Political EconomyPolitical EconomyEconomic Liberty andEconomic Liberty and

Political LibertyPolitical Liberty

Are InseparableAre Inseparable

Free People, Free MarketsFree People, Free MarketsThe Vanguard SchoolThe Vanguard SchoolColorado Springs, COColorado Springs, CO

July 14, 2009July 14, 2009

Paul T. Prentice, Ph.D.Paul T. Prentice, Ph.D.pprentice@farmsector.com

----------------------------------------------------------------------------------Left RightLeft RightSocialism CapitalismSocialism Capitalism

Collective IndividualCollective Individual

We MeWe Me

Us IUs I

Ours MineOurs Mine

"What is common to many is least taken care of, for "What is common to many is least taken care of, for all men have greater regard for what is their own all men have greater regard for what is their own than for what they possess in common with than for what they possess in common with others."others." - - AristotleAristotle

----------------------------------------------------------------------------------Left RightLeft Right

Group rights Individual rightsGroup rights Individual rights

Public property Private propertyPublic property Private property

Equal outcomes Equal opportunityEqual outcomes Equal opportunity

G’vt gives rights G’vt secures rightsG’vt gives rights G’vt secures rights

----------------------------------------------------------------------------------Left RightLeft Right

The individual The governmentThe individual The government

exists to serve exists to serveexists to serve exists to serve

the government the individualthe government the individual

Their right to Your right toTheir right to Your right to

your property your propertyyour property your property

----------------------------------------------------------------------------------Left RightLeft Right

Individual must Government mustIndividual must Government mustbe limited be limitedbe limited be limited

The people used to rule the government The people used to rule the government (right); now it rules us (left).(right); now it rules us (left).

America is split about 50-50 between these America is split about 50-50 between these polar opposite philosophies. It is not a polar opposite philosophies. It is not a sustainable society. sustainable society.

Economic PrinciplesEconomic Principles(1) (1) Human ActionHuman Action – Ludwig Von Mises – Ludwig Von Mises

In any given situation, people take In any given situation, people take purposeful action to maximize their purposeful action to maximize their values (“utility” in econ-speak).values (“utility” in econ-speak).

Values are Values are subjective and subjective and individualisticindividualistic (mine are not (mine are not necessarily yours, and vice-versa).necessarily yours, and vice-versa).

Values are Values are situationalsituational (subject to (subject to change, dependent on time, space, change, dependent on time, space, and circumstance).and circumstance).

(1) Human Action (cont’)(1) Human Action (cont’)

In a given situation, people rank-order In a given situation, people rank-order their values from highest to lowest.their values from highest to lowest.

Subject to their resource constraint, Subject to their resource constraint, people maximize their values at the people maximize their values at the margin (MB>MC).margin (MB>MC).

Each choice implies a different choice not Each choice implies a different choice not made (trade-off)made (trade-off)

The cost of Choice A is the foregone The cost of Choice A is the foregone benefit of Choice B (opportunity cost).benefit of Choice B (opportunity cost).

(2) People Respond To Incentives(2) People Respond To Incentives

““Price” is an incentive.Price” is an incentive. A high price is an incentive for consumers A high price is an incentive for consumers

to purchase less.to purchase less. But a high price is an incentive for But a high price is an incentive for

producers to supply more.producers to supply more. A low price is an incentive for consumers A low price is an incentive for consumers

to purchase more.to purchase more. But a low price is an incentive for But a low price is an incentive for

producers to supply less.producers to supply less.

(3) Law Of Supply And Demand(3) Law Of Supply And Demand Free markets solve this apparent Free markets solve this apparent

contradiction through supply and demand.contradiction through supply and demand. If the price is too high to clear the market, If the price is too high to clear the market,

there is a surplus. Producers will lower there is a surplus. Producers will lower price until consumer demand equals price until consumer demand equals producer supply.producer supply.

If the price is too low to clear the market, If the price is too low to clear the market, there is a shortage. Producers will raise there is a shortage. Producers will raise the price until consumer demand equals the price until consumer demand equals producer supply.producer supply.

Prices are Prices are relativerelative: $3/gal. milk only has : $3/gal. milk only has meaning in the context of $2/gal. gas, or meaning in the context of $2/gal. gas, or in the context of $10/hr. wage.in the context of $10/hr. wage.

(3) Law Of Supply And Demand (3) Law Of Supply And Demand (cont’.): Markets Clear(cont’.): Markets Clear

Over time, markets clear: there is no sustainable Over time, markets clear: there is no sustainable tendency to have either surplus or shortage.tendency to have either surplus or shortage.

Prices are neither “good” nor “bad”. They are an Prices are neither “good” nor “bad”. They are an objective realityobjective reality..

The “The “righright” price is the market price: the price at t” price is the market price: the price at which the quantity supplied equals the quantity which the quantity supplied equals the quantity demanded.demanded.

Free people exercising their property rights, Free people exercising their property rights, seeking their values in a moral framework, seeking their values in a moral framework, achieve the greatest value for the greatest achieve the greatest value for the greatest number of people (A. Smith’s “invisible hand”).number of people (A. Smith’s “invisible hand”).

The chances that a central planner could The chances that a central planner could accurately determine the “right” price and accurately determine the “right” price and quantity are virtually zero.quantity are virtually zero.

(4) Standard Of Living Depends On (4) Standard Of Living Depends On The Ability To ProduceThe Ability To Produce

Production must necessarily precede Production must necessarily precede consumption.consumption.

Income is earned from production.Income is earned from production. Factor payments exhaust the product Factor payments exhaust the product

(Say’s Law: Supply creates its own (Say’s Law: Supply creates its own Demand).Demand).

In the aggregate, income equals In the aggregate, income equals production.production.

Therefore, to stimulate income you must Therefore, to stimulate income you must stimulate production (supply-side stimulate production (supply-side economics).economics).

(5) Trade Makes People Better Off(5) Trade Makes People Better Off

Misean Praxeology: People engage in free Misean Praxeology: People engage in free and voluntary trade because it maximizes and voluntary trade because it maximizes their values.their values.

Both parties are better off due to trade Both parties are better off due to trade (the double “thank you”)(the double “thank you”)

If this were not so, people would not trade.If this were not so, people would not trade. Therefore, restricted trade makes people Therefore, restricted trade makes people

worse off.worse off. Geographic or political boundaries Geographic or political boundaries

between trading partners do not change between trading partners do not change this objective economic reality. this objective economic reality.

(6) Gross Domestic Product:(6) Gross Domestic Product:Bogus Measure Bogus Measure

GDP = C + I + G + NXGDP = C + I + G + NX According to this formula, when According to this formula, when

government hires people to dig holes, then government hires people to dig holes, then hires more people to fill them it, GDP has hires more people to fill them it, GDP has increased. increased.

According to this formula, when According to this formula, when government hires someone to sit at home government hires someone to sit at home and produce nothing, GDP has increased.and produce nothing, GDP has increased.

““Beware of accountants disguised as Beware of accountants disguised as economists.”- economists.”- Paul PrenticePaul Prentice

(7) Government Has No Money(7) Government Has No Money

Before government can spend $1 Before government can spend $1 dollar, it must first:dollar, it must first:

Tax it Tax it (take economic activity from (take economic activity from one area and give to another).one area and give to another).

Borrow itBorrow it (take economic activity (take economic activity from the future).from the future).

Print itPrint it (devaluing all money). (devaluing all money). Santa Claus; Easter Bunny; Tooth Santa Claus; Easter Bunny; Tooth

Fairy.Fairy.

(8) Prices Rise When Government (8) Prices Rise When Government Prints Too Much MoneyPrints Too Much Money

Inflation is not caused by higher Inflation is not caused by higher prices.prices.

Higher prices are a symptom, not a Higher prices are a symptom, not a cause, of inflation.cause, of inflation.

““Inflation is too much money chasing Inflation is too much money chasing too few goods.” – too few goods.” – Milton FriedmanMilton Friedman

Therefore only government is Therefore only government is responsible for inflation.responsible for inflation.

(9) Monetary Theory(9) Monetary Theory

Money is a Money is a medium of exchangemedium of exchange (facilitates trade as the most liquid of all (facilitates trade as the most liquid of all assets).assets).

Accepted by allAccepted by all for legal payment of for legal payment of debt.debt.

Money is a Money is a unit of accountunit of account allowing allowing people to make economic calculation people to make economic calculation (compare MB to MC of a given action).(compare MB to MC of a given action).

Money is a Money is a store of valuestore of value..

The Link Between a The Link Between a Degenerating Currency Degenerating Currency

and a Degenerating and a Degenerating CultureCulture

Austrian Scholars Conference 2009Austrian Scholars Conference 2009Ludwig von Mises InstituteLudwig von Mises Institute

Auburn, ALAuburn, ALMarch 14, 2009March 14, 2009

Paul T. Prentice, Ph.D.Paul T. Prentice, Ph.D.pprentice@farmsector.compprentice@farmsector.com

AxiomAxiom: Man Acts: Man Acts

PostulatePostulate: Human action involves moral : Human action involves moral choices. Man can act morally (voluntarily) choices. Man can act morally (voluntarily) or immorally (coercively).or immorally (coercively).

In a natural state of liberty, government is In a natural state of liberty, government is by definition limited to securing man’s by definition limited to securing man’s natural rights to life, liberty, and property.natural rights to life, liberty, and property.

Free societies choose moral voluntary Free societies choose moral voluntary behavior.behavior.

Immoral coercive behavior is by and large Immoral coercive behavior is by and large shunned.shunned.

""The Principle of spending money to be paid The Principle of spending money to be paid by posterity, under the name of funding, is by posterity, under the name of funding, is

but swindling futurity on a large scalebut swindling futurity on a large scale.. – – Thomas JeffersonThomas Jefferson

From America’s founding until WWI, total From America’s founding until WWI, total government commandeered 5-10% of the government commandeered 5-10% of the economy.economy.

This means that 90-95% of human This means that 90-95% of human economic action was voluntary (moral).economic action was voluntary (moral).

There was little net accumulation of There was little net accumulation of government debt. Deficits in one time government debt. Deficits in one time period were by and large offset by period were by and large offset by surpluses in a later time period. surpluses in a later time period.

The moral basis of American The moral basis of American society started to change in 1913society started to change in 1913

The 16The 16thth Amendment was the beginning of the Amendment was the beginning of the end of formal property rights (the right to the fruit end of formal property rights (the right to the fruit of one’s labor).of one’s labor).

The simultaneous founding of the Federal The simultaneous founding of the Federal Reserve System was the beginning of the end to Reserve System was the beginning of the end to another right – the right to a hard currency.another right – the right to a hard currency.

"Sound money was devised as an instrument for "Sound money was devised as an instrument for the protection of civil liberties against despotic the protection of civil liberties against despotic inroads on the part of governments. Ideologically inroads on the part of governments. Ideologically it belongs in the same class with political it belongs in the same class with political constitutions and bills of rights." - constitutions and bills of rights." - Ludwig von Ludwig von MisesMises

TheoremTheorem: A degenerating : A degenerating currency contributes to a currency contributes to a

degenerating society.degenerating society.

With a fractional-reserve fiat With a fractional-reserve fiat currency, government no longer currency, government no longer needed to tax or borrow in order needed to tax or borrow in order to spend. Now it could just print to spend. Now it could just print

and spend.and spend.

The true tax rate is the percentage of The true tax rate is the percentage of resources commandeered by government.resources commandeered by government.

Measured by calculating government Measured by calculating government spending as a percent of total spending.spending as a percent of total spending.

Commandeering of resources could now Commandeering of resources could now be accomplished through the printing be accomplished through the printing press. Even Keynes acknowledged this.press. Even Keynes acknowledged this.

Within one generation of the Within one generation of the creation of the Fed, the Great creation of the Fed, the Great Depression ensued and the Depression ensued and the

Welfare State became Welfare State became institutionalized -- the New Deal.institutionalized -- the New Deal.

Constitutional restraints were gradually eroded.Constitutional restraints were gradually eroded. No longer restrained by the necessity to tax No longer restrained by the necessity to tax

before it can spend, government is set free to before it can spend, government is set free to engage in unlimited “free lunch” promises. engage in unlimited “free lunch” promises.

These promises have misled a mal-educated body These promises have misled a mal-educated body public into substituting the philosophy of public into substituting the philosophy of individual responsibility with a philosophy of state individual responsibility with a philosophy of state “security”. “security”.

A cultural-political-economic A cultural-political-economic death spiral beginsdeath spiral begins

Society then demands more free Society then demands more free lunches, leading to more fiat lunches, leading to more fiat currency, etc. currency, etc.

The State crowds-out the moral The State crowds-out the moral behavior of the individual. behavior of the individual.

The State becomes both The The State becomes both The Parent and The SpouseParent and The Spouse

Eventually, young women and men Eventually, young women and men begin to have children without the begin to have children without the means to support them. means to support them.

Out-of-wedlock births skyrocket. Out-of-wedlock births skyrocket. The family degenerates. The family degenerates.

Behaviors are disconnected Behaviors are disconnected from consequencesfrom consequences

The social safety net grows along with the The social safety net grows along with the government printing presses. government printing presses.

People are empowered to internalize People are empowered to internalize benefits but externalize costs. benefits but externalize costs.

Moral hazard becomes the norm for Moral hazard becomes the norm for society.society.

A nation birthed in liberty slowly A nation birthed in liberty slowly transforms into a fascist state.transforms into a fascist state.

Generation after generation becomes Generation after generation becomes increasingly corrupted. increasingly corrupted.

Business is not immune, as can be seen in Business is not immune, as can be seen in the current financial meltdown and the current financial meltdown and bailout. bailout.

Fiat currency allows profit to be privatized Fiat currency allows profit to be privatized while losses are socialized.while losses are socialized.

““The spread of collectivist ideas in The spread of collectivist ideas in the business worldthe business world” – ” – Murray Murray RothbardRothbard ( (America’s Great America’s Great

DepressionDepression, Ch. 10), Ch. 10)

The “Swope Plan” to compulsively cartelize The “Swope Plan” to compulsively cartelize American business. (General Electric).American business. (General Electric).

Endorsed by the U.S. Chamber of Commerce.Endorsed by the U.S. Chamber of Commerce. More and more businessmen become “political More and more businessmen become “political

entrepreneurs” rather than “market entrepreneurs” rather than “market entrepreneurs”. (entrepreneurs”. (Thomas DiLorenzoThomas DiLorenzo, , How How Capitalism Saved AmericaCapitalism Saved America))

Liberty is lost, since political Liberty is lost, since political liberty cannot be disconnected liberty cannot be disconnected

from economic libertyfrom economic liberty

““Power over a man’s subsistence is power Power over a man’s subsistence is power over his will.”over his will.” – Alexander Hamilton – Alexander Hamilton

"To be controlled in our economic pursuits "To be controlled in our economic pursuits means to be controlled in everything." –means to be controlled in everything." – F.A. HayekF.A. Hayek

“ “The ultimate sanction of a planned The ultimate sanction of a planned economy is the hangman.”economy is the hangman.” – F.A. Hayek – F.A. Hayek

Even Atheists Can Be ProphetsEven Atheists Can Be Prophets(Today’s headlines written in 1957)(Today’s headlines written in 1957)

"When you see that trading is done, not by consent, "When you see that trading is done, not by consent, but by compulsion - when you see that in order to but by compulsion - when you see that in order to produce, you need to obtain permission from men produce, you need to obtain permission from men who produce nothing - when you see that money who produce nothing - when you see that money is flowing to those who deal, not in goods, but in is flowing to those who deal, not in goods, but in favors - when you see that men get richer by favors - when you see that men get richer by graft and by pull than by work, and your laws graft and by pull than by work, and your laws don't protect you against them, but protect them don't protect you against them, but protect them against you - when you see corruption being against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed." - you may know that your society is doomed." - Ayn Rand. Ayn Rand. Source: Source: Atlas ShruggedAtlas Shrugged, Francisco's , Francisco's "Money Speech""Money Speech"

In God We TrustIn God We Trust

Becomes: In Gov We TrustBecomes: In Gov We Trust But when it comes to money, it should be:But when it comes to money, it should be: In Gold We TrustIn Gold We Trust

TheoremTheorem: A degenerating currency : A degenerating currency contributes to a degenerating contributes to a degenerating

society.society. QEDQED

"Paper (money) is a mortgage on wealth that "Paper (money) is a mortgage on wealth that does not exist, backed by a gun aimed at those does not exist, backed by a gun aimed at those who are expected to produce it.  Paper is a check who are expected to produce it.  Paper is a check drawn by legal looters upon an account that is drawn by legal looters upon an account that is not theirs: upon the virtue of the victims.  Watch not theirs: upon the virtue of the victims.  Watch for the day when it bounces, marked, "Account for the day when it bounces, marked, "Account Overdrawn."Overdrawn." - - Ayn RandAyn Rand

Are we still free?Are we still free? "The American people will never knowingly adopt "The American people will never knowingly adopt

Socialism. But under the name of 'liberalism' they Socialism. But under the name of 'liberalism' they will adopt every fragment of the Socialist will adopt every fragment of the Socialist program, until one day America will be a Socialist program, until one day America will be a Socialist nation, without knowing how it happened." -- nation, without knowing how it happened." -- Norman Thomas. Norman Thomas. Six-time U.S. Presidential Six-time U.S. Presidential candidate for the Socialist Party of America candidate for the Socialist Party of America

Norman Thomas and Gus Hall, the U.S. Norman Thomas and Gus Hall, the U.S. Communist Party Candidate, both quit American Communist Party Candidate, both quit American politics, agreeing that the Republican and politics, agreeing that the Republican and Democratic parties by 1970 had adopted every Democratic parties by 1970 had adopted every plank of the Socialist Party and they no longer plank of the Socialist Party and they no longer had an alternate party platform on which to run.had an alternate party platform on which to run.

InterestInterestThe Most Important Economic PriceThe Most Important Economic Price

"The wavelike movement affecting the economic "The wavelike movement affecting the economic system, the recurrence of periods of boom which system, the recurrence of periods of boom which are followed by periods of depression, is the are followed by periods of depression, is the unavoidable outcome of the attempts, repeated unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate again and again, to lower the gross market rate of interest by means of credit expansion. There is of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom no means of avoiding the final collapse of a boom brought about by credit expansion. The brought about by credit expansion. The alternative is only whether the crisis should come alternative is only whether the crisis should come sooner as the result of a voluntary abandonment sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and of further credit expansion, or later as a final and total catastrophe of the currency system total catastrophe of the currency system involved." involved." -- Ludwig von Mises-- Ludwig von Mises

Final Thought -- Final Thought -- Friedrich NietzscheFriedrich Nietzsche

"The state is the coldest of all "The state is the coldest of all cold monsters. Coldly it lies, cold monsters. Coldly it lies, too; and this lie creeps from too; and this lie creeps from its mouth: `I, the state, am its mouth: `I, the state, am the people.'... Everything the people.'... Everything about it is false; it bites with about it is false; it bites with stolen teeth. "stolen teeth. "