Economics in Three Lessons & One Hundred Economic Laws

Economics in Three Lessons

Chapter Two: The Central Role Played by Free Prices

Why is the human race so poor? Why do billions still lack enough even to eat? As this author noted in an earlier book, even a small sum of money, such as $10, if compounded at 3% over 1,000 years, would produce a sum equal to twice the world’s wealth today. It should be ridicu­lously easy, over time, to end human poverty. Why have we failed to do so?

Failure to cooperate, to work together is the obvious answer. There is very little each of us can do alone, but there is endless opportunity in organizing ourselves to work constructively together in an ever broaden­ing circle. Like children, we refuse to do what is clearly in our long-term interest to do. We either think only of the short term, or sacrifice the common and greater good for the immediate benefit of our particular group. Moreover, we cover up and lie about what we are doing, lie both to ourselves and others.

How can we do better? First of all, we must be assured of our physical safety and the safety of our property. How can we consider the long term if our life and prop­erty are at risk at any moment from human predators, whether criminal or sanctioned by government? It is difficult to consider the long term if everything we have can be stolen at any moment. But safety and protection from theft is not enough either. In addition, we need an honest system of mutual exchange that everyone can rely on. A corrupt and dishonest economic system does not create wealth; it destroys it.

The most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipu­lated nor controlled, provide both investors and con­sumers with reliable economic signals. They show, beyond any doubt, what is scarce, what is plentiful, where opportunities lie, and where they do not lie.

A corrupt economic system does not want hon­est prices, honest information, or honest results. The truth may be inconvenient or unprofitable for power­ful government leaders or private interests allied with them. Typically, throughout human history, these leaders and special interests have sought to use their power to manipulate and control prices to their own advantage.

Much of the time, powerful price manipulators and controllers are accompanied and assisted by ideologists or theoreticians, special pleaders for hire, as described by Hazlitt. These professional advisors—skilled verbally or in mathematics—confidently argue that dishonest prices are really honest; honest prices are really dishon­est; the resulting chaos is really order; and a future filled with jobs and plenty lies ahead with just a few more manipulations or controls. Sometimes the arguments are presented with calculated deceit, sometimes with muddled sincerity.

Can it really be this simple, that job growth and eco­nomic prosperity will follow if we provide a safe envi­ronment and allow economic prices to tell the truth, free from the self-dealing and self-interested theories of powerful special interests? That is the central thesis of this lesson, and each chapter will explore it from an additional angle. What is needed to pull humanity out of dire poverty is a free price system, one that is neither manipulated nor controlled.

If prices are not free, an economic system cannot be expected to function properly. What happens there­after will depend on the degree of price manipulation or control. If it is not extreme, the economy may limp along, impaired, not realizing its full potential, but not in overt crisis.

If the undermining of free prices is extreme enough, the system will visibly falter and may even collapse, as in 1929 or 2008. In this case, capital, jobs, and people’s lives are destroyed. Ironically, the crisis often leads to a government response entailing even more price manipulation or control, which guarantees even more trouble, if not immediately, then down the road.

A further irony of all this is that a large majority of professional economists, including those aligned on the political “left” as well as “right,” respond to surveys by indicating that they generally oppose “government price controls.” The problem is that most government price manipulations and controls are not advertised as such. They may be stealthy by design, or they may just take a form that is not easily recognized for what it is. Whatever form they take, they are doing untold dam­age to the hopes and prospects of anyone who depends on the economy, especially the poor.

One Hundred Economic Laws

Preface

The concept of economic law was once a famil­iar feature of everyone’s education. It was taken for granted that they existed. The difficulty was discovering what they were and elucidating them for the enlightenment and betterment of humanity. They were also assumed to be complex, so that after economists worked them out through abstruse investigations and debates, they would have to be translated for lay people.

In more recent years, another idea has gained ground: that while physical laws certainly do exist and help us manage our lives better, economic laws do not really exist or at least have no predictive value whatsoever. This the­sis has been argued in a 2013 Atlantic article by an expert titled “The ‘Laws of Economics’ Don’t Exist.”

This Atlantic article assumes that economic laws must be derived from massive amounts of data, with­out explaining why this must be so, and claims that we simply lack enough systematic economic history to draw any conclusions. This is wrong for reasons that will shortly be explained.

The author also writes that “I may agree that the war on drugs is flawed, but not because it violates ‘laws of economics,’ …rather because it fails in most of its basic goals.” This is actually contradictory. Laws of economics are based on our own human logic. A pub­lic policy or private action that is inconsistent with its most basic goals violates logic, and by doing so, vio­lates economic law as well.

Lawrence Summers, former Treasury Secretary under President Clinton, President of Harvard, and Chief Economic Advisor to President Obama, evidently does believe that economic laws exist. He wrote an article in the Washington Post shortly after President Trump’s election titled “Trump Can’t Repeal the Laws of Eco­nomics.” Summers did not, however, give any specific examples of the laws of economics he had in mind.

The ideas that have been organized and presented in this book under the term “economic law” have been developed (and frequently corrected) by numerous economists over the centuries. The most notable con­tribution by far was made by the twentieth-century economist Ludwig von Mises, although it should be emphasized that he did not present his own ideas as a system of laws, but rather as a treatise that often made reference to underlying laws.

At the onset of Mises’s masterpiece, Human Action, we have this discussion of how the discovery of the concept of economic law changed human history:

The discovery of the inescapable interde­pendence of market phenomena …[pro­duced] a new view of society….Bewil­dered…[at first], people…learned…that there is another aspect…[of ] human action…than that of good and bad, of fair and unfair, of just and unjust. In the course of social events, there prevails a regularity of phenomena to which man must adjust his action if he wishes to succeed….[Despite their differences], one must study the laws of human action and social cooperation as the physicist studies the laws of nature. Hu­man action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be—this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.

Mises’s students Friedrich Hayek and Murray Roth­bard also contributed many insights about economic law. Another contemporary and friend, Henry Hazlitt, in turn described many of these same ideas with unpar­alleled clarity in both books and articles.

In some cases, the names of economic laws were developed long ago, and are now settled. No one would ever call the law of supply and demand anything else, although they might call it the principle of supply and demand or just “supply and demand.”

The law of marginal utility may sound needlessly obscure or jargonish, but has too much history even to think of rephrasing it. As groundbreaking as the law of marginal utility was (and is), it is presented in this book not as a standalone law, but as a corollary (deriva­tive) of another law. The logic behind the laws is often highly interrelated, so the order of presentation mat­ters. In this book, there are twenty principal laws and eighty corollaries, each of which could be considered a law in its own right, which is why the title is One Hun­dred Economic Laws.

Although for some economic laws (e.g. supply and demand and marginal utility) there is a well-estab­lished terminology, in other instances, there is not. The goal in developing terminology for this book has been to keep it clear and free of technical language. The reader should feel free to substitute his or her own terms and descriptions, to challenge whether some of the laws really qualify as laws, and to identify laws that should be added to the list.

Economics is a collaborative and cumulative disci­pline. This can lead to serious lapses in logic, self-decep­tion, or, worse, deliberate deception. Self-deception may be closely linked to deliberate deception if someone’s personal income, career standing, and prestige depend on promoting untruths, and both forms of deception are particularly acute in economics.

Over the years, no other scientific discipline has been so plagued by “thinkers for hire” lavishly rewarded by special economic interests. But it must be acknowl­edged that this practice is increasingly spreading within the physical sciences as well, because of the high finan­cial and political stakes in industries closely connected to government, including, among others, drugs, bio­technology, chemicals, energy, and farming.

Even so, there is no place for dismissal, disdain, or mockery in economics. We owe each other a respectful hearing, if only because, being human, we are prone to logical errors, and can learn from listening.

We will now attempt to establish, as briefly as pos­sible, what economic laws are, what they tell us about economic life, and how we can use them to guide our actions and choices in an uncertain world.

It is hoped that most readers will start with the first law and proceed from there through the hundredth. Each law builds a further foundation for what follows. Alternatively, there is a summary list of the one hun­dred laws at the back of the book without explanation or commentary, but noting the page where explana­tion or commentary may be found. In this way, readers who wish to browse can pick out particular laws they wish to read about.