Chapter 15
THE MARKET
THE CHARACTERISTICS OF THE MARKET ECONOMY
The market economy is a social system where individuals specialize in their occupations and the means of production (natural resources, tools, etc.) are privately owned. Although everyone acts to serve his own interests, in a market economy this is achieved by aiming to satisfy the desires of the consumers.
The market steers individuals into those areas where they can best serve the wants of their fellow men. It does this through voluntary inducements; a person who produces what others desperately desire will make more money than if he spends his day toiling on what he himself thinks is best.
Compulsion is the characteristic of the state, which is necessary for a market to function but is itself not part of the voluntary relations of the market.
The market is not a place or a thing but rather a process. At any time, the state of the market is summarized by the variety of prices for all goods and services. The prices changes constantly guiding individuals as they adjust their conduct to best serve each other by the division of labor.
Market prices allow economic calculation, which is the basis of the market economy.
2. CAPITAL
Economic calculation rests on capital and income.
Capital associated with a particular company is: the estimated sum of money that could be raised if all of the assets were sold and all the liabilities were discharged.
Income is: the amount of consumption that a particular collection of goods can yield without lowering the capital.
Saving is: If income exceeds consumption, the difference is saving.
Capital consumption is: If consumption exceeds income, the difference is capital consumption.
Capital is a mental concept that makes sense only in a market economy, with actual prices to guide the desire for particular items.
Capital goods refers to the physical objects that man produces and can be used to increase future production.
A socialist community can have capital goods, but it would only metaphorically have capital, because it requires economic calculation to be meaningful.
3. CAPITALISM
History shows that private property goes hand in hand with civilization. Ironically, those who wish economics would become more of an “experimental science” are the ones who ignore this evidence and claim for interventionism or outright socialism. Although the market economy has never existed in a pure form, the Western civilizations embraced it more and more since the Middle Ages, and because of this, population figures exploded and the standard of living grew fantastically.
The economists must study “pure” capitalism not because they mistakenly think such a system has ever existed, but because economic calculation is only possible in capitalism. Once the benchmark has been analyzed, the chaos of interventionist and socialist approaches can be contrasted with it.
Contrary to popular belief, big business does not necessarily favor laissez-faire, but often seeks government privileges or restrictions that at least hamper their smaller competitors more. But to call such interventionism “mature” or “late” capitalism is pure confusion; it is simply that at present, big business does not favor capitalism.
4. THE SOVEREIGNTY OF THE CONSUMERS
Although the entrepreneurs appear to be “in charge” of a market economy, this is a superficial view. In reality, even the head boss must answer to the consumers. The entrepreneur hires laborers, purchases raw materials and equipment, and decides how many factories to build. But if those factories creates products that no one wants, he will soon lose his “authority.”
In a sense, every penny the consumer spends is a vote for that particular product or service. Because the entrepreneurs must compete with each other for scarce factors of production, the consumers ultimately determine which businesses grows and which goes out of business. If an operation shuts down because it can’t turn a profit, what that means is that the consumers weren’t willing to hand over enough money for the products to allow the entrepreneur to purchase the necessary inputs on the labor and factor markets.
5. COMPETITION
The biological competition in nature, in which the fittest survive and the weak perish, is totally different from the social competition in a market economy. Even though some positions are more coveted than others, all participants benefit from exchanging; there are no “losers” in this competition.
The purpose of social competition is to entrust control of scarce resources to those who are most likely to satisfy the wants of the consumers. Writers often say there is “no competition” in a field dominated by large companies. Yet absent government barriers, newcomers can enter the field provided they have a superior method of serving consumers. The large startup costs and other “barriers” reflect real conditions of scarcity, and to ignore them would be to miss the purpose of competition.
The term “competition” is often used as the antithesis of monopoly. Yet even a monopolist must compete with all other producers for the dollars of the consumers. The true restrictions on competition come from government, not the market.
6. FREEDOM
Freedom and liberty represent the most precious goods to many thinkers in the Western tradition. These terms have meaning only in society; there is no freedom in nature. In inter- personal relations, to be free means to live without being at the mercy of arbitrary decisions of other people.
At first the socialists sneered at the “bourgeois” love of freedom, but it soon became clear that the masses would never support an open restriction of their liberties. Thus the socialists contrasted political and economic freedoms. But if the socialist government controls the press and can assign its critics to work in Siberia, constitutional guarantees of free speech are pointless.
7. INEQUALITY OF WEALTH AND INCOME
People are not born equal, and it is no surprise that the market economy, where incomes are based on how well the consumers are served—yields disparities in wealth and income. However, this inequality is necessary if society is to preserve the freedom of occupation. Without the incentives of higher pay, force must be used to channel workers into areas where they are needed.
8. ENTREPRENEURIAL PROFIT AND LOSS
In the first place, profit and loss are psychic phenomena; an individual profits when he improves his situation according to his subjective value scale. For this very reason, psychic profit and loss can’t be measured. However, in a market economy an individual may use the monetary profit or loss as an indication of everyone else’s appraisal of his actions. If a farmer can earn more planting tobacco than corn, that doesn’t mean he will be happier with the former crop. But it does mean (in a loose sense) that the con- sumers are indicating a preference for him to plant tobacco.
Even in the evenly rotating economy, where there is no money profit or loss, actors would still achieve psychic profit. In the ERE people still go to work, and consumers still purchase products, all because they hope to achieve greater satisfaction through these actions.
Entrepreneurial profit and loss ultimately stem from the uncertainty of the future. If a man buys factors of production for $1,000 and creates a good that he sells for $10,000 one week later, this is an indication that other entrepreneurs were mis- taken in their evaluation of the usefulness of those factors of production. Had others been able to anticipate the future revenues from the good, they too would have entered the factor markets and bid up the “cost” of making the good (and lowered its sale price as more units were created). An entrepreneur earns true profits (over and above what he pays himself as wages for his labor) when he forecasts the future better than others.
9. ENTREPRENEURIAL PROFITS AND LOSSES IN A PROGRESSING ECONOMY
A progressing economy is one in which the per capita quota of capital is increasing. In such an economy, the sum total of entrepreneurial money profits exceeds losses. However, the entrepreneurs do not exhaust the increase in wealth made possible by the additional savings and investment. In order for them to incorporate the additional capital goods into their operations, they must bid up the prices for other factors of production (including labor). This raises the incomes of others in society, which in turn leads them to purchase the increased stock of consumer goods (made possible by the injection of new capital goods). Once the economy has fully adjusted to the new capital goods, the entrepreneurs do not enjoy any lasting increase in income; it has been absorbed by the owners of nat- ural resources and by the workers.
10. PROMOTERS, MANAGERS, TECHNICIANS, AND BUREAUCRATS
Entrepreneurs direct business operations, but they must delegate particular tasks to subordinates. This is made possible through economic calculation: The owner of a giant company can look at the books to determine how much profit (or loss) a particular manager generates in his department. This allows the manager to be given relatively free rein, so long as his branch remains profitable.
In contrast, when an enterprise is not run for profit (such as a police department or a soup kitchen), then the conduct of sub- ordinates must be strictly regulated to ensure that they fulfill the purpose of the enterprise. Otherwise, the fire department could “cut costs” by selling off all of its engines and hoses, and using water bottles to fight fires. This obviously wouldn’t serve the consumers, but because taxes fund the agency, they would not go out of business. Hence the government puts in place strict guidelines, i.e., a bureaucracy.
11. THE SELECTIVE PROCESS
The market constantly adjusts to new conditions and “selects” those most capable of handling the scarce resources available. In a pure market, there are no privileges and past suc- cess is no guarantee of future wealth. If someone comes along who can use factors of production to better serve the con- sumers, he or she will become wealthier and supplant the incumbent entrepreneurs. Ironically, it is outside of a market economy—such as in medieval times or under interventionist policies—where the rich and powerful had secure positions and didn’t need to prove their merit daily.
12. THE INDIVIDUAL AND THE MARKET
Economists often speak of “the market” acting, but the mar- ket is simply a collection of individuals. There are no “auto- matic” market forces, but simply the outcome of each individ- ual’s actions. Every producer is also a consumer, and thus “producers’ policies” (which simultaneously hurt consumers) are nonsensical.
13. BUSINESS PROPAGANDA
It is true that commercials do not display the highest artis- tic qualities, but that is because they appeal to the masses. Their purpose is to cultivate desires and transmit information to the bulk of consumers, and (by definition) the majority will not have the refined tastes of the elite. Contrary to popular belief, commercials cannot force people to use inferior products. The sellers of the “truly” better goods can likewise hire ad writers and musicians to compose jingles.
14. THE “VOLKSWIRTSCHAFT”
Volkswirtschaft is a term German statists used to denote the total complex of economic activities directed by the govern- ment. It embodies the desire to expand the boundaries of the state in order to acquire resources and achieve self-sufficiency; other countries are viewed as threats and infringements on the growth of the homeland. This mentality is completely alien to the classical liberal who believes in a market economy, where foreign boundaries are irrelevant.
Mises explains what the market really is- A process where millions of individuals interact through voluntary exchanges, giving rise to the quantitative prices that points out the mental concept of capital and hence the concept of economic calculation.
The market economy is a social system where individuals specialize in their occupations and the means of production (natural resources, tools, etc.) are privately owned. Although everyone acts to serve his own interests, in a market economy this is achieved by aiming to satisfy the desires of the consumers.
The market steers individuals into those areas where they can best serve the wants of their fellow men. It does this through voluntary inducements; a person who produces what others desperately desire will make more money than if he spends his day toiling on what he himself thinks is best.
Compulsion is the characteristic of the state, which is necessary for a market to function but is itself not part of the voluntary relations of the market.
The market is not a place or a thing but rather a process. At any time, the state of the market is summarized by the variety of prices for all goods and services. The prices changes constantly guiding individuals as they adjust their conduct to best serve each other by the division of labor.
Market prices allow economic calculation, which is the basis of the market economy.
2. CAPITAL
Economic calculation rests on capital and income.
Capital associated with a particular company is: the estimated sum of money that could be raised if all of the assets were sold and all the liabilities were discharged.
Income is: the amount of consumption that a particular collection of goods can yield without lowering the capital.
Saving is: If income exceeds consumption, the difference is saving.
Capital consumption is: If consumption exceeds income, the difference is capital consumption.
Capital is a mental concept that makes sense only in a market economy, with actual prices to guide the desire for particular items.
Capital goods refers to the physical objects that man produces and can be used to increase future production.
A socialist community can have capital goods, but it would only metaphorically have capital, because it requires economic calculation to be meaningful.
3. CAPITALISM
History shows that private property goes hand in hand with civilization. Ironically, those who wish economics would become more of an “experimental science” are the ones who ignore this evidence and claim for interventionism or outright socialism. Although the market economy has never existed in a pure form, the Western civilizations embraced it more and more since the Middle Ages, and because of this, population figures exploded and the standard of living grew fantastically.
The economists must study “pure” capitalism not because they mistakenly think such a system has ever existed, but because economic calculation is only possible in capitalism. Once the benchmark has been analyzed, the chaos of interventionist and socialist approaches can be contrasted with it.
Contrary to popular belief, big business does not necessarily favor laissez-faire, but often seeks government privileges or restrictions that at least hamper their smaller competitors more. But to call such interventionism “mature” or “late” capitalism is pure confusion; it is simply that at present, big business does not favor capitalism.
4. THE SOVEREIGNTY OF THE CONSUMERS
Although the entrepreneurs appear to be “in charge” of a market economy, this is a superficial view. In reality, even the head boss must answer to the consumers. The entrepreneur hires laborers, purchases raw materials and equipment, and decides how many factories to build. But if those factories creates products that no one wants, he will soon lose his “authority.”
In a sense, every penny the consumer spends is a vote for that particular product or service. Because the entrepreneurs must compete with each other for scarce factors of production, the consumers ultimately determine which businesses grows and which goes out of business. If an operation shuts down because it can’t turn a profit, what that means is that the consumers weren’t willing to hand over enough money for the products to allow the entrepreneur to purchase the necessary inputs on the labor and factor markets.
5. COMPETITION
The biological competition in nature, in which the fittest survive and the weak perish, is totally different from the social competition in a market economy. Even though some positions are more coveted than others, all participants benefit from exchanging; there are no “losers” in this competition.
The purpose of social competition is to entrust control of scarce resources to those who are most likely to satisfy the wants of the consumers. Writers often say there is “no competition” in a field dominated by large companies. Yet absent government barriers, newcomers can enter the field provided they have a superior method of serving consumers. The large startup costs and other “barriers” reflect real conditions of scarcity, and to ignore them would be to miss the purpose of competition.
The term “competition” is often used as the antithesis of monopoly. Yet even a monopolist must compete with all other producers for the dollars of the consumers. The true restrictions on competition come from government, not the market.
6. FREEDOM
Freedom and liberty represent the most precious goods to many thinkers in the Western tradition. These terms have meaning only in society; there is no freedom in nature. In inter- personal relations, to be free means to live without being at the mercy of arbitrary decisions of other people.
At first the socialists sneered at the “bourgeois” love of freedom, but it soon became clear that the masses would never support an open restriction of their liberties. Thus the socialists contrasted political and economic freedoms. But if the socialist government controls the press and can assign its critics to work in Siberia, constitutional guarantees of free speech are pointless.
7. INEQUALITY OF WEALTH AND INCOME
People are not born equal, and it is no surprise that the market economy, where incomes are based on how well the consumers are served—yields disparities in wealth and income. However, this inequality is necessary if society is to preserve the freedom of occupation. Without the incentives of higher pay, force must be used to channel workers into areas where they are needed.
8. ENTREPRENEURIAL PROFIT AND LOSS
In the first place, profit and loss are psychic phenomena; an individual profits when he improves his situation according to his subjective value scale. For this very reason, psychic profit and loss can’t be measured. However, in a market economy an individual may use the monetary profit or loss as an indication of everyone else’s appraisal of his actions. If a farmer can earn more planting tobacco than corn, that doesn’t mean he will be happier with the former crop. But it does mean (in a loose sense) that the con- sumers are indicating a preference for him to plant tobacco.
Even in the evenly rotating economy, where there is no money profit or loss, actors would still achieve psychic profit. In the ERE people still go to work, and consumers still purchase products, all because they hope to achieve greater satisfaction through these actions.
Entrepreneurial profit and loss ultimately stem from the uncertainty of the future. If a man buys factors of production for $1,000 and creates a good that he sells for $10,000 one week later, this is an indication that other entrepreneurs were mis- taken in their evaluation of the usefulness of those factors of production. Had others been able to anticipate the future revenues from the good, they too would have entered the factor markets and bid up the “cost” of making the good (and lowered its sale price as more units were created). An entrepreneur earns true profits (over and above what he pays himself as wages for his labor) when he forecasts the future better than others.
9. ENTREPRENEURIAL PROFITS AND LOSSES IN A PROGRESSING ECONOMY
A progressing economy is one in which the per capita quota of capital is increasing. In such an economy, the sum total of entrepreneurial money profits exceeds losses. However, the entrepreneurs do not exhaust the increase in wealth made possible by the additional savings and investment. In order for them to incorporate the additional capital goods into their operations, they must bid up the prices for other factors of production (including labor). This raises the incomes of others in society, which in turn leads them to purchase the increased stock of consumer goods (made possible by the injection of new capital goods). Once the economy has fully adjusted to the new capital goods, the entrepreneurs do not enjoy any lasting increase in income; it has been absorbed by the owners of nat- ural resources and by the workers.
10. PROMOTERS, MANAGERS, TECHNICIANS, AND BUREAUCRATS
Entrepreneurs direct business operations, but they must delegate particular tasks to subordinates. This is made possible through economic calculation: The owner of a giant company can look at the books to determine how much profit (or loss) a particular manager generates in his department. This allows the manager to be given relatively free rein, so long as his branch remains profitable.
In contrast, when an enterprise is not run for profit (such as a police department or a soup kitchen), then the conduct of sub- ordinates must be strictly regulated to ensure that they fulfill the purpose of the enterprise. Otherwise, the fire department could “cut costs” by selling off all of its engines and hoses, and using water bottles to fight fires. This obviously wouldn’t serve the consumers, but because taxes fund the agency, they would not go out of business. Hence the government puts in place strict guidelines, i.e., a bureaucracy.
11. THE SELECTIVE PROCESS
The market constantly adjusts to new conditions and “selects” those most capable of handling the scarce resources available. In a pure market, there are no privileges and past suc- cess is no guarantee of future wealth. If someone comes along who can use factors of production to better serve the con- sumers, he or she will become wealthier and supplant the incumbent entrepreneurs. Ironically, it is outside of a market economy—such as in medieval times or under interventionist policies—where the rich and powerful had secure positions and didn’t need to prove their merit daily.
12. THE INDIVIDUAL AND THE MARKET
Economists often speak of “the market” acting, but the mar- ket is simply a collection of individuals. There are no “auto- matic” market forces, but simply the outcome of each individ- ual’s actions. Every producer is also a consumer, and thus “producers’ policies” (which simultaneously hurt consumers) are nonsensical.
13. BUSINESS PROPAGANDA
It is true that commercials do not display the highest artis- tic qualities, but that is because they appeal to the masses. Their purpose is to cultivate desires and transmit information to the bulk of consumers, and (by definition) the majority will not have the refined tastes of the elite. Contrary to popular belief, commercials cannot force people to use inferior products. The sellers of the “truly” better goods can likewise hire ad writers and musicians to compose jingles.
14. THE “VOLKSWIRTSCHAFT”
Volkswirtschaft is a term German statists used to denote the total complex of economic activities directed by the govern- ment. It embodies the desire to expand the boundaries of the state in order to acquire resources and achieve self-sufficiency; other countries are viewed as threats and infringements on the growth of the homeland. This mentality is completely alien to the classical liberal who believes in a market economy, where foreign boundaries are irrelevant.
Mises explains what the market really is- A process where millions of individuals interact through voluntary exchanges, giving rise to the quantitative prices that points out the mental concept of capital and hence the concept of economic calculation.
Questions
Entrepreneurial profit and loss
What does profit does in a monetary calculus? P.289
What is the psychic profit or loss?
Is psychic profit happiness and satisfaction?
What’s an rotating system?
How as an entrepreneur one can get closer to the correctness of his success? p/ 290
What is the role of technological knowledge towards success of an entrepreneur? P. 291
What is contingency revert? P 292
Does all business need the help of the technological knowledge?
Entrepreneurial profits and losses in a progressing economy
What is an stationary economy?
How’s the profit of the entrepreneur in a progressing economy?
What needs to happen for the complementary factor of production to equal the price of the product? P. 295
What happens when there is an increase in the quantity of capital goods available? P. 296
How to deal with the short run disadvantages? P296
How do we incentive other people the importance of accumulation of additional capital goods? P. 297
How is profit and loss determined by? P 297
What information does the entrepreneur has when profit and loss are absence? p. 299
What is the under consumption myth? P300
Why are there unsuccessful entrepreneurs? P. 301
How to reach economic improvement?
What does profit does in a monetary calculus? P.289
What is the psychic profit or loss?
Is psychic profit happiness and satisfaction?
What’s an rotating system?
How as an entrepreneur one can get closer to the correctness of his success? p/ 290
What is the role of technological knowledge towards success of an entrepreneur? P. 291
What is contingency revert? P 292
Does all business need the help of the technological knowledge?
Entrepreneurial profits and losses in a progressing economy
What is an stationary economy?
How’s the profit of the entrepreneur in a progressing economy?
What needs to happen for the complementary factor of production to equal the price of the product? P. 295
What happens when there is an increase in the quantity of capital goods available? P. 296
How to deal with the short run disadvantages? P296
How do we incentive other people the importance of accumulation of additional capital goods? P. 297
How is profit and loss determined by? P 297
What information does the entrepreneur has when profit and loss are absence? p. 299
What is the under consumption myth? P300
Why are there unsuccessful entrepreneurs? P. 301
How to reach economic improvement?