersonal (subjective) values. No economic tsarneed tell producers or traders what to do, for thepurchases or refusals to purchase of individualconsumers tell them what to produce, where and inwhat quantities.

2. How do knowledge and understanding pro-gress over the years? The very earliest men on

earth had to learn everything for themselves andreason things out alone. Until men were able tocommunicate over space and time, the learningprocess had to start over again and again in everycommunity and with every generation. Gradually,however, people learned to share with others whatthey had learned and reasoned out. Those whocame later had an advantage. Even if the ideas,knowledge and understanding passed along tothem were rudimentary and unsatisfactory in manyrespects, they were still of some assistance. Themere formulation of a question or even a wronganswer may sometimes help other persons alongthe road to correct solutions. Thus, ideas, theoriesand doctrines were gradually developed and re-fined and later thinkers were able to build on them.

Trying to figure out how one man's contributionto the history of ideas is related to another's issomething like trying to fit together the pieces ofa complex jigsaw puzzle. It is often possible tolearn how an earlier idea sparked a later one, butnot always. We can only know that every idea issparked in some way by a person's experiencesplus his knowledge and other ideas he has en-countered during his lifetime. Yet the source ofideas remains a mystery. Two people with essen-tially the same heredity and environment maydraw very different conclusions on the basis of sim-ilar facts while completely unrelated persons livingfar apart may come up with essentially the sameideas. Nevertheless, the fact remains that the morewe can know of what others have thought and rea-soned, the more likely we are to reach correctconclusions. "A dwarf standing on the shouldersof a giant may see farther than the giant himself."So said Didacus Stella (A.D. 39-65).° Similarly,later thinkers need not necessarily be any brighterthan their predecessors to advance knowledge astep or two further; they need only build carefullyand logically on ideas and theories already for-mulated.

NOTE: TO impress on the students how our under-standing and knowledge depends on the work of otherindividuals, draw a simple line drawing on the black-board of a giant with a dwarf who can see over theheads of other giants and beyond, because he is stand-ing on the shoulders of a giant.

In this Unit, we shall try to fit into place some ofthe many jigsaw-puzzle-like ideas, each shaped

°As translated and quoted by Robert Burton (1577-1640) inAnatomy of Melancholy and by Samuel T. Coleridge (1772-1834) in Essay No. 8, "The Friend."


and contributed by many individual thinkers whohave helped to formulate modern economic the-ories. We shall discuss the attempts of early think-ers to explain the two basic economic enigmas—(a)the reason for market values and (b) how produc-tion and trade are arranged without the overalldirection of a planner. We shall show how, stepby step, the explanations offered became more andmore successful at explaining the way men act inreal life.

3. How did the study of "economics" begin?The word "economics" is a compound word de-rived from the Greek oikos, meaning house, andnemein, meaning to manage. In the time of theancient Greek philosophers, the operation andmanagement of the household was called oiko-nomia. Some communication and trade amonghouseholds, communities and even among otherpeoples beyond the country's borders took place inthe time of the early Greeks but the basic unit seenand analyzed by thinkers of that era was the familyhousehold.

The greatest Greek thinkers, whose ideas live onin modern theory and philosophy, are Socrates(470P-399 B.C.), a teacher of Plato, Plato (427?-347 B.C.), who was a teacher of Aristotle, and Aris-totle (384-322 B.C.).

Socrates is known primarily for his philosophyand teaching technique. Although nothing hascome down to us that he may have written, hisname has lived on through his students, his philos-ophy and his teaching method. The "Socraticmethod" is to ask questions and encourage stu-dents to reason things out for themselves. Soc-rates, considered one of the wisest men of alltimes, was an original thinker for his time. Be-cause of his refusal to conform with conventionalpractices and beliefs, he was condemned to deathand forced to drink a cup of poison hemlock.

Plato was a student of Socrates. His name ismore closely associated with what is now con-sidered economic theory, the field of human action.His description of the division of labor, which heconsidered the basis of society because cities werebuilt on the division of labor, was a partial explana-tion of the economic arrangement responsible forproduction and distribution. The state's role, ac-cording to Plato, was to protect the community.There different people specialize in different ac-tivities. The police themselves are specialists. Hepointed out that:

All things are produced more plentifully and eas-ily, and of a better quality, when one man does one

thing which is natural to him and does it at the righttime and leaves other things.

Plato apparently didn't realize, however, thatproducers and traders in a free society do not needto be ordered to produce and trade. His views havecome down to us through his Dialogues, the mostpertinent being The Republic, in which he de-scribes his "ideal state," a planned community inwhich each person would be assigned a particularrole. Everyone's daily activities would be directedby a "Philosopher King" with the wisdom to seethat the interests of everyone were served. Platoapparently didn't realize that his "PhilosopherKing" would have to be a dictator. Nor did herealize that even a dictator could not create an"ideal state," for the insight, knowledge and abil-ities of even an ideal dictator would be limited.Whether or not Plato's portrayal of a "PhilosopherKing," governing an "ideal state," was made inseriousness or in jest for educational purposes, isdebated to this day.

Aristotle studied under Plato. His philosophyand logic have stood up over the centuries betterthan has his analysis of the physical world, whichhe believed to be made up of four elements—earth,air, fire and water. Aristotle contributed to ex-plaining economic relationships by criticizing Pla-to's totalitarian communistic "ideal state." Hepointed out that "people pay most attention totheir private property and less to that which theyhave but a part interest." He opposed abolishingexisting relationships for the sake of drastic re-form, lest the result lead to worse conditions thanthose they replaced. He stood for gradual change,recognition of the nature of the individual and theencouragement of personal initiative and a senseof private property. However, he did not questionthe institution of slavery, which was then con-sidered "natural."

Ideas have changed radically over the centuries,but many of Aristotle's ideas have stood the testof time. His theories profoundly influenced modernlogic and, thus also, the a priori assumptions andlogic from which economic principles are derived.Aristotle is perhaps best known in the field of eco-nomics for his attempted explanation of marketvalues. His position was that when a trade takesplace the two sides of the transaction must be"equal" in some respects.

When people get as the result of exchange exactlywhat they had at the beginning, neither more norless, they are said to have what belongs to them andto be neither losers nor gainers. . . . The builder is to


receive from the shoemaker of his ware, and to givehim of his own. If then there be first proportionateequality, and then the Reciprocation takes place, therewill be the just result which we are speaking of. Ifnot, there is not the equal, nor will the connectionstand, for there is no reason why the ware may not bebetter than that of the other, and therefore before theexchange is made they must have been equalized. . . .How many shoes are equal to a house or a given quan-tity of food? As then the builder to the shoemaker, somany shoes must be to the house (or food, if insteadof a builder an agriculturist be the exchanging party),for unless there is this proportion, there cannot beexchange or dealing. . . . Agriculturist: Shoemaker:Wares of shoemaker: Wares of agriculturist . . . whenthey have exactly their own, then they are equal andhave dealings, because the same equality can come tobe in their case.

Aristotle's reasoning—since superseded by thelogic of subjective value theory—leads to the con-clusion that if one person profits from a trade, itmust be at the expense of another. In the Aristote-lian view, this must be the case in a reciprocatingmarket transaction for then the commodities of-fered on both sides are equal. If there is gain onone side, it must then be offset by a loss on theother. Aristotle did not realize that when two par-ties trade voluntarily, both are "trading up," soto speak, i.e., they are both exchanging somethingthey value less for something they expect will bemore valuable to them. Thus in a free market trans-action, both parties expect to gain and both willgain as a result of the trade—barring force, fraudand human error. Aristotle's explanation of marketvalues persists to this day and is still influential,in spite of the logic of modern subjective valuetheory which has shown up its error by demon-strating that both parties to a trade can be, andusually are, gainers (Units 3, 6 and 12).

4. How has economic knowledge and understand-ing advanced over the years? Ideas are passed onfrom generation to generation by "teachers" inthe broadest sense of the word—anyone who tellsor shows another something he or she has learned.From one experimenter-learner-thinker-teacher tostudents, who become in turn experimenters-learn-ers-thinkers-teachers themselves, ideas are spreaddirectly in conversation, in writing and by any andall other means of communication.

Persons who hold similar views in any field areconsidered members of the same "school" ofthought. Anyone with convictions who is persua-sive enough may try to attract others to his wayof thinking and in this way, a new "school" ofthought may come into existence. The views of the

adherents of a specific "school" are that"school's" doctrines. The doctrines of some phil-osophical or ideological "schools" are based on acorrect understanding of reality. However, menmake mistakes, thus there is no guarantee thattheir ideas will always be correct. Thus, many"schools" of thought whose doctrines are poorlyconceived and based on only partially correct oreven completely false interpretations of reality,often attract adherents and have significant influ-ence. It is important, therefore, to analyze anytheory carefully so as to be better able to distin-guish truth from falsehood, logic from illogic, morehelpful interpretations of reality from less helpfulones. Only in this way may fallacious ideas begradually weeded out and those found consistentwith reason, logic and the course of events may beorganized into a scientific body of knowledge. Inthis process, the "dwarf" who deals with ideas de-veloped earlier has a "headstart" over intellectual"giants" of the past who developed from scratchthe ideas the "dwarf" uses as tools to build on.

The first major economic "school" of thought todevelop out of the ideas of ancient Greece andRome, was Scholasticism. In the Middle Ages, St.Thomas Aquinas (1225-1274) took Aristotle's ideaof market values—namely that the goods or servicesexchanged for each other in a voluntary trademust be in some way "equal"—and went one stepfarther. Aquinas claimed that "equality" on bothsides was necessary if there was to be any kind ofjustice. He developed the "just price" idea whichhe considered consistent with "natural law." Ac-cording to this thesis, a price may be too high, ortoo low, to be "just." As Aquinas phrased it:

If the price exceeds the value of a thing, or con-versely if the value of a thing exceeds the price, justiceis violated.

Reasoning from this thesis, Aquinas and the Scho-lastics of the Middle Ages argued that charginginterest on a loan was "wrong" and they de-nounced interest-taking as "usury." Not until themodern subjective value theory was developed wasthe fallacy in this reasoning pin-pointed and ex-posed; there is nothing "wrong" with charging in-terest on a loan in a free market for the amount ofinterest is the outcome of voluntary bidding amongwould-be borrowers and would-be lenders (Unit10). Nevertheless, a critical attitude towardscharging interest lingers on. There is still a ten-dency on the part of many persons to frown on anylender who asks a borrower to pay what seems tothem a "high" interest rate on money.


The next significant economic "school" ofthought was Mercantilism, which flourished aboutthe 17th century. Its leading spokesmen wereThomas Mun (1571-1641), Sir William Petty(1623-1687), Sir Josiah Child (1630-1699) and SirDudley North (1641-1691). The Mercantilists rea-soned that the more money (i.e., gold and silver)an individual had, the wealthier he was. Similarly,the more gold and silver there was within a na-tion's borders the wealthier that nation would be.In the eyes of these men, therefore, the goal oftrade was to improve the nation's wealth and thefortune of its king. As a result the Mercantilists'concern was the nation's "balance of trade" andthe "terms of trade." The "national goal" shouldbe to export goods and import the precious metalsand metallic money.

The Mercantilists failed to understand the fun-damental economic lessons of this SYLLABUS. Theydidn't realize that the purpose of production andtrade was consumption, that people work, produceand trade in order to obtain things to consume andenjoy. They failed to realize that money was only atemporary expedient, a "trading commodity," amedium of exchange that people want to have onhand only for a time until it seems desirable tospend it. They thought money was the goal of pro-duction and trade. Therefore, they equated wealthand money, not wealth and increased quantitiesof consumers' goods and services, and they advo-cated direct government action to influence the"balance of trade" and encourage the import ofgold and other precious metals, which they con-sidered the most valuable goods in the world. Thusthey advocated regulating industry and trade bypolitical privilege and subsidy on occasion, to en-courage the export of commodities and foster theimport of metallic money. As Thomas Mun wrote:

Behold then the true form and worth of forraignTrade, which is, The great Revenue of the King, Thehonour of the Kingdom, the Noble profession of theMerchant, The School of our Arts, The supply of ourwants, The employment of our poor, The improve-ment of our Lands, The Nurcery of our Mariners, TheWalls of the Kingdoms, The means of our Treasure,The Sinnews of our wars, The terror of our enemies.

In the 17th and 18th centuries, a new economic"school" of thought came to the fore—the Physio-crats. To a considerable extent the Physiocrats re-lied on the philosophical ideas of John Locke(1632-1704), spokesman for "natural law," limitedgovernment and the protection of private property.Among the leading Physiocrats were Francois

Quesnay (1694-1774) and Anne Robert JacquesTurgot (1727-1781). The Physiocrats held that na-ture, the "natural" and "natural law" were good.To live close to nature, to till the soil and to engagein agriculture were more noble pursuits thanmanufacturing. Many people today have similarideas which no doubt contributes to the emotionalattachment so many of them have for agricultureand the "family farm." Because of their venerationfor farming as a way of life, the Physiocrats fa-vored government aid to agriculture. Otherwisethe government should not interfere, economic ac-tivities should be allowed to develop "naturally."

5. From what economic "school" of thought didmodern economics originate? Modern economicsprobably really started in the 18th century withthe "Period of Enlightenment" and the develop-ment of the "Classical School of Economics."David Hume (1711-1776), the leading philosopherof that time, wrote many volumes, still worth read-ing, on the nature of the individual, the role of gov-ernment ethics and moral principles. A youngfriend and student of Hume's philosophy, AdamSmith (1723-1790), often called the "first econo-mist," made the first extensive analysis and com-prehensive study of economic activity—An Inquiryinto the Nature and Causes of the Wealth of Na-tions (1776), usually referred to simply as TheWealth of Nations. He explained fairly satisfactor-ily one of the two basic economic enigmas. Al-though he didn't understand the reasons—whichwere not to be fully explained for another centurywhen the subjective value, marginal utility theorywas elaborated by the founders of the "AustrianSchool of Economics"—he pointed out that produc-tion and trade proceed in a more or less orderlyfashion without the need for an overall dictatoror planner. The businessman is led as if "by an in-visible hand to promote an end which was no partof his intention." The baker could judge pretty wellhow many loaves of bread to bake each day. Theshoemaker could estimate fairly well how manypairs of shoes and what sizes people would ask for.No Philosopher King or dictator had to tell themwhat to do. Businessmen were fairly flexible; itwas in their personal interest to shift and juggletheir production plans continually and adapt tochanging market conditions and market prices.Thus, a tendency always prevails on the markettoward "equilibrium" between the supply of goodsavailable and the demand for them by consumers.Smith's reasoning led him to advocate laissez faire,French for "leave the people alone," or let them


"do their own thing." Smith recognized that Mer-cantilist interventionist policies had frequentlycaused economic bottlenecks, surpluses of somethings, shortages of others, so he favored govern-ment non-interference. In the view of Adam Smith:

The statesman, who should attempt to direct pri-vate people in what manner they ought to employ theircapitals, would not only load himself with a most un-necessary attention, but assume an authority whichcould safely be trusted, not only to no single person,but to no council or senate whatever, and which wouldnowhere be so dangerous as in the hands of a man whohad folly and presumption enough to fancy himself fitto exercise it.The Wealth of Nations (Modern Library ed., 1937),

p. 423

Smith and his colleagues in the Classical Schoolfailed, however, to explain satisfactorily the othereconomic enigma—the reason for market prices.They couldn't understand why some very usefulthings, things which were needed to sustain lifeitself—air, water, food—were not as valuable in ex-change as were many luxury items—gold, silver,diamonds—which were of little use to people exceptperhaps for ostentatious display and adornment.The inability of the Classical economists to explainthis apparent "paradox of value" was due to theirconsidering consumer wants and consumer goodsin categories, in the aggregate, rather than in units.They failed to realize the importance of the factthat potential traders always consider wants andgoods individually in their minds, in "bite-sizedpieces," that individuals contemplating a trade arealways weighing mentally the relative values tothem personally of one more, or one less unit of aspecific good or service at a definite place andtime. They lacked an understanding of the sub-jective value theory which lies at the crux of theexplanation of market prices. They also failed tosee the importance of the concept of the "margin,"the invisible line which separates in a person'smind the units of a good or service he or she iswilling to relinquish from those they are not, andthe units of a good or service they consider worthacquiring from those that are not.

It took thinkers and economists another centuryto come up with the subjective value, marginalutility theory (Unit 6). Today, by being able to ex-plain market prices as Smith and the other Clas-sical scholars could not, we are like dwarfs on theshoulders of later intellectual giants who built onthe contributions of Adam Smith and his col-leagues. Thus, it is possible for us to surpass their

understanding and to explain market prices moresatisfactorily than they could. Nevertheless, theirideas are important for the history of economicthought. So a few more comments are includedhere about some of the leading exponents of the"Classical School of Economics." Among thosewho helped to elaborate the theories Smith intro-duced were Jeremy Bentham (1748-1832), Thom-as Malthus (1766-1834), David Ricardo (1772-1823), James Mill (1773-1836) and his son JohnStuart Mill (1806-1873).

Jeremy Bentham's views on value, utility andutilitarianism became stepping stones from thedoctrines of the Classical economists to those ofthe modern subjective value, marginal utilityeconomists of the "Austrian School."

Thomas Malthus wrote an important essay onThe Principle of Population, for which he wascriticized for his pessimism in anticipating "pop-ulation explosions" with starvation and epidemicsas inevitable because the then existing agriculturalmethods were inadequate for feeding many morepeople. However, his explanations did call atten-tion to the economic "law of diminishing returns,"the fact that the yield of any single piece of land orother factor of production begins to decline once itpasses its productivity peak.

David Ricardo made a major contribution to ex-plaining economic arrangements in setting forththe doctrine of "comparative advantage" (Unit 12& GLOSSARY). Almost everyone can recognize thatpersons may gain by exchanging things they canproduce easily and inexpensively for things theyfind more difficult to make for themselves. Ricardoexplained that both parties can gain even if oneperson is more efficient, more productive and morecapable in every respect than the other. The moreproficient person gains from a trade with someoneless capable, because the goods and services he re-ceives from the less advantaged person save himthe time and trouble of producing them for him-self, thus permitting him to specialize in the thingshe does still better. Both parties to such a trade—the more proficient and the less proficient also—have a relative "comparative advantage" in trad-ing with each other. The "law of comparative ad-vantage" helps to explain the gains to be derivedfrom trading with others, both within and acrossnational boundaries, irrespective of the relativewealth, economic status or abilities of the partiesconcerned. It was a step toward the realization thatself-interest guides people—the orders of dictators


aren't necessary—to take advantage of trading op-portunities.

James Mill helped make Smith's views betterknown, though he himself contributed nothing sig-nificantly new to economics. His influence wasfelt primarily through his son, John Stuart Mill.

John Stuart Mill was a genius and a prodigiousstudent. Before he was six he knew many lan-guages and by the time he was twelve, he wasreading and writing philosophical treatises. Hehad a "nervous breakdown" when he was 20, ap-parently due to the intense pressure to please hisfather and succeed in his studies. When about 26years old, he met and fell in love with Harriet Tay-lor, a young married woman and mother of twochildren. For twenty years the two were closefriends, working and frequently traveling together,apparently with Mr. Taylor's consent. HarrietTaylor nursed her husband faithfully during hislast six months, when he was dying of cancer. Aproper two years after Mr. Taylor's death, Mill andHarriet Taylor married. By then, both were suffer-ing from ill health and they had only a few years ofmarried life before she died. He lived about 20years longer, served in the British Parliament andcontinued to work and write. His The Principles ofPolitical Economy, widely used as a textbook formany years, even decades, had a tremendous in-fluence on economic thought. He wrote a popularessay in the field of political economy, On Liberty,still widely read today and he also producedseveral important treatises on logic and philos-ophy. He was a serious student and a prolific au-thor throughout his life.

Many of the ideas of the Classical economistshave stood the test of time. Smith, Bentham, Mal-thus, Ricardo and the two Mills were undoubtedlyintellectual "giants." However, by "standing ontheir shoulders," so to speak, later economistswere able to see farther and more clearly. As aresult they succeeded in time in improving on theirrudimentary theories. Today, by "standing on theshoulders" of those later intellectual giants, wetoo are in a position to recognize some of the flawsin the Classical theories of Smith, Bentham, Mal-thus, Ricardo and the Mills.

The spokesmen of the Classical School of Eco-nomics recognized three distinct categories ofeconomic factors of production—land, labor andcapital—based primarily on their physical char-acteristics. Yet physical traits have no significancefor economics; for economics the important thingis the subjective value individuals attach to an ob-

ject for some specific purpose. (See "Objectivecharacteristics" and "Subjective value" in theGLOSSARY.) Also, the failure of the Classical econo-mists to recognize the importance of subjective(personal) values and consumer sovereignty ledthem to attribute selling prices to production costsand to credit labor almost exclusively with theresponsibility for a finished product. Yet in view ofthe "niggardliness" of nature, they consideredpretty slim the chances workers had of earningmuch more in the long run than their basic subsist-ence. This pessimistic doctrine, that wages wereseverely limited to what was required for baresurvival, was later termed the "iron law of wages."The Classical economists' pro-labor bias, combinedwith their crude labor theory of value, led themalso to neglect the importance of the human mindand ideas in planning what and how to produce.They also failed to recognize the significance oftime, the fact that all actions, production and con-sumption, take place over time. These flaws inClassical doctrines led many of their followers offat tangents. Probably the most noted student ofthe Classical theories to be led astray by many ofthe "School's" wrong ideas was Karl Marx.

Karl Marx (1818-1883) was strongly influencedby the philosophical ideas of Georg Wilhelm Fried-rich Hegel (1770-1831). Marx's views on social or-ganization came from early socialist thinkers, suchas Jean Charles L. Sismonde de Sismondi andComte Henri de Saint-Simon. He was bitterly crit-ical of both (a) those who advocated a "utopian"socialism and (b) those who favored capitalism.But Marx also studied thoroughly the doctrines ofthe Classical School and many of his economicideas were derived from the errors of Adam Smithand David Ricardo. Marx elaborated the ClassicalSchool's "labor theory of value" representingprices as depending almost exclusively on theirlabor costs. His labor theory of value was muchmore explicit than Smith's or Ricardo's. Marx wenton to say that labor was the sole source of a prod-uct's market value and that anyone who receivedinterest on savings or profits on investments was"exploiting" the workers, "stealing" from themsomething to which they, the workers, were en-titled. Marx also accepted Smith's concept of thethree basic factors of production—land, labor andcapital. Variations of these Marxian doctrines per-sist in the minds of many persons today, whowould be astonished indeed to learn that quite afew of their views on economics were developedby the "Father of Communism."


6. Who were the economists who helped tobridge the gap from the labor theory of value tosubjective value, marginal utility theory? AdamSmith had described two kinds of value—"value inuse" and "value in exchange." The market price ofa good or service was derived from one or theother, or a mixture of the two. This lack of clarityled into a dilemma. Smith could not explain whya commodity with a high use value, such as coalor iron, had a low exchange value as comparedwith less "useful" commodities like gold or dia-monds. Nor could other economists of the Clas-sical School explain this "paradox of value." How-ever, a few writers were beginning to hint at thecorrect explanation. We shall mention a few ofthem and cite several short quotations:

Nicholas Barbon (c. 1640-1698)"The value of all Wares arise from their Use;Things of no Use, have no Value, as the Eng-lish phrase it, They are good for nothing."

Richard Cantillon (1680P-1734)Abbe E. B. de Condillac (1715-1780)

"A thing does not have value because of itscost, as some suppose; but it costs because ithas value."

James Maitland, Lord Lauderdale (1759-1839)Johann Heinrich von Thtinen (1783-1850)Richard Whately (1787-1863)

"It is not that pearls fetch a high price becausemen dive for them; but on the contrary, mendive for them because they fetch a high price."

Nassau William Senior (1790-1864)Samuel Bailey (1791-1870)William Forster Lloyd (1795-1852)

"Let us now inquire, what happens with re-spect to value, at the time when the demand orwant is thus fully satisfied? It will be foundthat, in the case of every commodity, its valuevanishes at the very instant of satisfaction."

Antoine Augustin Cournot (1801-1877)Antoine-Auguste Walras (1801-1866)—father ofLe*on Walras

"The scarcity (rare'te') of certain useful objects'makes them capable of being appropriated,and thus value is an idea prior to that of prop-erty.'"

Mountifort Longfield (1802-1884)"When an exchange is made therefore it maybe fairly presumed that each party to it hasgained something, by receiving for the articlehe disposed of something. . . . which is, rela-tive to him, of more utility."

Hermann Heinrich Gossen (1810-1858)Gossen came close to describing what latereconomists called "marginal utility," for he de-scribed the principle of diminishing utility andshowed that "subjective (use) value attachesto a good only when the supply is smallerthan the quantity demanded." However, hisbook had little sale and, in disgust, he askedthe publisher to destroy all copies. Only bychance did his views, written in German, be-come available to English readers throughWilliam Stanley Jevons, about whom we shalllearn more later.

NOTE: If local libraries are amply enough stockedwith histories of economic thought and encyclopedias,some students might choose to write term papers onthese forerunners of modern subjective value econom-ics, rather than on a single economist or economic"school" of thought.

A Frenchman of this period—Jean Baptiste Say(1767-1832) deserves special notice. His Treatiseon Political Economy (first edition, 1803), widelyused in English translation as a textbook, wastremendously influential in the English-speakingworld. Adam Smith had correctly pointed out that"consumption is the sole end and purpose of allproduction," that people don't work for the loveof work but because they want what they can getby working—consumers' goods and services or pur-chasing power to obtain consumers' goods and ser-vices. Say expanded on this idea. Not only wasconsumption the goal of production, he argued,but this gave assurance that there was no need tofear general economic "over-production," i.e., ageneral surplus of goods and services, with a"shortage of money" in the economy for buyingthe goods and services that had been produced—assome earlier thinkers had held was possible. Saypointed out that there could be no general "short-age of money" in an unhampered market economybecause money prices tend to adjust. Thus pur-chasing power stretches, or shrinks, to make anyquantity of money suffice.

Sales cannot be said to be dull because money isscarce, but because other products are so. There is al-ways money enough to conduct the circulation andmutual interchange of other values, when those valuesreally exist. . . . A product is no sooner created, thanit, from that instant, affords a market for other prod-ucts to the full extent of its own value. . . . Thus,the mere circumstance of the creation of one productimmediately opens a vent for other products.


The quantity of money in a society isn't the cru-cial factor for its economic well-being; it is the sup-plies of goods and services produced that are im-portant and that create the purchasing power forconsumers' goods and services. The more goodsand services produced and offered on the market,the more purchasing power the producers of thosegoods and services will have, for the goods andservices a person produces give him leverage (bar-gaining power) on the market for obtaining thevarious things he wants. Thus the production ofsomething creates at the same time a market forthings other people have produced. A producermay not always receive as much in trade for hisproduce as he wojild like; he may not even receiveenough to cover all the costs incurred in produc-tion; but the goods he produces that other peoplewant furnish him with something to trade withthem for money or whatever else he chooses. It isnot the quantity of money that is important. Moneyis merely a temporary way station, so to speak,between production and consumption, a conve-nient "medium of exchange" that makes transac-tions easier than they would have been underbarter. By pointing out that everything producedcreates a demand for other goods and services onthe market, Say's "law of markets," as it is called,successfully refuted the idea many people heldthat a widespread "shortage of money" may leadto a general slowdown in business. Production it-self represents purchasing power to its producerand thus creates a demand for other goods andservices on the market.

Another Frenchman of the early 19th centurywho deserves special mention is Frederic Bastiat(1801-1850). Bastiat was impressed by the writ-ings of Say. He became a journalist and a memberof the French Chamber of Deputies. He was astrong free trader, an ardent anti-socialist and aprolific pamphleteer. Tariffs on imported goodswere his special target—see "The Candlemakers"Petition" (Reading No. 55). Through his clear ex-planations of economic theory and political econo-my, he was influential in the 19th century freetrade movement. The short excerpt on the pro-visioning of Paris, reprinted from one of his essaysin Unit 5 under SUGGESTED ACTIVITY NO. 2, illus-trates his skill in describing how economic activ-ities proceed in an orderly fashion in a marketeconomy without the need of general supervisionor central planning. His writings, now available inmodern colloquial English translations, havegained a new audience in recent years among

persons interested in free market economics andthe limited government philosophy.

7. Discuss the origins of the modern subjectivevalue, marginal utility theory of economics. Aswe have seen, the 19th century was a time of intel-lectual ferment. Many ideas about political econo-my were being vigorously discussed throughoutthe civilized world. Thinkers were pondering, lec-turing, listening to lecturers, conferring at eco-nomic meetings, talking informally in salons, argu-ing with one another in coffee houses and writingbooks about their explanations for market valuesand other economic phenomena. In this stimulat-ing intellectual climate, three men, in three differ-ent countries, each working independently ap-parently without any knowledge of what the othertwo were doing, developed at about the same timethe subjective value, marginal utility theory. Thenames of these three men and the titles of thebooks in which they presented this idea are:

Carl Menger, an Austrian—his Principles ofEconomics was written and published in Ger-man in 1871.

William Stanley Jevons, an Englishman—hisThe Theory of Political Economy also appearedin 1871.

L6on Walras, a native of France living inSwitzerland—his Theory of Exchange, written inFrench, was published in 1874.

Each of these three men, intellectual giantsthemselves, stood on the shoulders of earlier intel-lectual giants whose ideas contributed to their ownunderstanding. Reasoning as logically as theycould along the lines anticipated by their pred-ecessors and by the forerunners of the concepts ofsubjective value and marginal utility, each of thesethree men reached essentially the same conclu-sion—namely that economic values rest on the ideasof individuals concerning the importance they at-tach to specific units of particular goods or ser-vices.

The more urgently a person wants something,the more he values it, the more he will be willingto offer for it in trade. The market is a compositeof countless such acting individuals, each thinking,choosing and seeking his or her various personalgoals and values. Market prices evolve out of theinterplay of countless such persons, each acting onthe basis of his or her individual scale of values.The more limited the quantity of anything and thegreater the relative demand for each unit the rela-tively higher price consumers will be willing to


pay for it. In their desire to earn profits out of theirown personal interest, producers try to satisfy themost urgent demands of consumers for variousgoods and services. To do this successfully andstay in business, they must compete with otherproducers over and over again on the market forthe purchases of consumers. At the same time theymust keep their production costs lower than theprices consumers are willing to pay. Thus, in onefell swoop, by recognizing the significance of in-dividual ideas and values in determining marketprices, the theories derived from the work of thesethree men explained (a) the origin of market valuesand (b) the reasons why economic production andtrade proceed in a more or less orderly fashionwithout any overall direct or conscious super-vision.

8. How has the work of Menger, Jevons andWalras influenced the later development of eco-nomics? Over the century since the appearanceof their books on subjective value theory and mar-ginal utility, the science of economics has under-gone a revolution. The concept of marginal utilitybroadened the subject matter of economics andaltered its methodology. However, the differentapproaches the three men used have led to dif-ferent economic "schools" of thought. Jevons andWalras tried to express marginal utility in math-ematical terms. Thus, their work inspired several"schools" of mathematical economists who havecompiled reams of statistical data in the attemptto measure economic phenomena and to forecastthe future. On the other hand, the Austrian CarlMenger, used the "literary" approach exclusively.He relied on logic, reasoning from fundamentala priori assumptions to explain value theory, mar-ginal utility and other economic phenomena. Thisapproach—the one used throughout this SYLLABUS—led to the "Austrian School of Economics," sonamed in honor of Menger and other prominentspokesmen of that "school" who were natives ofAustria (Austria-Hungary before World War I).

As a result of the work of Jevons and Walrasthe number of "mathematical economists" andstatisticians has multiplied. They assemble math-ematical data, draw charts and graphs and com-pile statistical tables in the hope that these willenable entrepreneurs, savers, investors, traders,businessmen and government officials to antic-ipate the future more correctly. However, statis-tics are necessarily data based on past events.Statistics are always history. Their value to any-one depends on the way they are interpreted and

the interpretation depends on the ideas of theinterpreter as to how long the trends revealed bythe statistics will continue. No amount of statis-tical data can predict if, as and when a change intrends will occur.

Moreover, statistics are usually totals and aggre-gates, frequently pertaining to the activities ofgroups, associations and communities of people,not individuals. Thus, the statistical methodtends to obscure the individual and his evaluationof specific units of a good or service, to whichMenger, Jevons and Walras directed attention asbeing responsible for market prices and economicarrangements. Therefore, by trying to use the sta-tistical method in economics, the key that unlockedthe door to explaining market prices and all othereconomic phenomena in the first place is buriedunder stacks of statistics.

This entire SYLLABUS is based on the theories de-veloped by Carl Menger, especially as they havebeen elaborated by his most noted successors inthe "Austrian School"—Eugen von Boehm-Bawerkand Ludwig von Mises. However, a few commentsshould be included here about some of the moreprominent individuals and "schools" which haveadopted the statistical method in the attempt toexplain economic phenomena:

Alfred Marshall (1842-1924)—an Englishmanwho taught for many years at Cambridge Univer-sity. Marshall attempted to combine the teach-ings of the Classical economists and the con-cept of marginal utility with mathematics anddifferential equations. His teachings are thebasis for the doctrines of the "Neo-classicalSchool of Economics."Wesley Clair Mitchell (1874-1948)—an Amer-ican, research director for many years at theprominent National Bureau of Economic Re-search, an institution dedicated to accumulatingstatistics on many aspects of economic life inthe United States in the hope eventually of beingable to explain economic phenomena and toforecast business fluctuations.John Maynard Keynes (1883-1946)—an English-man whose influence on the economic policiesof governments in recent decades has been tre-mendous. His major work was The General The-ory of Employment, Interest and Money (1936).His thesis was that certain rigidities and ineq-uities are inherent in free enterprise unless gov-ernment interferes to manipulate the quantity ofmoney and stimulate consumer spending. Thistheory has led to inflation and many government


spending programs, some of which will be dis-cussed in Unit 14.Frank H. Knight (1885-1972)—an American, pro-fessor for many years at Chicago University. Al-though an advocate of free market prices andwages, he and his colleagues in the "ChicagoSchool of Economics" have favored governmentintervention to compensate for what they see asinjustices and inequities arising out of the freemarket system. Thus, the "School's" most artic-ulate spokesmen have advocated that govern-ment (a) expand the quantity of money at asteady rate per year to maintain "stable prices"as production increases, (b) enact a "negativeincome tax" to replace the existing hodgepodgeof welfare programs and (c) regulate some eco-nomic activities to produce certain desired re-sults which they maintain may be statisticallydetermined with some assurance in advance.

9. Why was the development of the subjectivevalue, marginal utility theory an important mile-stone in the history of economic thought? It rep-resented a completely new, revolutionary approachto economics. For the first time, the individualactor himself became the unit with which econom-ics was concerned. His actions, his responses tospecific units of particular goods or services at cer-tain places and times, were recognized as the keyto explaining market phenomena. At every in-stant, an individual has in his mind a mental cut-off point, an invisible dividing line which separatesthe units of a good or service that he considersworth striving for from those that are not, and theunits of a good or service that he wants to retainfrom those he is willing to relinquish. The logicaland consistent application of the theory of subjec-tive value and the concept of the "margin"changed the nature of the subject matter of eco-nomics. Economics had been concerned previouslyonly with physical goods and services and themeans men used for the satisfaction of their var-ious material wants. It had dealt with the relativelynarrow fields of monetary transactions—produc-tion, commerce, trade. With the recognition of theimportance of the individual's personal (subjec-tive) values and the utility of the marginal unit thescience of economics was broadened to encompassall human (purposive/conscious) actions. It be-came a study of any and all the peaceful (non-vio-lent) means men use to attain any and all of theirvarious ends—material, primitive, physical, base orimmaterial, ethical, cultural and higher. The pur-

posiveness of their actions is the important thing.With this shift in emphasis, tremendous impor-tance attaches to the role of ideas in motivatingmen to act. The full significance of this intellectual"revolution" is probably still to be revealed byfuture economists. However, it is hoped that thisSYLLABUS contributes in part to explaining clearlythe significance of the subjective value, marginalutility, theory by showing how the ideas, values andactions of individuals account for all economicphenomena.

GLOSSARY WORDS(For definitions, see GLOSSARY, p. 223ff.)

AUSTRIAN SCHOOL OF ECONOMICSBALANCE OF TRADECHICAGO SCHOOL OF ECONOMICSCLASSICAL SCHOOL OF ECONOMICSCOMMUNISMCOMPARATIVE ADVANTAGEECONOMIC "SCHOOL" OF THOUGHT"IRON LAW OF WAGES""JUST PRICE" IDEALABOR THEORY OF VALUELaissez faireMARKETS, SAY'S LAW OFMERCANTILISMNEO-CLASSICAL SCHOOL OF ECONOMICS"NIGGARDLY," "NIGGARDLINESS" OF NATUREPARADOX OF VALUEPHYSIOCRATS

PURCHASING POWERSCHOLASTICISM

SOCIALISMSUBJECTIVE VALUE"USURY"VALUEVALUE THEORIES

"WELFARE ECONOMICS"


Articles

In the BASIC READER:8. "Freedom's Theory of Value," Leonard E. Read

21. "Where Karl Marx Went Wrong," Samuel B.Pettengill

55. "The Candlemakers' Petition," Frederic Bastiat°57. "On Foreign Trade," David Ricardo°61. "The Formation and Function of Prices," Hans

F. Sennholz°62. "The Consumer Theory of Prosperity," John

Stuart Mill°63. "Of the Demand or Market for Products," Jean

Baptiste Say


*64. "Marx's View of the Division of Labor," GaryNorth

°65. "The Fallacy of 'Intrinsic Value'," Gary North•66. "The Man Who Answered Marx," Dean Lipton68. "The Communist Idea, I," Karl Marx

°75. "Food Control During Forty-six Centuries,"Mary G. Lacy

76. "How to End Poverty," Dean Russell°79. "Progress or Regress?" Hans F. Sennholz

Additional titles:°"The Austrian Economists" (1891), Eugen von

Boehm-Bawerk—in Shorter Classics of Boehm-Bawerk (Libertarian Press, 1961)

"Capitalism and Morality," Edward Coleson—in TheFreeman, October 1973

"Marx, Mises and Socialism," Dave Osterfeld—in TheFreeman, October 1974

"Who is a Teacher?" Leonard E. Read—in Notes fromFEE, March 1974

Books

Ballve1, Faustino. The Essentials of Economics(Van Nostrand, 1963; FEE, 1969)

* Hayek, F. A. The Counter-Revolution of Science(Free Press of Glencoe/Macmillan, 1952/1964)

°Hazlitt, Henry. The Failure of the "New Economics"(Van Nostrand, 1959; Arlington House, 1973)

°Kirzner, Israel. The Economic Point of View (VanNostrand, 1960)

°Mises, Ludwig von. The Historical Setting of the Aus-trian School of Economics (Arlington House, 1969)

* North, Gary. Marx's Religion of Revolution (CraigPress, 1968)

Roche, George C , III. Frederic Bastiat: A Man Alone(Arlington House, 1971)

NOTE: For additional material on the history of eco-nomic thought, several general encyclopedias willprobably be available in library or classroom. As tospecific economic encyclopedias, the InternationalEncyclopedia of Social Science (17 volumes publishedby Macmillan & Free Press, 1968) and its predeces-sor, the Encyclopedia of the Social Sciences (15 vol-umes published by Macmillan, 1937) are both massiveand expensive. Many histories of economic thoughtare in print—some good, some bad, some indifferent.The histories of these men are among the better ones:John Fred Bell, Edwin Cannan, Alexander Gray, LewisH. Haney, John Kells Ingram, W. E. Kuhn, WilliamA. Scott and Henry W. Spiegel. Especially helpful isthe anthology of essays about various economistswritten by other economists, edited by Henry W.Spiegel—The Development of Economic Thought:Great Economists in Perspective (New York: JohnWiley & Sons, Inc., 1952) and The Critics of KeynesianEconomics, edited by Henry Hazlitt (Princeton, N.J.:D. Van Nostrand, 1960). Some writings of the morenoted authors in the field should also be available—notably those of Adam Smith, David Ricardo, JohnStuart Mill, Karl Marx, Alfred Marshall, John MaynardKeynes and, of course, the "Austrians"—Carl Menger,Eugen von Boehm-Bawerk and Ludwig von Mises—onwhose contributions this course has been based. Ex-cerpts from the works of these men are often avail-able in anthologies. See also miscellaneous biogra-phies (books and encyclopedia articles) about individ-ual economists, schools of thought and economic doc-trines.

14. CAPITALISM, THE HAMPERED MARKETECONOMY, SOCIALISM (COMMUNISM)


1. The teacher will find current newspapers andmagazines increasingly helpful in connection withthis Unit. Both teacher and students should bringto class articles dealing with economic activitieshere and abroad—production, construction, trade,merchandizing, retailing, etc. In this Unit the em-phasis will be on the interaction of governmentand individuals, i.e., the effects of governmentintervention, government controls, regulations andplanning on the actions of individuals and, thus, onfreedom of choice and production. Have the stu-dents sort the articles according to country first ofall. Then have them sort the articles about eco-nomic activities in the U. S. into the followingthree categories, each to be discussed in this Unit:

a. Articles about privately-owned and operatedenterprises—the development of resources, in-ventions, plans for production, projects, con-struction, merchandizing, trade, etc. and pro-posals for introducing new ideas, schemes andchanges.

b. Articles about government-operated enterprises—i.e., public hospitals, clinics, housing, schools,buses, railroads, employment offices, lendingagencies, storage facilities for farm products,minerals and other resources, race tracks, print-ing offices, etc.

c. Articles about government regulation and con-trol of privately-owned businesses—i.e, reportsthat a firm must have a government quota orlicense, fill out government forms, comply withrestrictions in land use, follow local buildingcodes, use certain procedures in dealing withworkers and would-be workers, pay certaingovernment-fixed prices, seek government ap-proval to expand, merge or sell a business, andso on.

2. If the students are especially sharp, it shouldbe feasible to use the pricing auction problems

given in Unit 6 (pp. 37-43) to illustrate the effectsof government interventions. Reproduce copies ofProblems A (p. 38) and B (p. 40) to distribute tothe students. Ask them to recalculate the marginswithin which the free market price would fall ineach case. (See pp. 39 & 41 for answers and ex-planations.) Then have the students calculate theprices and the number of transactions which wouldbe made under the conditions described in thediagrams that follow:

a. if taxes were levied (p. 176)b. if price ceilings were imposed (pp. 178 & 179).

Solutions and explanations follow the diagrams.3. To explain the effects of various government

interventions on (a) prices and (b) number of trans-actions, conduct another fictitious auction in theclassroom, according to the procedure described inUnit 6. Once the "market price" for a particularitem is determined, levy an imaginary sales tax,tariff or impose a ceiling on the price sellers maycharge. Then ask the students—would-be buyersand owners (potential sellers)—to bid once more onthe basis of their original subjective value scales,but this time in the face of the specified govern-ment restrictions. The results should demonstratethat such government interventions (a) reduce thenumber of voluntary transactions that may bemade and/or (b) raise prices, thus making it moredifficult or more costly for traders and would-betraders to improve their respective situations. Seepp. 179-180 of this Unit for further explanationsof these results.

4. Student reports previously assigned on booksin this area might be presented to the class orturned in at this time. Ask each student reviewerto notice whether the book describes persons whowere free to decide how to use available resources.Or were their choices restricted? If so, how andwith what results? The more such details they men-tion, the better. Especially suitable for discussion

175


in connection with this Unit are the followingbooks (see Bibliography, pp. 9-10):

1. Bastiat, Frederic— The Law; Economic Sophisms;"What is Seen and What is Not Seen"

2. Campus Studies Institute— The Incredible BreadMachine

3. Fleming, Harold M.—States, Contracts and Prog-ress

°4. Hayek, F. A.—The Road to Serfdom5. Hazlitt, Henry—Man vs. the Welfare State

°6. Mises, Ludwigvon—Bureaucracy; Planned Chaos7. Read, Leonard E.—The Free Market and Its En-

emy

5. This Unit offers another opportunity for alocal businessman to speak to the class or for stu-dents to report on interviews with local business-men. On this occasion, the local businessmenshould be encouraged to explain how they planproduction for the market, what type of informa-tion they look for, and how they adjust to new con-ditions. How do they learn about and take accountof (a) recent consumer purchases in their fields ofproduction? (b) potential shifts in consumer de-mands? (c) changes in the costs of necessary rawmaterials? (d) introduction of new materials ormethods in their fields? (e) new potential sourcesof supplies? (f) possible techniques for cuttingcosts and/or improving quality of output? (g)

daily requirements of plant maintenance? (h) thethreat of new government regulations or controls,etc.? How much flexibility do they have to makechanges as necessary? Ask them to discuss any re-strictions there may now be on their freedom to usetheir factors of production—land, plants, equip-ment, energies, time and capital—to adjust to newconditions as they arise. How much time must theyand/or their employees spend in complying wthgovernment regulations? How much considerationmust they give to government restrictions of vari-ous kinds—on hiring? firing? determining wagesand/or hours of work? controlling product quality?using land? introducing safety devices? labeling?pricing? etc.?

NOTE: Businessmen are often unaware of governmentinterventions as such. They must accept the laws onthe books when they start in business and considerthem along with all other factors when making theiroriginal plans. The drive to survive economically com-pels them to adjust to changes—step-by-step, almostwithout realizing what they do. Only when some newgovernment intervention seriously affects their opera-tions do they become aware of restrictions on theirfreedom to maneuver. However, every interferenceby government in the market—large or small—tends tohamper entrepreneurs from exercising their best judg-ment and leads in time to economic distortions, dis-crepancies between supply and demand, and so on.

PROBLEM A—EFFECT OF TAXES (Answer)

Assume the following subjective valuations for similar taxis:

OWNERS OF 13 TAXIS

Ace'sBag'sCod'sAce'sDove'sEby'sBag'sAce'sFork'sGuy'sAce'sBag'sDove's

1st1st1st2nd1st1st2nd3rd1st1st"4th3rd2nd

$4,000.3,800.3,750.3,600.3,500.3,450.3,380.3,360. .3,330.3,250"'3,050.2,800.2,600.

POTENTIAL BUYERS


3rd2nd2nd2nd1st2nd1st"1st1st1st

$2,750.2,920.3,080.3,130. ,3,400. £3,550. \3,680.3,780.4,100.4,250.

How many will be traded: 1. under conditions of free market competition? 62. if there is a sales tax of $50? 53. if there is a sales tax of 10%? 4

14. CAPITALISM, THE HAMPERED MARKET ECONOMY, SOCIALISM (COMMUNISM) 177

1. Under conditions of free market competition:As explained in Unit 6, pp. 38-40, six taxis willexchange hands, as a result of the bidding out-lined there step by step, at a price somewherebetween $3,360 and $3,380.

2. 7/ there is a sales tax of $50:a. Let us say that the tax-collector intervenes,

once a price has been determined by free mar-ket competition, at the moment the would-bebuyers are handing over their money to the cabowners who have agreed to sell—"You must payan extra $50 as sales tax." The cost to eachwould-be buyer suddenly becomes $50 morethan he had agreed to pay—i.e. between $3,410and $3,430. This brings the total price of a cababove the top amount Ott is willing to pay.

b. Ott drops out of the market—because a cab isnot worth more than $3,400 to him. As a result,the number of cabs offered at that price (6) nowexceeds the number of cabs wanted at thatprice (5). Thus, the bidding must resume toequate supply and demand.

c. With Ott out of the picture, only 5 potentialbuyers remain in the running. Thus the netprice must drop below $3,360 ($3,410 grosswith the $50 sales tax) to keep Ace from offer-ing a 6th cab on the market. However, the grossprice must be more than $3,400 ($3,350 net+ the $50 tax) to keep Ott from re-entering thebidding.

d. Thus, the addition of a sales tax in this examplemeans that only five cabs will be traded at agross price of just over $3,400 to just under$3,410 with the net return to the seller after thetax is paid, falling somewhere between $3,350and $3,360.

e. Whereas, under free market competition, buy-ers in this example would have paid between$3,360 and $3,380 all of which would havegone to the sellers, they must now pay more—the gross price now being between $3,400 and$3,410—of which each seller receives less—somewhere between $3,350 and $3,360.

f. Thus it becomes obvious that the imposition ofthe sales tax (1) reduces the number of trans-actions that may take place, (2) raises the grossprice to each potential buyer, but (3) reducesthe net return to each owner-seller.

3. If there is a sales tax of 10%:

a. Let us say that once a price has been deter-mined by free market competition, the tax col-lector intervenes at the moment the would-bebuyers are handing over their money to the cabowners who have agreed to sell—"You must pay10% of the price agreed upon as a sales tax."The total cost to each would-be buyer sudden-ly becomes 10% more than had been agreedupon—in this case, between $3,696 ($3,360 +$336) and $3,718 ($3,380 + $338). This elim-inates Ott, Pry and Moon from the market aspotential buyers.

b. The number of cabs offered at that price (6)now exceeds the number of cabs wanted at thatprice (3). Thus, the bidding must resume toequate supply and demand.

c. If the gross price drops so Moon bids, 4 po-tential buyers remain in the market. Thus thenet price must drop below $3,330 (gross $3,663with the 10% tax of $333) to eliminate Ace andFork from offering a fifth and sixth cab on themarket. However, the net price cannot drop be-low $3,250 (gross $3,575 with the 10% tax of$325) if Guy is to be induced to put a fourth cabon the market.

d. Thus the addition of a 10% sales tax in this ex-ample means that only four cabs will be tradedat a gross price falling somewhere between$3,663 ($3,330 + the 10% tax of $333) and $3,575($3,250 + the 10% tax of $325).

e. Whereas buyers in this example would havepaid between $3,360 and $3,380 under freemarket competition, all of which would havegone to the sellers, they must now pay more—agross price falling somewhere between justover $3,575 to just under $3,663 (not more,else Fork will be induced to offer a 5th cab onthe market for which there is no taker). The netto each seller out of the gross price agreed uponwill be less—somewhere between $3,250 andjust under $3,330.

f. Thus, it becomes obvious that the imposition ofthis 10% sales tax (1) reduces the number oftransactions that may take place, (2) raises thegross price to each potential buyer, but (3) re-duces the net return to each owner-seller.


PROBLEM A—THE EFFECT OF PRICE CONTROLS (Answer)

Assume the following subjective valuations for similar taxis:

OWNERS

Ace'sBag'sCod'sAce'sDove'sEby'sBag'sAce'sFork'sGuy'sAce'sBag's ̂Dove's

OF 13 TAXIS

1st1st1st2nd1st1st2nd3rd1st1st4th3rd2nd

$4,000.3,800.3,750.3,600.3,500.3,450.3,380.3,360.3,330.3,250r-)3,050. ( , .„. T1r 4 wiInner spllcrs

£<m-* at $3'300

POTENTIAL


BUYERS

3rd2nd2nd2nd1st2nd1st1st1st1st

$2,750.2,920.3,080.

3,400.3,550.3,680.3,780.4,100.4,250.

6would-

bebuyers

at $3,300

How many taxis would be traded if a price ceilingof $3,300 were imposed on cabs of this type? Sixwould-be buyers will be competing to purchasecabs at that price, but only four cabs would be of-fered on the market by owners who were willing tosell at that price. Two owners who would havebeen willing to sell at the free market price arrivedat through competition (between $3,360 and$3,380)° will now refrain from trading. Thus twopotential sellers will remain less satisfied than iftrading at the market price had been permitted.Moreover, two of the six would-be purchasers who°As explained on p. 39.

have been led to hope they could buy a cab for$3,300 are doomed to disappointment. The fourwho prove "lucky" and are actually able to buy atthis artificially low price must be determined onsome other basis than free and open competition—friendship, pressure, threats, extra non-monetaryconsideration, surreptitious under-the-counter pay-ments, artificially decreed quotas, license applica-tions, rationing or making everybody line up to beserved on a first-come, first-served basis, etc.

NOTE: See p. 180 for conclusions to be drawn fromthis Problem.


PROBLEM B—THE EFFECT OF PRICE CONTROLS (Answer)

Assume the following subjective valuations for:10 IDENTICAL UNITS (OR SETS)—PORTABLE TVs, STEREOS, MOTORBIKES, ELECTRICTYPEWRITERS, ELECTRONIC COMPUTERS, CAMERA EQUIPMENT, SPORTS OUTFITS,ETC.


BUYERS

$372.50-—370.00365.00362.50360.00357.50345.00330700""""323.00310.50300.00290.00272.50267.50255.00250.00230.00227.50225.00170.00

1 &2



$400.00375.00360.00355,00.

.00"50 '

320.001«310.00 {295,002...

How many units (or sets) will be traded:

1. under free and open competition?2. if controls force the legal selling "price" for

such units (or sets) down to $347.50?3. if controls force the legal selling "price" for

such units (or sets) down to $340?

1. Under free and open competition: Six sales willbe concluded to the mutual satisfaction of allparties concerned. Six would-be buyers arewilling to pay enough (between $350 and $355—as explained in Unit 6, p. 41 to induce sixowners to sell voluntarily.

2. 7/ controls force the legal selling "price'Jor suchunits (or sets) down to $347.50: Only five salesmay be concluded. Only five owners are readyto sell; yet six potential buyers are still eagerto purchase at this artificially low price.

3. If controls force the legal selling "price" forsuch units (or sets) down to $340: Only foursales may be concluded. Only four owners areready to sell; yet seven potential buyers are noweager to purchase at this artificially low price.

CONCLUSIONS

First of all, see Unit 6, pp. 38-43 & 52, for thereasons why free and open competition producesthe greatest number of voluntary transactions andthe greatest possible satisfaction among buyers,sellers, non-buyers, non-sellers.

THE EFFECT OF TAXES

The imposition of a tax on a market transaction,other things remaining equal:

1. Reduces the number of voluntary transactions.Thus, fewer persons are able to improve theirrespective situations by trading than couldhave if competition had been free and openamong all would-be buyers and sellers;

2. Raises the total cost to the purchaser of thegood or service taxed;

3. Lowers the seller's net return from the sale ofthe goods or service that is taxed;

4. Because it reduces the number of potentialsales and lowers the return to sellers, it tends


to discourage future production. As productiondeclines, prices generally will tend to be rela-tively still higher than they would have been.This means that reducing the gap between whatpeople have and what they want becomes moredifficult and the hope of alleviating the "eco-nomic problem" grows fainter.

THE EFFECT OF PRICE CONTROLSThe imposition of controls compelling the ownersof goods and sendees to sell at below-marketprices, other things remaining equal:

1. Reduces the number of voluntary transactions.Thus, fewer persons are able to improve then-respective situations by trading than if compe-tition had been free and open among all would-be buyers and sellers;

2. Reduces the supplies available on the market;i.e. it reduces the quantity and/or the quality ofthe goods and services owners are ready andwilling to offer at the artificially low prices de-creed;

3. Increases the demand of would-be buyers topurchase goods and services at the artificiallylow prices decreed;

4. Dooms many would-be buyers to disappoint-ment and calls for some technique other thancompetitive bidding on the market to determinewhich of the would-be buyers will actually re-ceive the fewer units of goods and serviceswhich are available at the ceiling price. Would-be purchasers are denied the opportunity ofshowing legally their relatively greater desireto buy; the price control law prohibits themfrom trying to outbid competitors by offeringowners higher prices for the limited quantitiesof goods and services available on the marketat government-decreed "prices." Therefore, the"lucky" ones who will be able to purchase someof the supplies the owners are willing to sell atthe artificially low prices must be decided onsome basis other than free and open competi-tive bidding:

a. willingness to spend a long time on queues,waiting to be served

b. surreptitious under-the-counter paymentsc. extra non-monetary consideration, offers of

special tips, personal favors, threats, pressures,etc.

d. reliance on personal friendship, political pull

e. enactment of additional laws to set up a legalrationing system

5. Because of the legal curb on selling, compellingowners to trade at below-market prices, sup-pliers have little or no incentive to offer moreunits of their stock on the market and/or to ex-pand future production. As production de-clines, the gap between supply and demandwill become still greater, making it still moredifficult to reduce the gap between what peoplehave and what they want, thus compoundingthe "economic problem."

EXPLANATORY TEXT

Most textbooks on "comparative economic sys-tems" describe the economic arrangements in var-ious countries and then attempt to classify them bytype. The result is usually a long list of different,vaguely-defined and overlapping economic "sys-tems." A much simpler way to distinguish one eco-nomic arrangement from another—and the onlybasis on which a clear-cut distinction may be made—rests on the method of the ownership and controlof productive resources and property. Only onequestion need be asked: Are the factors of produc-tion—raw materials, land, factories, tools, ma-chines, labor used in producing goods and services—owned and controlled by private individuals or bygovernment officials?

In the course of this Unit, only three economicsystems will be defined, each distinguished by themanner in which productive resources, factors ofproduction, are owned and controlled: (1) capital-ism or a free market economy under which thefactors of production are fully owned and com-pletely controlled by private individuals, (2) social-ism or communism, under which the factors of pro-duction are owned and controlled by governmentofficials of a totalitarian centrally controlled gov-ernment state and (3) a hampered market economyin which factors of production may be nominallyowned by private individuals but the use made ofthese factors of production is controlled or partiallycontrolled by government rules and regulations.

1. How does private ownership and control ofthe products of production arise under capitalism?We learned in Unit 4 how the institution of privateproperty evolved and how the right to own prop-erty permitted trade and exchange, specialization


and the division of labor to develop. Thanks toincreasingly complex arrangements for interper-sonal cooperation (Unit 5) and the gradual accum-ulation of savings (Unit 7), entrepreneurs, inspiredby consumer sovereignty (Unit 8), have developedmore and more complicated, refined and efficientmethods of production (Unit 11) and exchange(Units 5 and 12).

In such a peaceful society, distribution is noproblem. (See the GLOSSARY definition of "'Dis-tribution,' economic") Every good or service pro-duced in the course of this cooperative processcomes into existence as the private property of theparticular persons involved. In a voluntary society,every piece of raw material or unit of labor whichcontributes in any way to the production of a goodor service is furnished by particular individuals, inexchange for compensation previously agreedupon. Thus every individual who helps to makeproduction possible is reimbursed at the time forhis own personal contribution. His financial inter-est in the final product ends when he is paid for hislabor or for the particular share of a factor ofproduction that he furnishes.

The entrepreneur "gets it all together." As hepays for things in the course of carrying out hisproject on the market, he acquires ownership, step-by-step, of the factors of production. With the own-ership of these factors of production comes also theright of control, i.e. the opportunity to decide howthey shall be used. Therefore, the products whichare made from an entrepreneur's resources—withthe aid of (a) savings he has assembled or bor-rowed, (b) the voluntary cooperation of many per-sons with whom he made arrangements and (c) hisideas and planning—are his and his alone once hehas fulfilled all previous commitments.

If we consider the products of any specific pri-vate enterprise from this angle, it is easy to under-stand why and how they become the private prop-erty of the entrepreneur who took the risk. Hisright to the output of his project depends, ofcourse, on his having contracted for and paid inadvance for all the goods and services which wereused in the process. Under capitalism, therefore,the person to whom the final products belong hasacquired legal and effective title to them by havingpreviously acquired and paid for everything usedin their production.

NOTE: Insofar as an entrepreneur may fail to fulfillhis obligations, his title to the output of his enterprisewill be flawed, it will not be free and unencumbered.Any of his workers, creditors or suppliers, who has

not been paid as promised, may secure a lien and suethe person responsible for such reimbursement asthat to which their contributions entitle them.

2. What is the significance of the fact that thefactors of production may be owned and controlledby private individuals? When denied the oppor-tunity and right to own private property men arelittle more than slaves or serfs, dependent on somelord or master and necessarily subject to his everywhim. Once they can acquire property which theymay dispose of as they choose—so long as they donot interfere with the equal rights of others—theycan become free men, free to trade, buy, sell,save, invest, experiment, try out new ideas, movearound and make any possible change that appearsin their interest.

NOTE: Throughout this Unit, stress the importance offlexibility and freedom of choice in using the thingsone owns. A person who does not have control of hisproperty in these two respects, is not really its owner;he is not in a position to use it as he chooses; he mustfollow someone else's orders.

In primitive societies, when individuals werefirst able to keep for themselves and their familiessome of their own production, over and above whatwas needed for immediate consumption, no mat-ter how little that might be, they could feel a bitmore free and independent. With a small backlogof resources, "rainy day" (or plain) savings to useas they chose, they could be more confident aboutmeeting future contingencies and even a little lessfearful of arousing the ire of a tribal chief or "med-icine man." Without property rights all the mate-rial things they have and even their lives are at themercy not only of nature, but also of the commu-nity "strong man," king, ruler, dictator, gangster,or anyone who proves physically more powerful,more ruthless or more persistent in compellingothers to do his bidding. The opportunity to ownprivate property and to control its use, therefore,fosters individual freedom and independence evenin primitive societies.

The right to own and control property is prob-ably even more important in a specialized, divisionof labor, capitalistic economy. Personal freedom,independence and economic survival depend onthat right. If property rights are protected and aperson's private home is "his castle," a place towhich he may retire in peace, he may be confidentthat he, the members of his family, his papers andeffects will be safe there from unwelcome intru-sions, "from unreasonable searches and seizures"as assured in the U.S. Constitution (Amendment


IV). Moreover, the right to own and control privateproperty is important to entrepreneurs and pro-ducers in a complex capitalistic market economy.But it is important not only to them. It is perhapseven more important to all the rest of us. As a mat-ter of fact, most of us living today would not evenbe alive if producers had not been relatively free inthe past to use their private property as they chosein the hope of earning profits. It is only because theproperty rights of producers, would-be producers,savers, investors, entrepreneurs, inventors, inno-vators, etc., have been respected and protectedthat they were willing and able to cooperate in ex-panding production. As a result, life expectancyhas lengthened, death rates declined, populationincreased and people throughout the marketeconomy now live longer, healthier lives and havea much greater quantity and variety of food, cloth-ing, shelter, luxury goods and leisure than everbefore. The reasons why this is so rest on the prin-ciples explained in Unit 4.

Every one of us acts in the attempt to improvehis own situation as he sees it—from the point ofview of his own subjective (personal) values. Eachof us tries to remove felt uneasiness with the leastpossible effort and cost. Each of us wants to use hisresources to best advantage—to yield the greatestpossible return (psychic and monetary) to us asowners. Thus the opportunity to own private prop-erty and the freedom to use it as we choose—so longas we don't use it to interfere with the equal rightsof others—increase our options. The right to ownproperty and to control its use, therefore, makes iteasier than it would be otherwise for us to accom-plish the many things we want.

Property owners are interested in using theirresources to serve their own ends. They find thatthe surest way to attain their various ends undercapitalism is by providing consumers with the var-ious goods and services they want. As a result,property owners are challenged under capitalismto try to serve consumers. When they succeed indoing this, they can earn not only the psychic profitwhich comes from knowing they are helpingothers, but they will also be rewarded with mone-tary profits (Unit 8) for themselves. Therefore, ifproperty owners expect their output to be reason-ably safe, do not anticipate losing it through theft,violence and/or confiscation and have confidencethat their productive efforts and initiative will notbe thwarted or hamstrung or that the financialgains from their activities will be taxed away theywill be anxious to use their property to produce

things for consumers to buy on the market. In acapitalistic society, therefore, where private prop-erty is respected, the personal desires of individ-uals to improve their respective situations provideproperty owners and entrepreneurs with the in-centive to develop their ideas, resources, propertyand labor for the benefit of other people.

3. Just how does the right to own property andthe freedom to control its use affect production?To use their property to best advantage, propertyowners must be free to make their own decisions.Flexibility is most important. Persons with thegrasshopper time preference may well consume al-most everything they have as soon as they get it.On the other hand, those with the ant's time pref-erence will try to refrain from consuming every-thing today so as to set aside something for tomor-row—in the form of "rainy day" (or plain) savings.What they do and how they plan for the futurewill depend on their ideas, expectations and free-dom to choose. If property is relatively safe, somewill begin to use their "rainy day" savings to sup-port themselves while they develop tools to makefuture production easier and more efficient. In thisconnection, the students might review Fred I.Kent's "Letter to His Grandson" (Reading No. 19).As time passes and more and better tools becomeavailable some capitalist savings will be accumu-lated bit by bit. This makes it possible graduallyto develop and produce more things, more quicklyand more easily. What kinds of tools are developed,what form capitalist savings will take, and whatwill be produced will depend on the ideas and ac-tions of specific entrepreneurs in the light of theirunderstanding of conditions and their future ex-pectations.

NOTE: Remind the students of the "line of command"on the market—from consumer-puppeteer to entrepre-neur-marionette, as explained in Unit 6 (p. 51).It was this consumer-directed process of productionwhich has been responsible for the industrial expan-sion of the last two centuries and the tremendous in-crease in the quantities of the various things peoplewant to have and to use.

The entrepreneur contemplates an ever-chang-ing "half-baked cake," a smorgasbord of (a) "rainyday" (or plain) savings, i.e., stores of availableconsumers' goods, plus (b) capitalist savings in theform of potentially productive factors of produc-tion. He tries to juggle things around, reassemblethem, and make them more productive. The entre-preneur-marionette must interpret correctly theyanks and pulls of the consumer-puppeteers by


which they seek to "manipulate" him. To do this,he must study consumer purchases and refusals topurchase, analyze available resources, considermarket prices of the very recent past and try toanticipate future conditions—all difficult tasks atbest. If, as a result of his efforts, he can alter thevarious factors of production so as to serve con-sumers better and/or cheaper than before, theywill become more valuable on the market. Themore freedom and flexibility he has to act in ac-cordance with his own best judgment, the betterhis chances are. The safer property is expected tobe, the more capitalist savings he can expect to at-tract for investing in his enterprise. The more as-surance entrepreneurs and investors have of beingable to keep what they earn through the enterprise,the more incentive they will have to continue sav-ing, investing, producing and serving consumers.Any outside interference that deters such enter-prises will interfere or hamper their plans for pro-duction, reduce the amount of goods and services,and so cut down on the number of voluntary trans-actions possible.

NOTE: TO help explain how important it is for entre-preneurs to maintain control over the factors of pro-duction, discuss specific examples. Some studentsmight take a certain item and trace the orders its pur-chase engenders among suppliers, manufacturers,shippers, producers of raw materials, etc. Have stu-dents talk with local merchants, refer to encyclopediasor study the annual reports of corporations, to plotthe course of their supply lines as far as possible. Callattention to the many transactions that must dovetailto keep the production process operating smoothly.Any change in consumer demands and/or in the avail-ability of any good or service used in supplying themarket will necessitate shifts in entrepreneurial plans,searches on the part of traders and/or producers fornew sources of supplies and/or changes in the wayfactors of production are used. If the ostensible ownersof the raw materials and factors of production in-volved do not really control them, and are not free todispose of them as they wish in response to new andbetter price offers on the market, delays and difficul-ties will arise in adapting to changes. Bottlenecks andshortages will appear as producers hold up productionwhile obtaining permission to switch factors of pro-duction from one use to another. Production will startto lag farther and farther behind demand until in timeit loses all relationship to the wants and wishes of con-sumers. In a free market economy it is the interrela-tionship of various prices that keeps production mov-ing in response to the demands of consumers.

Every time a person buys something—a pair ofblue jeans, a hamburger, hi-fi equipment, or any-thing else—the retailer gains some idea of the pop-ularity of that particular item and the latest ideas

of consumers. If a would-be purchaser decidesNOT to buy, that tells the retailer and his sup-pliers something too. In either case, a purchaseor a refusal to purchase, the merchant gets themessage loud and clear, with the information heneeds for placing future orders. If sales of an itemare brisk at its current offering price, he will wantto replenish stock. If sales are slow, he will hesitatebefore re-ordering—unless he can find another sup-plier with something available to sell that the re-tailer considers better and/or cheaper enough toovercome the objections of those who refused tobuy before. The more flexible a merchant is, thefreer he is to change his plans, offer different itemson the market, seek new suppliers of goods andservices, arrange purchases through differentchannels, the more promptly he can act and themore responsible he can be to the ever-changingdemands of consumers so as to increase transac-tions and overall satisfaction. Just as the retailer'santicipation of consumer wants is his guide in plac-ing orders, so do his orders furnish clues to ship-pers, suppliers and producers as to what to pro-duce, how to schedule their activities, what meth-ods of transportation to use, what machinery andraw materials to purchase, how many workers,with what skills, to keep or to hire, and so on.

Consider blue jeans, for instance. A few yearsago all blue jeans on the market were made inpractically the same style from essentially thesame tough blue denim, with brass studs at seamsand pockets. Then buyers began to ask for jeansin various styles and colors, showing their prefer-ences through the prices they were willing to payfor new styles and their refusals to purchase oldstyle jeans. Bell bottoms came in; stretch materialsappeared; some buyers wanted their jeans to lookfaded and torn, even when brand new; otherswanted elegant jeans, decorated with beads andsequins. Information on each new consumer fadwas passed back by the retail merchants fromconsumers to wholesalers and then, in short order,to manufacturers and textile producers. Some in-genious persons developed ways to make brandnew jeans look old and torn, ordered special chem-ical solutions for this purpose, bought large vatsin which to pour the solutions, dip the jeans, andsoon brand new artificially-aged jeans began toappear on the market. Some producers of jeansbegan to order denim in different colors, so thatproducers of denim had to order different coloreddyes from producers of chemicals. Some manu-facturers began to decorate blue jeans with beads


and sequins to satisfy other consumers.In every one of these cases, changes were made

fairly promptly in the production of blue jeans be-cause of shifts in consumer wants and the pricesthey offered. In every one of these cases, producerswere in a position to make changes in their plants,buy different raw materials and machinery and bidfor different kinds of workers because they ownedand had substantially effective control over theproperty they worked with. They were relativelyfree to use their resources as they thought bestand could be fairly flexible in adapting their fac-tors of production as they chose. Without free mar-ket prices, arising from consumer preferences, toguide them, entrepreneurs would be like ships atsea without a compass, floundering around in a seaof goods and services lacking clues as to whatdirection to go to reach their goal—the satisfactionof consumers in the hope of earning profits. With-out the freedom to own and control their propertyas they think best, without the flexibility to use,adapt and adjust their factors of production, theirhands would be tied, their operations and attemptsto serve consumers hindered. Given a marketeconomy with specialization, division of labor, pri-vate property, exchange and the right to own fac-tors of production and control their use, entrepre-neurs on their own energy and initiative, have aninterest in helping to expand production. Theresult over the last two centuries was a tremendousburst of production.

4. Suppose some one, or some thing, interferes—even if unintentionally—to break, weaken, or dis-tort the lines of communication between consum-ers and producers? The lines of communicationwe have been discussing, connecting purchasersand non-purchasers through retailers to shippers,suppliers, fabricators and producers of raw mate-rials, extend over large areas, touch many per-sons and involve long periods of time. Thus, theyare vulnerable to interruption and breakdown—by(a) the forces of nature and/or (b) the actions ofindividuals, unintentional and accidental or pur-posive and malicious. Such disruptions are inevit-able upon occasion, given the nature of the uni-verse and the fallibility of human beings. Theresults are often heartbreaking and costly. Thus itis in the interest of everyone to reduce their fre-quency, minimize their unfortunate consequences,repair promptly insofar as possible any harm done,and smooth a return to uninterrupted communica-tions and peaceful cooperation among individuals.

Left to themselves, individuals are tremendously

resourceful. In the words of the old proverb,"Necessity is the mother of invention." If peopleare free to use their own brains, ingenuity, efforts,energy, resources, factors of production to cope asbest they can with problems as they arise, they cando a great deal to reduce disruptions, whethercaused by natural or human forces, and relievetheir disastrous consequences.a. Forces of nature—When storms, floods, earth-

quakes, tornadoes or other cataclysms of na-ture destroy railroad tracks, highways, build-ings, telephone lines and broadcasting stations,it is obvious that communications have beenphysically disrupted. Many people are incon-venienced. Some may suffer physical harm andeven death. Many others face serious economicloss. Men have used a great deal of intelligenceand ingenuity over the centuries in findingways to reduce the damage nature may do themand their property. They can now build struc-tures capable of withstanding much damage byfire, hurricanes, floods and even earthquakes.Nevertheless, human beings are still helpless attimes in the face of the tremendous forces ofnature and must cope as best they can withlosses. Makeshift arrangements often proveexpensive; scarcities and bottlenecks arise; theprices of things in short supply may go up call-ing for still further suffering, effort and con-servation. Conditions will never really be thesame again for the consequences of some lossesgo on forever. However, sooner or later, meanswill be found to repair a large part of the phys-ical damage, restore essential communications,compensate for some of the destruction and ad-just to some extent to the new situation. Thesurvivors must then continue on as best theycan, accepting as philosophically as possiblethe tragic consequences of such natural cata-clysms as cannot be avoided.

b. Actions of individuals—It is not surprising thatmalicious actions, acts of violence undertakenon purpose to hurt others or to damage theirproperty, are destructive. If a gunman demandsyour wallet, takes your money and runs away,it is clear you have lost ownership and controlof some of your property. If the gunman ap-proaches you in a restaurant, uses the gun as athreat to make you pay for a meal he has eaten,you have also lost ownership and control ofproperty, even though the gun is concealed andyou appear to be paying for his meal of yourown volition. Such acts of theft and violence


are obvious violations of your rights as a prop-erty owner. Property you had earned throughyour own efforts or had acquired honestly bysome other means is taken from you by force.Control over property, which was legally andmorally yours to use as you chose, is shifted tothe thief who forced you to turn it over to himfor his purposes. As a result, your freedom ofchoice is curtailed; purchasing power is takenfrom you; the communication lines from yourdecision to act and make purchases is de-stroyed, or at best interrupted or delayed, be-fore it reaches entrepreneur and producer. Allcriminal acts have similar effects; they depriveowners of property and their freedom to con-trol its use, interfere with their efforts to com-municate their wishes through the market.Thus, the criminal's demand on the market re-places the demands of those whose property(and purchasing power) he takes by force ordeceit.

Even the actions of well-intentioned personsmay backfire, due to error, ignorance, misjudg-ment. As pointed out in Unit 3, people make mis-takes. Their mistakes may sometimes prove costly—not only in time and money, but also in life andlimb. Once a person recognizes a mistake, how-ever, he does his best to compensate. Discuss withthe students some mistakes, and attempts to re-coup, they may know about from personal expe-rience. To start the ball rolling, here are severalcategories:

1. Mistakes on the part of businessmen that led tothe purchase or production of things whichcouldn't be sold at prices that covered costs, sothat their enterprises suffered losses, had to goout of business or shift operations;

2. Decisions with respect to personal relationshipsthat proved unfortunate—friendships made orbroken, jobs accepted or turned down, residen-tial moves made, trips taken, friends or relativesvisited, etc., which had unhappy consequences;

3. Purchases that proved less valuable than hadbeen expected because of changes in a person'ssituation, tastes, interest, fashions, etc.;

4. Purchases that could not be used as intendedbecause of new family circumstances, jobchanges, moves to a new location, unantici-pated price shifts, unusual weather conditions,failure of the item purchased to perform as ex-pected, etc.;

5. Actions which actually led to accidents, caus-

ing physical harm to life, limb and/or prop-erty;

6. Actions which failed to attain the goals soughtbecause of poor timing, accidents or misjudg-ment. Mistakes may result from decisions oractions taken too fast, too slowly, too soon ortoo late—as in sports or in stock market spec-ulations;

7. Judgments, decisions or actions taken by oneperson at the behest of another who used spe-cial pressure or even force, ofttimes with thebest of intentions, to hinder or prevent freedomof choice.

Having to suffer the consequences of a mistaketeaches a very important lesson—equally importantto everyone of us as private individual, consumer,businessman, producer, etc. It is easier and cheap-er all around to try to avoid mistakes in the firstplace. Timing is important. Within the limits oftime and opportunities available, consult experts—

"Wisdom is the better part of valor."

Study the pros and cons of a situation, considerwell the likely consequences of every action andevery decision—

"Look before you leap."

Then use your best judgment. However, once anaction is taken that proves a mistake, do your bestto make amends and repair the damage as quickly,cheaply and effectively as possible—

"Don't cry over spilt milk."

However, individuals may also be deprived of life,property and freedom of choice in other ways. Inaddition to the forces of nature, acts of violenceand human mistakes and accidents, market com-munication lines may also be disrupted by certaingovernment actions.

5. What are the fundamental duties of govern-ment? To distinguish those government actions,which protect individual life and property andmake it possible for individuals to cooperate andtrade with one another in peace, from those gov-ernment actions, which hamper market transac-tions, help some at the expense of others and makeinterpersonal cooperation and trade more difficultand costly if not impossible, we must discuss gov-ernment and its basic role in society. Most highschool students should have some ideas, gleanedfrom their various courses in history and govern-ment, as to the most important task of government


—i.e., to protect the lives and property of its cit-izens. A brief review of this country's early his-tory might be helpful.

Early settlers in this country feared attack fromoutsiders—Indians, pirates and political enemies.They also wanted protection from possible harm bydomestic troublemakers. In trying to provide fortheir own protection, no matter where they lived,they very soon organized some form of govern-ment, with police, sheriffs, judges, soldiers and/or"vigilantes," to protect themselves, their families,their homes and their property. A few inhabitantsof the new community were hired as full-time spe-cialists in guarding the town and the people in it,their homes and their belongings. Then everyoneelse could go about their daily pursuits as theychose in relative peace. Relieved of the need toprotect themselves and their families from per-sons who might use or threaten to use force to dothem harm, the majority of the community's cit-izens had more time, energy and freedom to dowhat they wanted—to farm, cook, sew, build,mLie, trade, read, study, worship, play, relax, orwhat have you. They could better cope with naturalforces and scarcities, accomplish and producemore than they could have otherwise. Everyonebut the troublemakers gained as a result. Like anight watchman or an electrified fence—which pas-sively prevents trespass, theft and molestationunless provoked into response by intrusion or vio-lence—a community's police and courts serve as a"catalyst" to peaceful activities. If the police andcourts are not there to curb malicious acts of vio-lence and to punish criminals, practically no pro-duction or trade can be carried on at all. Yet likethe night watchman or electrified fence, just beingthere standing on the sidelines waiting to be need-ed, they act as a "catalyst" permitting peacefultransactions to be made.

Knowing protection is at hand if need be, thecommunity's inhabitants can go about theirbusiness without giving much thought to potentialtroublemakers—producing in the attempt to satisfyconsumers, experimenting and trying out newthings, all in the hope of improving their respectivesituations as best they can and earning psychicand monetary profits for themselves. At the sametime, consumers too are as free as they can beunder the circumstances to express their most ur-gent preferences. When such a "night watchman"government is at hand to deter persons who mighttry to use force or threat of force to interfere, thesignals consumers transmit when they go to mar-

ket reflect their most important desires and valuesand—barring ignorance, accidents and errors—they will reach the producers of the things theybuy. Only when such a government is on hand toprotect citizens and their property, is it possiblefor producers and consumers to trade in peace andto undertake—with some hope of success—thecomplicated voluntary transactions which makeup a highly-specialized market society.

6. // the government in a community uses itspower and influence to go beyond protectingequally the lives, property and freedom of all itscitizens, i.e., if it tries to regulate and control theirpeaceful activities in various ways, how does thischange the situation? Remind the students atthis point of what they learned in history classesabout the most serious shortcoming of a big andpowerful government—i.e., its inability to providethe conditions necessary for its citizens to enjoyfreedom and prosperity. No matter how well-in-tentioned a government may be, if it tries to con-trol or regulate the activities of its citizens, if itgives special benefits to some citizens at the ex-pense of others, it will no longer be protecting thelives, property and freedom of all its citizensequally. As a result of such government interfer-ences, it becomes difficult if not impossible for themajority to pursue their own ends in peace. Theirdaily activities are affected in many ways by sucha government. The more the people are hamperedby government in doing the things they want to domost, in using their earnings as they would like,in trading voluntarily, in pursuing the goals theyconsider most important, the more oppressive itbecomes.

The failure of a government to provide the condi-tions necessary for freedom and prosperity be-comes obvious when its people are willing to un-dergo personal and economic loss, face danger andeven death, to escape its jurisdiction in order to goto a land where they expect conditions to be bet-ter. As a matter of fact, most of the people whohave come by choice to this country, from its earlydays down to the present, left their native landsbecause of government oppression. Many came be-cause they opposed military conscription. Stillothers came because their governments taxed soheavily, imposed so many restrictions on their ac-tivities or confiscated their property so that it be-came difficult if not impossible for them to eke outa living. And quite a few came because their ef-forts and ambitions were thwarted in the "oldcountry"—by government, conservative traditions


and social rigidities. These immigrants who havecome to our shores over the years—and who stillcome—came in search of freedom. They came fromlands where the government failed to protect thelives and property of all its citizens adequately.They came—and they still come—from countrieswhose governments do not permit them the free-dom to pursue their own personal interests and toacquire private property to use as they wish—toexperiment by making changes and trying to im-plement new ideas. Immigrants have come to thiscountry in the hope that here they would be betterable to attain their personal goals and ambitions.They have come because our government was notexpected to interfere so much with their daily ac-tivities, transactions and peaceful pursuits andambitions.

Conditions in America for most newcomers havealways been rough. For them life has been hard,even dangerous for those who sought to settle in awilderness unpopulated as yet except by hostilenatives. Yet even so, America was soon recognizedas the land of freedom and opportunity. In Amer-ica, every person had a chance. A new arrival couldmake a fresh start, confident of being judged on hisown merits. Every mature and independent personknew that any property he acquired by honestmeans was his very own to dispose of as he chose.He was free to act in accord with his own personal(subjective) values, goals, ideas and interests, inthe light of circumstances and his own best judg-ment at the time. Whether to consume and enjoywhat he had, trade it for something he preferred,save it for future "rainy days," offer it to consum-ers on the market, or use it as a factor of productionto produce other goods and services, was his owndecision. Because property was private, individ-uals were free to do with it what they wanted,within the limits imposed by nature and their owncapabilities—to work, trade, experiment, play, rest,think, speak, worship, and so on—by themselvesor with others, so long as they did not use force orthreat of force to interfere with the equal rights ofothers. At the same time every individual realizedthat he was responsible for himself; his success orfailure, even his very survival was up to him.

7. What are the different kinds of government?There are really only three different kinds of gov-ernment: (1) limited government; (2) totalitariangovernment; and (3) interventionist government.The power at the disposal of government to useforce has a significant impact on the ability of theindividuals under its jurisdiction to cope with their

daily affairs and to solve the economic problem.For the study of economics, the important ques-tion is whether the government (1) facilitates thepeaceful and moral actions of individuals by leav-ing them alone while standing on the sidelinesready to intervene only when necessary to protectand preserve personal freedom, lives and property,(2) controls and plans every aspect of the dailylives of the people living under its jurisdiction, or(3) controls, plans, regulates and restricts some, al-though not all activities of individuals, often arbi-trarily on a case-to-case basis, so that when peopleact and try to plan for the unknown future theymust take into consideration additional uncer-tainties due to potential political interference.

NOTE: The subject of government is thoroughly inter-twined with the study of economics. The acts and de-cisions of government officials seriously affect theconscious, purposive actions of individuals in their at-tempts to attain their various subjective (personal)values, ends and goals. However, in discussing eachtype of government in turn, keep in mind that this isa course on economics. Try not to let the classroomdiscussion become too much concerned with the formof government itself.

(1) LIMITED GOVERNMENT—a governmentthat is limited to (a) protecting insofar as possiblethe lives and property of persons under its jurisdic-tion and (b) settling, according to established ju-dicial procedures, disputes and controversies thatmay arise under its jurisdiction, among individuals,groups and/or representatives of individuals. Alimited government is like the "night watchman"or electrified fence mentioned above that reservesits use of force to responding to provocation bythe actions of individuals who invade or violatethe equal rights of others. Under such an ideallimited government, individuals are free so long asthey do not use force or threat of force to interferewith the equal freedom of anybody else. Under thistype of government, property is owned and con-trolled by private individuals. Its citizens are assecure as possible from serious interference, fric-tion or disruption caused by domestic or foreigntroublemakers. Under a limited government, acontract society with a capitalistic or free marketeconomy will evolve.

A limited government protects the rights of in-dividuals to own, use, buy, sell and/or trade pri-vate property freely, so that capitalism or a freemarket economy may function in relative peace.Individuals are free to pursue their personal ambi-tions and goals in accord with their own subjectivevalue scales—insofar as their capabilities and re-


sources permit. Incentive and initiative are notneedlessly or arbitrarily discouraged. Thus individ-uals remain free to act as they think best, relievetheir many felt uneasinesses and use any peacefuland moral means available to pursue their variousends.

In a capitalist or free market economy, under theprotection of a limited government, individuals arefree to express their preferences as consumers.By their purchases and refusals to purchase, theyhelp to determine the prices of consumer goodsand services—as we learned in Unit 6—and thus fur-nish producers with clues as to what goods and ser-vices are wanted most on the market. Similarly,producers and would-be producers are free to own,buy, use, sell and/or trade their privately-ownedproperty. Their actions as producers and potentialproducers reflect their interpretation of consumerwants and needs. Throughout the production pro-cess their decisions are expressed in their pur-chases of some factors of production and their re-fusals to purchase others. Just as consumer pref-erences, as expressed by their purchases and/orrefusals to purchase, help determine the marketprices of consumer goods and services, so do thepurchases and non-purchases of producers help todetermine the market prices of the various factorsof production.

The bids and asks of producers and potentialproducers encourage the further production ofsome factors, discourage the further production ofothers and furnish clues as to how the variousfactors of production may be best and most eco-nomically employed. So long as producers andwould-be producers remain free and flexible inbuying, selling, competing, experimenting andtrying out new products, technologies, distributionchannels, etc., they will adjust and adapt as bestthey can to changes. Such give and take, bids andasks among many free and independent entrepre-neurs, each seeking as best he can to satisfy hisown most urgent personal wants and needs—i.e.competition and free market prices under the guid-ance of consumer sovereignty—help to ensure thatthe factors of production will be channelled intotheir most urgent uses. Producers then tend to bein a position to supply consumers as economicallyas possible with the greatest amounts possible ofthe countless goods and services they want.

NOTE: For a review of this free market process, seeearlier parts of this SYLLABUS, especially Units 5,"Social Cooperation and the Market," 6 "Prices, Pric-ing," 7 "Savings, Tools and Production" and 8 "The

Entrepreneur and the Profit and Loss System." For adiscussion of how government may disrupt and inter-fere with the smooth operation of the market process,see below.

(2) TOTALITARIAN GOVERNMENT—a gov-ernment which owns all property, controls distri-bution, as well as the activities of all its citizens. Acompletely totalitarian government would be acommand society. All production and consumptionwould be planned and controlled by a central au-thority and every individual's position in lifewould depend on government decisions. Such asystem may be theoretically described, but it wouldbe impossible to implement in real life. In the firstplace, the officials in charge of the governmentwould never be able to plan and control every-thing. They would not know enough, be powerfulenough or be able to cope promptly enough withnew and unexpected changes as they took place.At every moment of every day, every individualcitizen would necessarily be making decisions anddoing things, in the very process of living and sur-viving, in response to urgent and unpredictablepersonal and local situations, which no centralplanner could hope to anticipate soon enough totake into consideration in making plans for thewhole economy. Also, even a completely totali-tarian government, that aimed at eliminating pri-vate property and substituting community and/orgovernment ownership and control, would stillhave to recognize private ownership of consumergoods and services once they were actually con-sumed (eaten, worn or used) by individuals.

The economic system under a government that isclose to being totalitarian is usually referred to ascommunism or socialism. In a communistic or so-cialistic economy, private ownership and control ofproperty is minimal. Except in the case of smallscale operations where private ownership cannotbe effectively eliminated, the managers of an en-terprise do not own and/or control the factors ofproduction in their custody. Under socialism orcommunism, the managers of an enterprise aremerely government-designated caretakers. Theyare told what and how to produce, in what quan-tities and qualities, what prices to pay for resourcesand workers, and what to charge for their output.Because no government can be completely totali-tarian in practice, they are usually allowed somediscretion at times. Nevertheless, the manager ofan enterprise under communism or socialism maynot expand or contract production at will or makesubstantial production shifts he might consider ap-


propriate when conditions change. Nor is he per-mitted to transfer workers or other resources intoa different field of production without first obtain-ing permission from the government departmentsresponsible. In other words, there are strong, in-flexible "strings" attached to the factors of produc-tion in his custody, obligating him to comply withthe orders of government officials. Final controlalways rests with the government.

The factors of production in a communist orsocialist economy are not owned and controlled byparticular individuals who are free to act on theirown best judgment—not by the manager of anoperation where they are being used, or by anyother person or persons who may dispose of themas they choose. The factors of production are notprivate property. They are not available to bemoved, traded, bought, sold or transferred freelyfrom person to person in response to their ownideas and to serve their individual purposes. Someprivate property does exist, to be sure, in mostcommunist or socialist economies—as in Russia, forinstance, where the opportunity has been given hercitizens to farm small plots of land to grow foodand to keep livestock for their personal use. How-ever, factors of production are not traded widelyamong private owners in such controlled econo-mies, as they are constantly under capitalism.

A person with a new idea in Russia or in any•communist or socialist economy finds it difficult, ifnot impossible, to acquire the goods and servicesneeded to put his scheme into operation. Awould-be entrepreneur, who wanted to producesomething new and/or different on a sizeable scaleto offer consumers in a socialist or communisteconomy cannot just go out and buy on the marketthe factors of production he wants or hire the work-ers he needs to go into production, not even if hehas savings of his own or can obtain funds fromother savers, would-be investors or lenders. Therejust aren't any factors of production to speak ofavailable for sale. Practically everything is underthe control of government officials. The first step aperson with a new idea, who lives under such asystem, must take is to seek government permis-sion for this scheme. If timing is crucial, delay maybe fatal. If nothing else, it is likely to dampenenthusiasm and discourage initiative and incen-tive. Even if he does succeed eventually, his expe-riences with the authorities and the limited oppor-tunity available in such a government-controlledeconomy for earning and retaining any profit atall are not likely to spur many other would-be en-

trepreneurs into trying to follow his example.According to communist or socialist theory, pro-

duction must be centrally planned and controlledto function smoothly. This makes the central gov-ernment authorities responsible for production. Asa result they become hesitant, not surprisingly, toaccept new ideas or to admit newcomers to themarket who might upset the status quo and showup as uneconomic, wasteful or outmoded, the es-tablished enterprises on which their reputationsrest. Then too, if they approve a new scheme andit fails, they will be blamed. So they generally playit safe, continue on in established channels, followeconomic developments abroad and don't experi-ment by permitting the introduction of question-able and as yet untried methods and products.Communications between consumers and entre-preneurs are effectively disrupted as plans for sig-nificant changes must be channeled through au-thorized government officials. Thus, production ina communist or socialist economy tends to becomerigid and inflexible and to lag behind the methodsbeing pioneered elsewhere by capitalistic entre-preneurs.

(3) INTERVENTIONIST GOVERNMENT—agovernment which interferes to restrict, regulateand/or control some of the activities of individ-uals but leaves them free in other respects. Theeconomic system which prevails under such a gov-ernment is a hampered market economy. Someinterventionist governments interfere in theeconomy to such a considerable extent that theycome close to being totalitarian; others interfererelatively little, leave citizens relatively free, sothat they approach the ideal of a "night watch-man" or limited government. In any event, mostgovernments fall somewhere between the twoextremes—the ideal of a limited government andthe unattainable completely totalitarian govern-ment. Most economies, therefore, represent someform of a hampered market economy.

NOTE: After having discussed the characteristics ofthe two theoretical extremes, it should be relativelysimple to consider our present interventionist govern-ment. Call attention to some of the government in-terventions that are responsible for shaping our par-ticular brand of a hampered market economy. Stressat every opportunity the fact that government inter-ventions disrupt the economy by interfering with thefreedom and flexibility of owners to dispose of theirproperty. Suggest that the students bring to classnewspaper and magazine articles that illustrate someof the ways described below in which government in-terventions (federal, state and local) interfere with theownership and control of the factors of production,


raise costs of production, bring about changes in vio-lation of consumer sovereignty and reduce the numberof voluntary market transactions. Some students mayalso be able to report from personal experience—theirown or that of a relative—on specific changes thathad to be made because of government interventions.Speculate on the effects each intervention may haveon production costs, market prices, individual pur-chases, the pattern of production, economic communi-cation channels, entrepreneurial flexibility and thenumber of voluntary transactions.

Government interventions disrupt the economyby interfering with the freedom and flexibility ofprivate individuals to own and control the factorsof production. To meet the test of a free marketeconomy, the factors of production must be pri-vately owned and controlled. If owners are not freeto use, sell or otherwise peacefully dispose of theirfactors of production as they choose, if they mustfirst obtain approval from some government of-ficial, economic communications are hampered.The result is a hampered (not a free) marketeconomy. In a hampered market economy, theremay be several types of government interventions:

(1) Government enterprises. Government it-self may undertake some projects. If so, it acts likea producer, buying factors of production, hiringworkers on the market, producing, in accordancewith legislation, some good or service which it thenoffers to consumers. The price a government en-terprise asks for its output may not always covercosts, for it is expected that government funds willbe available to make up the difference betweenthe outgo and income. As a matter of fact, somegovernment enterprises are established for the spe-cific purpose of supplying people with somethingthat private entrepreneurs are not willing to pro-duce for the market at all because they do not be-lieve consumers want it enough to pay, or at leastare not willing and able to produce and offer it atas low a price as government officials want it tobe available. Some government enterprises evengive goods and services away free to persons whomeet certain qualifications. The beneficiaries us-ually like this arrangement. But it is important toremember that when government supplies someindividuals with "something for nothing," otherindividuals are being forced to pay the cost—intaxes or in reduced purchasing power because ofinflation. Thus when a government enterprise op-erates at a deficit, it is helping some people bydepriving others of freedom of choice and a partof their own earnings. Here is a list of some gov-ernment enterprises (federal, state and local)

which actually own factors of production and sodirectly control their use:

Post offices and other facilities for deliveringmail and parcel post

Public schools and universitiesPublic hospitalsPublic housingPublic transit systems (buses, subways, trains,

etc.) in many citiesProduction and distribution of hydroelectric and

atomic power in some areasRural electrification projectsFinancing and insuring of real estate loans and

mortgagesScientific researchRecreational projects—state and national park

facilities, community orchestras, theaters,golf courses, etc.

Printing and publishing operations such as theGovernment Printing Office

Government employment agenciesGarbage, trash and sewage disposal in many

communitiesProvision of water supplies in some localitiesEtc.

(2) Government interventions. These are actsof government that interfere with peaceful inter-personal transactions. They may take the form of:

a. controls or regulations that force persons to dothings they wouldn't have chosen to do volun-tarily. If they would have, government wouldnot have considered passing laws for the pur-pose of compelling them to act differently

b. special privileges, favors or advantages to cer-tain persons denied others in the same sit-uation. Special privileges frequently take theform of handicapping would-be competitors,domestic and/or foreign, making it more diffi-cult, or impossible, for them to sell in certainmarkets. See the GLOSSARY definitions of "Pro-tectionism" and "Producers' policy"

c. subsidies, gifts of goods, services or money tosome persons or groups who fulfill certainqualifications. See "Welfare economics" in theGLOSSARY. Government has no funds of its ownto pay for such gifts. Their costs are alwayspaid by specific individuals. If the funds for asubsidy come from taxes, the taxpayers whopay the costs are forced to get along with less.If the funds are made available by inflation,deficit financing and/or credit expansion, thecost is borne in part by everyone with dollars,


dollar savings and other assets fixed in dollarterms, as every dollar in existence becomes lessvaluable and is deprived of some of its formerpurchasing power.

NOTE: Keep in mind always that the activities of a lim-ited government (see above) are absolutely necessaryfor the protection of lives, private property, defense,peaceful market transactions and the operation of thejudicial system. Thus they are not government inter-ventions or interferences for they facilitate—they donot hamper—the market process. The government pro-grams listed here are all government interventionsbecause they force people engaged in peaceful (non-violent) activities to act differently from the way theywould have if they were not required to comply withthe particular laws, statutes, decrees and/or regula-tions. Because they interfere with freedom of choiceand action they have the effect of reducing the numberof voluntary transactions and also, as a result, con-sumer satisfaction.

Here is a list of some of our more important gov-ernment interventions, controls and regulations,special privileges and subsidies:

Progressive or regressive taxationControl of prices, wages, rents, etc.Taxes on "capital gains," i.e., on a capital asset's

appreciation in value over a period of timeSales or excise taxes on certain itemsRecognition of certain labor unions for purposes

of bargainingCompulsory collective bargaining in some firms

and industriesLegally-decreed minimum wage ratesRestrictions on wages and hours of employmentCompulsory unemployment insuranceBenefits—financed in part or in full by govern-

ment—to certain persons such as the desti-tute, unemployed, handicapped, dependentchildren, aged, strikers, etc.

Restrictions on hiring or firing of workers be-cause of age, sex, race, religion, union status,etc.

Government support of agricultural prices, cropinsurance, soil conservation, irrigation, etc.

Regulation and control of carriers engagedin interstate commerce—railroads, airlines,buses, trucks, etc.

Restrictions on vehicles for purposes of safetyand/or pollution control

Regulation of production and product standardsto "protect" consumers

U.S. government permission required for rail-roads or airlines to open up, or close down aroute serving passengers

Government permission required to operate in-terstate communication facilities—telegraph,telephone, radio, TV, etc.

Government restrictions and specifications onproduct labeling

Government required reports from certain busi-nesses, including those listed and traded onstock exchanges

Control and regulation of credit and bankingFederal government grants to states and certain

communities to help finance schools, students,libraries, scientific research and development,hospitals, nursing homes, the arts, highways,welfare benefits

Public housing, slum clearance, urban renewalEnvironmental protection regulationsRestrictions on land use, zoningRight of eminent domainLicensing requirements to practice law, med-

icine and other professions, to operate certainbusinesses or even to go out of business, erector remodel buildings

Restrictions on international trading such as ex-port or import quotas

Tariffs or excise taxes on imports or exportsGovernment grants or loans to foreign govern-

ments to help finance economic developmentthere and/or to stimulate U.S. exports

Government subsidies to U. S. firms exhibitingat international trade fairs

Etc.

3. Economic consequences of government-op-erated enterprises and government interventions:

a. When government officials purchase factors ofproduction, establish and operate governmententerprises:

(1) Taxes must be raised and/or the quantity ofmoney increased to cover the additional ex-penditures

(2) Those who pay these taxes or who are de-prived of purchasing power because theircosts are paid by inflation have to get alongwith less for themselves, their families andthe projects they would otherwise have un-dertaken

(3) The prices of the factors of production thegovernment officials buy will tend to rise inresponse to their demand

(4) The further production of the particularfactors of production employed in the gov-ernment enterprises will be encouraged, tothe disadvantage of those factors private


entrepreneurs would have chosen to use intheir enterprises in response to consumersovereignty

(5) Private entrepreneurs engaged in the sameor similar operations will face serious com-petition, perhaps even losses and potentialbankruptcy because of the "cutthroat" com-petition of government enterprises whichare in a position to offer their production onthe market below cost, or even free, con-fident that government funds will be pro-vided to pay their expenses

(6) Production will be channeled into the areasgovernment spending calls for and awayfrom those private entrepreneurs wouldhave chosen in the hope of pleasing con-sumers and earning profits in the process

(7) Private enterprise in the areas governmenttakes over will be discouraged and anyoneconsidering entering and/or expanding intothese fields is very likely to be discouraged.

b. When government regulates and/or controlsthe operations of private enterprises in variousways, gives special privileges or grants subsi-dies to favored persons and/or groups:

(1) Taxes must be raised, or the quantity ofmoney and/or credit increased to cover thecosts of operating the bureaucracy requiredto administer the government regulations

(2) Those who pay the taxes or whose purchas-ing power declines because their costs arepaid by inflation will have to get along withless for themselves, their families and theprojects they would otherwise have under-taken

(3) Government regulations and controls neces-sarily tie the hands of private entrepreneursto some extent in the employment of theirfactors of production. The owners are nolonger completely free to buy, sell, trade, ex-pand, contract, plan production, design prod-ucts, adopt or reject new ideas or technol-ogies in accordance with their own best con-sidered judgment in the light of all condi-tions, keeping in mind the many interests oftheir potential customers. Ofttime business-men are not fully aware of the extent towhich they must conform with governmentrulings. The factors of production theyemploy—raw materials, tools, machines,workers, buildings, funds, etc.—may haveto be shifted to meet government require-

ments. Entrepreneurial freedom of choiceand flexibility in adapting to new conditionsand consumer demands is hampered by theneed to comply with the legal provisionswhich affect their particular operations

(4) The costs per unit of production are boundto rise as private entrepreneurs must spendmore time, thought and energy in copingwith the government regulations, shiftingworkers around, perhaps employing morepersons to handle duties not directly relatedto production, such as additional recordkeeping, filing government forms, and mak-ing changes in production methods andmaybe even products in order to complywith new government provisions and legaldecisions

(5) As unit production costs rise, entrepreneursmust cut costs and quality, or ask higherprices, to remain solvent. Yet consumerswill not, cannot, buy as many units at high-er prices—other things being equal—as theywould, or could, at lower unit prices. Thussales are bound to decline; producers willno longer be able to maintain the same out-put or to keep on employing as many work-ers as before

(6) The pattern of production will shift bit bybit in response to the government interven-tions. Entrepreneurs will plan differentlybecause they will no longer be receiving in-formation through the pricing system tellingthem what consumers would choose on thebasis of their own subjective (personal) val-ues. The responses of consumers are mod-ified by their need to act on the basis of theactual situation as it has been altered by theintervention of government force. The com-munications lines between consumers andentrepreneurs are diverted, distorted, inter-rupted and sometimes even broken by thegovernment interventions which have de-nied complete freedom of choice to consum-ers. The opportunities of consumers to com-pete in bidding for things they would haveliked to buy are hampered, for instance, byquotas that prevent some would-be com-petitors from selling in certain markets, byprice controls that restrict their freedom tooffer higher prices for something they wantvery much, by minimum wage laws thatkeep some persons unemployed, by tariffsthat raise the price of imports, by special


privileges to labor unions that exclude non-union workers from certain jobs and indus-tries, by added taxes required to pay for thesubsidies and bureaucracy that increasecosts per unit of production and deprive tax-payers of purchasing power they wouldotherwise have been able to spend on con-sumption, or to save and invest enablingfuture production to be increased.

To list all the economic effects of any govern-ment intervention is impossible. Everything in theeconomy is always in flux. All of us are alwaystrying to adjust as best we can to improve our ownpersonal situation, to relieve our various felt un-easinesses, considering present economic condi-tions and all interventions and obstacles to ourgoals. To understand the full economic impact ofany government intervention we would have tovisualize what persons would have done in the ab-sence of that interference, what new ideas andschemes would have been developed and howeveryone else would have been affected if markettransactions had not been so hampered and entre-preneurs so misled. This is impossible. However,encourage the students to think through as far asthey can the likely long run, as well as the shortrun, consequences of an intervention. Call their at-tention to Frederic Bastiat's essay where this the-sis was developed, "What is Seen and What is NotSeen" in Selected Essays on Political Economy.Have them re-read Henry Hazlitt's 'The BrokenWindow" and perhaps his book, Economics in OneLesson from which that short article was taken.Keep in mind always that the intervention of gov-ernment force makes it impossible for prices, pro-duction and personal consumption to evolve asthey would have on a free market in response toconsumer sovereignty resulting from the voluntarychoices of individuals. To the extent that govern-ment interventions hamper and prevent us frompursuing our own subjective (personal) values andpeaceful goals, they reduce personal freedom andsatisfaction.

SUMMARY

As we have stressed time and again, entrepre-neurs on the free market try to satisfy the wants ofconsumers in the hope of earning profits. To dothis, they must keep on the alert to anticipate asbest they can what consumers will be buying and

not buying in the future and how much they will bewilling to pay when newly produced goods and ser-vices can be offered on the market. Free marketprices furnish the entrepreneurs with the cluesthey need to plan intelligently. However, just astelephone and telegraph lines may be broken bynatural forces, so may the communication betweenconsumers and entrepreneurs be disrupted by actsof violence—criminal and/or the intervention ofgovernment force.

The consequences of criminal violence are easyto see and steps to compensate are soon taken.However, the effects of government force are notso readily recognized. Nevertheless, it can be verydestructive. It disrupts economic communicationsby distorting consumer price signals and/or by re-stricting and preventing entrepreneurs from usingtheir factors of production as they think best tomeet the future demands of consumers. Many per-sons, far and wide, will feel the effects in time.Freedom of choice and action are bound to sufferand living standards will be lower than they mighthave been as savings and investments are discour-aged and production is shifted irretrievably intogovernment-directed, i.e., non-consumer oriented,channels. Future generations will not be as welloff as they could have been for they will not inheritas large a backlog of savings, investments and cap-ital. The precise consequences of a specific inter-vention will vary in every case, of course. How-ever, the general economic effect of any govern-ment intervention is to bring about a tendency to:

1. disrupt economic communications channels,making it more difficult if not impossible forconsumer signals (prices) to reach producers

2. reduce the flexibility of producers in adaptingto changes

3. hamper the accumulation of savings and in-vestment

4. hinder the introduction to the market of newideas, new products, new methods, etc.

All the effects of government interventions deriveultimately from the fact that they interfere with thefreedom of individuals to express and pursue inpeace their own personal (subjective) values.


BUREAUCRACYCAPITALISMCOMMAND SOCIETY


COMMUNISMCONTRACT SOCIETY

"DISTRIBUTION," ECONOMICENTREPRENEURFACTORS OF PRODUCTIONFREE MARKETGOVERNMENT CONTROL OR REGULATIONGOVERNMENT INTERVENTIONGOVERNMENT, ROLE OFHAMPERED MARKET ECONOMYINTERVENTIONIST GOVERNMENTLIMITED GOVERNMENTPRIVATE PROPERTYPROPERTY RIGHTSSLAVERY, SERFDOMSOCIALISMSPECIAL PRIVILEGESSUBSIDYTOTALITARIAN GOVERNMENT"WELFARE ECONOMICS"


Articles

In the BASIC READER:•32. "The Elite Under Capitalism," Ludwig von

Mises*61. "The Formation and Function of Prices," Hans

F. Sennholz67. "A King of Long Ago," Lewis Love68. "The Communist Idea, I," Karl Marx69. "The Communist Idea, II," Earl Browder70. "A Lesson in Socialism," Thomas J. Shelly71. "The Tale of the Little Red Hen," W. A. Paton72. "The Beetle and the Centipede," W. A. Paton73. "Not Yours to Give," David Crockett

°74. "Intervention Leads to Total Control," GustavoR. Velasco

*75. "Food Control During Forty-six Centuries,"Mary G. Lacy

77. "American Communism, I & II," Percy L.Greaves, Jr.

Books

Bastiat, Frederic. Economic Sophisms (D. Van Nos-trand, 1964; FEE, 1968)

The Law (1850) (FEE, 1950/1961)"What is Seen and What is Not Seen"

(1850) in Selected Essays on Political Economy (D.Van Nostrand, 1964; FEE, 1968)

Campus Studies Institute. The Incredible Bread Ma-chine (World Research, 1974)

Carson, Clarence B. Throttling the Railroads (Lib-erty Fund, 1971)

Fleming, Harold M. States, Contracts and Progress:Dynamics of International Wealth (Oceana Publica-tions, 1960/1966)

°Greaves, Percy L., Jr. Is Further Intervention a Curefor Prior Intervention? (FEE, 1956)

°Hayek, F. A. The Road to Serfdom (Chicago, 1944;paperback, 1956)

Hazlitt, Henry. The Conquest of Poverty (ArlingtonHouse, 1973)

Economics in One Lesson (Harper, 1946;2nd ed., McFadden Publications, 1962; ManorBooks, 1973)

Man vs. the Welfare State (ArlingtonHouse, 1969)

Mises, Ludwig von. Bureaucracy (Yale, 1944; Arling-ton House, 1969)

* The Free and Prosperous Commonwealth(D. Van Nostrand, 1962)

• Human Action (Yale, 1949/1963; Regnery,1966)

Planned Chaos (FEE, 1947/1961)Planning for Freedom (Libertarian Press,

1952/1962/1974)• Socialism (Yale, 1951; Jonathan Cape, 1969)0 North, Gary. Marx's Religion of Revolution (Craig

Press, 1968)Read, Leonard E. Anything That's Peaceful (FEE,

1964)The Free Market and Its Enemy (FEE,

1965)Sumner, William Graham. What Social Classes

Owe to Each Other (1883). Many reprints.

15. ECONOMIC HISTORY


1. By now the students should have enough back-ground to analyze specific current events from theeconomic point of view. Some of them might trywriting letters to the local newspaper editor. Theycould discuss a recent newspaper editorial con-cerning high prices, a proposal for a new factory,shopping center or industry coming to town, a shiftin the demand for a local product on the worldmarket, some economic shortage due to a new law,government regulation or ruling affecting local cit-izens, the effects of a new tax, a Congressman'sstatement for or against controls, etc. Any suchchange analyzed on the basis of the economic the-ories covered in this course, should interest localreaders and might, therefore, appeal to local news-paper editors as well. They might discuss, for in-stance, the effect of the change—will it help or hurtconsumers? individuals with, or without, jobs?businessmen? taxpayers? young people? retiredpersons? etcetera?

2. Student papers or reports, assigned but nothanded in earlier, should be turned in or presentedto the class. Especially suitable in connection withthis Unit would be those dealing with some aspectof economic history—the development of privateproperty, the history of tools, labor unions, work-ing conditions, production methods, changes intransportation, trade routes, production and mar-keting techniques, etc., or reviews of books onspecific industries, biographies of industrialists orentrepreneurs.

3. Any stock market transactions, carried out asexplained in Unit 7 (ACTIVITIES 4 and 5) and Unit11 (ACTIVITIES 4 and 5), should be wound up at thistime. The most successful speculator in the classmight be recognized in some way for proven entre-preneurship—perhaps with a credit bonus or withthe presentation at a simple ceremony of a cer-tificate or "trophy," as suggested in Unit 11, suchas inexpensive jewelry with a design showingbear, bull, dollar sign or facsimilies of old coins.

4. Visits to historical homes or museums in thevicinity would supplement this Unit nicely. Pointout the relationship between (a) the earlier moreprimitive living conditions, the less efficient pro-duction techniques, distribution and marketingmethods, trade routes, methods of transportation,etc., and (b) the relatively less savings then avail-able. Compare the self-sufficiency of individualhouseholds in years past with the tremendouslycomplex specialization, division of labor, socialcooperation, mass production and trade that hasevolved over the years. Students might be askedto comment on the role played in this developmentby (a) ideas and entrepreneurial initiative and (b)savings and investment.

5. Ask the students to read, or re-read BurtonRascoe's "The Cow in the Apartment" (ReadingNo. 49), perhaps also Readings Nos. 19-27 on sav-ings. With Mr. Rascoe's thesis in mind, discuss thecurrent popularity of opting out of society, return-ing to nature and primitive living conditions, per-forming simple handicrafts, farming with crudeagricultural methods, etc. In a society where free-dom of choice is possible, individuals may refuseto participate in the market if they choose, reducetheir living standards and live a life of relativeself-sufficiency. However, if everyone were toadopt primitive, less efficient and more time-consuming methods of farming and production,fewer goods and services could be produced andthe quantities available for consumption woulddrop drastically; there just would not be enoughfood and shelter to support the present popula-tion. Mr. Rascoe's article illustrates how mucheasier it is to obtain milk—and also other foodsand clothing—through the market than it is to pro-duce them from scratch. If some students engagein handiwork, they may be able to compare thetime and trouble it takes to weave or knit the yardgoods necessary for a suit or dress, for instance,or to make paper, print and bind a book by hand,or to grind grain for flour and bake bread at home,with what it would take to earn the money on the

195


market—by doing what one does best and easiest—to pay for similar items.

6. A great deal of economic history may belearned from TV. Some producers of historicalshows take great pains to be accurate in portray-ing former means of communication, transporta-tion, production and living conditions. A number ofadvertisers stress the role of ideas, inventions, sav-ings and time required to produce and supply theirproduct to the market. Perhaps some studentsmight volunteer to monitor TV shows, looking formaterial illustrating economic changes in the useof savings, tools, specialization, etc., over theyears. Alert the students also to be on the look-outfor inaccuracies, historical inconsistencies and in-correct or misleading representations of an his-torical period. Are the costumes, vehicles, tools,guns and other items shown in a period piece alltypical of the time portrayed? Written or oral re-ports may be made on the information and/ormis-information on economic history available toTV viewers.

7. Grandparents may be rich sources of infor-mation on economic history. Perhaps some stu-dents can question a grandmother or grandfatheron the economic conditions under which they usedto live and work. Where did they live? Work?Shop? What utensils, appliances, tools, did theyuse daily? At home? On the job? How did theytravel to work or play? Daily? Week-ends? Vaca-tions? Do they now buy things they used to makefor themselves? Or vice versa? If they'need re-pairs or chores done at home, do they hire helpersor do it themselves? Did they do things differently20-30 years ago to obtain similar help?

8. There are many interesting topics suitable forreports or papers in connection with this Unit.Challenge the students to use references other thaneconomic books. See, for instance, books describ-ing life, fashions, work, production and living con-ditions at various times and places—in old Rome,on an English manor, in the American colonies,and so on. Refer also to histories and encyclopediaarticles dealing with specialized topics such asclipper ships, piracy, the Crusades, transportation,trade routes, particular industries, productiontechniques, biographies, and the Wild West.Look for ways trade, production and/or living andworking conditions were helped, hindered or dis-rupted by various historical events, when research-ing such topics as the following:

Life in old Rome

Life in a medieval French or German castleThe travels of Marco PoloThe spice tradeThe CrusadesThe slave tradeThe development of merchant shipping, Amer-

ican clipper ships, etc.The economic effects of war on two nations who

had formerly traded with one another—viz.England and the U.S. during the War of 1812,the North and South during the Civil War

The economic effects of opening up the west,i.e., the competition of food grown on richfarm lands in the Western U.S. with that pro-duced by farmers on the eastern seaboard andin Europe

The effect of pirates on merchant shipping, add-ing to the cost of goods from abroad becauseof extra risk, uncertainty and losses

The development step-by-step of some of theearly industries, during the Industrial Revolu-tion

The effects of the recent conflicts in Africa, theMideast, Southeast Asia, etc. on the produc-tion and trade of copper, rubber, rice, oil, tea,coffee, etc.

The economic life of isolated primitive tribes inthe 20th century—i.e., those native to Africa,Brazil, the Philippines (e.g., the Tasaday) etc.

The economic arrangements—the ownership ofproperty, division of labor and productionmethods—prevailing in early American cul-tures among the Indians of North America, theAztecs of Mexico, the Incas of Peru or theMayans of Central America

9. List and compare typical jobs and professionsduring various historical periods. Describe the typeof work and duties performed in each. Such infor-mation may be gathered from books and encyclo-pedia articles dealing with specific historical pe-riods (Roman Empire, Middle Ages, Feudalism,Mercantile System, Industrial Revolution, etc.),specific industries (farming, mining, pottery mak-ing, shipbuilding, merchant shipping, fishing, an-imal husbandry, transportation and commerce,banking, machine tool manufacture, electronics,printing, textiles, clothing, etc.), forms of industrialorganization (handicraft, cottage industries, tools,apprenticeship system, factories, craft guilds, labororganizations, mass production, assembly lines,etc.). This type of research should lead the stu-dents to recognize that the modern counterparts of

15. ECONOMIC HISTORY 197

a pre-Industrial Revolution craftsman would nowinclude countless workers in various highly spe-cialized fields of production. For instance, thework of a cobbler who made shoes from beginningto end is now divided into many narrow tasks, per-formed by countless persons, each of whom con-tributes something to many pairs of finished shoes,usually by doing easier work for shorter hours thantheir predecessors did. Not only are shoe machineoperators needed in a complex market economy totransform raw materials into finished shoes in thehands of consumers, but also machine makers,leather buyers, producers of canvas and rubber,truckers, salesclerks, janitors, accountants, secre-taries, etc. The result of their many specializedcontributions, made possible by tremendous capitalaccumulations and investments is more and bettershoes, more readily accessible to customers, than ifconsumers had to rely on the output of handi-craftsmen.

10. An historical study of tools, machines, meth-ods of production and industrial technologies mayinterest some students and quite a few books areavailable which describe and illustrate them andexplain their development. However, ask the stu-dents to keep in mind that this is a course in eco-nomic principles. Therefore, in reviewing suchtechnical books, they should emphasize the eco-nomic aspect—i.e., whether or not the tools andtechnologies discussed enabled individuals to bet-ter relieve their felt-uneasinesses. Here are severalquestions to help guide their analyses into eco-nomic channels:

a. Are the names known of the specific individuals—the innovators, inventors, ideamen, etc.—whowere responsible for developing the tools ortechniques described?

b. Were rainy-day and/or capitalist savings re-quired to introduce—i.e. to conceive of, invent,develop, manufacture and put into use in pro-duction—the new tools or technologies? If so,who supplied the savings needed?

c. Were all private individuals then permittedand/or able to own private property? If not,why not? Or were only a privileged few, al-lowed to own, accumulate, use and exchangeprivate property and savings as they saw fit?

d. To what extent did the attitude then prevailingtoward private property affect the economicconditions, living standards and savings of thepeople and their freedom to use what they had—their ideas, knowledge, abilities and property

—to experiment and to try new ways of doingthings?

e. Were innovators, inventors, ideamen, savers,investors and entrepreneurs hampered in anyway by other individuals or by governmentsin their efforts to develop new tools, machines,factories, plants and/or other productive facil-ities?

f. What effect did new technologies, tools or ma-chines, have on the kinds of jobs people per-formed? Did they increase the degree to whichlabor could be divided and specialized?

g. Did the tools or technologies described make itpossible for individuals to accomplish their ownpersonally-selected (subjective) values, endsand goals more fully, more satisfactorily, morepromptly and/or more easily? If so, how?

11. To increase their understanding of howmodern capitalism developed, the students mightreport on a particular phase of recent economichistory—the situation in a particular country or thedevelopment of a specific industry, technology ormarket process. The earlier Units of this SYLLABUS

(especially 6-12 and 14) contain the reason andlogic needed to interpret recent economic historyand to appreciate the respective influences of in-dividual initiative, ingenuity and savings and gov-ernment controls and regulation. Here are a num-ber of questions the students might keep in mindwhen researching for this project:

a. Did individuals have the opportunity to experi-ment, to try out new things?

b. Were individuals allowed to keep their earningsand any profits received from their ventures?

c. Did people have the right to own and controlproperty, and to use it precisely as they wished?

d. Were people free to save and invest as theychose?

e. Was the right to make private contracts as-sured? Were the terms of such contracts en-forced and violators penalized by the courts?

f. How were productive enterprises owned andmanaged?

g. What kinds of work did individual workers do?Did they work with their hands? Simple tools?Or with expensive, complex mechanized, auto-mated equipment?

h. How was production arranged? Who ownedproductive enterprises? Who took risks? Whoreaped profits, if any? What percentage of aworker's earnings or an entrepreneur's returndid he have to pay to government?


i. Did the government regulate or control the op-erations of productive enterprises? How wereprices affected?

j . Was more or less produced than at other timesand places? Were the goods and services peo-ple wanted more (or less) accessible? Was thequality of goods and services generally con-sidered better (or worse)?

k. Were individuals in a position to accomplishmore (or fewer) of their own personal (subjec-tive) values?

1. Were people able to relieve felt uneasinessesmore (or less) easily, promptly and success-fully?

EXPLANATORY TEXT

Economic history can be studied in many ways.The economic activities of men may be discussed(1) age by age—primitive caveman, tribal commu-nity, town life, feudalism, mercantilism, industrialrevolution, modern capitalism, etc.; (2) country bycountry—each modern nation being consideredchronologically from its settlement or founding tomodern times; (3) industry by industry—agriculture,trading, commerce, marketing, communication,manufacture, etc.; (4) according to tools and tech-nologies used; (5) from the viewpoint of workingconditions, living standards, home life, sanitation,and so on. Local libraries should have considerableinformation on many or most of these topics. Con-sult the card catalog or encyclopedias for materialon the history of specific countries, industries, pro-duction techniques, etc. One or all of these ap-proaches may be used in presenting economic his-tory in the classroom. In any case, however, theteacher should interpret historical data in the lightof the approach taken in this Unit—stressing therole of (a) individual conscious, purposive actions,choices, values and ideas, (b) the entrepreneurial,profit-and-loss, incentive, (c) capitalist savings andinvestment and (d) peaceful cooperation, exchangeand the market.

1. How did economic production start? Backin the days of cavemen, long before civilization aswe know it began, people lived in a real wilder-ness. They had to struggle against many obstaclesto survive—the vagaries of nature—cold, rain,storms, heat, drought, floods, starvation, wildbeasts, disease, etc. It wasn't easy to acquire eventhe barest necessities of life. Like animals, most

primitive men probably took things for granted asthey found them, became accustomed to beingcold, wet and hungry a good bit of the time, en-dured pain when necessary, brushed insects asidewhen irritated by them, scratched when theyitched, starved when food was scarce, stuffed whenthey had a lucky catch or find and died young aftera hard and brutish existence. Persons living undersuch primitive conditions had ample cause for rec-ognizing the "niggardliness of nature." However,they probably didn't analyze their situation criti-cally enough intellectually to be able to look at it inthat way. Nor did they have the vocabulary orlanguage to express such thoughts if they hadthem. The development of a few simple expres-sions was a long, slow process and, without words,a clear understanding of any concept as well asany profound interpersonal communication wasprobably impossible. Thus the development ofideas about communication and/or cooperationmust have awaited the evolution of languagewhich took centuries or, more likely, millenia.

Men living under primitive conditions were rivalsfor available resources. If food was scarce, twofamilies or family groups who happened on thesame nest of eggs, pack of wolves or tribe ofgoats were fierce competitors. The "law of thejungle" prevailed among men as well as animals.Only the fittest survived—until men began to applytheir superior powers of reason and came to recog-nize the advantages of interpersonal cooperation.For a review of this development, see Unit 5. Rec-ognition and application of the potential gains tobe derived from cooperating with other personswere probably attained separately many timesover, among individuals in isolated groups of sev-eral families, only to be lost time and again if dis-ease, pestilence, inter-tribal warfare and/or nat-ural catastrophies killed off the persons who hadacquired this superior understanding before theycould pass along this insight to others. In time,however, as the advantages of social cooperationreasserted themselves again and again, contactsamong persons and groups increased and the ideasof specializing, cooperating and exchanging grad-ually gained wider and wider acceptance.

One idea inevitably leads to another. As peoplelearned it was to their advantage to cooperate andtrade with persons in other communities, as wellas within the tribal group, trade routes and mar-kets began to develop. The right to own propertyaccompanied this trend—as explained in Unit 4—for unless a person has exclusive ownership and


control of an object he is not in a position to offerit in trade. Men also showed intellectual superior-ity over animals by developing tools to help themaccomplish more, more easily. Persons who devel-op new tools are usually spurred to invention bythe desire to have more production to consume:

Tools and machinery are primarily not labor-savingdevices, but means to increase output per unit of in-put.

Ludwig von Mises, Human Action (3rd ed., 1966),p. 774

Although the primary reason for using tools wasto increase output, tools were labor-saving devicestoo. Once men discovered the use of tools, learnedthe advantages of social cooperation and speciali-zation and began to trade, their productivity in-creased step by step. The economic history of theworld is the history of production and trade fromthe time of the primitive caveman down to thepresent time. Starting with nothing but their ownphysical powers, energies and mental abilities,plus natural resources—the land, plants and an-imals they found around them—men applied reasonand logic to transform what was available intogoods, services and tools they could consume oruse in some way to serve their various purposes,to relieve their most urgent felt uneasinesses andto attain their most important values and goals.Taking the very early steps in this process—locat-ing, subduing and preparing raw resources forconsumption—was a tremendously difficult processthat took considerable time and effort. Few goodsare consumable or usable in their natural state.Remember the saying attributed to Confucius:

Man with mouth openMust wait long timeFor roast duck to fly in.

2. What course has production followed? Theeconomic history of the world has been extremelyuneven, with alternating ups and downs, successesand setbacks, progress and regression. Step bystep as individuals conceived ideas that were help-ful and discovered how to accomplish some tasksmore easily than before, goods and services be-came more readily accessible and people couldhave more things. Also, as they learned to dothings cheaper (i.e., with the expenditure of lesshard physical labor, physical resources and time)and better (i.e., resulting in a good or service moresuitable for the purpose intended) they were grad-ually in a position to improve their living stand-

ards. Then in time when they were able to pro-duce a little more than they needed for bare sur-vival, they could set something aside to consumeor to use later—on proverbial "rainy days/'

Unfortunately, however, the course of economichistory is never steadily in the direction of moregoods and services. Efforts spent on productionmay come to naught, due to human error, naturaldisaster and/or interpersonal violence. Goods pro-duced at great cost and savings accumulated bycare and forbearance may be lost or destroyed.Life inevitably has ups and downs. As individualsare free to produce, trade and save in peace, con-ditions may improve for a time. But then inevitablythere will be setbacks—personal, accidental, localand/or widespread obstacles, mistakes, changes,diseases, pestilences, epidemics, criminal activ-ities, natural catastrophes, wars and/or govern-ments—all of which may interfere with privateactivities and even confiscate wealth. Some con-sequences of a disaster may possibly be overcomevery soon; other effects may be long-lasting andperhaps never remedied at all.

The economic history of the world since life be-gan is the outcome of the struggle of countless in-dividuals, each trying as best he or she can, in theface of various obstacles, to use goods available onthe existing "smorgasbord" of resources to im-prove his or her situation, as he or she sees it, torelieve their most urgently felt uneasinesses, at-tain their most important needs, wants and goalson their value scales. Every single individual al-ways tries to use time, energy and other availableresources to best advantage—so as to reduce the in-evitable gap between these various resources andtheir individual needs, wants and wishes, i.e., toalleviate his or her own personal "economic prob-lem." The total amount of goods and services pro-duced and available at any instant—as well as theimportant events and large scale trends historianswrite about—are all consequences of the ideas,choices and actions of separate individuals, actingalone, in cooperation or in combination with oth-ers, under the influence of various ideas andvalues. To describe the economic history of theworld in this way, as the outcome of the purposiveactions of countless individuals is to approach itfrom the viewpoint of micro-economics.

Thus, the history of production throughout theworld may be traced to the actions and interac-tions of countless individuals, every one of them anentrepreneur in the sense that he or she makesdecisions and choices and then acts, speculates, in


the attempt to cope with changes, bringing aboutfurther changes, hopefully in the direction desired.Every one of us is always acting in the hope of prof-it, psychic and/or monetary, as explained in Unit8. Individuals will succeed in attaining their variousvalues and ends if they correctly anticipate the fu-ture. Entrepreneurs will succeed in avoiding mone-tary losses and will earn monetary profits on themarket if they (a) make good use of the "half-baked cake" (described in Unit 8, p. 73) of rawmaterials, factors of production, semi-finishedproducts and finished consumers goods, (b) copewith changes successfully and (c) provide con-sumers with things they need and want at pricesover their production costs but not over what con-sumers can and will pay. When natural forces in-tervene, or other persons interfere with force orthreat of force, entrepreneurial efforts are dis-rupted or sidetracked into different, non-consumerdirected channels, perhaps damaged, lost or evendestroyed completely. The outcome of these com-peting and counteracting forces is history.

World history, therefore, is the outcome of whatcountless individuals have done over the ages inthe face of changes. People make economic his-tory by their purposive actions—taken alone or incooperation with others—under the influence ofideas, various pressures and exigencies of the mo-ment due to natural and/or interpersonal forces orthreats. Every historical event—other than changesdue to natural causes—can be explained as the out-come of the actions of specific individuals in theirrespective attempts to relieve felt uneasinesses,attain various ends and cope with their own "eco-nomic problems" in the light of their ideas, valuesand conditions as they view them.

3. How have people organized interpersonal re-lationships throughout the ages? World economichistory encompasses such a tremendous amountof material and miscellaneous data that it is com-pletely incomprehensible unless systematized andarranged in some logical order—by events, timeperiods, production methods, characteristic institu-tions or some other common denominator. Perhapsthe simplest way to make the countless purposiveactions of men comprehensible is to arrange themaccording to economic organization and produc-tion methods. We .shall consider the means menadopted and the institutions they established.Were they suitable for relieving individual feltuneasinesses? Did they help or hinder individualsin accomplishing their personal, subjective values,ends, goals? Did they contribute to reducing the

gap between what people had—their resources,skills and aptitudes—and what they wanted—satis-faction of their needs, wants, wishes, "castles inSpain," etc. Here are brief descriptions of the moreimportant economic arrangements men haveadopted from time to time:

a. Primitive economies in which men live in smallgroups, relying almost entirely on foraging andhunting for the necessities of life.

b. Nomadic tribes which acquire and domesticatea few animals, and move from time to time insearch of fodder for their flocks. Their livestockare their major source of food, clothing andshelter.

c. Agricultural societies, substantially self-suffi-cient, made up of families, tribal groups orsmall communities which have learned to tillthe soil and so seldom move around. The sys-tem of feudalism, under which the majority ofthe people lived clustered around the manor ofa privileged lord or ruler, in practically self-sufficient communities, has much in commonwith primitive agricultural societies.

d. The development of tools permitted men toproduce more goods and services more easilyand quickly. Tools range in sophistication fromthe simplest wooden club, stone hammer orlever concocted from a tree branch, through thewheel, down to extremely huge, complicatedand highly productive modern vehicles, toolingmachines, assembly lines, transistorized com-puters, etc. For convenience sake, historianssometimes label civilizations according to themost important materials out of which men ofthat era made their tools. For instance, theearliest period in the history of man-made toolshas been called the Stone Age. Then at varioustimes and places, with considerable variationand overlapping, came the Copper, Bronze andIron Ages. Then perhaps the Steel Age and theAge of Electricity, and now the Electronic Ageor the Age of Automation.

e. Specialization, cooperation and trade devel-oped as people learned the advantages theyoffer over individual, family or tribal self-suf-ficiency and autarky. Progress in this directionwas slow. Among the first to trade were com-munities linked by waterways along whichtravel was easier than through raw and under-developed wildernesses. The earliest interre-gional traders sought raw materials not obtain-


able locally and exotic items such as spices. Astransportation and knowledge of the world ex-panded, so did interregional trade.

f. The development from barter to a moneyeconomy. Many, many centuries ago, individ-uals began to discover, one by one, that it waseasier to trade if they didn't have to exchangewhat they had for what they wanted directly,but could arrange transactions in terms of athird commodity which was wanted by manypeople. In time, it became apparent that somecertain commodity was considerably more ac-ceptable in exchange by the inhabitants of acommunity than any other commodity. Thatcertain commodity then became that commu-nity's medium of exchange or money. Thelarger the trading area in which this commod-ity money was accepted in exchange, the moreopportunities there could be to expand the di-vision of labor and, thus, to improve efficiencyand increase production and trade.

g. The "Industrial Revolution" was named for the"revolution" in production methods which tookplace from about 1750 to 1850. Small handi-craft enterprises were replaced in many areasof production by large-scale assembly line tech-niques. This shift in production methods wasreally only a part of the long-term economicevolution which began when men first devisedtools to help them produce more of the thingsthey wanted. It was the outcome of (1) in-creased specialization and division of labor, (2)the development of more efficient tools, tech-nologies and transportation and (3) greater ac-cumulations of capitalist savings, larger invest-ments and wider interregional trade. Duringthe 18th and 19th centuries one man's ideasabout improving production followed another'sin rapid succession in response to the greaterfreedom then permitting producers to seekprofits by serving consumers, retain their earn-ings, accumulate savings and invest. Becauseeconomic changes were coming along so fast,later historians described that time of strikingand noticeable changes as "revolutionary."

h. Modern capitalism with its many large scaleenterprises, economies of scale, computerizedand automated plants, expanded internationaltrade and increased worldwide economic co-operation of the long-term evolution in massproduction methods which gained momentumwith the "Industrial Revolution" of the 18thand 19th centuries.

4. Describe the more important economic sys-tems in the history of the world. It is logical tostudy history chronologically. However, economichistory should be approached from the viewpointof the economic arrangements men have workedout and adopted at various times and places. Inthis Unit, a compromise between these two ap-proaches will be attempted. The history of thewestern world will be divided into six major moreor less chronological time periods, civilizations orcultures, each to be discussed from the viewpointof the economic arrangements then prevailing: (a)primitive societies; (b) the ancient civilizationswhich centered around the Mediterranean; (c)Feudalism of the Middle Ages; (d) Mercantilism;(e) the "Industrial Revolution" of the 18th and19th centuries, and (f) modern large-scale, mass-production capitalism.

NOTE: A word of caution against thinking of worldhistory as a series of neatly defined time periods, eachwith clear and distinct characteristics. The history ofacting men cannot be divided precisely by dates intosharply defined and distinctly separate civilizations,cultures or economic systems. These are all outcomesof ideas, ideas conceived by specific individuals atparticular places and times, ideas passed on one byone from one person to another. It takes time for anew idea to become accepted by enough persons tohave any significant influence. Thus civilizations, cul-tures and economic arrangements overlap; the linesdividing them are blurred and indistinct; some ideasfrom an earlier culture linger on when times arechanging while other new ideas, later associated byhistorians with a new civilization or culture which isstill to come, are advanced by pioneer thinkers dur-ing an earlier historical period. Thus changes from onesocial system to another generally take place verygradually. Yet every event in history, even the be-ginnings, widespread manifestations and final dis-solutions of the most important civilizations, culturesor economic arrangements have all been products ofthe ideas and actions of specific individuals. Theirclassification as typical of distinct historical periodswith certain characteristics is an arbitrary deviceon the part of historians who try in this way to explainhistorical events and to arrange extremely complexdata in some logical and comprehensible order.

The six major chronological periods listed belowshould illustrate how the institution of privateproperty evolved, the division of labor and tradedeveloped, inventions were made, savings wereaccumulated, investments were permitted and asociety based on status was replaced by a societybased on contract. These developments throughoutthe six historical periods discussed below were notwithout interruptions. Progress from simple eco-


nomic arrangements with relatively little speciali-zation and crude tools to more sophisticated spe-cialization, more finely divided labor, increasedsavings, capital accumulation and the wider use ofcontracts, more complex and efficient tools, massproduction and expanded trade had many setbacksover the years.

1. Primitive societies: Primitive economieswhich rely primarily on foraging, hunting, herdingdomestic animals and simple farming have beenmentioned from time to time in earlier units of thisSYLLABUS and need not be discussed here. The stu-dents have probably seen exhibits of primitiveartifacts and museum reconstructions of primitivefamily units or tribal communities. The major les-son to be learned from such simple economic insti-tutions is that they were relatively inefficient andunproductive. Production with the simplest of toolsyields so little food and shelter that primitive peo-ples barely exist from hand to mouth. Even theslightest miscalculation or calamity of nature maytip the scales against survival in favor of hungerand starvation. It was probably only as a result ofextreme effort and/or luck that a few individualsgradually were able to produce enough so theycould abstain from consuming a part of what theyproduced in order to set something aside for themorrow. Until they could begin to save a little inthis way, they were completely at the mercy of theelements, disease, animals and other potentialenemies. The numbers of persons who could besustained and nourished to maturity by such prim-itive production methods are extremely limited.Unless disturbed by outside factors, such com-munities are not apt to change much in size. War,famine and pestilence may reduce their numbers.Good fortune might permit a community togrow but then it is likely to split up lest the compe-tition among so many persons for the resourcesavailable in a limited geographical area becometoo keen, leading to extreme want and perhapsserious disputes within the group.

It is difficult for men to accumulate savingswhen they have available only the very most prim-itive of tools. However, it is still possible. After all,the tremendous complex of capitalist savings andinvestments available to producers today had theirorigin in the simple "rainy day" savings of somecertain individuals living and producing under in-efficient and primitive conditions.

One by one, specific individuals existing underthe most primitive, almost animal-like conditions,found it was possible at times—and advantageous—

to abstain from consuming all they produced, soas to set something aside to consume later or touse in making tools to increase their production.Step by step, some of our early ancestors began todivide tasks up among several persons, to special-ize more, to develop tools and money, to trade overwider areas, to accumulate capitalist savings andto expand their investments. As they were able tosave a little something, they could produce a bitmore. As they developed more productive ar-rangements, they were able to move out of caves.Then gradually they learned to make pottery, tools,houses, wagons, ships, textiles, etc., and beganto construct more substantial communities. Thenext economic institutions in this chronologicalsurvey will be those characteristic of the majorancient civilizations which centered around theMediterranean Sea—the Egyptian, Babylonian, As-syrian, Phoenician, Cretan, Greek and Roman.

2. Ancient civilizations: By the dawn of theearly Egyptian civilization—about 3500 B.C. or3000 B.C.—tremendous progress in productionmethods had been made since the age of primitiveman. The wheel had been invented. The crudetools of the Stone Age had been improved. TheBronze Age came along, followed by the Iron Age,as people discovered how to use these metals toproduce more efficient tools. Many skilled crafts-men and artisans developed special skills. Con-siderable knowledge about mechanics was accum-ulated, enabling the Egyptians to construct spec-tacular monuments, the Pyramids and other hugestructures. Their ruling monarchs enjoyed manyconveniences and luxuries, although the majorityof the people barely survived. Production still de-pended to a large extent on manual labor. Thewealth of the few was acquired from the masses ofthe people by force, taxation, confiscation andcompulsory labor.

Throughout the ancient world, sharp distinctionsexisted between the privileged classes and theworking serfs and slaves. This class structure, thisstatus society, was reinforced by beliefs in pagangods depicted as cruel, vengeful and intolerant ofrevolt against the existing social system. Changestook place, of course, and new ideas were devel-oped. Living conditions and production methodsshifted over the centuries so that distinctive char-acteristics developed at different places, times andamong different peoples.

The Phoenicians took to trade, built ships and intime opened extensive trade routes throughout theMediterranean, through the Straits of Gibraltar to


the western coast of Africa and perhaps even as farafield as Great Britain.

The Greeks were known for their contributionsto rational thought. By questioning the nature ofthe universe and the basis of ethics and morality,their leading thinkers developed an intellectual un-derstanding of much that had previously been ac-cepted only on faith or out of superstition. Theymade important contributions in the fields of phi-losophy, astronomy, mathematics and mechanics.Yet production of economic goods and servicescontinued to be done largely by slaves. Their idea-men and inventors had little incentive to put theirknowledge of math and mechanics to practical usein production. Production was the province ofslaves, whose time and energy there seemed noreason to economize.

Although broad generalizations tend to over-simplify, it was generally true throughout the an-cient world that religious beliefs contributed toholding physical labor in contempt. When work islooked down upon, there is little incentive for thesmarter, brighter, more clever and ambitious per-sons to devote time, thought and ingenuity to try-ing to improve working conditions and productionefficiency. Consequently, the intellectuals of thatera devoted their efforts to art, literature, oratoryor philosophy and so had little impact on eco-nomic relations, production and trade.

The Romans introduced significant changes ingovernment, developing a legal system which pro-moted law and order and provided greater protec-tion of life and property. The system of RomanLaw was spread through military conquest and theexpansion of the Roman Empire. The developmentof law and order, combined with road buildingthroughout the Roman Empire improving overlandtransportation substantially, made it possible toexpand communications and trade over larger andlarger areas. Division of labor increased as a result,production became more specialized, trade ex-panded, larger markets developed and the peoplebecame increasingly integrated and economicallyinterdependent. Even so, production still dependedto a large extent on manual labor and the work ofslaves. Any demand for more goods and services toconsume represented a demand for more slaves todo the work. The source of more slaves was warand conquest, so the use of slaves in productionencouraged military action.

Reliance on slave labor tends to depress the so-cial status and earnings of individuals in the non-privileged classes. It tends to undermine the

independence of the people, as well as social co-operation through the market and the strength ofthe economic system. This made it difficult forfree citizens in the Roman Empire to earn theirown living as farmers, for instance, artisans ormanual workers. Many who could not supportthemselves as a result joined the army. Othersdrifted into the cities where the government is-sued free food to gain their favor and votes and toprevent unrest among them. Government expensesto pay for the armed forces and for the food hand-outs rose. Yet taxes declined because of the inevit-able drop in the production due to these govern-ment policies. To obtain funds, therefore, the gov-ernment of Rome began to expand the quantity ofmoney by reducing the metallic content of thecoins, by clipping or by debasing the alloy fromwhich they were made. Not surprisingly, produc-ers then asked higher prices for their goods andservices in terms of the depreciated currency. Thegovernment's next step, in an attempt to keepprices from rising, was to fix maximum pricesabove which produce could not be sold. The own-ers of large agricultural estates who had formerlysupplied the cities with foods and other commodi-ties then refused to ship their produce. The citieshad evolved in a climate of law and order, whichrespected private property and encouraged spe-cialization, fairly large scale production, economicintegration and interregional trade so they had be-come economically dependent on produce grownthroughout the Empire. When the large agricul-tural estates, manned by slaves, stopped shippingproduce to the cities and bent their energiestoward becoming self-sufficient, the cities could nolonger survive. The Roman economic system,erected on a broad base of interpersonal cooper-ation, then began to disintegrate. In place of thesystem of social cooperation, production for a mar-ket and interregional trade throughout the RomanEmpire there arose widely scattered, isolated, self-supporting agricultural estates, the predecessorsof the feudal manors of the Middle Ages.

What brought about the decline of the empire and thedecay of its civilization was the disintegration of thiseconomic inter connectedness, not the barbarian in-vasions. The alien aggressors merely took advantageof an opportunity which the internal weakness of theempire offered them.

Ludwig von Mises, Human Action (3rd ed., 1966),p. 767

3. Feudalism: Rome was sacked by Alaric, theGoth in 410 A.D., and again in 455 A.D. by the


Vandals under Gcmseric. Then in 476, the Germanchieftain Odoacer ousted the last Roman emperorand assumed power. By that time, Attila, the Hun,had overrun large sections of the Roman Empirein Europe. The Empire's huge integrated marketeconomy was broken up and the advantages ofinterregional cooperation were lost. Roman roads,over which large armies had traveled long dis-tances and over which traders had shipped goodsand produce, were not kept in repair and graduallydisintegrated. Communication and transportationamong widely scattered communities becamemore and more difficult and dangerous. The lord ofa feudal estate could protect only the territory inhis immediate neighborhood. Once a traveler wasoutside the sphere of his lord's influence, he wason his own, with no assurance of help in defendinghimself against attacks from highwaymen whomight steal or murder for their own immediategain. Thus, contact and trade with neighboringestates was rare. Under such conditions markettransactions were difficult and risky and importsexceedingly expensive. Each feudal estate thenbecame of necessity practically self-sufficient.The peasants whose huts clustered around thewalls of a lord's castle grew their own food, madetheir own clothing, built their own homes andhunted within the area of their lord's influence.They were not free to do as they wished or to gowhere they chose. They were required to spend acertain amount of their time working for their lordand they had to serve in his regiment in time ofwar. In return, they were given small plots of landto cultivate, some protection and allowed to takerefuge within the walls of the castle at the sign ofdanger. On the whole, however, the peasant's lifewas difficult and harsh. He had only very crudetools to work with so that his output was low. As aresult, relatively few goods and services were pro-duced and available for consumption. Only a veryfew persons living under feudalism could expect tohave more than the bare necessities of life.

With the fall of the Roman Empire, most of thelibraries and books of the ancient world civiliza-tions had been lost or destroyed. Considerableknowledge was kept alive during the followingcenturies, by the priests in monasteries, althoughthe established church did little during that timeto encourage independent thought among themasses. Lack of freedom, the rigid class structure,religious superstitions, tradition, customs and iso-lation combined to discourage thought and experi-mentation as to how to develop new and better

ways of doing things and so improve conditions.As a result, the age of feudalism is sometimesknown as the Dark Ages.

Many historians have treated this period offeudalism—roughly the eight centuries from 500 to1300 A.D.—as if conditions remained essentiallythe same throughout. In doing this, they probablyintend to call attention to the fact that economicconditions did not show a noticeable trend in anyone direction; the material well-being of the peoplein general did not improve or decline substantiallyover these centuries. But conditions did changefrom time to time. Some events brought significantchanges in their train. Many persons were pro-foundly affected by wars, plagues and local condi-tions. Also new ideas did crop up and some inno-vators were successful in carrying out projects. Forinstance, the age of feudalism is known for itsRomanesque structures, and Gothic arthitecturewas developing during this period also.

Religious ideas were extremely important andinfluential during these centuries. It was underfeudalism that Christianity became the major re-ligion of western Europe. Slavery died out and anew attitude of respect for labor developed. Be-tween 1096 and 1272, countless thousands of per-sons embarked on religious Crusades to the MiddleEast; they marched across Europe to do battleagainst the non-Christian "infidels" and to wrestJerusalem from them for the Christians. The Cru-sades also had far-ranging consequences outsidethe area of religion. Survivors brought back manynew ideas and many Europeans came to realize, asa result, that there was a large and varied worldbeyond the borders of the feudal estates wherethey were born and raised. Many learned aboutstrange commodities previously unknown in Eu-rope. Thus, in time, some Europeans arrived atan awareness that interregional trade and the ex-change of ideas with others could bring advan-tages.

NOTE: This is a good place to remind the students,when studying the economic institutions of any his-torical period, to look for indications of artificial ob-stacles which interfere with the freedom of individualsto think, make decisions and act. Natural forces—i.e.,time, gravity, space, nature, weather, inborn personalcharacteristics, etc.—may be serious obstacles to in-dividual choices and actions at any time in history.However, the important consideration from the eco-nomic viewpoint is the extent to which some persons,groups of persons or other agents impose artificialobstacles in the path of others. Granted of course, noone should be free to use force or threat of force to


interfere with the freedom of others to do the same.Nor should anyone be permitted to do injury to othersmaliciously. Once these exceptions have beenacknowledged and explained, ask the students to de-termine, so far as they can, how much freedom peo-ple have had at each period in history to develop andimplement new ideas, act and experiment on the basisof new ideas and use their own personal peacefullyacquired or produced property to put new ideas intooperation.

REMEMBER: (1) THE ESSENCE OF A FREEMARKET ECONOMY IS THE OPPORTUNITYTO EXPERIMENT WITH NEW IDEAS (2) ES-SENTIAL FOR EXPERIMENTING IS THERIGHT TO OWN AND CONTROL THE USE OFPRIVATE PROPERTY.

To analyze how much freedom people had atdifferent periods in history to try out new ideas,the students will, of course, have to look at the op-posite side of the coin too. Were artificial (notnatural) obstacles threatened or imposed bysome individuals, groups of individuals or theiragents, during an historical period hampering, re-stricting, regulating, barring or prohibiting thefreedom and opportunity of some or all other indi-viduals to develop, acquire, use and/or experimentwith their own personal (a) new ideas? (b) knowl-edge? (c) production, earnings, profits? (d) privateproperty? (e) savings? (f) investments? (g) tools,technologies or production methods? (h) etcetera?in their attempts to relieve personal felt uneasi-nesses.

4. Mercantilism: It is said that Rome was notbuilt in a day. And it is just as true that it did notfall in a day. As we have seen, the preparation forits final collapse took a very long time. The prin-ciple of interregional cooperation and pride in theRoman Empire made it powerful and vital wher-ever its influence extended. However, these ideaswere eroded very slowly bit by bit over severalcenturies before Alaric, the Goth, and Genseric,the Vandal, sacked the city of Rome itself. Sim-ilarly, the "Dark Ages" of feudalism which fol-lowed did not come to a sudden end. The Crusadeshelped to open the eyes of many people to the factthat there was much to know about the world be-yond their horizons. Wars and political conditionsduring the 1300s disrupted the prevailing eco-nomic institutions. There was considerable unrestamong the people, both on the continent of Europeand in England. The bubonic plague, the dreadedBlack Death caused by rat fleas, started in 1347 inConstantinople and spread throughout most of

Europe, wiping out almost half of the population.As a result previously existing economic and po-litical arrangements were seriously disturbed.

Peasants, ousted by the widespread turmoilfrom the feudal estates where they lived, had tofind new places to live and work. Surviving land-owners were desperate to replace the workers theyhad lost. The competition among them for men totill their soil and operate their establishmentsplaced the relatively few workers still available inbetter bargaining positions than they had been be-fore. With all these upsets, adjustments and pop-ulation shifts, the old system based on self-suffi-cient feudal estates centered around fortifiedcastles of privileged lords began to change. Theauthority of the feudal lords gradually waned. Bitby bit, people moved off the feudal estates andtowns began to spring up. With the decline offeudal authority, power gravitated into the handsof national governments.

As national governments assumed greater prom-inence, kings and queens sought wealth and pres-tige. Not only did they relish great riches for them-selves, but also it was generally believed that awealthy monarch was the sign of a prosperousnation. In the hope of adding to the nation's wealthand gaining advantages over military rivals, kingsand queens financed many expensive voyages ofexploration in the search for gold, silver and spices.An entire complement of laws evolved to imple-ment the ideas of Mercantilism by assuring a"favorable" balance of trade, i.e., a net importsurplus of the precious metals.

Privileged landholders and political authoritieswere jealous of their entrenched positions andfearful of change. They made use of their power toenact laws intended to protect their establishedpositions, preserve the status quo and prevent eco-nomic innovations. Countless restrictions wereimposed on trade and commerce during this time.Mercantilist legislation was enacted to givespecial assistance to domestic "infant industries"such as the manufacture of cloth, glass, cutlery andpaper in the desire to reduce imports. To encour-age the domestic fishing industry in England, itwas made compulsory to eat fish on certain days.The export of goods produced by domestic arti-sans and merchants was subsidized with tax funds.The mobility of workers was restricted. Wages andhours of work were regulated. Privileged craftguilds were given the power to bar the sale in theircommunities of competing products produced withthe labor of unauthorized, non-guild members and


lower-paid workmen. Special monopolies and priv-ileges were granted by the Crown to many firms—for the exclusive right in a certain locality to pro-duce playing cards, wine, textiles, bread, shoes,etc. The freedom of aliens living in the country togo into business was severely restricted. And so on,and on, and on.

In spite of the attempts to preserve the statusquo by enacting "mercantilist" programs, changesdestined to have tremendous impact were takingplace. The development of towns and larger com-munities brought increased division of labor, spe-cialization and interregional trade. Interpersonalcommunication and contact gradually increased.The horizons of many persons were being broad-ened bit by bit. With the rediscovery of ancientGreek and Roman documents, some old, long-for-gotten ideas were being revived. A number of newideas were also being introduced, arousing interestand creating a certain skepticism among manyEuropeans as to the value of traditional "knowl-edge," customs and practices. Thus gradually theway was being paved for the "Renaissance" of the14th-16th centuries. Doubts as to the dictates ofthe established church caused men such as JohnWycliffe, John Huss, Savonarola, Martin Luther,Ulrich Zwingli and John Calvin to ask questionsabout religion, laying the groundwork for the "Ref-ormation" of the 16th and 17th centuries. Intellec-tual curiosity about the universe sparked the in-quiring minds of Galileo, Copernicus, Leonardoda Vinci and Francis Bacon. The scientific datathese men developed spurred the adventurous spir-its of Columbus, John Cabot, Amerigo Vespucci,Vasco da Gama, Ponce de Leon, Balboa, Magellanand many others who crossed uncharted seas insearch of spices, gold and other precious metals.These explorations expanded the size of the knownworld and opened more regions to trade, settle-ment and economic development.

Bit by bit over the centuries, the intellectual cli-mate was being prepared to permit a veritable"revolution" to take place in production methods.Scientists had added to available knowledge.Philosophers had raised serious doubts aboutmany ancient superstitions and the infallibility ofthe official church hierarchy. Intellectuals had be-gun to question long-standing governmental poli-cies and even the authority of kings and queensthemselves. Montesquieu, Locke, Hume and otherswere developing the concept of individual rights,furnishing the rationale for limiting the power ofgovernment, protecting individual lives and prop-

erty and leaving people otherwise free. Increas-ing numbers of persons were beginning to insistthat government stay out of their personal affairs.As this trend spread, government interventions ofthe Mercantilist type were repealed, ignored or by-passed and government reforms were instigated toprotect individual privacy, private property and thefreedom of individuals to worship as they chose.With fewer restrictions, more opportunity to ex-periment and better chances of retaining what theygained from their efforts, people had greater in-centive to look for ways to make their work easier,more efficient and more productive, to developnew and better tools and machines, to search fornew sources of raw materials and larger marketsfor their increasing output. The foundations foran industrial "revolution" were being prepared.The groundwork had been laid by earlier thoughtleaders who prepared a climate of opinion whichpermitted inventors, innovators and entrepreneursto experiment and to try to put their own ideasinto practice. Keep this in mind when discussingthe development of modern industry.

Ideas engender social institutions, political changes,technological methods of production, and all that iscalled economic conditions. . . . New ideas do notoriginate in an ideological vacuum. They are calledforth by the previously existing ideological structure;they are the response offered by a man's mind to theideas developed by his predecessors. . . . We knowthe names of the men who invented and step by stepperfected the motorcar. . . . We do not know the namesof the men who, in the beginnings of civilization, madethe greatest inventions—for example lighting a fire.But . . . it is always an individual who starts a newmethod of doing things, and then other people imitatehis example. . . . The historical process . . . is the com-posite outcome of the intentional actions of all indi-viduals. . . . Every idea originated at a definite point oftime and space in the head of an individual.

Ludwig von Mises, Theory and History (Yale,1957/Arlington, 1969), pp. 187-8, 192, 196, 225

5. Industrial Revolution: After the decline ofthe feudal system until the 18th century, indus-trial production shifted gradually, as we have seen,to cities and towns. Government, under the influ-ence of the prevailing Mercantilist philosophy,often granted town and city guilds of craftsmenand merchants the power to restrict prices, limitthe number of apprenticeships and regulate pro-duction, commerce and trade for the benefit oftheir members. Freedom of entry to such priv-ileged industries and protected markets was de-nied would-be entrepreneurs and producers. Thusestablished producers enjoyed a special protection


from potential competition. Under such an ar-rangement new products were necessarily limitedin quantity, high in price and available primarilyonly to the more well-to-do. Anyone with a newidea about how production might be improved hadto look outside the jurisdiction of the guilds for anopportunity to put his scheme into practice. Thus,any significant change in economic arrangementscould arise only outside the cities and towns, out-side the protected markets of the privileged guilds,outside established economic channels. And thatwas where the "Industrial Revolution" began.

To understand the "Industrial Revolution" ofthe 18th and 19th centuries we must realize that itwas the outcome of the ideas and actions of count-less individuals. No single idea about a new way toproduce something may have seemed particularlynoteworthy or important at the time. But over theyears many such ideas added up to an "industrialrevolution." The textile and clothing industrieswere among the first affected. Before the "Indus-trial Revolution," the majority of the people livedin abject poverty, often lacking even the barenecessities of life. Standards of cleanliness andmedical care were distressingly low. At times,people starved—witness the high death rate, espe-cially among babies and small children. Yet thepoverty-stricken multitudes had little hope of bet-tering their conditions, for the guild system pre-cluded large numbers of persons from looking forwork in the towns and condemned countless thou-sands to near-starvation.

However, the new ideological climate of opinion—pioneered by the intellectuals of the Renaissanceand the Reformation—was beginning to have aneffect on persons engaged in production. Sooner orlater, some bright young man was led by the freersituation to recognize an opportunity no one hadseen before. Denied the opportunity of becoming aguild member and, as a result, unable to competein the towns, he conceived the idea of hiring on apiece work basis some of the hungry and homelesspeople, some of the poor country peasants livingoutside the towns. He may have started by buyingraw wool on the market and hiking out into thecountry with the wool in a knapsack on his back,looking for persons willing to spin the wool intoyarn or to weave it into cloth. To earn a littlemoney doing such piece work at home, even if thesmall sums they paid were considerably less thanwhat guild members received for similar work inthe towns, was a godsend to the wives and chil-dren in many poverty-stricken households. As a

result, the young entrepreneur's enterprise paidoff. In time others began to notice what this younginnovator was doing and before long many small-time peddlers were roaming the English country-side on foot, packs on their backs, delivering woolto be spun or woven by women and children, thenretracing their steps several days or weeks later topick up the finished work and pay for what hadbeen done.

Once small-time peddlers had shown that pro-duction could be accomplished without using high-priced guild labor, the idea occurred to someoneto assemble several spinning wheels and looms inone building and to hire workers from the sur-rounding countryside. Many spinners could thenbe employed at one location, even if they had notools of their own. Several operations could evenbe handled under one roof. In time, larger andmore efficient machines, which could not havebeen accommodated in a peasant's tiny hut cameinto use, for they could be run to advantage byartificial power—water power if the factory waslocated by a stream, or steam power furnished bythe newly invented steam engines. In addition toall these advantages, time and energy were savedas peddlers no longer had to traipse all over thecountryside. Thus, step by step, the factory systemof mass production evolved.

Then at about the same time, other small-timeentrepreneurs were considering the possibility ofimporting from the British colonies in America cot-ton which was starting to come into productionthere. Still other small-time merchants were be-ginning to look for new markets for the textiles be-ing produced in the growing number of little fac-tories that were spotted over the English country-side. Prior to this time, the market for anythingnew, which was usually handmade and expensive,had been extremely limited. The majority of thepeople grew a large part of their own food andmade most of their own clothing or wore hand-me-down woolen clothing. Only a well-to-do minoritymade any substantial purchases on the market.Thus production of things to be sold was gearedprimarily to handicrafting small quantities of highgrade commodities for the wealthy. The masses ofthe poor had never been good customers for any-thing, let alone anything new. However, somesmall-time speculator, noting that American cottonwas cheaper to produce than British wool musthave reasoned that perhaps the poor might be ableto buy new cotton clothing if it were cheap enough.Perhaps inexpensive raw cotton might be brought


from the colonies, woven into cloth and sewn intogarments on a piece work basis by workers whowere glad enough to work at lower wages thanthose privileged guild members insisted upon. Thisshould make it possible to produce and sell cottontextiles cheaply so that the poor workers them-selves might represent a potential market for greatquantities of cotton clothing. This line of reasoningproved correct. Thus, step by step, many small-time operators made countless changes which intime completely overturned the textile and cloth-ing industries. By the middle of the 19th century,this "revolution" was complete. New productionmethods, new sources of supplies and new mar-keting outlets were in operation. The earlier eco-nomic arrangements based on small-scale enter-prises of skilled handicraftsmen producing smallquantities of quality merchandise for the well-to-do had been largely phased out by the "IndustrialRevolution" and replaced by large-scale, stan-dardized assembly line production for mass mar-kets. The poor whose labor made possible the "rev-olution" in the textile industry were its principalbeneficiaries.

New and more extensive channels of trade werealso gradually being opened up. More natural re-sources were being brought from far-flung sup-pliers throughout the world, and markets withina country's borders were also expanding. Farmers,for instance, were beginning to expand their op-erations to grow more than they needed them-selves, in order to feed greater numbers of peopleliving in the cities and in the growing factorytowns. We can't know precisely, but we can thinkthrough the way this shift might have started.Consider, for instance, the production of eggs. Wecan know that there was a time when eggs wererelatively very cheap in the country where theywere plentiful, but considerably more expensive intowns and cities where most of the people werecraftsmen, merchants, factory workers and veryfew raised chickens. Perhaps the son of an 18thcentury dairy farmer may have noticed the egg sit-uation and acted on the theory that he might beable to profit from this difference. He visited farm.-ers near his home, collected eggs from many farmsand carted them off to the city to sell. As hisscheme caught on, several of his suppliers beganto increase their flocks of layers and expand theiregg production. At the same time, some of the townand city people who had kept a few chickens them-selves began to realize that they could always findeggs to purchase at the market and disposed of

their chickens so as to use their time, energies andproperty for other things they preferred and foundmore profitable than raising chickens. Thus, newchannels of distribution were gradually openedup, markets expanded, and increased specializa-tion, division of labor and larger scale agriculturalproduction for bigger markets became possible.

The "Industrial Revolution" was an age ofsteam. James Watts' steam engine freed produc-tion from its dependence on the water wheel andfactories from locations next to waterways. Im-proved transportation contributed tremendouslyto the "revolution" that was taking place. Net-works of canals were opened up, making it mucheasier to move raw materials substantial distancesto factories and finished goods to markets. Thenalong came the railroads. Prior to the 19th century,communication among isolated farms and villageshad been difficult at best. Travelers went on footor horseback, always at the mercy of the elements,or they spent long uncomfortable hours in coachesor wooden wagons, being shaken over rutted anddusty or muddy highways. The canals representeda tremendous improvement, and so did the trains.In spite of the cinders and dirt of the early rail-roads, they made the transport of goods much eas-ier, quicker and cheaper, and travel for personsbecame much smoother, swifter and more com-fortable. However, the application of steam en-gines to move containers holding produce andcarriages carrying people would not have suc-ceeded nearly so well if no one had thought ofhaving the single steam engine pull trains of carson special tracks made of metal rails mounted onwooden planks or ties. If the steam engines hadhad to travel on the narrow and rutted roads ofthat era, they certainly would never have beenaccepted so promptly and enthusiastically. Theideaman who conceived of building rail roadsmade a valuable contribution to increasing pro-duction.

Agricultural methods improved as well. The atti-tude of intellectual curiosity that developed out ofthe ideas of the Renaissance thinkers led some in-novators to experiment with new farming tech-niques—crop rotation, fertilizing, stock breeding,etc. As a result, larger scale, more efficient agricul-tural operations became possible. Using newly de-veloped techniques, farmers were able to bringmore land into cultivation. With the introduction ofnew and more efficient farm machinery, agricul-tural output rose. Many landholders then chose tofence in, i.e. to "enclose," and to develop acreage


which they owned, but which they had not beenusing before because farming it with the old meth-ods was not worthwhile. Small tenant farmers, ac-customed to using this land belonging to theselarge landholders as "commons" for grazing theirown personal livestock, resented these "enclo-sures." Many found their best hope for survivalby moving into the towns to work in the newly de-veloping factories. Many others emigrated toAmerica and Australia. Nevertheless, in spite ofthe exodus of so many people from England dur-ing this period, the population was increasing.People were living longer and infant mortality wasdeclining—due largely to the availability of moreand better food. Thanks to improved farmingmethods, one farmer could then feed more peoplethan ever before in history so fewer people wereneeded on the farms. Many of the persons freedfrom agricultural labor went to work in other areasof production making goods and services con-sumers wanted more urgently, under the changingsituation, than they did additional quantities offarm products. In this way, agriculture not onlybenefitted from the "Industrial Revolution" butalso helped to expand specialization, division oflabor, production, trade and worldwide markets.

The English people of the 18th and 19th cen-turies were freer than people had been at almostany time before in history. As a result, the Britishled the rest of the world in that period in improv-ing production. They could own and accumulateproperty, confident that they would be able to keepmost of their earnings or profits. This assurancegave them the incentive to try to develop new andbetter ways of doing things in the hope of earningprofits. Once small-time peddlers had shown theway, other entrepreneurs began to pioneer in manydifferent directions. New inventions were devel-oped and adapted to industrial production. Trans-portation was improved substantially. Agriculturewas improved. New trade routes were openedthroughout the world. As workers had more andbetter tools available, the productivity of a singleworker rose, the competition for his services in-creased and therefore necessarily his real wageswent up also. When workers could produce andearn more, they were in a position to have moreand better food. Being better nourished, their chil-dren had a better chance of living to maturity.With more goods and services available, livingstandards improved. Increased production alsopermitted people to save and invest more. Moresavings and investment helped to expand the pro-

duction of the things consumers wanted still fur-ther. And so the spiral appeared to become self-propelling—more savings and investment led toincreased productivity, which made more savingspossible, and so on.

NOTE: Many factors combined, as has been pointedout, to spark the "revolution" in industrial methodsthat began in England of the 19th century—the atmo-sphere of freedom, the generally prevailing respect forprivate property, the opportunity people had in thedeveloping contract society to live and work in peace,to cooperate, to take risks, to experiment, to makeprofits or suffer losses and to spend, keep, use or saveand invest their earnings. The result was the develop-ment of many new tools, machines and methods,leading to significant improvements in productivityand living standards. Thus, the teacher should findthe "Industrial Revolution" a good historical illustra-tion of the inevitable advantages of:a. leaving people free (Unit 3)b. protecting private property (Unit 4)c. allowing prices and wages to fluctuate (Unit 6)d. permitting people to save and invest (Unit 7)e. letting entrepreneurs keep, accumulate and use

their profits, if any, from their ventures (Unit 8)

However, we should not ignore the seriouscharges that have been levied against businessmenof the "Industrial Revolution" for having madepeople (including many women and children) worksuch long hours, for very low pay, under terribleconditions. Certainly the conditions and wages inthe early "Industrial Revolution" factories appeardreadful to us today, when we compare them withthe situation in modern factories. However, theyrepresented a significant improvement to theworkers of the 18th and 19th centuries, over thestill poorer living standards, the still worse work-ing conditions, the still lower wages and the nearstarvation they had endured before. By making itpossible for the individual worker to produce more,the new methods of production enabled him toearn more. With more goods and services pro-duced, more was available for consumption. As aresult of the "Industrial Revolution," therefore,many people had more and better food, as well asmany other things they couldn't have before. Andthey lived longer!

6. Modern capitalism—mass production andautomation: The various elements that came to-gether in the 18th century and inspired so manyideamen—thinkers, scientists, inventors, entrepre-neurs, etc.—did not disappear with the close of theperiod known as the "Industrial Revolution." Theatmosphere of freedom continued in most majorcountries throughout the 19th century. The goal of


their governments remained substantially thesame—to protect the lives and property of individ-uals without interfering in private affairs, exceptwhen some person or persons used force or threatof force to injure others. The spirit of inquiry sur-vived in all fields—the physical sciences, philos-ophy, religion, political science, etc. Whereverthese conditions prevailed, people were free tothink, to work, to worship, to experiment, to save,and to have fun as they chose—so long as they re-frained from using force or fraud to hurt others.Specialization and the division of labor developedstill further. Private property and private contrac-tual agreements were respected. Transportationfacilities continued to be improved substantiallyand trade expanded materially. Market transac-tions increased tremendously in number and sig-nificance. In effect, many new "industrial revolu-tions" were in the making. As a result, economicproduction flourished. More goods and services be-came available for consumption. Living standards,sanitation facilities and medical care improved.People had more and still they could save and in-vest more too. Isolated and economically self-suffi-cient families or groups became rarer and rarer.Practically everybody in the world became inte-grated into the market economy. Changes weretaking place all over the world and people every-where were affected.

NOTE: Change, as we learned in Unit 2, is one of thesix categories of a priori knowledge. So long as a per-son is still living, he will always be thinking, deciding,acting and making changes to the best of his ability—in the attempt to relieve his various felt uneasinessesand so to improve his situation. As a matter of fact,the study of how changes come about and how peo-ple act, consciously and purposively, in response toprior changes, in the attempt to bring about the par-ticular changes they desire in the future, is preciselythe subject matter of economics.

No change can take place without disrupting thelives of some people. But barring mistakes, acci-dents and human error, the changes resulting fromvoluntary choices and actions tend to benefit theparties directly concerned. Voluntary changes re-flect the combined best judgments of everybody asto how best to improve their respective situations—all things considered—in the light of conditionsas they view them. The intervention of force orthreat of force alters the picture considerably.Some persons inevitably benefit at the expense ofothers from a change brought about by force. How-ever, the changes that come about as a result ofthe voluntary choices, actions and cooperative ef-

forts of individuals tend to help everyone. Andmodern capitalism evolved, by and large, as aresult of voluntary actions building on ideas thathad their origins in the years of the "IndustrialRevolution." The years since then have simplybrought about their further expansion, intensifica-tion, application and/or refinement:

a. Mass production for mass marketsb. Tremendously increased specialization and ex-

tremely fine division of laborc. Substantially improved—faster, easier and

cheaper—transportation facilitiesd. Expanded trade throughout the world, tapping

far-flung supplies of natural resources and de-veloping far-flung markets for finished goods

e. Introduction and development of larger, moreefficient and more finely specialized, mech-anized and automated machines, tools andtechnologies, thanks to increased savings andinvestment

f. Much wider use of money in market transac-tions, expanding the monetary economy sub-stantially. Isolated, self-sufficient families ortribal groups are exceedingly rare in today'shighly integrated exchange economy.

In the one and a quarter century since the "In-dustrial Revolution," innovators have continued toimprove and expand production methods. Manymodern plants are so huge that the early factoriesof the "Industrial Revolution" appear extremelycrude, primitive and small-scale in comparison.With increased production and more readily avail-able food, sanitation and medical care, the popula-tion has grown at a prodigious rate. As a result,producers have experimented with much larger-scale production than ever before so as to caterto still larger mass markets. New means have beendeveloped to power the huge machines on whichmass production depends. The single worker whooperated the crude water or steam-powered ma-chines of a small "Industrial Revolution" factoryhas been replaced by a worker who has at hisfinger tips, with* precision control, machines ca-pable of exerting tremendous power representingthe force of hundreds or thousands of horses. Tomake possible these new developments in massproduction for mass markets, tremendous cap-italist savings had to be accumulated. People savedover many years and huge stocks of capital goodsand factors of production were gradually built up.Only then could entrepreneurs invest huge sums ingreat plants, and more efficient and complex tools


and machines. Thus the mass production of recentyears, on a scale never before seen in history,has been a result of the combined efforts of manypersons—inventors, savers, entrepreneurs andworkers.

The economic developments of modern capital-ism—described and explained at some length inUnits 7-12 and 14—may be approached from twomajor points of view:

1. The conspicuous shift in production methods,making use of more and more mechanical andautomated equipment to mass-produce forlarger and expanding markets, made possibleby increased savings

2. The effect of government policies on industry—(a) encouraging private initiative and enter-prise by protecting individual rights, privateproperty and freedom of opportunity or (b) dis-couraging private initiative and enterprise byarbitrary and unequal treatment of different in-dividuals, and by imposing heavy taxes, reg-ulations and controls.

Anyone interested in some aspect of the first ofthese two approaches should find ample materialin local libraries. See books and encyclopedia ar-ticles on machines, tools, inventions, technologies,enterprises, production methods, markets, distri-bution channels and specific industries, as well asbiographies and reports on the experiences of in-dividual inventors, entrepreneurs, industrialists,businessmen, etc. Many innovators led interestingand exciting lives. Some inventors made remark-able discoveries or scientific breakthroughs.Some of them—for instance Charles Goodyear whodiscovered how to vulcanize rubber and Isaac Mer-ritt Singer who invented the sewing machine—struggled for years and endured real poverty andhardship trying to persuade financial backers,entrepreneurs, customers, etc., of the merits oftheir innovations. No doubt many inventors failedand their names are unknown to us today. How-ever, many did succeed. Some were extremelylucky, or rather were prepared to recognize andtake advantage of lucky breaks when they hadthem. In any event it was the inspiration andhard work of many such ideamen and innovatorsthat helped make modern industrial productionpossible.

Nowadays some scientists and inventors havea much easier time than did many of their prede-cessors. Quite a few of them earn regular salariesas employees of large industrial firms. Scientists

and thinkers often cooperate, work in groups and/or exchange experiences and ideas with others be-cause one person's ideas and experiments mayspark another person to come up with a new ideaof his own. But such arrangements do not alter thefact that every new development of any kindsprings originally from an idea in the mind of somespecific individual. Just as in the 18th and 19thcenturies, all new inventions, techniques and eco-nomic developments still originate from the ideasand experiments of specific individuals. To inspirea maximum of ingenuity, invention, experimenta-tion, innovation, etc. (a) there should be no arti-ficial barriers to discourage individual thought, in-novation and experimentation; (b) there must alsobe private property which individual inventors, in-novators and/or savers and investors interested inan invention or innovation are absolutely free todispose of as they think best.REMEMBER: (1) THE ESSENCE OF A FREEMARKET ECONOMY IS THE OPPORTUNITYTO EXPERIMENT WITH NEW IDEAS; (2) ES-SENTIAL FOR EXPERIMENTING IS THERIGHT TO OWN AND CONTROL THE USE OFPRIVATE PROPERTY.

POSTSCRIPT

Discussion of one important phenomenon of eco-nomic history—the trade cycle—has been omittedfrom this SYLLABUS on purpose. It is really too com-plex to cover in a course for high school students.However, a few brief words for the benefit of theteacher may be in order.

Economic ups and downs, booms and busts,peaks and depressions (or recessions) are consid-ered by many persons to be inherent in the capital-istic system. However, this is not the case. Ratherthey are results of government interference withthe capitalistic system. When government acts tomanipulate the quantity of money and/or credit,and to determine interest rates by fiat rather thanleaving them to the market, it disrupts all pricesand monetary transactions. Economic calculationsare then distorted, entrepreneurial speculationsupset, wealth and income shifted and contractualrelationships altered. These results lead in time toserious imbalances causing alternating periods of(a) false economic "prosperity," i.e., the boomproduced by artificially-stimulated credit expan-sion and (b) depression, i.e., the bust.

People generally applaud the illusory "pros-


perity," but they abhor the relative economic stag-nation, recession or depression which follows. As aresult, officials in control of money and bankingtry to do everything they can to prolong the arti-ficial boom. They do not realize that they cannotforever avoid paying the price of the malinvest-ment their inflationary policies have caused.Sooner or later there must be a day of reckoning,an economic crisis of some kind. When the mone-tary expansion is halted and/or when people areno longer induced by it to expand productionfurther, the crisis will come. The depression thatfollows is a period of recovery. Once the depres-sion sets in, prices begin to readjust and the econo-my starts to redirect production and to liquidatethe malinvestments undertaken during the timeof the preceding illusory boom-prosperity. If gov-ernment then refrains from further interferencewith the market, the market's checks and balanceswill soon see to it that economic flexibility revivesand economic imbalances in the future are kept toa minimum. Entrepreneurs, savers and producerswill then resume producing to satisfy as best theycan the wishes of consumers who have receivedthe money they spend by working in productionand/or as voluntary gifts from others who workedand saved.

The most famous, or infamous, depression of alltime was that of the 1930's. Since then, out of fearof a recurrence of such an economic catastrophe,most government officials have advocated con-tinued and increasing credit expansion. They trydesperately to postpone a depression or recessionand hope—in vain it should be added—to avoid fu-ture economic crises. The consequences of infla-tion and credit expansion arising out of the systemof fractional reserve banking are bound to come—sooner or later!

For the benefit of the teacher as well as of thosefew students who may be interested in readingabout the causes and consequences of the tradecycle, here are several references on the subject:

Greaves, Percy L., Jr. Understanding the DollarCrisis (Western Islands, 1973). Chapters V-VII.

Mises, Ludwig von. Human Action (Yale, 1949; 2nded., Yale, 1963; 3rd ed., Regnery, 1966). ChaptersXVII-XX.

The Theory of Money and Credit (Yale,1953; FEE, 1971)

Rothbard, Murray N. America's Great Depression(Van Nostrand, 1963; Nash, 1972)

Sennholz, Hans F. "The American Economy is NOTDepression-proof in The Freeman, November 1972

"The Great Depression" in The Freeman,April 1975

Stevens, Paul. "The Making of an InternationalMonetary Crisis" in The Freeman, April 1973

GLOSSARY WORDS(For definitions, see GLOSSARY, pp. 223 ff.)

AGRICULTURAL ECONOMYANCIENT CIVILIZATIONSAUTARKYCAPITALISMCOMMAND SOCIETYCONTRACT SOCIETYCRUSADES"ECONOMIC PROBLEM"FEUDALISMFORAGE"INDUSTRIAL REVOLUTION"MASS PRODUCTIONMERCANTILISMMICRO-ECONOMICS"NIGGARDLY," "NIGGARDLINESS" OF NATURENOMADIC TRIBESPRIMITIVE SOCIETIESREFORMATIONRENAISSANCESLAVERY, SERFDOMSTATUS SOCIETYUSURY


Articles

In the BASIC READER:13. "The War on Property," Paul L. Poirot19. "Letter to His Grandson," Fred I. Kent20. "Technological Status," John W. Campbell25. "The Liberation of Women," Bettina Bien

Greaves28. "If Men Were Free to Try," John C. Sparks

*34. "Why Speculators?" Percy L. Greaves, Jr.°75. "Food Control During Forty-six Centuries,"

Mary G. Lacy76. "How to End Poverty," Dean Russell77. "American Communism, I & II," Percy L.

Greaves, Jr.°78. "Facts About the Industrial Revolution,'" Lud-

wig von Mises79. "Progress or Regress?" Hans F. Sennholz

Additional titles:"Capitalism and Morality," Edward Coleson—in The

Freeman, October 1973*"Marx, Mises and Socialism," Dave Osterfeld—in

The Freeman, October 1974°"The Puritan Experiment in Common Ownership,"

Gary North—in The Freeman, April 1974•"The Puritan Experiment with Price Controls," Gary

North—in The Freeman, May 1974


*"The Puritan Experiment with Sumptuary Legisla-tion," Gary North—in The Freeman, June 1974

Books

°Ashton, T. S. An Economic History of England: The18th Century (Barnes & Noble, 1954)

• The Industrial Revolution: 1760-1830 (Ox-ford, 1948/1962/1973)

Carson, Clarence B. Throttling the Railroads (LibertyFund, 1971)

Chamberlain, John. The Enterprising Americans(Harper & Row, 1963, 1974)

•Dietze, Gottfried. In Defense of Property (Regnery,1963; Johns Hopkins, 1971)

* Greaves, Percy L., Jr. Understanding the Dollar Cri-sis (Western Islands, 1973)

*Hayek, F. A. (editor). Capitalism and the Historians(Chicago, 1954/1963)

Hazlitt, Henry. The Conquest of Poverty (Arlington,House, 1973)

*Mises, Ludwig von. Human Action (3d ed., Regnery,1966). ("Observations on the Causes of the Declineof Ancient Civilization," pp. 767-769)

Polo, Marco. The Travels of Marco Polo•Rougier, Louis. The Genius of the West (Nash, 1971)Weaver, Henry Grady. The Mainspring of Human

Progress (FEE, 1953)White, Andrew Dickson. Fiat Money Inflation in

France (1912). Many editions.

16. SUMMARY


1. As suggested at the beginning of the SYLLABUS,ask the students to answer once more one or sev-eral of the 30 questions posed in Unit 1 (pp. 7-9).Compare their answers now with those they mayhave given at the start of the course. As a guide tothe teacher for the significant points to look for inany definition of "economics," called for to answerthe first of those 30 questions, see pages 215-216of this Unit.

2. To realize the changes that are always takingplace in an economy, it may be helpful for the stu-dents to try to look at present economic conditionsthrough the eyes of a "Rip van Winkle," or of thetwo Japanese soldiers who refused to surrenderafter World War II and remained in hiding close to30 years—Choichi Yokoi, until discovered in Jan-uary 1972, and Lt. Hiroo Onoda, until March 1974.Some U. S. soldiers felt like "Rip van Winkles"too when released in December 1973 after severalyears in Vietnam POW camps. What changesmight they have noticed upon returning to themodern world? Let the students speculate on themany new consumers' goods, production methods,means of transportation, fashions, customs, etc.—each produced by countless little changes and de-cisions in response to purposive individual actions—such "Rip van Winkles" must have encounteredafter having been isolated for several years. It isalways difficult to recall just when and how newideas come to the fore and when and how changesare made. For help in trying to reconstruct whatthe world was like several years ago, or in 1945when the two Japanese soldiers went into hiding,the students might ask relatives or friends whomay remember the automobiles, clothing, housing,food, entertainment (radio, TV, movies), jobs,prices, salaries, working conditions, etc., of sometime back.

3. From time immemorial, authors have beenentranced by the idea of fictitious "utopian" soci-eties. These range from Plato's Republic to "Gait's

Gulch" in Ayn Rand's Atlas Shrugged, and be-yond. Perhaps the students would like to speculatein a similar vein as to how they might go aboutsetting up a 20th century "utopia," insofar as thatmight be possible in this world of imperfect men.

Incidentally, the word "utopia" comes from thename of the imagined "ideal" state and societydescribed in an essay (1516) by Sir Thomas More(1478-1535), "The Man for All Seasons," who wasbeheaded by Henry VIII because he, More, refusedto accept the King's supremacy over the Pope inmatters of religion.

Let the students imagine they are setting out in arocket ship, with a complement of 500 more orless persons to colonize an unoccupied planet inanother solar system. What kinds of specialistswould they want to have included in this group?What provisions would they take along? Whattools would they need, not only hand tools butalso capital goods, produced and semi-producedfactors of production? What reference materialsor other books would they select to take? For whatforms of entertainment would the members of theparty want to be prepared? How would they ar-range for property to be assigned once they arrivedon the new planet? What procedures would theysuggest adopting in the new community for trans-ferring property and exchanging goods and ser-vices from one person to another? What arrange-ments would they make for protecting life andproperty—from potential enemies they may en-counter on the new planet, or from members oftheir own group who violate—intentionally or unin-tentionally—the rights and property of others?

NOTE: The teacher might remind the students thatthe Pilgrims struggled with essentially this sameproblem when they came to America in 1620. At theurging of their financial backers in England, the May-flower Compact, which they adopted aboard shipprior to their landing at Plymouth Rock, provided forcommunal ownership of property and that arrange-ment contributed to the suffering and starvation thesettlers underwent during their first few years here.See Percy L. Greaves, Jr.'s "American Communism,II" (Reading No. 77).

214

16. SUMMARY 215

Hopefully the students will have grasped themessage of this SYLLABUS sufficiently well by nowso that they will advocate establishing a limitedgovernment on the new planet, to protect therights, property and freedom of all citizens equally.This will then leave the individual settlers free todo as they wish so long as they do not interferewith the equal freedom of others. Only then willit be possible for a free market economy to evolveamong the members of the new community.

NOTE: In connection with this discussion, the teachershould stress that no matter how large the new col-ony's stocks of provisions, tools, machines and otherequipment may be, no matter how much technicalknowledge or how many skills may be representedamong the new settlers, it will not be possible forthem to maintain anything like the living standards towhich we are now accustomed, unless and until theycan develop a highly specialized intricate trading com-munity with communication and trade among count-less producers of raw materials, entrepreneurs andspecialists comparable to the present worldwide mar-ket economy. For instance, if the production of asimple pencil calls for such a far-reaching integratednetwork of trades and skills as Leonard Read describesin "I, Pencil" (Reading No. 15), then it should be easyfor the students to realize that to maintain, replenish,reproduce and add to the provisions, tools, machinesand equipment the party takes with them to the newplanet will require an immense productive system call-ing for substantial savings, investment, specialization,division of labor and trade in terms of a medium ofexchange (i.e. monetary transactions not barter)among the suppliers of huge quantities of various rawmaterials and factors of production.

It should not be difficult to assemble sufficientsupplies and provisions to live on a high standardof living for a time—as on a luxury liner or at a com-fortable mountain retreat. But to maintain such aliving standard for an indefinite period of time, theinhabitants must have a viable economic systemto draw on, a system of production and exchangewhich is continually obtaining new supplies of rawmaterials and labor, processing and combiningthem to maintain, replenish and reproduce thetools and machines they need to manufacture newfactors of production and so supply consumerswith the various things they want and will be want-ing in the future. This means that the studentsshould be asked to consider not only the thingsneeded for short-term survival but also some wayto assure the means for providing the knowledge,skills, tools, equipment and incentive system toenable production to get started and then in timeto become self-reliant, independent of suppliesbrought from Planet Earth, and thus able to obtainneeded raw materials locally.

EXPLANATORY TEXT

Economics is like a Chinese puzzle. Many ideasand influences have their impact simultaneously.At every instant, many decisions are being made,actions being taken and their effects are being felt.Many separate and individual factors are involved,yet all are interdependent, intertwined and inter-meshed with one another. To speak of one factoronly without at the same time also mentioning allother factors and influences is apt to be mislead-ing. Only when all are considered in context, is itpossible to understand any single factor in its rela-tionship to all other factors. Yet, complex marketphenomena must be analyzed one by one and eco-nomic concepts explained one at a time in somelogical sequence in order to make the interrelation-ships of the market comprehensible. In this Unitwe shall attempt to summarize the most importantpoints presented in this SYLLABUS with respect tothe actions of individuals and their consequencesfor the market economy.

1. Economics is a logical science, based on apriori axioms. An a priori axiom is somethingthat is so fundamental, so basic, so characteristicof the world as we know it, that we cannot conceiveof its not being true:

a. Regularityb. Logicc. Causalityd. Timee. Changef. Value

Individuals can think and act as they do only be-cause there is some order, regularity or "plan" inthe universe. Everything a person does dependson these a priori categories. And all the economictheories, "laws" or principles the students havebeen studying are derived from them by using de-duction, reason, logic, the "armchair method."

2. Economics is a study of the conscious pur-posive actions of individuate, not of groups or col-lectives. Therefore, it may be called micro-eco-nomics. (Note that "macro-economics" is some-thing very different!) Because economics dealswith the actions of individuals, any definition ofeconomics should include the idea that it is indi-viduals who are doing the thinking, deciding,choosing, preferring, valuing and acting. Everydefinition of economics should also include someword meaning "conscious" or "purposive" to de-


scribe the actions individuals take. Economics is astudy of peaceful (NOT coercive) actions. Here areseveral sample definitions:

a. Economics is the study of how people try to getwhat they want with what they have, withoutthe use of force

b. Economics is the science of human action; thestudy of the conscious choices, actions andpreferences of individuals, undertaken in theattempt to attain their various goals with thetime and resources available

c. Economics is the study of the peaceful meanspeople use to relieve felt-uneasinesses and toattain their most urgent, as yet unsatisfied,personal (subjective) values on their own per-sonal scales of values

d. Economics is a study of the "spontaneous or-ganization for transmuting what every man hasinto what he desires wholly irrespective of whathis desires may be," i.e., it is a study of the "in-strumentality whereby every man, by doingwhat he can for some of his fellows, gets whathe wants from others." (Philip H. Wicksteed,The Scope and Method of Political Economy,1913/1914)

e. Economics is "a science of purposeful humanactions. It is a science of means for attainingdesired ends. It reveals the human actions thatmoral and intelligent men may take to attaintheir self-selected goals with the least use oftheir available time, energy, and scarce goods."(Percy L. Greaves, Jr., Understanding the Dol-lar Crisis, 1973. p. 7)

f. Economics is "the science of every kind of hu-man action. Choosing determines all human de-cisions. In making his choice man chooses notonly between various material things and ser-vices. All human values are offered for option.All ends and all means, both material and idealissues, the sublime and the base, the noble andignoble, are ranged in a single row and subject-ed to a decision which picks out one thing andsets aside another. Nothing that men aim at orwant to avoid remains outside of this arrange-ment into a unique scale of gradation and pref-erence. The modern theory of value widensthe scientific horizon and enlarges the field ofeconomic studies." (Ludwig von Mises, HumanAction, 3rd ed., 1966. p. 3)

3. Three conditions must be present for a per-son to act. Individuals act, consciously, pur-posively, intentionally to relieve their most urgent

"felt-uneasinesses." However, merely feeling dis-satisfied with the present situation is not enough.Before acting, a person must have:

a. some dissatisfaction or felt-uneasiness—this isessential. If a person is completely satisfied hewould have no reason for action.

b. some idea concerning a situation or circum-stance he or she would prefer—otherwise, whybother?

c. some hope that his or her action may bringrelief or success—if a person is physically con-fined or firmly convinced that any action on hispart will be completely useless, he won't makean effort.

4. Individuals act on the basis of their ideas,knowledge and values. What an individual con-siders a felt-uneasiness depends on his ideas. Theends, goals, and values individuals hold vary fromtime to time according to their personal ideas,thoughts, knowledge and subjective values. Themeans a person uses in the attempt to relieve his orher various felt-uneasinesses, to satisfy needs andwants and his or her many ends and goals willalso depend on his or her ideas, thoughts, knowl-edge and subjective values.

5. Every one of us has available only limited re-sources (strength, energy, time, abilities, aptitudes,skills, knowledge, tools, wealth, etc.), but everyonewants many things, ends, goals and values. Thegap between what a person has and what he wantsis the "economic problem." Because there is thisgap—between what we have and what we want—weall try to devote what we have to what we considermost important. We try to use our resources andstretch them out to cover our most urgently de-sired, as yet unsatisfied needs, wants, ends andgoals, according to their relative personal (subject-ive) value to us.

6. Consciously or unconsciously, every one of usranks or grades his or her various needs, wants andgoals in the order of their importance to him or herat the moment—in the light of conditions as he orshe views them. Valuing is a personal process,as the students should realize as a result of con-templating their various wants, discussing themin class and analyzing their purposive actions. Aperson's scale of values is distinctive, unique andalways changing. A person's scale of values neverremains the same for very long. Yet if we stop tothink about it, we always know what we considermost urgent at any moment—that is the particular

16. SUMMARY 2 1 7

need or want or goal we are seeking to satisfy atthat particular instant.

7. Every voluntary action is an exchange of onesituation, good or service for another that the actorconsiders preferable, more valuable or at least lessunsatisfactory in the light of his own subjective(personal) values. Thus it follows that every timea person acts, trades, buys or sells anything volun-tarily, he or she is exchanging something he valuesless for something he values more. This means thatboth parties to every voluntary transaction expectto gain, to be better off after trading—each fromhis own personal point of view—than they werebefore. Therefore, it behooves each of us who wantsto buy, sell or trade anything with someone elseto try to offer the person or persons with whomwe want to deal something they want more ur-gently than they do the item we want from them inexchange.

NOTE: Call attention to the significance of applyingthis subjective value theory to everyday transactions.Anyone who wants to buy anything—a MacDonaldhamburger, a motorcycle, a pair of blue jeans, a book,a portable radio or what-have-you—must offer thepotential seller something the seller values more thanthe item the would-be buyer is seeking. Similarly,anyone wanting a job must offer the potential em-ployer a quantity and quality of labor that the poten-tial employer will value more than the full cost (in-cluding all money wages, fringe benefits, overhead,taxes, etc.) of hiring that particular person.

8. The right to own and control property is es-sential for people to trade with one another. Pri-vate property and exchange are like two sides ofthe same coin. How can a person offer somethingto someone else—as a gift or loan or in trade—if itisn't his private property in the first place? Isn't atrade itself evidence that the two individuals con-cerned actually owned and were free to dispose ofwhatever they offered the other? Doesn't the con-summation of a voluntary transaction mean, there-fore, that each trader becomes the legitimate newowner, with the right to control the use, of what-ever he or she receives in trade?

9. Specialization and the division of labor de-pend on trade. Specialization, division of laborand exchange (trade) are like two sides of the samecoin also. If we were not free to seek the things wewant that other people have (i.e., their privateproperty) by trying peacefully to offer them some-thing we have (i.e., our own private property)which we hope they will want enough to relinquishto us what we want of theirs, we would have to(a) steal from them or (b) become completely self-

sufficient. Without the opportunity to trade, everyone of us, or at least every family or tribal group,would have to produce all the various goods andservices we needed and wanted to consume. Noone would then have time, energy, incentive oropportunity to concentrate or specialize on thethings he or she could do best or liked to do most.Only when people may exchange goods and ser-vices with one another in peace may each of themspecialize and divide the labor among several ormany persons according to their respective abil-ities, aptitudes, skills, interests and preferences.

10. Traders on a complex market economy needa generally-accepted "trading commodity" me-dium of exchange or money. Money is an out-come of the division of labor and trade. As amarket grows in size and complexity, it is no longerfeasible for producers, traders and consumers toobtain the many goods and services they need andwant through barter. Interpersonal transactions,involving increased specialization, division of laborand trade, are much too complicated to be carriedout by direct exchange. Thus traders need some"common denominator," in terms of which theymay implement trades over large geographicalareas and extended periods of time, compare al-ternatives and calculate. In time, as a result ofcountless transactions on the market, traders grad-ually began to make agreements and payments interms of some third commodity, a good which forsome reason enjoyed relatively widespread pop-ularity among the people generally. Gold and silverare such commodities. Being in widespread de-mand for many centuries, they have been generallyacceptable to traders as a temporary makeshift oras a means they can use later to obtain the specificgoods and services they ultimately desire. Thus, intime, as a result of countless transactions, tradersgradually narrowed down the number of such"trading commodities." In this way, the preciousmetal gold has become the generally accepted me-dium of exchange or money throughout the world.Thus money is simply a commodity which makestrading easier. Because it is in demand by manypersons, almost everybody is willing to take it inexchange. Money evolved as a market phenom-enon, out of countless market transactions, in re-sponse to the need of traders for a suitable, gen-erally-acceptable "trading commodity" or mediumof exchange. When individuals need not bartergoods and services directly but may arrangetransactions in terms of some such generally ac-cepted common denominator, "trading com-


modity" or money, trading becomes easier andsimpler.

11. When deciding whether to act or not to act,a person always considers the value to him or herpersonally of the particular amount, unit or item heor she expects to gain, or lose, by action. In otherwords, each of us always compares the relativesubjective (personal) values to us of the particularunit of satisfaction or utility we expect to receiveand the subjective (personal) value of the particu-lar unit of satisfaction or utility we expect to relin-quish in a transaction. Every one of us alwaysbreaks things down mentally into "bite-sizedpieces" which makes our personal decisions to act,or not to act, relatively easy. The units of satis-faction or utility of the goods or services beingcompared which tip the balance scales towardaction—or inaction—are the marginal units. Thetheory of subjective (personal) value therefore maybe described more precisely as the subjective val-ue, marginal utility, theory of value.

12. Market prices evolve as individuals tradeunits of their own private property (goods, ser-vices, money, etc.) with one another, each in re-sponse to his own personal (subjective) values.The more eager a person is to satisfy some partic-ular need or want or goal, and the more he or shewill be willing to offer for it relative to his ownpersonal means and other needs and wants, themore he or she will value what it takes to get it. Asevery one of us tries to get what he or she wantsmost and/or the money needed to buy it, marketprices appear reflecting the relative eagerness ofall bidders and non-bidders and the relativestrength of their personal (subjective) values. Intime, out of the melee of bids and asks, "higglingand haggling," competition for all goods, servicesand/or money among countless persons, each of-fering something he or she has for something he orshe prefers, money prices emerge. On a free mar-ket economy—when no person or group of personsuses force or threat of force to interfere with thepeaceful and moral acts of others—these moneyprices tend to reflect the relative importance topeople of specific units of goods, services and/or money.

NOTE: The fictitious auction technique—described inUnits 6, 9 and 14—should have made it clear that (a)everyone gains as the result of a voluntary trade if hehasn't made a mistake, and (b) the number of trans-actions and thus the opportunities for gain are at amaximum when no one interferes with force or threatof force to prevent, limit, regulate or control peacefultrading.

13. When people save some of their production,they may make tools to improve their future pro-duction. Only when people are in a position to re-frain from consuming everything they have at anytime, may they set aside some of the things theyhave produced to consume later. By saving suchconsumers' goods, they show that they have thetime preference of the ant in Aesop's Fable. Theyare then accumulating "rainy day" savings. Thegrasshopper had a different time preference, onethat led him to prefer consuming everythingtoday. When many people have the time prefer-ence of Aesop's ant, they very likely reduce or dis-continue their production-for-consumption effortstemporarily and consume some of their "rainyday" savings while they spend time, energy andraw materials on the development of tools to makefuture production and consumption easier, quick-er and better. In this way, "rainy day" savings be-come the means for developing tools, machinesand other factors of production. Savings in theform of factors of production are called "capitalistsavings."

14. In time, if people are free to produce andsave, they will accumulate quite an assortment of"rainy day" savings and capitalist savings. As aresult of their actions and choices, there will comeinto existence a miscellany of raw materials, semi-produced and produced tools, machines (factorsof production or capital goods) and consumers'goods. The complex of goods and services whichexist in the world at any instant may be comparedwith a "half-baked cake." Like a "half-bakedcake," everything in it—every produced, semi-pro-duced factor of production and every good or ser-vice it includes—is inert and without value unlessor until it is used by persons with ideas so that itbecomes or contributes to the satisfaction of someindividual's want or need. Human nature beingwhat it is, there will always be a gap betweenthe currently available world-wide economic "half-baked cake" of things that people have and themany things they want. The important questionfor economics, therefore, becomes how best tochannel all these various goods and services intotheir most urgent uses, while at the same timekeeping waste and mal-investment at a minimum.How should the countless components of this eco-nomic "smorgasbord" be shifted around, com-bined, altered, modified, transformed, etc., so as toserve where they are valued most? What is the bestway to enhance their usability and value and avoidwaste and mal-investment? In economic terminol-

16. SUMMARY 219

ogy, the persons who make these decisions, whoplan how to use and alter the various items in theworld-wide economic "smorgasbord" or "half-baked cake" are called entrepreneurs. Their goal isto do their best to please consumers. At the sametime their decisions, often made with only theimmediate future in mind, profoundly affect theeconomic "smorgasbord" of the more distant fu-ture with which future entrepreneurs will have tocope when they, in turn, will be trying to transformthe then-existing inert goods and services into thethings consumers will be wanting at still laterdates.

15. Entrepreneurs try to anticipate what con-sumers want. Because consumers compete withone another on the basis of their subjective (per-sonal) values, they bid up the prices of the goodsand services they want most. This means that toearn a profit, an entrepreneur must recognize thesovereignty of consumers and supply them withthings they want. The better he succeeds in pleas-ing them, the greater his chances for profit. Likethe box office receipts of a rock group or moviestar, therefore, an entrepreneur's profit (loss) re-flects his popularity (unpopularity) with, andsuccess (failure) in serving customers. Thus, lim-iting the chances for profit tends to hamper theefforts of entrepreneurs in supplying consumerswith the goods and services they need and want.

16. Entrepreneurs try to plan for the future.They try to anticipate today what consumers willbe wanting in the future when the projects onwhich they are working now are completed andthe goods and services they will be producing havecome off the production line and are ready to offeron the market. Production takes time, sometimesmany long years of planning, especially when itinvolves many different raw materials from widelyscattered parts of the world, huge investments incomplex and sophisticated plants, equipment,tools and machines, widespread cooperationamong countless individuals and trade throughoutfar-flung geographical areas. Thus interfering withinvestment, interpersonal transactions and tradetoday will discourage entrepreneurs from embark-ing on projects in anticipation of producing goodsand services consumers will be wanting in the fu-ture. This means that economic restrictions arebound to lead sooner or later to some kind of mal-investment, mal-distribution, economic bottle-necks, imbalances and shortages. These will be-come increasingly serious as time goes by and thedemands of consumers for the goods and services

entrepreneurs were discouraged from starting be-come more and more apparent.

17. Banks originated as (a) warehouses and/or(b) money lenders. Complications arose whensome warehousemen-bankers, who had agreed tostore gold and silver for safekeeping, began to lendout to borrowers some of these precious metalswhich had been deposited with them for safekeep-ing by savers. A bank that adopted this practicethen had in its vaults only a fractional reserve forall its outstanding paper notes—"warehouse re-ceipts," IOUs or promises-to-pay. If its notes werelabeled like warehouse receipts—for specific quan-tities of precious metals in storage—when thesequantities of precious metals were not in fact allstill warehoused there as the receipts implied, thenthey misrepresented the true situation. If its notespromised to pay on demand more gold or silverthan actually remained in their vaults, the bankwas in fact insolvent. The insolvency of the bankwould become apparent if, as and when the hold-ers of its demand paper notes all asked for re-demption in precious metals.

18. Inflation is an increase in the quantity ofmoney and/or credit. The major inflations of thiscentury have all been permitted, sanctioned andeven encouraged by government-protected frac-tional reserve banking. Over the centuries sincethe idea of fractional reserve banking was first con-ceived, the trend has been for more and morebanks to pool their resources and issue more andmore paper banknotes while retaining lower andlower fractional reserves. Most central banks to-day, including our Federal Reserve System, havebeen relieved of the obligation to redeem theirpaper notes in any real commodity. Thus FederalReserve Notes are not now promises-to-pay any-thing, and there is no effective legal limit to thequantity of notes or credit the "Fed" may issue.However, government officials may find some daythat there is a limit to the Notes the "Fed" mayissue and expect to have used as money. Shouldthe people ever refuse to accept its Notes willinglyin trade, that limit will have been passed; FederalReserve Notes will then no longer be suitable touse as media of exchange, i.e. money.

19. The market and individuals trading on themarket need to be protected. Persons who wishto communicate, cooperate and trade with oneanother in peace should be confident that they cando so without interference from others who woulduse force or threat of force to harm them and/ortheir private property. For this a government is


necessary. For the sake of their own interests, how-ever, the citizens must see to it that the govern-ment's power is so restricted that government, it-self, may not interfere with the market process—any more than does a night watchman or an elec-trified fence—by using force or threat of force tohelp some at the disadvantage of others.

20. Here we have all the basic essentials forunderstanding the principles of economics and ex-plaining modern market phenomena. Today'smarket economy is the outcome of the actions ofcountless individuals, each making decisions onthe basis of his or her own personal ideas, endsand values. Today's complex of tools, machines,plants, equipment, investments, business estab-lishments, large and small, and finished consum-ers' goods are products of the actions, choices,savings, production, specialization, division oflabor and trade of countless persons. In acting,every one of us must take into consideration theworld as it is and the other people in it. Personsconsume or save in accordance with their respec-tive time preferences. The more they save and in-vest, the more refined, sophisticated and efficienttools and machines can be developed. The morecustomers a producer can attract, the larger hisenterprise may become, the more he can produceand sell that consumers want to have and to use,the better are his chances of profit. Market pricesand wages are determined on the market by thebidding and asking of owners (potential sellers)and would-be buyers, each in accord with his ownpersonal values at the time. Interregional trade isthe outcome of complex division of labor and im-mense savings and transactions throughout theworld.

In the desire for profits, entrepreneurs make de-cisions in line with their respective interpretationsand anticipations of consumer needs, wants andwishes. If they succeed, they cannot avoid helpingothers.

Free market economics is the only system of the divi-sion of labor that advances the general welfare of allthe people. It is in accordance with the Golden Rule.We advance ourselves as we help others. The more wehelp others, the more we receive in return.

Percy L. Greaves, Jr. Understanding the DollarCrisis (p. 62)

The more freedom people have to produce and totrade with one another in peace, the more trans-actions they will agree to and be able to carry out,the more goods and services will be produced andavailable for consumption, and the more successful

individuals will be in seeking their own personalends, goals and values.

CONCLUSION

In a free market economy, protected insofar aspossible from disruption by persons who would useforce or fraud to violate the rights of others:

All individuals act on the basis of ideas, correctand incorrect

The entrepreneur "gets it all together"Entrepreneurs are guided by consumer sov-

ereigntyConsumers determine prices by their purchases

and refusals to purchase, depending on therelative subjective values they place on themarginal units concerned

Profits may be earned only by successfully ar-ranging, transferring, transforming and/orfurnishing consumers with something theyvalue more than they did its component partsin their previous form. Thus, production forprofit consists of constantly shifting goods andservices from where they are valued less towhere they are valued more. Production forprofit, therefore, is necessarily also productionfor use

Money is a commodity which buyers and sellerssettle on as a medium of exchange, as a resultof their transactions through the market

Savings, tools and a market-determined moneyhelp to facilitate and expand production, tradeand individual well-being

A free market is a "democracy" in which everypenny has a vote, helping entrepreneurs toknow the preferences of its owner

Both parties to a free market transaction expectto be better off as a result, each judging fromthe point of view of his/her own personal (sub-jective) valuations

The greatest possible number of mutually-satis-factory market transactions take place on afree market where individuals are free to bid,offer and compete as they think best for onemore, or one less, unit of any good or serviceup for auction

The intervention of force or threat of force dis-turbs the market process, leads entrepre-neurs to miscalculate, malinvest and so causesgaps between supply and demand

The essence of a free market economy is the op-portunity to experiment; and experimentation

16. SUMMARY 221

requires the ownership and control of privateproperty.


Articles

In the BASIC READER:80. "Hello!" Joan Wilke81. "Free Market Disciplines," Leonard E. Read

Books

Read, Leonard E. Deeper than You Think (FEE, 1967)Let Freedom Reign (FEE, 1969)

Williams, Roger. You Are Extraordinary (RandomHouse, 1967; Pyramid Books, 1974)

SUGGESTIONS FOR FURTHER READING

Anyone who has followed this course of studyfrom beginning to end and who wants to read moreabout free market economics might start with thebooks, as yet unread, that are listed on the "Bibli-ography" in Unit 1. Those marked with asterisksshould keep almost any reader busy for quite awhile. See also the titles on FEE's current bookcatalog. However, a few general hints may helpreaders locate for themselves books in this generalsubject area that will be worthwhile reading:

(1) Watch for book reviews published from timeto time in newspapers, magazines, The Freeman

and other journals, announcing the appearance ofnew books and/or reprints of old books on eco-nomics and related fields.

(2) If a book or article is of particular interestto the reader, keep an eye out for other works bythat same author.

(3) Pursue references that seem interesting,which are mentioned in books and essays—in foot-notes, bibliographies and bibliographical articles.See, for instance, the last chapter in Henry Haz-litt's Economics in One Lesson, which has beenreferred to frequently in this SYLLABUS, and thereprint of Hazlitt's Thinking as a Science (NashPublishing, 1969). There are several pages of rec-ommended readings in the back of Ludwig vonMises' The Free and Prosperous Commonwealth(Van Nostrand, 1962) and also in the LibertarianPress editions of Mises' The Anti-capitalistic Men-tality (1972) and Planning for Freedom (1974).

The more a person reads, the more skillful hewill become at discovering new material he wantsto read. However, a person's reading should byno means be limited to books with which heagrees. Students of economics should read allkinds of books, raise questions and try to developa critical mind. They should become familiar withthe arguments both pro and con the logic of freemarket theories. It is hoped that an understandingof the principles explained in this SYLLABUS willhelp those who study them carefully to read moreintelligently and interpret more successfully theeconomic events of the day.

Glossary

These definitions are offered in the attempt to ex-plain some of the more significant economic termsin the light of the subjective value, marginal utility,theory of economics, on which the defense of a freeand unhampered market must rest. Anyone inter-ested in more detailed explanations of the meaningof these and other economic terms should find ithelpful to refer to Mises Made Easier: A Glossaryfor Ludwig von Mises HUMAN ACTION by PercyL. Greaves, Jr. (Dobbs Ferry, N.Y. 10522: FreeMarket Books, P.O. Box 298, 1974).

BBG

Action—the purposive attempt on the part of an individ-ual to relieve a "felt uneasiness" or dissatisfaction, toattain a goal or end, to acquire economic goods, to sat-isfy economic wants or needs. Three conditions neces-sarily precede action: (a) some "felt uneasiness," (b) anidea concerning a preferred situation, and (c) the hope orexpectation that purposive action will have some chanceof success. Three essentials must be present to carry outan action: (a) a plan, (b) time and (c) resources. Severalfactors may interfere to obstruct or hamper an individ-ual's action from having the results intended: (a) acci-dents, (b) natural phenomena, (c) the actions of otherpersons, (d) changes due to the passage of time and (e)mistakes.

"Administered price"—a term which carries the implica-tion that a large-scale producer can fix almost any highprice per unit he chooses for his output and maintain it inspite of the wishes of consumers. The fact is, however,that no seller can "administer" prices on a free market.He can only ask and hope consumers will pay. If con-sumers refuse to pay what he asks, he must either comedown in his price per unit or make fewer, if any, sales.

Advertising—the act or process of publicizing or furnish-ing information about a good or service with a view topersuading potential customers to buy. Advertising isoften criticized for being unnecessary, wasteful, mislead-ing, in bad taste and unconcerned with the interests ofconsumers. Criticism may be justified in some cases.However, advertising a product is really a necessary stepin the process of its production, i.e., in transforming rawmaterials into a completely finished product in the handsof its final consumer.

Aggregate—the sum, total, or composite of many parts;thus the term "aggregate economics" is used to describe

the field of study which deals with statistics based on theactivities of large numbers of persons, groups, collec-tives, etc. See "Macro-economics."

Agricultural economy—a society in which most of thepeople are farmers, relying primarily on agriculturalproduction to obtain the things they want and need toconsume or to trade.

Ancient civilizations—the early cultural and economicsocieties based on considerably more specialization anddivision of labor than the much earlier primitive societies(see below). In this SYLLABUS we shall refer primarilyto the civilizations centered around the Mediterranean,from which Western culture arose—the Egyptian, Baby-lonian, Assyrian, Phoenician, Cretan, Greek and Roman.These ancient civilizations were "Status societies" (seebelow).

Antitrust legislation—laws intended to inhibit corpora-tions and persons engaged in interstate commerce fromtaking actions which the Federal Trade Commission orthe courts may interpret as "tending to create a monop-oly," "lessen competition" or lead to "restraint of trade."

A Posteriori knowledge—something learned; informa-tion or data acquired from experience, experiment, ob-servation and/or historical study.

A Priori knowledge—something we know "instinctively,"inherently, innately, without consciously having to learnit. The a priori categories of knowledge are:

1. Regularity 4. Time2. Logic 5. Change3. Causality 6. Value

Assets—objects (material or immaterial) which havevalue to someone. In business parlance, the word assetsnormally refers to objects that have a market valuewhich may be calculated in terms of money.

223

224 GLOSSARY

Austrian School of Economics—the set of economic theories which explain economic phenomena logically asthe outcome of purposive actions by individuals. Themethod of "Austrian" economists is to use logic to rea-son from basic a priori assumptions. Their subject mat-ter is purposive human action; they explain every eco-nomic phenomenon as the outcome of the actions andideas of individuals. The Austrian School of Economics,so-called because its founders and, until very recently,its leading spokesmen were born in the old Austro-Hungarian Empire, is the marginal utility, subjectivevalue "school" of economics.

Autarky—an economically, self-sufficient economy. In anautarky, the inhabitants produce within their own geo-graphical borders essentially all the goods and servicesthey consume.

Automation—a fairly new term for mechanization, i.e.,the automatic performance of an operation using ma-chines or tools created by men but which, once producedby human beings, need only be set in operation by themto function mechanically—unless and until they breakdown. The development and application of tools, tech-nology and other labor-saving devices made possible bysavings and investment, arising out of specialization andthe division of labor. The use of technically-sophisticatedequipment that operates almost automatically.

Balance of payments—a statement of accounts, balancesheet, listing in monetary terms, an individual's, firm's,social unit's, legal entity's or nation's total debts andtotal credits, for a certain period of time. Accountingprocedures are such that a balance sheet always bal-ances—total debits and total credits are always equal. Anation's balance of payments is the composite of theindividual balances of payments of all its inhabitants.Because every individual sees to his own personal re-ceipts and expenditures, there is no need to fear a one-way flow in, or out of, the country of either cash or goods—unless some outside forces interfere to prevent individ-uals from acting on their own best judgment and per-sonal preferences.

Balance of trade—a statement giving the estimated mon-etary value of an individual's, firm's, social unit's, legalentity's or nation's total exports and imports of goods,services and/or money for a certain period of time. Anation's balance of trade is the composite of the individ-ual balances of trade of all its inhabitants. The balance oftrade, unlike the balance of payments, need not balanceat all times. When money savings are being accumulated,cash income will exceed outgo; when they are spent,cash outgo will exceed income. Mercantilists (see be-low) consider a nation's balance of trade favorable ifgoods are being shipped out of a country and gold andsilver coming in; thus they advocate protectionist gov-ernment programs to restrict imports of goods.

Balance sheet—a statement of the assets, liabilities andnet worth of an individual or a business entity, givingthe estimated monetary value of each item as of a spe-cific date. Assets are traditionally listed on the left side

of a page, liabilities and net worth on the right. Thegreater the estimated value of the assets, as comparedwith that of the liabilities, the more valuable is the prop-erty considered to be—and the greater is its net worth orthe equity of its owners. And vice versa.Banknote—a bank's note or promise-to-pay something,usually gold, silver or some other form of money. Bank-notes originated as "warehouse receipts" issued as evi-dence of gold, silver or some other commodity left ondeposit by the owner for storage and safekeeping—bythe bank, as warehouse custodian—for the owner's ac-count and available for redemption as agreed upon byholders of the notes. As banknotes came into frequentuse in trade, without being returned to the bank (ware-house) for redemption, the connection between the bank-note itself and the bank's promise to deliver somethingtangible was gradually forgotten. Banknotes themselves,especially those put out by a government's legally-priv-ileged "Central bank of issue" (see below), came to beconsidered money, equal to and as good as the com-modity it represented, especially when given status as"Legal tender" (see below).

Banks, banking—fundamentally banks are merely de-positories, warehouses for storage and safekeeping ofother people's money. In the course of fulfilling this rolebanks usually have substantial funds on hand in theirvaults, so that they have traditionally sought to combinetheir warehousing function with moneylending.Barter—commodity-for-commodity trade. See "Directexchange" (below).

Bond—an IOU or promise to repay money borrowed.These pledges, IOUs or promissory notes are frequentlytraded, i.e., bought and sold, on the market. When theloan falls due, the borrower's obligation is always to re-pay the money borrowed to whoever owns title to thebond at that time.

Bureaucracy—the system any government uses to ad-minister its various activities. Any government, whetherlimited, totalitarian or interventionist employs "bureau-crats." The government administrators or bureaucratsare permitted little, if any, discretion but must complywith procedures prescribed in the legislation setting upthe programs they administer and defining their duties.

Buyer—it is customary to speak of a trader who givesmoney in exchange for some other good or service as a"buyer." In this sense, a buyer is contrasted with a seller.

C

Capitalism—the economic system based on private prop-erty, including the private ownership of the factors ofproduction. Because property under capitalism is pri-vate, its owners may risk it in trying out their new ideas.Thus, capitalism is the only economic system conduciveto entrepreneurial experimentation, free and open com-petition, the accumulation of capitalist savings, the im-provement of tools and the development of mass produc-tion. Capitalism, with private ownership and control ofthe factors of production, contrasts with (a) socialism orcommunism and (b) various forms of interventionismon the basis of the way property is owned and con-trolled.

GLOSSARY 225

Capitalist savings—savings in the form of "Producers'goods" (see below)—raw materials, tools, machines,building, equipment or anything else which is intended—not for consumption directly—but for use in some pro-cess of production.

Cartel—a monopolistic combination of domestic produc-ers, made feasible by government protection permittingit to restrict total output and/or sales within the econo-my so as to charge a monopoly price. (See below). Acartel can come into existence only if the governmenthampers imports, so that the cartel members are pro-tected from foreign competition. Under a domestic cartelagreement, every member is assigned a definite produc-tion quota, those members who restrict production be-ing compensated by the other cartel members accordingto a definite formula. "Surpluses" produced by cartelmembers are often disposed of abroad at lower prices.Cartels differ from duopolies and oligopolies (see be-low) in their greater formality and their being legallysanctioned and protected.

Cash holding—a sum of money an individual keeps onhand so as to be prepared for any expenses that mayarise requiring cash payment. The cash holding anyparticular person will want to have varies in size fromtime to time, place to place and situation to situation.Everyone continually adjusts the size of his or her cashholding according to the situation. Many persons lettheir cash holdings decline after pay day, for instance,until another paycheck may be cashed to replenish it.Most persons increase their cash holdings when travel-ing. In today's money economy few persons permit theircash holdings to decline to zero and remain there for anylength of time. To increase a person's cash holding, heor she sells for cash some good or service (labor) at hisdisposal; to reduce his cash holding, he or she spends orgives money away.

Central Bank of Issue—a legally-privileged bank, author-ized by the government to issue banknotes, which areusually declared legal tender for payment of debts with-in the nation's borders.

Chicago School of Economics—a theoretical school, sonamed because many of its spokesmen have been asso-ciated with the University of Chicago. This "school" isyoung, having developed as a "school" since the 1920s.Representatives of this "school" attempt to prove theorywith statistics. Although they favor many free marketideas, they use statistics as the basis for advocating polit-ical reform (the negative income tax, manipulation ofthe quantity of money and various kinds of governmentregulations).

Classical School of Economics—a school of thought de-veloped in the 18th and early 19th centuries by thinkersand writers who were among the first to describe busi-ness, commerce and market operations in some detail.The philosophy and teachings of its most important rep-resentatives laid the basis for free enterprise and the de-velopment of limited constitutional government. Yet oneof its theories, the fallacious labor theory of value, wastaken over by Karl Marx and used as the basis for histheory of communism, the very opposite of free enter-prise and limited government.

Closed shop—a business enterprise which has an agree-ment with a labor union (see below) requiring that onlypersons who already hold membership in certainunions may be hired. Closed shops are contrasted with(a) open shops and (b) union shops (see below).

Coin clipping or coin debasement—processes by whichthe metallic content of coins is reduced by (1) paringthem down in size (clipping) or (2) lowering the ratio ofthe precious metals in the alloys from which they aremade (debasement). In olden times when metallic coinsplayed a significant role as money in the economy, gov-ernments clipped and debased coins so as to obtain newstocks of the precious metals from which they could fab-ricate additional coins to spend for their own accounts.This was their method of spending more than they col-lected in taxes. Each of the clipped, debased or smallernew coins was legally designated to represent the samenominal denominations as their larger or metallicallypurer predecessors. Coin clipping and debasement areforms of Inflation (see below).

Collective bargaining—negotiations between an employ-er's representatives and representatives of the firm's em-ployees' duly authorized unions—on behalf of all theworkers under that union's jurisdiction—to try to reachagreement with respect to wages, hours of work, andother conditions of employment. Bargaining effectivelyprecludes individual workers from bargaining personallywith their employer or his representatives.

Command society—a community of persons whose ac-tions are controlled and regulated in many respects byofficials in authority. Individuals in a command societyare not free to pursue their own personal ideas, prefer-ences, choices, values, ends, goals. A command societycontrasts with a free market or contract society, whereprivate property is protected and interpersonal relation-ships are the outcomes of voluntary, peaceful coopera-tion, exchanges and contractual agreements. A com-mand society is also, inevitably, a status society.

Communism—the term selected by Karl Marx and hisfriend, Friedrich Engels, to describe the economic andpolitical doctrines they were advocating. A theoreticaleconomic system based on the ideas of Marx and as-serted by Lenin to be the ideal toward which the Russianstate was aiming. Under communism all property wasto be owned and controlled by the people in commonand/or local or central government. Because it is phys-ically impossible to do away with private ownership andcontrol of what a person actually consumes (eats up orwears out) the significance of communism arises out ofthe fact that private persons are not free to own, buy,sell, trade, use or control factors of production. In theory,under communism there would be no markets, no prices,no money. Both production and distribution would bedetermined by government officials. Everyone wouldcontribute to the general production "according to abil-ity" and receive "according to need." Such a system cannever be put into practice on any substantial scale. At-tempts to do so must always lead to dictatorship oranarchy and chaos.

Comparative advantage—a theory developed and appliedspecifically to international trade by the noted English

226 GLOSSARY

Classical economist, David Ricardo (1772-1823). Ri-cardo explained that trade is advantageous to both par-ties, even though one may be superior in every field ofproduction and the other superior in none. The resourcesand talents of the two parties may differ and dovetail sothat each enjoys a comparative advantage in a differentfield. The superior producer may have an absolute ad-vantage in every field, but a comparative advantage onlyin those fields in which he enjoys super-superior produc-tivity. The inferior producer may have an absolute ad-vantage in no field but, nevertheless, he can have a com-parative advantage in those fields in which the superiorproducer's productivity is not so pronounced.

Competition—the process in the system of social cooper-ation by means of which everyone strives to improve hispersonal situation. In the market economy producerscompete by trying to please consumers better; sellerscompete by offering better and/or cheaper goods andservices; buyers compete by bidding higher prices. Asa result, competition in the free market helps to spurproduction and increase the stocks of goods and ser-vices available. Competition on the market contrastssharply with biological competition in nature whereplants and animals struggle with one another for sharesof the limited resources available in order to be able tosurvive.

Conglomerate—an aggregate; an accumulation of manyunits to form a new entity. This term has only recentlybeen applied in economics to describe a specific type ofbusiness organization created by the merger of several,formerly independent and usually diverse corporations.The formation of conglomerates has become economic-ally worthwhile in recent years primarily because of cer-tain provisions in the tax laws. The 19th century trusts(see below), similar in some respects, usually engagedin the same or similar branches of production, while theinterests of conglomerates are often widely diversified.

Consumer sovereignty—the "economic power" consum-ers exercise on the market by their purchases and re-fusals to purchase. In a free market, the freedom of con-sumers to express their preferences, i.e., consumer sov-ereignty, determines (a) prices, (b) the sums which aresaved and invested, (c) the pattern of production, as wellas (d) entrepreneurial profits and losses. Consumer sov-ereignty is a consequence of the freedom of individualsto express their personal (subjective) values in opencompetition through the market.

Consumers' goods—anything people eat, wear out, useup in the course of daily living. Food, clothing, shelterand also luxury items are consumers' goods. Consumers'goods and producers' goods (see below) are distin-guished by their uses.

Consumption—the act of using things up or wearingthem out.

Contract society—a society based on peaceful, voluntaryinterpersonal agreements. Contracts may be betweentwo, or more, parties, written or oral, calling for the per-formance, or non-performance, of a certain act, or acts.In a contract society, an individual determines to a largeextent his own social standing and wealth. Unlike a

status society (see below) participants in a contract so-ciety may move freely from one economic social groupto another insofar as their personal efforts, in coopera-tion and with the mutual agreement of others, permit. Acontract society can endure only when, where and solong as individuals trust one another and the right of in-dividuals to own private property is respected.

Convertible factor of production—something used in pro-duction which may be shifted, more or less easily, to an-other use than that originally intended. A factory thatmight be remodeled into apartments would be a con-vertible factor of production. So would a family stationwagon that could be converted to truck farm produce tomarket. See also "Factor of production" and "Inconvert-ible factor of production" (below).

Cooperation, social or interpersonal—the process ofworking together; an act on the part of two or more per-sons undertaken for mutual benefit to attain a commongoal. Cooperative efforts may be organized in one of twoways—(1) by force, order, decree in a command societyor (2) by voluntary agreements in a contract society.

Corporation—a type of business organization defined bylaw which enables the company to exist as an indepen-dent entity, even if one or all of the persons supplyingthe original funds should die or sell their interest in theenterprise to someone else. The specific laws regulatingcorporations have varied from time to time, place toplace under different governmental jurisdictions. Underour laws a corporation may take action in many areas,just as an individual can, making contracts, owning, buy-ing and selling property and incurring liabilities. Theliability of a corporation shareholder is now limited bylaw to the extent of his investment, i.e., the shares heholds in that firm. The other assets of a corporationshareholder cannot be seized in fulfillment of that cor-poration's debts.

Credit expansion—most banks pool the funds of manydepositors so as to reduce the risk of lending out fundsleft with them by depositors for safekeeping, expectingthem to be available on demand. Once a bank lends outsome of its depositors' money, it no longer has on handall the reserves it would need if all its depositors shouldask at the same time to withdraw all the funds they hadleft with the bank for safekeeping—in checking accountsand other demand deposits. When a bank increases thenumber of claims to the money in its vaults in this wayby lending, it is expanding credit. To expand credit, itmust make it easier for persons to borrow more; it mustreduce interest rates below the free market rate or relaxthe terms for borrowing in other ways. Banks usually jus-tify credit expansion nowadays on the widely-acceptedbut fallacious theory that they have an obligation tohelp business firms by making money "easy" to borrow.

Crusades—religious treks to the Mideast undertaken byChristian fanatics (1096-1272) in the attempt to takeJerusalem from the non-Christian "infidels." Therewere nine distinct Crusades plus the Children's Crusadein 1212-1213.

"Cutthroat" competition—a catchy term used to describeany competition that seems "unfair." It may be applied

GLOSSARY 227

to cases which appear to represent price discrimination,below cost pricing, predatory pricing, dumping, etc., allof which have been ruled at times to be "in restraint oftrade." However, whether such pricing practices ac-tually lessen, or sharpen, competition in a particular in-stance depends on circumstances.

Deduction—the method of developing knowledge and un-derstanding by reasoning logically from a priori assump-tions, axioms, fundamental principles. This may begraphically described as the "armchair method" oflearning.

Direct exchange—barter; commodity-for-commoditytrade by persons, each seeking to acquire the variousthings he wants to use and consume directly in exchangefor the particular goods and/or services he himself hasavailable to offer.

"Distribution," economic—in a free market economy, thepattern of ownership which prevails at any instant.Those who contribute to production are compensatedin accord with previous agreements or understandings.Thus, goods and services produced under capitalism aredispersed, i.e., "distributed" in the physical sense, asthey are shipped from person to person and place toplace throughout the world. No special "distribution" isnecessary. However, when referring to economic "dis-tribution" we do not have in mind their actual shipmentor transport from one geographical location. Economic"distribution" takes place as everyone acquires owner-ship of that part of production representing his or herparticular contribution. Everything that is producedcomes into existence as the property of some particularperson at a particular place and time, and the owner-ship is already dispersed—in the course of their produc-tion—among the many market participants, geographic-ally scattered far and wide, more or less in proportionto the share each contributed to production. See "Ex-change" and "Production."

Disutility of labor—the tedium, discomfort, inconveni-ence, etc., which comes from having to forego imme-diate enjoyment, pleasure, fun, leisure, relaxation, etc.,in order to work or labor in the effort to attain othergoals; the dissatisfaction caused because work inter-feres with doing exactly what one would otherwise havepreferred.

Division of labor—a technique of work or labor whereinthe production process is divided into many small activ-ities, each intended to accomplish a part or portion ofthe entire task. Dividing work in this way gives the per-sons specializing in each separate activity opportunitiesthey wouldn't have had otherwise—to develop speed, ef-ficiency, and even new skills and ideas. The division oflabor thus helps speed up production, improve produc-tion methods and so make increased production pos-sible.

"Dumping"—disposal of goods or produce, usually acrossnational boundaries, at prices judged to be below theircost. For purposes of legislation, below-cost pricing

(dumping) has been defined as selling at less than themarket price in the country of origin.

Duopoly or oligopoly—collective nouns referring to two,or several, business firms who together effectively con-trol the total supply of a specific item. Duopolists andoligopolists may try, tacitly or by mutual agreement, toact like a real monopoly (see below) by restricting pro-duction so as to charge monopoly prices. However, un-less they are protected in some way from would-becompetitors, such agreements are bound to break downbefore long.

Duty—a payment due, or tax levied by, government.

Economic calculation—the mental process by which therelative importance of any particular good or servicemay be estimated by comparing units of each individ-ually to a "common denominator" for which any or all ofthem are exchangeable. Because economic or marketvalues are derived from personal (subjective) valuesand preferences of individuals, quantitative measure-ments and comparisons among them are impossible. Anindividual may know quite well what he prefers, but hecannot measure or weigh his greater preference for onething over another. Nor can he compare his preferencesto those of other persons. However, in a market econo-my, individuals may make certain comparisons by esti-mating the importance of something to them personallyin terms of another commodity, a "common denomina-tor" for which units of any and every other good or ser-vice may be exchanged. This mental process of compar-ing everything—raw materials, factors of production andfinished goods and services—to a single very marketablecommodity (money) permits producers and consumersalike to calculate, make plans and undertake businessenterprises. This process of estimating the relative im-portance of all the things we have and all the things wewant in terms of a generally-accepted medium of ex-change, money, is economic calculation.

Economic goods—things people try to obtain to use orconsume in the course of seeking their various personalgoals; anything material or non-material which is notavailable in sufficient quantity to satisfy all demand.Because demand is greater than supply, economic goodsare not free for the taking; they are not "free goods" (seebelow). People must work or pay for economic goods.Thus, economic goods are bought, sold and traded on themarket.

'Economic problem"—the conflict arising out of the factthat men whose wishes are limitless live in a worldwhere the things they want are scarce. In the attempt toalleviate this "economic problem," men try to increasetheir available resources—knowledge, understanding,skills, energy, time, and ideas, as well as their suppliesof economic goods and services—so as to better satisfymore of their various wants.

Economic "school" of thought—a set of theories or abody of doctrines proposed as the explanation of eco-nomic phenomena. A "school" of thought is an ideology

228 GLOSSARY

or philosophy, not a physical school building or a legally-recognized educational institution.

Economics—the science of human action; the study ofthe conscious choices, actions and preferences under-taken purposively by individuals in the attempt to attaintheir various goals peacefully, as best they can with thetime and resources available. Economics does not en-compass purposively violent, coercive, destructive, de-ceitful actions intended to harm others.

Economize—to try to use the easiest, cheapest and mosteffective means available—all things considered—to ac-complish one's ends or goals. This means trying to befrugal with respect to things of great value, saving themfor their relatively most urgently-desired purposes only.

Elasticity of demand—the extent to which the demand ofconsumers for an item is "elastic," i.e., responsive tochanges in its unit price.

Embargo—a restriction or prohibition of specific im-ports.

Empirical knowledge—knowledge acquired from experi-ence, controlled experiment, observation and/or histor-ical study.

Employee—a person hired to perform certain services foranother, in accordance with previously agreed uponterms respecting money wages, commissions, bonuses,hours of work, overtime pay if any, fringe benefits andother factors related to working conditions.

Employer—one who hires other persons to perform var-ious services on his behalf, in exchange for wages, sal-aries or commissions and possibly other benefits also asagreed upon.

Entrepreneur—an idea man and a decision-maker; onewho undertakes projects, acts and tries to cope withchanges and to bring about further changes. In econom-ics, the entrepreneurs are the ones responsible for aneconomic enterprise, who decide whether or not to em-bark on a project and, if so, when, where and how tocarry it out. They bear any loss that may result from un-anticipated changes or mistakes. They receive "entre-preneurial profit" if their enterprise income is greaterthan total outgo.

Entrepreneurial profit—the excess of money income overmoney outgo of a business enterprise. Unless an enter-prise recovers from its customers more than the cost ofproducing and/or reproducing its product, it is not yield-ing entrepreneurial or monetary (business) profit. Ofcourse, a businessman may also gain a "Psychic profit"(see below) from his enterprise if he enjoys what he isdoing for reasons other than the money income it yields.

Equity—the net value or net worth of a person's propertyor share of ownership in a business, i.e., assets minusliabilities. The sum of each stockholder's equity in a cor-poration is equivalent to the corporation's net worth.

Exchange—this term is usually used to refer to theprocess of trading one good or service for another. Strict-ly speaking, however, every conscious action is an ex-change. In the process of acting, i.e., consciously seekingto relieve a "felt uneasiness," the actor exchanges or

substitutes one situation or condition for another which,under the circumstances, he considers preferable.

Export—the verb meaning to ship out of a geographicalarea; also a commodity or the produce so shipped.

Factors of production—anything used in production.Land, labor and capital are the usual factors of produc-tion mentioned in textbooks. However, the term reallyincludes time and many other non-physical things suchas ideas, knowledge, recipes, etc., that are used tofurther production. See "Producers' goods" below. It isessential for a free market economy that individualshave the right to acquire ownership of factors of produc-tion and to use them as they wish. Unless the owners offactors of production have control over them, they arenot free to experiment with new ideas, methods orproducts in the hope of better satisfying the future de-mands of consumers.

Federal Reserve System—the nationwide system ofbanks in the United States set up by legislation passedin 1913. The "Fed," for short, is our central bank. It isadministered by a Board of Governors appointed by thePresident. There are 12 Federal Reserve Districts, eachwith one Federal Reserve Bank and many commercialmember banks. The "Fed's" operations are based on theprinciples of "Fractional reserve banking" (see below).All member banks are required to keep a fraction of theirreserves on deposit with the Federal Reserve Bank intheir District. Each of the 12 Federal Reserve Banksissues its own banknotes, known as "Federal ReserveNotes," which are privileged as legal tender.

"Felt uneasiness"—the general economic term for an in-dividual's dissatisfaction with the situation which pre-vails. Implied in this term is the idea that human beingsare not indifferent or neutral to their surroundings; inother words, they have values, preferences and are eagerto improve their conditions.

Feudalism—the eight centuries, more or less, of theMiddle Ages or Dark Ages, between the fall of theRoman Empire (410 A.D.) and the Renaissance. Afeudalistic society is a status society. Under feudalismthe majority of the people were peasants or serfs livingon autarkic self-sufficient estates in the service of aprivileged noble or lord.

Forage—to search for food or provisions. Only the verymost primitive peoples depend entirely, for the thingsthey need and want to consume, on finding such naturalresources in their own environs.

Foreign exchange—foreign moneys, or promises-to-pay for-eign money.

Fractional reserve banking—a system of banking basedon pooling the deposits of many depositors so as to per-mit "Credit expansion" (see above). Banks have tradi-tionally considered they were safe in lending funds thattheir depositors are entitled to withdraw, maintainingonly fractional reserves, on the assumption it is extreme-ly unlikely that all their depositors will ask to withdrawall the money in all their deposits at the same time. How-

GLOSSARY 229

ever, fractional reserve banking is unsound in principle.A bank that has loaned out more money than it canraise on demand from its assets is inherently insolvent.

Free goods—anything, material or non-material, whichis available in sufficient quantity to satisfy all demand.Because demand is less than the supply available, freegoods are free to anyone who wants them. They have nomarket price. The items that are free goods may varyfrom place to place and time to time. Water is a freegood beside a lake but a valuable economic good in adry desert area. Fresh air is a free good in the country,but an economic good to city residents who are willingto pay for fresh air in offices and apartments.

Free market—a market economy where private propertyis protected, competition is free and open, and the op-portunity to trade and to make voluntary contracts isprotected, so long as the persons involved do not useforce, fraud or threat thereof to interfere with the equalrights of others.

Free port—an area, set apart from all domestic markets,where goods and raw materials may be received, pro-cessed and fabricated—before being shipped out onceagain into world trade—without having to go through anation's customs and be taxed as imports.

Free trade—international laissez faire; an internationalfree market. In a free trade world, individuals would beat liberty to exchange with anyone anywhere who waswilling to trade with them. Goods would cross nationalborders without hindrance. Capital, labor, production,goods and services would tend to go where they weremost valuable, i.e., where their marginal utility washighest, where they enjoyed the greatest possible "Com-parative advantage" (see above).

Government control or regulation—a government im-posed and enforced restriction, directive or order.

Government intervention—an act on the part of govern-ment which interferes with the market process in someway; a coercive interference which compels peacefulpersons to act differently from the way they would haveotherwise, even though their actions would not haveviolated the equal rights of others.

Government, role of—the fundamental obligations of agovernment are really only two—(a) to protect the lives,property and freedom of all citizens equally from do-mestic and foreign intruders and (b) to adjudicate (settlethrough the courts) disputes that arise under its jurisdic-tion which the persons involved are unable to resolvepeacefully among themselves.

Gresham's law—a law of economics, not of governments,named after one of the first persons to note and describeit, Sir Thomas Gresham (1519-1579). Gresham's lawpoints out that when two moneys, valued differently onthe market are decreed by law to be equal in value,people will try to use the money they value less (the"bad money") to pay their bills and to keep for them-selves the money they value more (the "good money").The appearance on the market of depreciated, clipped ordebased units of money, which have been legally de-clared to have more value than they actually do, is asignal to traders to use the legally over-valued monetaryunits in trade whenever possible and to hold for them-selves the more valuable, but legally under-valued,monetary units. Thus in popular parlance this law hasbecome "Bad money drives out good." Gresham's lawapplies to money the general economic law that every-one tries to use the easiest, simplest and cheapestmeans available to attain his or her various goals.

Gambling—an action concerning which one can knownothing in advance about the results except that a cer-tain percentage of the persons gambling will win and acertain percentage will lose. The results depend on purechance. No amount of knowledge or understanding canimprove the odds. A person gambles when he or shebets on the turn of a roulette wheel or the toss of a coin.

Goal, end—the aim of purposive action, selected by theindividual actor on the basis of his personal, subjectivevalues, judgment, interpretation and understanding. Theever-present goal or end of every one of us is simply therelief of a "felt uneasiness." Specific goals or ends maybe short-, medium-, or long-run. The attainment of agoal or end calls for (a) planning, (b) time, and (c) var-ious resources.

Gold—a metal, units of which have become the world'smost widely-used "trading commodity" or medium ofexchange. It was gold's popularity for various purposesthat made it suitable to use in exchange as "money." Be-cause it is so popular it is known as a "precious metal."Silver enjoys a similar, if lesser, popularity, is also con-sidered a "precious metal" and has been used from timeto time as a medium of exchange although not to thesame extent as gold.

HHampered market economy—a market economy whichevolves when various government interventions preventor hinder certain otherwise peaceful actions of individ-uals. A hampered market economy cannot operate atmaximum potential efficiency because government in-terventions tend to mislead, delay, sidetrack and dis-courage voluntary transactions, add to the costs of doingbusiness, reduce production and employment and, thus,bring about different results from those of a free market.Most economies are hampered market economies.

History—past events and/or the record or study of pastevents; the past actions of individuals and the institu-tions they established, reported, related and interpretedin the light of available knowledge.

Human action—conscious, purposive, intentional actionof individuals; action aimed at definite goals. See also"Action."

"Human rights"—this term is normally used to refer tothe freedom of individuals to read, write, speak andworship as they wish. The right to own property, seldommentioned, should also be included as the basic "humanright," for the opportunity to own and control propertyis essential for all other "human rights." If a person

230 GLOSSARY

does not have the opportunity to acquire private prop-erty, he or she must submit as a serf or slave to survive,deprived of "human rights" except as they may be grant-ed by a master.

"Idle resources"—produced or semi-produced, more orless inconvertible, factors of production, fabricated forpurposes which later proved to have been mistaken."Idle resources" are usually malinvestments, due to en-trepreneurial failures in anticipating consumer demandand market conditions. This term is somewhat mislead-ing for it bears the implication that "idle resources" maybe artificially subsidized into activity and, by thissimple artifice, rendered non-idle and thus "economic."

Import—the verb meaning to ship into a geographicalarea from abroad; also a commodity or the produce soshipped.

Inconvertible factor of production—something used inthe production of a specific good or service which hasonly one presently known use. It cannot be shifted orconverted to serve another purpose at all, or at least notwithout incurring such high costs or serious difficultiesas to make its conversion appear impossible, impractic-able or at least not worthwhile. The huge luxury liners,that became unprofitable with the increase of air travel,and assemblyline machinery, which is geared to produc-ing a certain make or model automobile, are practicallyinconvertible factors of production. Few, if any, entre-preneurs would be able to conceive of an idea for con-verting them to uses which would be profitable. Seealso "Factors of production" and "Convertible factor ofproduction."

Indirect exchange—a market transaction or trade involvinga good or service on one side and on the other a "tradingcommodity," i.e., a medium of exchange or money. In-direct exchange contrasts with barter or direct exchange(see above).

Induction—the method of acquiring knowledge by ac-cumulating data and facts from experience, controlledexperiments, observation and/or historical study. Themethods of induction may be described in more familiarterms as the "look-see," "trial and error" laboratoryexperiments and/or research of papers and artifacts.

"Industrial Revolution"—any significant and perhaps es-pecially conspicuous shift or turn-over in productionmethods. The term is frequently used to refer to the rel-atively rapid introduction, primarily in England duringthe 18th and early 19th centuries, of the factory systemand mass production, using steam power, replacing theearlier, less efficient and smaller scale handicraft pro-duction techniques.

Infant industry—a new industry in an economy. A tradi-tional protectionist argument on behalf of tariffs andother import barriers has been that foreign competitionshould be restricted to give infant industries a betterchance to sell, become established and expand on thedomestic market.

Inflation—an increase in the quantity of money. Infla-tions may be caused by a new discovery of the com-modity used as money (whether shells, gold, silver orwhat-have-you), by a goldsmith's issue of more "ware-house receipts" for gold than he has gold on deposit,an increase of a bank's banknotes over and above thereserves available to redeem them, an increase in thegovernment's issue of printed (fiat) money, etc. Creditexpansion (see aoove) is a variation of inflation.

Interest, interest rate—the price, usually expressed as aratio or percentage of the sum involved, which a bor-rower pays for borrowing money. Borrowers are willingto pay such a premium to acquire cash funds promptly,and lenders are ready to forego the use of the funds in-volved until a later date, in exchange for the payment ofinterest, because they have different, yet dovetailingtime preferences. Interest is a consequence of the factthat events take place over time and that people havevalues. Interest rates are composed of three factors:(1) Originary interest, based on time preference; (2)Price premium, based on the expectation of a generalshift in prices, due to changes in the quantity of money;(3) Risk factor, based on the anticipated chances for suc-cess or failure of the specific enterprise concerned. Aspecific interest rate at a specific time and place is de-termined, as in the pricing auctions, by competitionamong prospective lenders and borrowers each biddingor refraining from bidding according to their own per-sonal values and value scales.

'Interstate commerce"—the term used to refer to tradeand market transactions carried out within this countrybut across State boundaries. The term is derived fromthe provision of the Constitution authorizing the Con-gress "to regulate Commerce . . . among the severalStates," as well as from legislation implementing Su-preme Court decisions defining this authority.

Interventionist government—a form of governmentwhich interferes, regulates, restricts, controls some, notall, peaceful actions of private individuals, even whenthey were not violating the equal freedom and rights ofother persons. Interventionist programs inevitably helpsome people while hurting others. Because individualsmake mistakes, they have seldom come close to theideal, a strictly limited government, and if they have,they have usually let it deteriorate sooner or later intosome form of interventionist government. The economicsystem associated with interventionist government is ahampered market economy.

Invest, investment—the process of directing savings intospecific enterprises set up to engage in production.

"Iron law of wages"—an early economic doctrine whichheld that the laborers in a society could never receivemore than a certain fixed percentage of the wealth pro-duced. If their wages fell below this percent, their num-bers would go down as infant mortality, diseases andstarvation went up. Their employers would see to it thatworkers never received more in wages than the percentprescribed by this "iron law," for they would hire fewerworkers, compel them to work longer hours, or takehigher incomes from the business for themselves.

GLOSSARY 231

J"Just price*' idea—the belief, associated primarily withScholasticism that in any particular situation there wasa price, wage, interest rate, profit, etc., which was"right" and "fair."

ciety and/or their property. A limited government leavespeople free and permits them to function in peace. Theeconomic system associated with limited government iscapitalism or the free market economy.

Loss—the decline in value resulting from an action whenthe total yield is insufficient to cover all the costs in-volved; the opposite of "Profit" (see below).

Labor—purposive activity, work, or effort, not necessarilyconsidered pleasurable in and of itself, but valued pri-marily as a means for attaining one or several of a per-son's other goals, ends, wants, needs, etc.

Labor theory of value—the value of a good or service onthe market is determined by the work or labor requiredto produce or obtain it. See "Value theories" (below).

Labor (trade) union—an organization of workers for thepurpose of attaining common goals. Membership may bealong company, craft or industrial lines. Although unionsmay be purely voluntary organizations, competing withother voluntary groups and societies for members andfinancial support, some organizations of workers havebeen given special recognition by law, entitling them tocertain privileges as unions—in obtaining members, ex-cluding non-members from competing for some jobs andbargaining with established and potential employers.

Laissez faire, French—a. term applied to the political pol-icy of leaving businessmen alone—to "do their ownthing," so to speak. If government were to adopt a policyof laissez faire this would, in effect, bring about a freemarket economy. The term is frequently used as a smearword to describe a system under which big businessfirms would be free to use any tactic, legal or illegal,to gain their own "selfish" ends at the expense of thecommon man or small consumer. But in fact laissez fairedoes not include allowing anyone the right or privilegeto ride roughshod over the equal rights of others. Truelaissez faire would mean freedom.

Legal tender—the commodity or money which the gov-ernment has recognized by law and which governmentrequires creditors to accept when it is offered them inpayment of monetary debts. The U. S. Constitution for-bids the States from making "any Thing but gold or sil-ver Coin a Tender in Payment of Debts." The U. S. na-tional government, however, has decreed the paperbanknotes of the "Fed" to be legal tender, and their statusas legal tender is indicated in print on all Federal Re-serve Notes.

Liabilities—the obligations and/or debts of a person ororganization.

Limited government—the ideal government, one that isrestricted to its legitimate role consisting of two impor-tant functions—(a) protecting lives and property fromdomestic and foreign interference and (b) settling dis-putes through the courts. A limited government isbased on equality under law for all peaceful citizens.Like a night watchman or electrified fence, it guardsindividuals and their property, without interfering un-less provoked into action by someone who uses violence,or threat of violence, to hurt other members of the so-

M

Macro-economics—the name used to describe the study ofmass economic phenomena, i.e., the operations and ac-tivities of large numbers of persons, groups, collectives,communities, societies, nations, etc.

Madison Avenue—one of the major north-south avenuesof New York City which has come to epitomize the ad-vertising industry, because the offices of many adver-tising agencies are located there.

Margin—an invisible dividing line, in economic terminol-ogy, separating (a) those persons who actually buy orsell an item on the market from those who don't and(b) those items that are actually traded on the marketfrom those that aren't. A "sub-marginal" good or ser-vice is not traded because potential purchasers value itless than they do the price they would have to pay—intime, money and effort—to acquire it.

Marginal unit—the last unit of a good or service which aperson considers worth what it costs to acquire it—intime, money and effort.

Marginal utility—the usefulness or satisfaction which de-pends on the possession of a single unit of a particulargood or service. We may determine the "marginal util-ity" of any item by ascertaining what we would lose inthe way of satisfaction if we had to get along with oneless unit of it.

Marginal worker—the worker at the margin. The mar-ginal worker is the person whose productivity justbarely covers the costs of hiring him or her. A marginalworker may become sub-marginal (or vice versa) if hisproductivity or the market demand for his output de-clines (or increases).

Market—a market is any place or geographical locationwhere two or more persons meet and exchange goodsand/or services. The term may also be used as a shortcut term for the market economy or market process.

Market economy—any trading area bound into a singleunit by the cobweblike network of interpersonal agree-ments, contracts and exchanges.

Market process—the procedure or arrangement prevail-ing throughout the market economy which results fromthe conscious, purposive actions of individuals cooperat-ing, competing and exchanging with one another. Theoutcome of the market process is production and trade.

Markets, Say's law of—a theory first set forth clearly byJean Baptiste Say (1767-1832) to the effect that produc-tion creates its own market; there can be no widespreadbusiness slump on account of general over-production ora general shortage of money. Goods produced become

232 GLOSSARY

purchasing power for other goods and services. Moneyprices adjust to help equate supply and demand.

Mass production—the process of production on a largescale for potentially large numbers of consumers; trans-forming large quantities of raw materials into finishedconsumers' goods by means of assembly line techniques.Mass production relies heavily on specialization, thedivision of labor, capitalist savings and the use of tools.Mass production for mass markets takes advantage ofthe economies of scale made possible by standardizingproducts and using machines and assembly lines insteadof individualistic hand labor.

Means—any resource or tool, material or immaterial,which a person finds useful for seeking a goal. Amongthe means or resources commonly referred to in eco-nomics are raw materials, labor, tools, factories, capitalgoods, money, and other things used in production.

Medium (media, pi.) of exchange—a "trading commod-ity" used as money in indirect exchange. As trade in-creases and the trading area expands, direct exchangeor barter becomes cumbersome and impractical. Tradersthen turn to making trades in terms of some commoditywhich is in greater demand and thus more readily mar-ketable than the actual items they are seeking to ex-change. As a result of countless such transactions, trad-ers may try to arrange trades in terms of several differ-ent items. In time one commodity may prove moremarketable than others. Then eventually that particularcommodity may be transformed from being simply oneof several desirable and marketable items into the mostdesirable and most marketable commodity and, thus, asuitable medium of exchange. The availability of amedium of exchange contributes substantially to trade,by making transactions easier to arrange, and to pro-duction, by making economic calculation possible.

Mercantilism—an economic theory and set of politicaldoctrines based on the concept of artificially stimulat-ing "national wealth" by subsidizing exports of goodsand the import of the precious metals (gold and silver).During the 16th, 17th and 18th centuries, quite a fewgovernments enacted various Mercantilist interventionsto protect domestic producers from competition. A pe-riod of relatively free world trade followed but Mercan-tilist doctrines have gained popularity in this centuryand many such programs are now in force in manycountries throughout the world.

Micro-economics—the body of economics and economictheory which analyzes, interprets and traces all eco-nomic phenomena back to the economic unit, i.e., theindividual actor, his individual actions, ideas, choicesand preferences.

Money—a commodity used to facilitate trade, thus a"trading commodity" or medium of exchange. Moneyis the most desirable and most readily marketable com-modity in an economy, the commodity which peoplegenerally are most willing to accept in trade. Austrianeconomist Ludwig von Mises defined money as "themost marketable good which people acquire becausethey want to offer it in later acts of interpersonal ex-change." (Human Action, 3rd ed., 1966, p. 401)

Money stock—the quantity of money in existence at anyone time. Federal Reserve statistics calculate moneystock in two ways. What they call M-l is defined as thetotal of (1) currency outside of banks plus (2) demanddeposits subject to check. Their second calculation ofmoney stock, M-2, includes M-l PLUS (3) time deposits,at commercial banks other than large certificates of Ideposit. (See Federal Reserve releases for details.) BothM-l and M-2 have increased substantially in recentdecades. The increase in M-2 relative to whatevermetallic money has formed its base has been especiallyspectacular.Monopoly, monopolist—speaking precisely, this termrefers to the exclusive control of the entire supply of aspecific good or service. Monopolies may be (a) na-tural, due to the fact that the quantity of the monop-olized item is limited by nature; (b) local, due to the factthat the physical space in which the monopolist operatesis strictly limited so that there is actually no room for acompetitor; (c) legal, due to the fact that the opportunityto operate depends on a special legal grant, a govern-ment license, franchise or privilege. The term monopoly,as well as monopolist, is often used imprecisely to referto almost any very large firm, or an extremely successfulbusinessman, irrespective of the existence of competitorsand potential competitors.Monopoly price, monopoly gain—a higher unit price thanwould have appeared on the market under free andopen competition; the extra gain, if any, from sellingfewer items at such a price. A monopolist may charge amonopoly price for something and reap a monopoly gainonly if the demand for it is such that enough consumersare willing to pay the higher price and so make the mo-nopolist's net return—from selling a smaller quantity atthe higher price—greater than if he sold a larger quan-tity at the lower, competitive, free market, price. Nomonopolist, not even one who exercises exclusive con-trol over the entire supply of a specific good or service,is always in a position to charge a monopoly price andreap a monopoly gain. This must depend on the wishesof potential consumers, and the existence of alternativesand substitutes. To yield a monopoly gain, the demandon the market for the monopolized item must be rel-atively "inelastic," i.e. consumers must be ready to buyalmost as many units at a higher price as they would ifits price were lower. See "Elasticity of demand." Yet nomonopolist can know with any certainty in advance,when deciding what prices to ask, how "elastic" thedemand for his product will be.

Most favored nations—a term used at least since 1922 torefer to those nations whose governments agree to admiteach other's products into their respective countries onmore favorable terms than they grant imports from lessfavored nations. Tariffs on imports from most favorednations may be reduced or even eliminated by mutualagreement.

Multinational corporation (MNC)-a corporation withinterests and investments in more than one country.

N

Neo-classical School of Economics—a school of thoughtor set of theories derived from the doctrines of the Clas-

GLOSSARY 233

sical School, modified somewhat by the marginal utility,subjective value theory. Representatives of this "School"often use mathematical formulae in the attempt to an-alyze and predict economic phenomena.

Net worth—the estimated market value of the assets ofa person or firm, after deducting all liabilities. See also"Equity" (above).

"Niggardly," "niggardliness" of nature—these termswere used by John Stuart Mill (1806-1873) in his Prin-ciples of Political Economy to describe the fact that theworld is not as amply supplied with resources as menwould wish. We must struggle to extract, transport andtransform raw materials, as they appear on earth, intotools and goods to satisfy our various wants.

Nomadic tribes—small bands of wandering peoples whodepend primarily on domesticated animals for the thingsthey need and want to consume. As their livestock re-quire new lands to graze, a nomadic tribe finds it neces-sary to move from place to place.

Non-tariff barriers (NTB)—governmental regulations,other than direct import taxes (tariffs), which make im-ports more difficult or more expensive. The purpose ofnon-tariff barriers—import license requirements, anti-dumping restrictions, Buy American stipulations, etc.—is to hamper trade and/or raise revenue for the govern-ment. Some government regulations not intended tohamper imports—domestic health and sanitation stan-dards, trucking restrictions, automobile safety legisla-tion, etc.—may turn out to be unintentional non-tariffbarriers.

OObjective characteristics—the physical or chemical prop-erties or traits of something; its capacity to bring abouta definite effect. Contrasts with subjective value whichdepends on the personal ideas and judgments of the in-dividual doing the valuing. See "Value."

Oligopoly—see "Duopoly" (above).

Open shop—a business enterprise which makes no stipu-lation respecting the union status of employees, bothunion members and non-members alike being eligiblefor employment.

Operating statement—a financial statement showing thetotal receipts and expenditures of a person or firm dur-ing a certain period of time.

Paradox of value—the apparent contradiction whichexists in the statement that some things are very "val-uable" in use (air, water) but not very "valuable" intrade; while some things (gold, silver) are very "valuable"in trade, but not very "valuable" in use. This "paradox"was explained when economists realized that marketprices were derived from subjective (personal) values ofindividuals, each of whom was always comparing therelative importance to him of specific units of various

commodities. Thus the market price of a particular itemhinges on die service that depends on a single unit sothat when the units of any good are plentiful, relativelyless depends on any single unit.

Physiocrats—an economic school of thought based on theconcept of "natural order" in production. The Physio-crats' incomplete definition of production, as the resultof combining human labor with nature, led them to ad-vocate the granting of special privileges to agriculturalproducers.

Pickets, picketing, picket lines—terms taken from mil-itary tactics where they applied to the posting of guardsaround a camp to keep out intruders by using force ifnecessary. This terminology is inappropriate for dis-cussing peaceful and voluntary employer-employee rela-tions. It is perhaps suitable, however, for describing thekind of disputes that arise under current labor legisla-tion. The picketing of an establishment holds the threatof violence if the union pickets are determined to pre-vent potential workers, who want no more than the op-portunity to accept jobs offered them, from crossingpicket lines.

Price—an exchange ratio, the ratio at which goods andservices are exchanged on the market for one another,or for money. Prices are usually expressed in terms ofmoney, i.e., die medium of exchange, currently in use onthe market.

Price, law of—the law that explains market prices. Theprice of any item on a free market is forced by compe-tition and the pricing process to fall within certain lim-its, determined by the personal, subjective, value scalesof the buyers and sellers at the "margin," (see above),i.e., the invisible dividing line between those who tradeand those who don't because they do not consider theexchange to be worth the cost—in time, money and effort.

Primitive societies—the simplest known economic ar-rangement. People forage, fish and hunt for food andtheir other necessities. They have only very crude andsimple tools to use in production.

Private property—anything, usually physical, which aperson may own and dispose of at will. The right of dis-posal, i.e., the right to control the use of a thing, is cru-cial! Unless a person has control of something, he can-not be said to own it. At some times and places personshave been legally treated as private property (slaves)and so bought and sold on the market. Some non-phys-ical things may also be considered private property andso exchangeable on the market—a song, a recipe, a pat-ented idea, a contractual right to acquire an asset, etc.

Producers' goods—anything used in production, to pro-duce consumers' goods and/or other producers' goods.Producers' goods include raw materials, land, labor, aswell as produced and partially produced tools, machines,factories and anything else used for further production.Although most people think of producers' goods as ap-plying only to physical things, the term also covers ideas,knowledge and recipes as they too are used to furtherproduction. Producers' goods and consumers' goods aredistinguished by their uses.

234 GLOSSARY

Producers' policy—a deliberate government policy in-tended to protect less efficient producers from the com-petition of more efficient producers. Helping some pro-ducers in this way must inevitably injure other produc-ers, raise production costs, lower output, increase mar-ket prices and, thus, reduce the satisfaction of consum-ers. Mercantilism and protectionism are specific formsof producers' policies.

Production—the process of combining raw materials, la-bor and other factors of production or producers' goodsover a period of time, in accord with some idea or plan,so as to create goods and/or services consumers wantand value more highly than they did its component partsin their previous uses. If the process results in goodsand/or services consumers do not want at all, or do notwant as much as they would have the component partsin other forms, then the outcome of the process is not"production" in its true sense; but rather it is waste anddestruction. It might be pointed out here also that anyprocess which helps a product reach the final consumer—transportation, advertising, selling, giving legal advice,etc.—is a step in its production. Even though it may notphysically alter the product, it is productive if it contrib-utes in any way to the provision of something a con-sumer wants.

Profit—the gain derived from an action, the total yieldless total costs. There are two kinds of profit: (a)"psychic profit," i.e., personal, subjective, mental orpsychological and (b) "entrepreneurial profit," i.e., mon-etary or business.

Promissory note—a promise-to-pay or an IOU. In thecourse of doing business, private persons and businessfirms frequently sign promissory notes—"notes," forshort—specifying sums of money, goods or services to bedelivered, and the time, terms and conditions of delivery.

Property rights—the freedom and opportunity to acquire,own, hold, use and dispose of private property. This"right" is basic to all market phenomena—exchange,division of labor, specialization, etc. It is an essentialelement of private property and it is also basic to so-called "human rights."

Protectionism—a deliberate policy on the part of govern-ment intended primarily to give domestic producers acompetitive advantage on the domestic market asagainst potential foreign suppliers. Tariffs, importquotas, direct subsidies to domestic producers and theestablishment of quality standards which foreigners areunable to meet are typical protectionist devices. Cartels(see above) are feasible only if, as and when some pro-tectionist measures are in force.

Psychic profit—the subjective or psychological gainfrom an action. If a person receives pleasure from givinga gift, that pleasure is a form of psychic profit. Any timea person trades voluntarily, he or she reaps a psychicprofit because the value to him or her of what is receivedis more than that of what was given in exchange. Thus,whenever a customer buys anything he or she gainspsychic profit and if the purchase seems an exceptionallygood bargain, something for which he or she would havewillingly paid even more, the psychic profit may be sub-

stantial. A job that is fun yields a psychic profit as com-pared with work that is boring. Psychic profits are in themind. As psychic profits are subjective they cannot bemeasured.

Purchasing power—the ability to command goods andservices through peaceful trading on the market. Pur-chasing power is the only real manifestation of so-called"economic power." In a free market economy, the onlyway to acquire purchasing power is to produce, or toreceive gifts or loans from someone else who has pro-duced, goods and services others want in exchange.Purchasing power reflects and follows success in serv-ing consumers, the greatest concentrations of purchas-ing or economic power gravitating into the hands ofthose who contribute the very most.

Quota—a governmental restriction or limitation of im-ports or exports, usually stated in terms of physicalquantity or monetary value.

"Rainy day" (or plain) savings—accumulations of stocksof consumers' goods as reserves to be consumed later—on "rainy days."

Reformation—the religious reforms of the 16th and 17thcentury. The Renaissance spirit of inquiry led somethinkers to re-examine many accepted religious dogmaand practices, including the doctrine of the infallibilityof certain church officials. Their doubts led in time toreforms in the Roman Catholic Church and the estab-lishment of a number of Protestant sects.

Renaissance—roughly the three centuries (1300-1600A.D.) following feudalism when an interest in learn-ing revived as a result of the rediscovery in Europe ofthe literature and art of the ancient Greeks and Romans.During the Renaissance, a spirit of inquiry among think-ers led to advances in the physical sciences, geograph-ical knowledge, religious philosophy and political the-ory. Renaissance thinkers contributed to the climate ofopinion permitting intellectual inquiry which madepossible the evolution of more efficient methods of pro-duction.

Resources—any good or service used for production.Raw materials are called natural resources because theyare natural phenomena, i.e., products of nature. As menrefine and fabricate them step-by-step, they becomesemi-produced or produced resources, factors of produc-tion, or tools. Resources may also be non-material—knowledge, theories, understandings skills, time, energy,ideas, etc. See "Means."

Restraint of trade—a technical term used, although notclearly defined, in antitrust legislation which refers toactivities on the part of businessmen and business firmsthat ostensibly lead to restricting competition and re-ducing commercial transactions.

"Right-to-work" laws—laws intended to prevent unionsfrom insisting that employers with whom they have con-

GLOSSARY 235

tracts hire only union members. Right-to-work laws pre-clude closed shops, but not union shops.

"Robber barons"—a name originally applied to some ofthe more flamboyant and successful 19th century entre-preneurs who extracted raw materials on a large scale,financed or pioneered mass production, amassing largepersonal fortunes. Implicit in this colorful expression isthe idea that their wealth was gained at the expense ofworkers and consumer.

"Round-about" methods of production—a term some-times used to describe production with the aid of com-plex tools, machines and equipment which themselveshad to be produced first by a complex, time-consumingprocess. This term is somewhat misleading. Productionis carried on with the aid of previously produced toolsand machines of various kinds precisely because that isthe most effective, efficient, fruitful and thus most di-rect—not "round-about"—method known to obtain the in-creased quantities of consumers' goods desired.

Saving—the process of refraining from consuming a partof production.

Savings—a surplus of production over consumption. See"'Rainy-day' (or plain) savings" and "Capitalist sav-ings."

Scale of values—the order of importance or urgency ac-cording to which every person, consciously or uncon-sciously, ranks his various needs, wants, goals or ends.Everyone is always necessarily aiming at his most ur-gently desired, i.e., most important or most valuable,goal or end of the moment—in the light of his personalsituation as he views it. See also "Value."

Scholasticism—the doctrine and philosophy of St.Thomas Aquinas (1225-1274) and other Medieval church-men. With respect to economics, they held that therewas a "just price" (see above) and that to charge moreor less than that was not right, fair or moral.

Scientific action—an action about which the results maybe known in advance. The more a person can learn aboutthe universe, the laws of the physical sciences, cause andeffect, the better equipped he or she will be to undertakescientific actions with confidence. A person acts as a sci-entist, performing scientific actions when he or she fol-lows the proper mechanical steps to start the motor of acar, put it in motion and steer it in a certain direction. Tobake a cake according to a proven recipe is also a scien-tific action. Barring accidents, insufficient knowledgeand human error, scientific actions have the results in-tended.

Seller—it is customary to speak of a trader who givessome specific good or service in exchange for money asa "seller." In this sense, a "seller" is contrasted with a"buyer."

Slavery, serfdom—a form of existence which allows nopersonal freedom. Serfs and slaves are dependent on amaster because they are denied the right to become in-dependent by acquiring private property of their own to

use as they wish for their own purposes. Serfs and slavesare considered the property of their owners who havethe right to control or dispose of them and/or their prod-uct.

Socialism—a theoretical economic system synonymouswith communism. Karl Marx and his friend, FriedrichEngels rejected the term socialism because of its asso-ciation at that time (1848) with a middle class (not work-ingmen) movement.

Special privileges—benefits granted by government tocertain persons, firms, organizations or groups not avail-able to everybody else in the same situation. A specialprivilege helps some, hurts others and, thus, is not con-sistent with limited government.

Specialization—the technique of production which usesspecialists, each of whom performs one or several sep-arate activities that in combination accomplish a singlecomplex task. See also "Division of Labor."

Specie—monetary coins, usually gold or silver. Whenbanks have found themselves in financial difficulties asa consequence of having inflated or expanded credit(see "Credit expansion," and "Inflation") governmentshave frequently relieved them of the obligation of ful-filling their pledges to redeem their notes in gold orsilver coins. In other words, banks have been permittedat times, with the permission of government, to "sus-pend specie payment."

Speculation—an action which must be based on onlypartial knowledge and understanding. A person acts as aspeculator when deciding whether, when, how and towhat extent to take a specific action. The uncertainty ofthe future makes every conscious choice a speculation.Deciding whether or not to act—even whether or not togamble or take a scientific action—is speculating. Entre-preneurial decisions are always speculations, for entre-preneurs can never have complete knowledge concern-ing the consequences of their actions.

Status society—a social arrangement based on estab-lished, government-defined "classes." Every person in astatus society is born into a certain status or "class."Some belong to the lower classes of slaves, serfs, peas-ants, servants or laborers; others to more privilegedclasses—masters, nobles or lords; except in rare cases noone moves out of the class into which he or she is born.Production in a status society relies to a considerableextent on the use of slave labor. In a status society,both the class structure and the institution of slaveryare upheld and strengthened by the superstitions andpolytheistic religions of the people.

Stock, common and preferred—a share of ownership in abusiness firm. Holders of shares of stock are issuedstock certificates as evidence of their ownership in thefirm. Holders of a company's common stock share—ac-cording to the terms of their partial ownership—the riskof loss as well as the chance of monetary or entrepre-neurial profit. When a company's income declines, theholders of its preferred stock are given preference overthe owners of its common stock in the payment of div-idends. Also, if the firm goes out of business, the ownersof its preferred stock have priority over the holders of its

236 GLOSSARY

common stock if, as and when anything is salvagedfrom the firm's assets.

Stock exchange—a market place where persons whowant to buy or sell shares of ownership in various busi-ness firms may meet and trade with one another.

Strike—a tactic used by a group of employees who refuseto work at the jobs they had been holding, but preventthose jobs from being filled by others whom the em-ployer might like to hire for those positions. To quitwork in unison is a perfectly legitimate way to try to ac-complish a common purpose. However, a strike involvesmore than simply quitting work in concert. Inherent inthe strike concept is the claim that the strikers have aright to use force or threat of force if need be to preventother would-be workers, known derisively as "strike-breakers" or "scabs," from taking the jobs they had heldbut which they now reject at the terms being offered.When government sanctions a strike, it backs up theunion's threat with force, so that a very few union pick-ets usually suffice to bar other workers effectively fromcompeting for jobs at the plant being struck and, thus,to protect the privileged position of the strikers.

Subjective value—value depending on the personal ideasand judgment of an individual. See also "Value."

Subsidy—financial aid to some person, persons, busi-nesses, organizations or groups. When governmentgrants subsidies to some, it helps the recipients atthe expense of those who are forced to pay the cost.

Tariff—a tax levied by government on imports, i.e., goodsbeing brought into the area under its jurisdiction. Atariff is a particular kind of duty.

Time preference—the relative urgency of a person's de-mand for present goods as compared with future goods.Like personal (subjective) values, different individualshave different time preferences and the same individ-ual has different time preferences at different times andunder different circumstances. In the Aesop fable, theGrasshopper's time preference is such that he is prob-ably willing to pay a special premium to enjoy consum-ers' goods today. On the other hand, the Ant's time pref-erence tempers his desire to consume today; he setssome things aside so he may consume more tomorrowthan he otherwise could.

Tool—a term usually applied to physical instruments, i.e.,factors of production which are considered useful forattaining a goal—viz. a train to transport goods and peo-ple, a hammer to pound nails into a board, a computer torecord data and calculate or a warehouse to store mer-chandise. However, ideas, knowledge and skills are alsotools, for they are means we consider useful to help usaccomplish our goals. Thus, a tool is any object (ma-terial or immaterial) which (a) an individual (b) consid-ers useful (c) for a purpose. Although tools are labor-saving devices, their most important function is to in-crease production.

Totalitarian government—a government that controlsevery aspect and action of all persons and things under

its jurisdiction. No government manned by falliblehuman beings will ever really be able to accomplishthis very difficult feat. However, many governmentshave been based on this theory, i.e., that everythingwhich takes place within the country should be plannedby the central authority. The economic system asso-ciated with such a totalitarian government is known ascommunism, socialism or Nazism, i.e., Hitler's type ofNational Socialism.

Trade—exchange (see above). Every trade or exchangemeans giving up something (some good, service or sit-uation, separately or in some combination) to obtainsomething else (some other good, service or situation,separately or in some combination). It permits people toobtain things from other persons and other parts of theworld that they could not acquire otherwise, or at leastnot as cheaply or as easily. Trade is a product of cooper-ation. At the same time a trade is very often a step onthe road to still further cooperation.

Trust—a specific type of business structure which be-came important in the late 19th century. The owners ofseveral independent companies in an industry wouldturn over their stock and control of their firm to "trust-ees" who then managed and operated the complex ofseveral companies as a single unit under a "trust agree-ment." The intent of such a "trust agreement" was totry to monopolize the entire production in an industry.(NOTE: This use of the term "trust" is distinct from itsuse in banking and financial communities to describe aspecific legal arrangement under which funds belongingto one person are turned over to another, a "trustee,"to be managed on behalf of a third party, the "benefi-ciary.")

U

Union shop—a business enterprise which has an agree-ment with a labor union requiring mat all employees incertain categories must be, or must become, membersof that labor union to retain their jobs; nonunion mem-bers may be hired, but only on the condition that theyjoin the specified union within an agreed-upon time.See also "Closed shop."

Usefulness, utility—the capability of a good or service tosatisfy a need or serve a purpose. The physical charac-teristics or properties of a good or service usually formthe basis of its utility, but the subjective value of a goodor service to an individual may have real significance formarket prices and pricing. The subjective views of in-dividuals concerning the utility of a ^ood or service maymake it more or less valuable in the minds of people thanits objective characteristics, its physical properties,would seem to warrant.

"Usury"—a term used to describe interest rates. By usingthis term the speaker implies that the rate of interestreferred to is higher than he considers proper under thecircumstances.

Value—the worth of anything to a specific person or per-sons. Value is necessarily personal and subjective, i.e.,

GLOSSARY 237

it depends on the ideas or judgment of the individualsdoing the valuing. A good or service may possess objec-tive (physical or intrinsic) properties or characteristics.However, to speak of its value as being objective orintrinsic is a contradiction in terms. Values are alwayspersonal, subjective, in the minds of the individualvaluer.

Value theories—several theoretical explanations havebeen suggested as to why some goods and services arewanted or needed more than others and considered de-sirable enough for people to be willing to work or giveup something else to get them. The most significanttheories advanced over the centuries to explain eco-nomic and/or market values have been:

1. Goods or services are valued the same as what isgiven in trade for them. (Aristotle and Aquinas)

2. Goods or services are valued at their cost of produc-tion. (Adam Smith and Karl Marx)

3. Goods or services are valued at what they will bringin trade or "exchange." (Adam Smith and others)

4. Goods and services are valued by individuals, asjudged from their personal (subjective) viewpoints.Adam Smith recognized one form of personal eval-uation, "use value." But Smith's concept of "use"was too narrow. Only later was full recognition, forthe determination of economic value, given to theimportance of individual, personal evaluations ofspecific units of a good or service under specific cir-cumstances. Individuals always believe what theyhave, and are not trying to dispose of, is more val-uable in "use" to them personally, under the circum-stances, then it would be in "exchange." Thus whenthey do decide to make a trade, it is because they be-lieve what they are offering to exchange is worthless to them personally than what they expect to re-ceive in return. Barring force, fraud and mistakes injudgment then, both parties will consider themselvesto have gained as the result of a voluntary trade.(Menger, Jevons, Walras and the subjective value"Austrian" theoreticians)

W

Wage, wage rates—the market price paid a person forperforming a service or certain amount of labor. Wages,like prices, are exchange ratios between money and theitem under consideration. A wage is simply a specificterm used to describe the price—usually expressed inmoney terms—paid at a particular place and time for acertain amount of labor or service, as opposed to aphysical good or commodity.

Wall Street—a New York City street which has becomealmost synonymous with the stock market, "big busi-ness," and financial speculation. The offices of the NewYork Stock Exchange and of many large banks and in-vestment firms are located there.

"Welfare economics"—the government policy of grant-ing special privileges or subsidies to favored groups orpersons. Advocates of such "welfare" programs usuaUyignore, or at least fail to mention, that their policies arehelping some persons only at the expense of others,those who must pay their financial cost and those whoseplans and activities are adversely affected.

"Wild cat" banking—a colorful phrase for describingfractional reserve banking. A "wild cat bank" is onewhich expands its issue of notes and loans more, on thebasis of lower reserves, than more cautious bankers ofits day generally consider wise. No "wild cat bank" cansurvive very long—its shortage of funds will become ap-parent as soon as a substantial number of its depos-itors try to withdraw their money from the bank.

"Yellow-dog" contract—an employment contract whichforbids employees from joining a union, or requires themto resign their jobs if they are, or ever should become,union members. The opposite of a closed shop (seeabove).

INDEXg=GLOSSARY

Action, 12, 16-19, g"Administered price," 51, 137, gAdvertising, 133-135, gAesop's ant and grasshopper, 61-62, 113Aggregate, 129, 172, gAgricultural economy, 200, 203, 208-209, gAncient civilizations, 202-203, gAnimal behavior, 13, 29, 30-31Antitrust legislation, 93, 142-143, 153, 154, gA posteriori knowledge, 11, 13, 14n, gA priori knowledge, 11, 13-14, 16, 44, 172, 210n, 215, gAquinas, Thomas, 166Aristotle, 165-166Armchair (logical, literary) method, 13, 79Assets, 77, gAuctions, see Pricing auctionsAustrian School of Economics, 46-47n, 171-172, gAutarky (self-sufficiency), 200, 203-204, gAutomation, 130, 131n, 200, 209-211, gAutomobile industry, 70, 131-132

B

Balance of payments, 157, gBalance of trade, 156-157, 167, gBalance sheet, 77, gBanknote, 112-114, gBanks, banking, 112-118, 219, gBanks, runs on, 114-115, 116, 124Barter, 103-107, gBastiat, Frederic, 171Bentham, Jeremy, 168Big business, 130-138Boehm-Bawerk, Eugen, 38n, 48-49, 172. See also Quota-

tionsBond, 135, g"Box office receipts," 50, 74-76, 79, 136-138Bureaucracy, 83, 192-193, gBuyer, 45, 109-110, g. See also Auctions, Consumer sov-

ereigntyBuyers' market, 42-43

Cash holding, 106, 107-110, 124-125, gCentral bank of issue, 115, 117-118, gChange, 14, 16, 19, 62, 71-74, 94-95, 184-185, 210Chicago School of Economics, 173, gClassical School of Economics, 167-169, gClosed shop, 93, gCoercion, force, 147n, 184-185, 188-193, 204n-205Coin clipping or Coin debasement, 111-112, 203, gCoins, 99n-100, 110-112Collective bargaining, 92, 93, gCommand society, 31, 188-189, gCommunism, 25n, 26, 75n, 188-189, 214n, gComparative advantage, 150-151, 168, gCompetition, 76, 89-91, 92, 136-138, gConglomerate, 142, gConsumer sovereignty, 50-53, 73-76, 79, 89-91, 130-132,

136-138, 143, 182-184, gConsumers' goods, 61-62, 63, 170, gConsumption, 23, 61, 133n, 150, 170, gContract society, 31, 187-188, 209n, gConvertible factor of production, 73, gCooperation, social or interpersonal, 31-34, 86-88, 147-

148, 198, 200-201, gCorporation, 64, 130, 132-133, gCorporation annual reports, 76-77Credit expansion, 114-115, 116-118, 124, gCrusades, 204, gCrusoe, Robinson, 12, 15, 18, 24, 31, 86"Cutthroat" competition, 142, 192, g

D

Deduction, 13, gDepression, recession, 116-117, 211-212Direct exchange, 103-107, g"Distribution," economic, 24, 26-27, 181, gDisutility of labor, 86, gDivision of labor, 25, 86-91, 147-151, 217, g"Dumping," 142, 152, 154, gDuopoly or Oligopoly, 141, gDuty, 152, gDwarf and giant, intellectual, 164, 166, 171

Capitalism, 25n, 130-131, 180-184, 187-188, 201, 209-211, g

Capitalist savings, 63-64, 65-66, 79, 88-89, 182-184, gCartel, 142, g

Economic calculation, 47, 80n, 106, 107, 217, gEconomic goods, 23, 44-46, 85, gEconomic power, 70, 142. See also Purchasing power"Economic problem," 21, 27, 31, 33, 79, 199-200, 216, gEconomic "school" of thought, 164, 166, gEconomic "schools," family tree, 162-163

238

INDEX 239

Economic thought, history of, 161-173Economics, 11-13, 14, 17-18, 147n, 165, 173, 210n, 215-

216, gEconomize, 48, 124, gElastic currency, "needs of business," 117-118Elasticity of demand, 141, gEmbargo, 152, 154, gEmpirical knowledge, 13, gEmployee, 87, 89-91, gEmployer, 88, 89-91, gEmployment, 86-88, 89-91Enclosures, 208-209Entrepreneur, 71-78, 80n, 88, 89, 130-132, 181-184,

207-209, 219, 220, gEntrepreneurial profit, 70, 73-76, 135, 137, gEquity, 77, gExchange, 25, 147, 217, gExport, 153, g

Factors of production, 63, 72-73, 169, 182-184, gFederal Reserve Notes, 100-101, 113, 115n, 123-124Federal Reserve System, 116-120, g"Felt uneasiness," 17, 79, gFeudalism, 203-204, gForage, 61, 62-63, 198, 200, gForeign exchange, 152, 153, gFortune's lists of corporations, 132-133Fractional reserve banking, 114-118, gFree goods, 45, 48, 85 gFree market, 24, 52-53, 180-184, 187-188, 205, 211,

220, gFree port, 153, gFree trade, 151, g

Gambling, 68, 71, g"Gate," see "Box office receipts"Goal, end, 19, gGold, 106, 110, 111-114, 117-118, 119-120, gGolden Rule, 220Government, see "Interventionist," "Limited," Totali-

tarianGovernment control or regulation, 189-193, gGovernment intervention, 51n, 176-180, 189-193, 204n-

205, gbusiness and, 95-96, 136, 142-143labor and, 82-83, 92-94money and, 111-113, 116-120, 123-125monopoly and, 138, 139-143trade and, 152-157unemployment and, 95-96See also Interventionist government

Government, role of, 26, 83, 110, 185-186, 191n, 219-220, g

Greaves, Percy L., Jr., 38n, 68Gresham's law, lOOn, 124, g

H

"Half-baked cake," 73, 78, 182, 218-219Hampered market economy, 186-187, 189-193, g

Hazlitt, Henry, 47History, 12, 13, 201n, gHistory, economic, 198-212History of economic thought, 161-173Human action, 17-19, 30-31, 46, 70-72, 216, g"Human rights," 21-22, gHume, David, 167

Ideas, 17, 72-73, 130-131, 164-166, 201, 204-205, 206,211

"Idle resources," 73, gImport, 140, 152, gInconvertible factor of production, 73, gIndirect exchange, 103-112, gIndividual, values and actions, 16-19Induction, 13, g"Industrial Revolution," 201, 206-209, gInfant industry, 152, 205, gInflation, 114-116, 119-120, 124, 152, 153, 219, gInterest, interest rate, 114, 121-123, 135, gInterregional trade, 147-158"Interstate commerce," 93-94, 142-143, 155, gInterventionist government, 186-187, 189-193, g. See

also Government interventionInvest, investment, 64-65, 88-89, 129, 135-136, g"Iron law of wages," 169, g

JJevons, William Stanley, 171-172"Just price" idea, 166, g

Keynes, John Maynard, 172-173Kirzner, Israel, 73, 127Knight, Frank, 173Knowledge, 13, 164-165, 166, 204

Labor, 85-96, 217, gLabor, working conditions, 88, 202, 203, 204, 205-206,

207-209, 210Labor theory of value, 169, gLabor (trade) union, 92-95, gLaissez faire, 167-168, gLegal tender, 110-112, 115n, 123-124, gLiabilities, 77, gLimited government, 185-186, 187, 191n, gLogical, literary (armchair) method, 13, 16, 79, 172Loss, 22n, 50, 70, 73, 131-132, 135, g

M

Macro-economics, 12-13, 156, gMadison Avenue, 134, gMalthus, Thomas, 168Margin, 46, 52, 53, 89, 168, 173, gMarginal unit, 45-49, 79, 173, 218, gMarginal utility, 45-49, 123, 170, 171-173, 218, gMarginal worker, 89, 90-91, g

240 FREE MARKET ECONOMICS: A BASIC SYLLABUS

Marionettes, producer/entrepreneur, 50-51, 74, 75, 182nMarket, 64, 135, gMarket economy, 31-34, 86-88, gMarket process, 31-34, gMarkets, Say's law of, 124, 150, 170-171, gMarshall, Alfred, 172Marx, Karl, 169Mass production, 91, 130-133, 201, 209-211, gMathematical/statistical approach, 172-173Means, 19, 216, gMedium (media, pi.) of exchange, 104-107, 171, 217-218,

gMenger, Carl, 47-48, 104-105, 171-172. See also Quota-

tionsMercantilism, 156-157, 167, 205-206, gMicro-economics, 12-13, 33-34, 79, 150n, 171-172, 173,

199, 201, 215-216, gMill, James, 169Mill, John Stuart, 27n, 169Minorities, rights of, 27nMises, Ludwig von, 38n, 49, 172. See also QuotationsMistakes, 19, 185Mitchell, Wesley Clair, 172Money, 100-101, 102-113, 123-125, 150, 171, 201, 217-

218, gMoney and government, 110-112, 115-118Money stock, 118n, 119-120, 123-125, gMonopoly, monopolist, 138-141, gMonopoly price, monopoly gain, 138, 139-141, gMore, Sir Thomas, 214Most favored nations, 152, 154, gMultinational corporation, 146, g"Musical banknotes," game of, 115, 116

N

Nature, forces of, 24, 184, 198-200, 204nNeo-Classical School of Economics, 172, gNet worth, 77, gNew York Stock Exchange, 58-61, 64, 127-130, 135-136"Niggardly," "niggardliness" of nature, 27, 169, 198, gNomadic tribes, 200, gNon-tariff barriers, 152-155, g

O

Objective characteristics, 18, 49, 106, gOligopoly, 141, gOpen shop, 93, gOperating statement, 77, g

Paradox of value, 45-46, 168, 178, gParis, provisioning (Bastiat), 29Physiocrats, 167, gPickets, picketing, picket lines, 93, gPlato, 165Price, 43-53, 103, 164, 165-166, 168, 170, 171-172, 218,

gPrice, law of, 52, 53, gPrice controls, 178-180Pricing auctions, 37-43, 52-53, 79-85, 108-110, 121-123,

175-180

Primitive societies, 181, 198-199, 200, 202, gPrivate property, 23-27, 180-184, 217, gProducers' goods, 62-63, gProducers' policy, 139-141, 152-154, 190-191, 205-206,

gProduction, 72-75, 88-89, 130-132, 133, 180-184, 198-

201, 207-211, 218-219, gProduction for consumption/use, 75, 156, 170, 220Production for profit, 75n, 220Profit, 73-76, 131-132, 219-220, gPromissory note, 112-114, 135, gProperty rights, 21-22, 24-27, 180-186, gProtectionism, 139-141, 152-154, 190-191, 205-206, gPsychic loss, 73Psychic profit, 70, 73, gPsychology, psychoanalysis, 12Puppeteers, consumer, 50-51, 74, 182nPurchasing power, 107-110, 123-124, 149-150, 170-171,

g

Quota, 140, 152, 153, 154, gQuotations

Aesop, 61Anonymous, 145Aquinas, Thomas, 166Aristotle, 165-166Barbon, Nicholas, 170Bastiat, Frederic, 29Boehm-Bawerk, Eugen, 48, 89Buley, R. Carlyle, 66Carney, Julia Fletcher, 148Communist slogan, 75Condillac, Abbe" E. B. de, 170Confucius, 86, 199Didacus Stella, 164Franklin, Benjamin, 47Gossen, Hermann Heinrich, 170Greaves, Percy L., Jr., 216, 220Hazlitt, Henry, 135, 157Holy Bible, 45Lincoln, Abraham, 21, 26Lloyd, William Forster, 170Longfield, Mountifort, 170Maxims

if wishes were horses, 21castles in Spain, 21law of the jungle, 27, 198dog-eat-dog, 27survival of the fittest, 27, 198use it up, 74a bird in the hand, 121eat, drink and be merry, 121necessity mother of invention, 184wisdom better part of valor, 185look before you leap, 185don't cry over spilt milk, 185

Menger, Carl, 21, 27, 47, 104-105Mises, Ludwig von

marginal utility, 49production "for use," 75"chocolate king," 75consumer sovereignty, 132

INDEX 241

market democracy, 143Swiss-Canadian trade, 145, 149trade, domestic and foreign, 145free trade, 151tools increase output, 199decline of Rome, 203ideas and history, 206economics defined, 216

Mun, Thomas, 167Petro, Sylvester, 92Plato, 165Russell, Dean, 88Say, Jean Baptiste, 170Shakespeare, William, 47Smith, Adam

"invisible hand," 73, 167"propensity to truck," 105"niggling" of the market, 107nconsumption, goal of production, 156, 170government regulation, 168

U. S. Constitution, 111, 153, 181Walras, Antoine-Auguste, 170Whately, Richard, 170Wicksteed, Philip H., 216

R

"Rainy day" (or plain) savings, 61-63, 79, 182, gReformation, 206, gReligion, faith, influence of, 202-203, 204, 206Renaissance, 206, gResources, 19, 21, 23, 199 gRestraint of trade, 93, 143, gRicardo, David, 151, 168, 169"Right-to-work" laws, 93, g"Robber barons," 142, gRoman Empire, 203-204"Round-about" methods of production, 63, g

Saving, 61-62, 63-64, 218, gSavings, 61-66, 113, 135, 136n, 209-211, 218, gSay, Jean Baptiste, 124, 150, 170-171Scale of values, 17-18, 44-45, 79, 216, gScholasticism, 166, gScientific action, 68, 70-71, gSeller, 45, 109, gSellers' market, 40-41Slavery, serfdom, 23, 26-27, 181, 202-204, gSmith, Adam, 88, 167-168, 169. See also Quotations

"Smorgasbord," 73, 77, 182, 199, 218-219Socialism, 188-189, gSocrates, 165Special privileges, 92-94, 116-118, 139,140, gSpecialization, 25, 86-91, 147-150, 200, 217, gSpecie, 116, gSpeculation, 68, 71-72, gStatistics, 12-13, 61n, 118n, 129-130, 172Status society, 23, 202-206, gStock, common and preferred, 135-136, gStock exchange, 59, 64-65, 128, 135-136, gStrike, 92, 93, 95, gSubjective value, 17-18, 49, 79, 147-148, 170-172, 173,

216-217, gSubsidy, 152, 153, 190, g

Tariff, 140, 152, 153-154, gTaxes, 82-83, 95, 176-177, 179-180, 191-192Time preference, 61-62, 63-64, 79, 121-123, 218, gTool, 62-63, 88-89, 91, 199, 200, 218, gTotalitarian government, 31, 188-189, gTrade, 24-25, 49-51, 52, 103-108, 200, 217, gTrade, interregional, 147-158, 202-203, 208-210Transportation, history of, 66Trust, 142, g

U

Unemployment, 94-96Union shop, 93, gUsefulness, utility, 18, 46, g"Usury," 166, g

Value, 14, 16, 17-19, g

Value theories, 165-166, 168-172, g

W

Wage, wage rates, 86-91, 94-96, 137, 217n, gWall Street, 135-136, gWalras, Leon, 171-172"Welfare economics," 92-94, 190-193, g"Wild cat" banking, 116n, g

XYZ

"Yellow-dog" contract, 93, g

ACTIVITIES INDEX

Advanced planning of activities, 3-6Anthology or mock newspaper of quotes, 161Auctions, pricing, 37-43, 52

buyers' market, 42-43effects of government intervention, 175

labor legislation, 82-83price controls, 178-180taxes, 176-177, 179-180

labor, 79-83, 84-85, 90-91sellers' market, 41

Bibliographical recommendations, 6, 9-10, 125n, 158n,174n, 211-212, 221

Book reviews/reports, 4, 15biographies of businessmen/entrepreneurs, 69, 127government, role of, 175-176labor unions and working conditions, 83

Bulletin board exhibitsadvertisements, 134n"broken window" thesis, 22, 47business activities and production plans, 127"I, Pencil" story, 24-25n, 145trade channels, 145-146transportation, 58

Classroom discussionsadvertising, 127, 134n-135Aesop's ant and grasshopper, 61, 79animal behavior, 29, 30-31automobile industry, 70, 132"box office receipts," 50"broken window" idea, 22, 47-48cash holding, 99, 107nchanges, 68-69Confucius, 86, 199cooperation, 29, 30economic freedom, 204n-205, 209n"economic problem," 21football, 19government intervention, 189n-190, 204n-205human action, 15, 29, 68Industrial Revolution, 209ninterview or TV panel format, 5marginal utility quotes, 47-49mistakes, 19, 185novel plots, 15, 22, 23private property, 21, 22, 47production, 133npsychic profit, 70Rip van Winkles, Japanese soldiers, 214tools, 56, 58trade channels (viz. "I, Pencil" idea), 24n, 33, 50-51,

65-66, 87, 215ntransportation/travel, 58values, value scales, goals, 15, 49, 147nwindfall spending, 15, 99, 107n

Congressional committee "investigation," 5Corporation Annual Reports, 4, 69, 76-77, 126

Dwarf on giant's shoulder, line drawing, 164n

Family tree of economics, 161-163Federal Reserve Notes described, 100-101, 115-116Field trips

export company, 146factory, 4, 126historical homes, 5, 195museums, 5, 25, 195stock broker, 4, 54, 126stock market exchange, 4, 54, 126

Film strip, "Understanding Inflation," 4, 98Fortune lists, 132-133, 146

Interviews and/or classroom visits, 4bank official, 101businessman/entrepreneur, 5, 69, 127, 176former economics students, 11grandparents, re changes, 196

Junior Achievement, 4, 69

Money collections, paper and coins, 99-100, 115-116Money stock, chart or table, 101-102, 119-120

New York Stock Exchange, 58-61, 127-130Newspaper clippings, 4-5, 83, 175, 189n-190Newspaper editors, letters to, 4, 195

Papers, reports, researchautomobile industry, 70, 131economic history, 29-30, 195, 196, 197-198economists, 161, 170n"Industrial Revolution," 83-84industries, firms, 131nlabor, unions, working conditions, 83-84, 196-197private property, 22tools, 197trade routes, 145, 146, 150n

Pricing auctions, see Auctions

Questions to determine student understanding, 7-9, 11Quizzes, rapid recall, 5

Stock Market "investment," 4, 54-57, 126-127Stock markets, described, 58-61, 127-130"Sound off sessions, 5Swap day, 98

TV monitoring, 196Trade, mapping interregional cooperation, 24-25, 145-

146, 183n

"Utopian" scheme, 214-215

White Elephant Sale, 98-99

242

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Free Market Economics a Syllabus