Dmitry Chernikov’s Blog

The term “roundabout” does not mean “requiring more capital and intermediate steps before final production” by rather simply “requiring more time.” According to Gene Callahan, “Eugen von Böhm-Bawerk… attributed the bulk of increases in productivity to the adoption of more time-consuming, or roundabout, methods of production.” (Economics for Real People, 131ff) Adds Mises: “As acting man prefers those processes which, other things being equal, produce the products in the shortest time, only such processes are left for further action which consume more time. People embark upon these more time-consuming processes because they value the increment in satisfaction expected more highly than the disadvantage of waiting longer for their fruits.” (Human Action, 481) It is time that costs money, along with labor and land; the actual number of intermediate steps is next to irrelevant. If it takes 10 years to carry good A through 10 transformations down to the final consumer good, and it takes 1 year similarly to carry good B through 100 transformation, then the process involving A is more roundabout than the process involving B. “Roundabout” may be synonymous with “circuitous,” but its technical economic meaning is “requiring more time.”

Four points:

1. Callahan continues that “It is not always true that the only available method of increasing production is to adopt more roundabout methods. Perhaps a shorter route to some goal just has not been imagined yet. … But historically, the constant agitation of humans to improve their circumstances is such that most of the opportunities to increase productivity lie in the adoption of more roundabout processes. Humans are adept at spotting the direct route to a goal in the first place.” (134)

   Reply: Suppose Crusoe uses sticks to collect berries and replaces his stick once it wears out, a process which takes him 1 day. But then he finds a cache of sticks on a steep hill, such that to go there, grab a stick, and come back takes 1 hour. Unfortunately, climbing the hill is too much for Crusoe. So, we see that not all shorter processes are in use.

2. Isn’t it often possible to initiate a more productive and at the same time shorter process with the help of new technology? What if it’s the same process yet with lower costs of, say, labor (e.g., Crusoe gets healthier due to all the manual work he had to do and capable of climbing the hill readily)? Won’t it be more productive yet take the same amount of time?

   Reply: Yes, but reducing the time it takes to build a thing is not the only way of cutting costs. One can also rely on less labor or less land. Finding an equally good shorter process will mean disinvestment with the same revenues and therefore greater profit. The problem arises if no way of profitably disinvesting can be found. Then only longer processes remain to be considered.

3. Time is just one of the traditional three factors of production. Why not say that if a particular process has expensive labor, it will be undertaken only if it is sufficiently productive to offset the extra costs? What’s so special about time? Why do we not say: “more labor-costly processes tend to be more productive”? Or: “processes which use more and more expensive natural resources tend to be more productive”? Or don’t we?
4. Suppose process A takes 1 week to produce its consumer goods. Process B is just like A but is preceded by a 3 week diversion of digging ditches and filling them back up. Surely, B is less productive than A, and yet it is longer. What’s going on here?

   See below for answers to (3) and (4).

Now it is true both that longer processes tend to be more productive, and that more productive processes tend to take longer.

I. Longer processes tend to be more productive, if we assume that entrepreneurs tend to profit despite higher interest outlays. Again, mixing labor with natural resources or higher-order capital goods in order to advance them down to the final consumer goods or having the goods mature on their own (e.g., wine) takes time. The more time you have, (1) the more labor productivity-increasing these goods must needs be; and (2) the greater the amount of labor that can be mixed in a step-by-step fashion which makes it possible to produce such goods (which will probably be more complex and sophisticated purely from the engineering perspective). Otherwise, no entrepreneur will bother investing. Profits due to higher productivity of labor have to outweigh the extra interest payments (in terms of money; or, in Crusoe’s case, the psychic profit of more berries a week from now and for as long as the stick lasts have to outweigh the psychic cost of lessening present consumption while the stick is being built.) It is true that digging and refilling ditches will make a process longer, but that’s why we say that longer processes merely tend to be more productive: we assume the human desire not to waste production time.

To put it simply, longer processes are more expensive to set up. Hence they had better be more productive. And the same thing can be said about the other original factors: a process requiring more labor or land is more expensive, so, analogously, it’d better be more productive, as well.

We have to see why time is a factor of production. There is a general relation that the more labor-saving you want your machine to be, the more time you have to spend constructing it. You can accomplish more with more time, just as you can accomplish more with more labor or land. There is, of course, no precise equation connecting physical productivity of a machine and the time invested into building it, but a general proportion still holds. In other words, you can hire several laborers to work on things simultaneously; or you can hire a single laborer and give him more time, depending on your production needs. In both cases you invest more and hope to gain more. (Or you can do both, if all stages of production exist alongside one another at any moment in time.) Otherwise there is no explanation for our phenomenon.

II. More productive processes (producing either (a) much more of the same thing or (b) things that were completely impossible to produce in shorter time intervals) tend to take longer, because there is an incentive to utilize all the feasible shorter processes first, other things being equal: this way the waiting time will be as low as possible. I add “feasible,” because there can always be a short process that, for example, is hugely expensive in terms of the original factors other than time, such as labor (e.g., Crusoe’s climbing a hill), and for that reason is eliminated from consideration despite its shortness. However, in the case of (b) the process will be not longer but, on the contrary, the shortest possible one to a particular want-satisfaction. Even in the case of (a) the allegedly longer process is nothing of the sort; it is rather the most efficient way of satisfying a desire for more goods or services. From the point of view of technology, the new process is longer, though physically more productive; from the point of view of economics, it is the shortest one, given that we aim at a certain end and disregarding entrepreneurial error and ignorance.

Again, simply put, we want to get results as soon as possible, so it is likely that most the shorter processes have been perfected, and any increase in business efficiency must therefore require more time-consuming (and therefore more productive for reasons outlined in (I)) production processes. Of course, that’s just one of the ways of boosting efficiency.

The accelerator principle states that increased demand for consumer goods causes a more-than-proportional increase in the demand of capital goods and therefore, there is no need for voluntary savings! For example, suppose that a company maintains its capital stock consisting of 20 machines at 2 times the total sales and replaces 1 machine used to produce its output per year. (Thus, if the revenues are $30 million, then $60 million is invested into capital goods, and gross investment is $3 millon/year.) If revenues increase from one year to the next by 50%, say, from $30 million to $45 million, the number of machines ordered in that year must also increase by 50%, from 20 to 30, and therefore 11 machines will be ordered (rather than a single replacement machine), a 1000% rise in this derived demand!

Well, shiver me timbers. The problems with this are legion: see de Soto’s Money, Bank Credit, and Economic Cycles for a detailed analysis.

First, all businesses may have idle capacity maintained in order to deal with unforeseen short-term rise in the demand. The increase in the number of capital goods need not be so high.

Second, the proportion need not be the same; the exact number will depend on the productivity and prices of various kinds of capital goods and labor which may have changed in the meantime.

Third, due to entrepreneurial errors the firm that supplies machines to our company may not be able immediately to handle the sharply increased demand.

Fourth, why look only at the year in which the revenues have gone up? It’s an entirely arbitrary time period. If we consider what happens in 20 years, then if there is no further boost in our company’s revenues, then on average, the demand for lower-order capital goods will have increased to merely 1.5/year.

Fifth, and most important, which capital goods will enjoy greater demand? Obviously, those closest to the final consumer goods. The demand for higher-order goods will lessen, and the production structure will flatten, widen at the “foundation,” and narrow at the top. In aggregate, total investment will decrease.

Moving from B to A due to increased consumption. You can’t have your cake and eat it, too.

My first attempt at clarifying the problem of the demand for money was somewhat successful. What’s the difference and connection between this demand (DFM) and the velocity of circulation of money? In the first place, demand for money can be measured at any instant, whereas velocity of circulation can be computed only over a period of time, where it can mean the average amount of money that changes hands.

Let’s entertain two cases. First, suppose that the DFM has increased. This causes surpluses of unsold goods. Hence the velocity of circulation of money will go down. But when prices have adjusted downward and the PPM has consequently risen, velocity will go back to its previous level, all other things, such as the money supply, being equal. Thus, velocity remains the same yet with a higher demand for money.

Second, suppose that the DFM has decreased. Temporary shortages will result. But velocity of money will be unchanged, since, like before, every good is sold, despite the fact that some buyers remained unsatisfied and would have paid the present price, had there been greater quantity supplied. But even when prices increase in response to smaller demand for money, velocity will be unchanged.

Now let’s consider the situation in which the velocity of money at Δt₁ is less than the velocity of money at Δt₂. It seems that people are more willing to get rid of their cash balances during Δt₂, and so the demand for money must decrease, and the PPM, decrease, as well. Similar reasoning applies when the velocity of money decreases.

In the first two cases I examine changes in the DFM which result in opposite price adjustments. In his article The Velocity of Circulation Hazlitt asserts that “In fact (though this happens less often), an increase in the velocity of circulation of money may be accompanied by an increase in the purchasing power of money, i.e., by a fall in prices.” In so doing he seems to be thinking of a peculiar reverse case:

1′) Prices go down yet without a corresponding increase in the DFM, so PPM increases and there is more economic activity and greater V. This is said to be possible “in a speculative collapse, as, say, in late 1929.”

2′) Prices go up yet without a corresponding decrease in the DFM, so PPM decreases and there is less economic activity and lesser V.

My final case, where I assume that V has increased, must be interpreted as caused by the smaller demand for money: “When people value money less and goods more, they will offer more money for goods, and may increase ‘velocity of circulation’.” This corresponds to (2) above. What can happen, I suppose, is that inventories will be cleared out faster, so even though I say that V does not change, in the real world it may increase. (I assume that entrepreneurs will fail to predict a decrease in the DFM and increase supply.)

In addition, Mises is quoted as saying that “In a changing world everybody is under the necessity of keeping an amount of ready cash on hand,” where I assume that by “changing” he means uncertain and un-ERE-like. I make the same point earlier: Cash balances provide “[g]reater security for the hoarder, since one of the functions of money is a ’store of value.’ In other words, it is a shield against the uncertainty of the future and against unforeseen future expenses.”

Thus the DFM can be affected by changes in both (1) the perceived uncertainty of the future and (2) the serviceability of money to protect one against this uncertainty. Changes in the DFM are due to particular monetary-type events. Thus, changes in frequency of payments to workers affect (1); expectations of inflation affect (2). Aside from those, all that change are relative prices of goods and services.

In my first article on DFM I say, following Rothbard, that “a greater number of goods and services on the market due to economic growth” will result in greater demand for money. Seemingly, (1) is unaffected (except insofar as greater security is afforded by more extensive division of labor), and neither is (2); why, then, does the DFM change? I think Rothbard has made a subtle error. For in the two cases mentioned the change in the DFM occasions an opposite change in prices. In the case of economic progress it is the lowering of prices which causes an increase in the DFM. Perhaps an even better way of putting this matter is to say that the relative supply of money has gone down.

1. Value scale is a psychological notion used to explain the process of choice. All action is always in the “now.” The scale of values can change between the two “nows” as a result of the first most highly valued goal’s being satisfied or for any other reason. The scale after the first most urgent need is satisfied need not remain as it was with that first goal lopped off. Let’s say the scale is: eat a bite of honey, watch TV, eat a sandwich. Eating a bite of honey can cause me, quite unexpectedly, to want to eat another bite 5 seconds later and even receive greater pleasure from it. But no matter how pleasant, the eating of honey is the first most urgent goal on the value scale at both t₁ and t₂.

2. Satiation: I’m planning to eat 2 bites of honey. But after I eat the first bite (at t₁), I no longer want the second one. Or: I prefer to watch TV to eating the second bite (at t₂). So, the value scale has changed despite by intention to maintain it. Happens all the time.

3. If two or more goals are satisfied at the same time, then the value scale does not change, but no observer can find out which goal was first on the value scale, which, second, etc., though the actor himself still knows.

If one goal is satisfied at t₁, and another at t₂, etc., then one can find out (namely, that the goal satisfied earlier was more urgent than the goal satisfied later), but it is always possible to err in this conclusion, if the value scale has changed in the time period between t₁ and t₂.

Under capitalism an entrepreneur uses present prices to calculate his costs and forecasts the future price at which he thinks he can sell his product. He must furthermore forecast the future prices of the factors; he must reason truly that, for example: “Even if I know that labor costs me $20/man-hour now, it should cost me $5 more a year hence.” Under socialism there is no such thing as prices, whether present or future, at all. Therefore, one can never know whether he turned in a profit of suffered a loss. But even given unhampered free enterprise, how can an aspiring producer predict how things are going to turn out once the months- or years-long production process is complete?

In Star Wars the emperor, attuned as he is to force (dark side of which though it is) claims that “everything is proceeding as I have foreseen.” But for the majority of entrepreneurs things are hardly so simple. For example, one must predict future time preferences of the public and therefore interest rates, the “price of time.” If you invest in stages of production far away from the final consumer goods, and if furthermore before your new and longer production process could be completed, the social rate of time preference goes sharply up, then, if you are struggling already, you may have to go out of business altogether.

An entrepreneur must further predict the demand for and supply of money, new technologies, new capital goods, products brought to the market by competitors, changes in government policies, and numerous other things.

Successful entrepreneurship is basically high art. But what saves the day is that everybody faces the same challenges with respect to future uncertainty. Therefore, as I argue here, “One does not have to be a super-entrepreneur in the absolute sense; one just has to be better than others in foreseeing the future in order to profit.” This is because, even if entrepreneur A is making a modest profit, and entrepreneur B is correctly forecasting a great profit, then B can bid resources that A is using in his own production process away from him and still profit despite their now higher price, whereas A may at that point no longer be able to continue his business activities. But it’s no skin off B’s nose.

In a series of previous posts I talked about the structure of production. But isn’t there, in fact, a separate and unique structure of production for every consumer good or service? By what right do we agglomerate all of these into something called “the” structure of production?

The answer to that important question is that what we are concerned with is not so much the structure itself, but (1) the fact that advancing capital goods of higher order into capital goods of lower orders and finally into consumer goods takes time; and (2) that that time costs money, an income called interest paid by the demanders of present goods (and suppliers of future goods = borrowers) to the suppliers of present goods (and the demanders of future goods = lenders). Thus, if interest is paid once a year, and a particular production process takes 5 years, then we can consider that process’s structure to have 5 layers, each layer representing payments to the higher-order capitalists and being shorter than the previous one as we move up towards earlier stages, because of payments to factors and interest. If interest is paid once a month, then the structure will have 60 stages. That the real particular structure of any process involves numerous transformations of intermediate goods each taking various amounts of time is true but irrelevant for our analysis. There thus comes into consideration a general production structure reflecting the timing of interest payments and summarizing the payments to factors in between.

George Reisman writes in an important article that during a deflationary correction “The result of this stew of ignorance is the existence of laws such as pro-union and minimum-wage legislation, which make it extraordinarily difficult or plain impossible for wage rates to fall.” But why should that be? The prices of consumer goods may fluctuate every day. So may the interest rates. Rents adjust every year, as well. Why not wages? Who said that wages may never come down? Why can’t wages and salaries be renegotiated at a moment’s notice and at will? Why must an employer lay people off during a deflationary economic downturn instead of offering to keep them working but at lower wages? What’s wrong with wages’ fluctuating every week? I mean, if prices are falling, then workers may no longer contribute enough to the company’s product at their current wages. Why should an employer take a loss? He should be able to say: you can either go or you can stay and keep working at lower wages, such that the worker’s marginal product is greater than his marginal cost.

A personal illustration. At the height of the last boom I was making ~$80/hour as a programmer and consultant working 35-40 hours/week. When the boom ended, the best job I could secure was as a full-time permanent employee at $80,000/year. In other words, I suffered a 50% reduction in my wages. Was I upset? Of course not! It’s what the market could bear, and it was the best choice available to me. The world does not owe me a living; I was happy with what I could obtain.

It is thus a grotesque part of our culture and our laws that we are horrified at any reduction in nominal wages. We should treat wages as a normal factor of production, which can and does fluctuate according to the specific contracts entered into by the employer and the employee.

I think a part of the explanation of this vicious ideology that wages can never decrease is that most of the workers are Guardians by temperament, and their wages are the cause of their status. A fall in the wages means a retrogression in status, something which is anathema to Guardians, even if the this fall is occasioned entirely by monetary deflation. Guardians care more about “seniority” than about productivity, certainly a perverse vice of that temperament, and one which may be responsible for the taboo against decreasing nominal wages. The solution is economic understanding and personal virtue.

In a previous post I mentioned that saving is inextricably linked to investing. Saving means buying capital goods rather than consumer goods, and an increase in saving means buying capital goods of the highest orders rather than consumer goods or capital goods of lower orders. And I wrote that “neither is saving accumulating paper dollars or even gold coins under the mattress.” But don’t by saving we often indeed mean increasing our cash balances? What are the effects of hoarding, of keeping the income earned under the mattress? These seem to be:

1. Greater security for the hoarder, since one of the functions of money is a “store of value.” In other words, it is a shield against the uncertainty of the future and against unforeseen future expenses.
2. Lower prices, because the demand for money increases as the hoard enlarges, which causes the purchasing power of other people’s money to increase and prices to fall, given constant money supply.
3. Lower (nominal) income to the factors of production, as a direct consequence of (2).
4. Higher real wages, because the hoarder keeps working to increase his hold but himself does not spend any of his money, thereby benefiting others though not himself. Thus, Scrooge McDuck of Duck Tales, who keeps his gold in a “money bin” and enjoys swimming in it, is a benefactor of his fellow man, because he supplies goods and services to others but consumes little.

Suppose that Crusoe gathers berries with his bare hands. In order to increase his productivity he can make a stick with which he can shake down trees and bushes and get many more berries and even other fruit. But producing the stick takes time, and Crusoe cannot do it unless he has accumulated a sufficient stock of berries to sustain him during the production of this capital good, that is, an intermediate good used not for direct consumption but as means of acquiring further goods. In other words, he has to save, and what he saves are consumer goods. In so doing he sacrifices present consumption either of berries, if he goes to sleep half-hungry, because, for example, he reduces consumption to the bare minimum necessary to keep him alive and saves the rest, or, say, of leisure or building a hut or whatever, if he works harder gathering berries. There is no such thing as a free lunch.

But what is saving in the modern economy? We don’t save consumer goods. I don’t hoard stuff in my apartment. And neither is saving accumulating paper dollars or even gold coins under the mattress. Saving is inseparable from investing and means simply a redirection of resources from the existing shorter production processes which make the presently available consumer goods to new, longer, and as yet nonexistent, setups. The number of consumer goods produced and sold temporarily declines, and there occurs a disinvestment away from current producers of the consumer goods and the capital goods used to make them into longer production processes. Greater savings indicate lower time preferences and lower interest rates, and so the costs of doing business for every firm engaged in comparatively longer production processes decline, making many of such ventures profitable.

Now Crusoe saves first, then consumes what he has saved while working on the stick. He does not collect berries in the meantime. What he could also do is to work while at the same time consuming less. He could cut the time during which he gathers berries in half and use that time for making the stick. That’s exactly how things work out in the modern economy. In simple terms the consumers buy fewer goods being produced. As a result, there is excess capacity in the later stages of the production structure. The competition there (that is, between companies which operate closest to final consumption) will intensify, and the marginal firms will go out of business, releasing their factors of production. If these factors are specific, then their price will drop in the later stages of the capital structure, because the demand for them there has decreased and they have nowhere to go. If they are nonspecific, then they will then be reallocated and re-employed in the earlier stages of novel and more circuitous endeavors. The structure of production in general will lengthen — the money that used to accrue to the factors in the later stages of production and no longer does (because the consumer decisions to curtail buying the present goods are transmitted up through the structure until a certain point in the form of decreased income to factors) has to go somewhere, and it will go into the new earlier stages of new production processes. (Or, to be more precise, the production structure will narrow in the later stages, widen in the early stages, and deepen in terms of the number of the stages.)

An increase in savings does not entail that there are too many consumer goods — there can never be too many consumer goods — but that there are too few future goods as compared to present goods from the point of view of the time preference and interest rates of the moment.

The sacrifice of present consumption occurs when the money in the hands of the public is channeled into capital goods used in more roundabout, longer production processes. But precisely because they are longer and new, they take time to set up. While that is going on, the same effort results in few consumer goods. To be sure, the sacrifice is worth it, because in the end, perhaps months, perhaps years, there will more and better goods out there than there were before, in obedience to the new consumer time preferences. But in the meantime, consumers are, by their own choice, shortchanged.

Because action always involves planning to bring about a certain desired state of affairs, it inescapably involves prudence or the Rational strategic element. But every moment provides an opportunity to change or revise the original plan by taking into account new and unforeseen circumstances, and successful adjustment of plans on the fly requires tactical mastery and therefore Artisan talents.

It must be grasped, however, that any revision of a past plan entails the fact of the actor’s having been a poor entrepreneur. Had he been aware of some unpredicted development that forced him to respond quickly, he would have acted differently; he would have utilized resources more efficiently, since he arrived at an outcome that is worse than he thought would take place. He regrets that he acted the way he did, because in hindsight he could have acted better.

But if plans, both the ends and the means, can change every second, of what significance are past plans? They are significant insofar as they determine the present. The past matters, because it provides a starting point for present (yet always future-oriented) planning and action. It is the point of departure for any plan, since what is actual (having come about as a result of past events), the present conditions, limits what is possible. Further, it allows for contemplation of one’s entrepreneurial competence by comparing your happiness before and after action.

When you have reached a goal or fulfilled a desire through action, what matters:

1. reflecting on your success by comparing your mental state before and after action;
2. the fact that the desire has been satisfied and is no longer bothering you;
3. the contemplation of the good attained and taking pleasure in its possession and the services it renders?

Answer: the third one is joy, the second one is peace (which is inseparable from joy, for otherwise a stone could be called at peace), the first one is an accidental pleasure of contemplating one’s own goodness or adequacy as an entrepreneur. Hence all three matter.

Update. Peace could be called the absence of pain, while joy, the presence of pleasure.

Suppose that you have $100. The interest rate is 10% for some time period Δt. You invest your money into company A and make $20 after Δt. But, you later learn, you could have invested the money into company B and made $30. Assuming low time preference, answer:

1. Do you profit, because you have $20 more after Δt than you had originally?
2. Do you profit, because you have $10 more than you would have, had you put the money in the bank?
3. Do you lose, because you have $10 less than you would have, had you invested better?

I would argue that, given that there is no such thing as perfect foresight, nor perfect human happiness, one need not always be too hard on himself for not doing better. Failure to predict the greater relative success of company B may be excusable. If it is, then the remaining question is whether the entrepreneur made a $10 or $20 profit. Rothbard considers a case where interest income is $50 rather than $20 and concludes that by investing into A you suffered a $30 loss (Man, Economy, and State, 512ff). This is presumably because the opportunity to loan the money at interest was open and considered. (If it was not open or not considered, then the profit would be $20.) Maybe Rothbard says this, because the combined cost of the factors of production, including time, was greater than the revenues.

But apart from disentangling interest from profit, surely, the $10 you could have obtained as interest is not an opportunity cost of making $20 on the stock market, because the same desires that would have been sated with the $10 are sated with $20 and then some. Hence real profit is $20. Again, suppose my value scale is as follows:

(1) consume coffee and cake
(2) drink coffee
(3) eat cake

When I drink coffee and eat cake, is consuming coffee alone an opportunity cost? Certainly not, because I satisfy my desire for coffee, when I drink coffee with a cake just as well. Opportunity cost is an unsatisfied desire that is ignored because I chose something more urgent at a particular time t. Suppose I drink coffee, but I could have drunk tea, yet I slightly perfer coffee. Tea would have satisfied my desire for a hot drink 90% as well as coffee. Not drinking tea is not an opportunity cost, because the same desire that tea would have satisfied is satisfied with coffee and more than that.

Now here are a few more scenarios:

1. Suppose that I was coerced under threat of death to invest into company A. Surely, we should say that the profit I made was not merely $20 but also the preservation of my life. My profit is $20 + staying alive.

2. I am hungry and decide to cook dinner. When the dinner is almost done, (a) for some reason I lose my appetite or (b) my friend comes in with free pizza which I prefer to my own cooking. Did I profit, because I no longer have the desire to eat, or did I suffer a loss, because I spend time and resources cooking in vain?

Let us note first that we do not act or begin a project to satisfy a present desire but a future one which will exist at the time of the completion of the project. If we take heed of the present desire, it is only because we predict that it will persist until the project has been finished. But we could always make a mistake, such that our goals may change in midstream. Further, one need not always have a present desire in order to work toward satisfying a future one. I am not hungry now, but I know I will be in a few hours and therefore go to the store to pick up groceries in anticipation of the desire to eat arising shortly. That is precisely why we seek future expected utility.

The second point is whether losing a desire in (a) is equivalent to satisfying it. I blogged about this question earlier. A desire extinguished may bring peace, but only a desire satisfied brings joy.

Third, the tricky situation here is that I obtained satisfaction without effort. The effort was entirely superfluous. Therefore, there are two distinct events here: one of profit (due to luck) and one of loss, because cooking was a complete waste. (In other words, what I lost was the alternative use of the resources used up during cooking and of my time and labor, the alternative use I contemplated before starting production.)

3. I am now 31 years old. If I exercise, then when I am 70 I will be healthy, though slightly less so than I am now. If I don’t exercise, then I will be very sick. If I do exercise, by the time I am 70, will I have (a) made a large profit (healthy vs. sick) or (b) suffered a small loss (less healthy than now)?

Again, I work in order to satisfy a future (namely, 39 years from now) desire to be healthy. We must compare (healthy - the cost of exercise) with (the benefit of not bothering to exercise - sick). If the cost of exercise is low, I will have made a large profit. Hence, (a).

Profit then is the difference between the revenues and the highest opportunity cost as perceived during deliberation and planning prior to any action. Even if it is later found out than a better course of action was available, it does not alter the amount of profit earned. Opportunity costs and hence profits are therefore highly subjective and mutable.

It follows that the line of reasoning, “I was miserable, now I’m happy; therefore I made a profit.” is illegitimate. Instead one should say, “If I had not acted, I would now be as miserable as I was before; but I did act, and I am now happy. Therefore, I made a profit.”

The most astounding thing about watching the thusly named program on CNN the other day was the contrast between the content of the broadcast and the commercials. The killing, the blood and gore, the destruction, the fanaticism of the state and its terrorist cousins was every few minutes interrupted by a message of what some peaceful and productive company wanted to do for you. There was UPS, delivering our goods to the ends of the earth. There was Lexmark, showcasing its peripherals. There was CICSO, welcoming us to its “human network.” What the state destroys, the market knits together. It was remarkable to recognize both the fragility of the market and its resilience. Like all life the market can be destroyed with ease, but at the same time it is found in the most oppressive environments.

The firms paying for the ads seemed almost innocent in their incomprehension: “Why are we so despised when all we want is to help and serve you? And why is the state, on the contrary, deified?”

What Bush wanted was to bring order to the Middle East, echoing Darth Vader’s saying to Luke: “With our combined strength, we can end this destructive conflict and bring order to the galaxy.” He put his faith in technological terrors, as well as into the power of the dark side, the violence of the state. He fully subscribed to Stalin’s (false) dictum: “When there is a man, there is a problem. When there is no man, there is no problem.” To every problem he saw only one solution: to tighten the screws, to clamp down on the “permissive environment” (as though the difference between permitting crimes and permitting entrepreneurship and personal freedoms escaped them). He succeeded as much as Vader did, namely, not at all.

But why have Bush and his top men failed to end the war when it proved unwinnable? Well, do you really expect the barbarian chieftain to admit defeat? Both he and the mob respect only force. If he were to show “weakness,” his legacy as a fool and coward would be secured. But if he were to hold to the end of his term, then maybe history would see him as a tough guy who did his best but in the end could not, despite every good faith attempt, overcome the absurdities of the Middle Eastern politics. Surely the latter result beats the former one.

1. It appears that in the Middle Ages interest-paying transactions were outlawed as “usury” or, at least, severely frowned upon. Yet there was a loophole in the laws, namely that if a banker could not return a deposit that was due to his customer on demand, then he was punished by being required by law to pay interest to compensate the depositor for having to wait to get his money back. (Clearly, it was dimly recognized even in those days that future goods were less valuable than present goods, that is, subject to a discount, all things being equal.) So, it became convenient to treat loans as bad deposits, and bankers all became tortfeasors for the sole purpose of allowing loan banking to take place. What’s interesting is that the confusion of deposit and loan banking in favor of the former eventually contributed to leading to the confusion of these things in favor of the latter to the extent that now there is no longer such thing as irregular deposit contracts.

2. De Soto writes: “The irregular deposit has other advantages, as well. In the regular deposit, or deposit of specific goods, the depositary is not responsible for the loss of a good due to an inevitable accident or act of God, while in the irregular deposit, the depositary is responsible even in the case of an act of God. Therefore, in addition to the traditional advantages of immediate availability and safekeeping of the entire deposit, the irregular deposit acts as a type of insurance against the possibility of loss due to inevitable accidents.” (Money, Bank Credit, and Economic Cycles, 7)

Notice a tension here between de Soto’s support for 100% reserve banking and irregular deposit as insurance. For if a part of the total deposit is destroyed, then any customer may still be likely to get his own deposit back, as long as no one tries to withdraw their property all at the same time. But this is exactly one important way in which the proponents of fractional-reserve banking defend their favored practice! Of course, we might reply that the depositary can still buy the tantundem (the equivalent in quantity and quality to the goods originally handed over) from someone else, thereby fully restoring the reserve. But so can an FR bank. Perhaps we could think of the difference as follows: that the goods irregularly deposited are insured is a fortunate happenstance of the deposit contract, yet it still means that the depositary is in financial trouble, which it would much rather avoid — it does not build its business on the basis of the fraudulent activity of this kind, such that its bank is at all times insolvent and bankrupt.

3. De Soto goes on: “all irregular deposit contracts, by their very nature, involve the transfer of ownership and the power to use the good (which is compatible, as is logical, with the fundamental obligation 100 percent of the tantundem in reserve).” (140) Our author is mistaken. What is transferred is the authority to use the goods or money deposited only for the purpose of safekeeping them. The banker has the right to, for example, move the goods from one vault to another in a different part of town, if he thinks this act will further the security of the deposits. But he cannot do much else. Every other substantive right, e.g., to sell the goods deposited or to buy something with the cash handed over, stays with the original owner.

4. The practice of FRB and the use of the demand deposits by the banker for his own profit may be defended on the ground that the relatively high probability of its real owner’s being able to obtain the deposit is sufficient for all intents and purposes. However, we see immediately that the authority of whether to give back the property is unjustly appropriated by the bank. It is the bank which decides whether or not to honor any of its customer’s request. That it will normally do so is beside the point. The same bundle of rights over the deposit gets to be possessed by multiple people, which is contradictory. Any contract which assigns these right in this manner must of necessity be null and void as impossible, a “monster,” in de Soto’s phrasing.

5. Is FRB protected by artifices such as the central bank and FDIC a victimless crime? Who exactly is harmed, as long the system is thought to be reliable and safe by the consumers? To that we may reply: (1) The system is objectively unstable, even though it looks solid to economic actors; in fact, the possibility of collapse of the banking industry and of hyperinflation is always there. (2) As de Soto cleverly observes, “the contract is null and void because it does serious harm to third parties (economic crises aggravated by the central bank), much greater harm than caused by a counterfeiter of money.” (156)

6. Rothbard argues that free banking “works” and that its inflationary tendencies (generated by bankers which will choose to run their business on the fractional-reserve basis) will be checked naturally by four forces: (1) the perceived trustworthiness of each bank; (2) the extent to which people are willing to use bank notes and deposits in general; (3) the threat of bank runs; and (4) the limited clientele of each bank. (See The Mystery of Banking, Ch. VIII.) But de Soto writes that “fractional-reserve banking (i.e., banking without a strict safekeeping obligation) has not been able to survive without a government-created central bank, which by imposing legal-tender regulations and compelling the acceptance of paper money, could produce out of nowhere the liquidity necessary in emergencies.” (152, italics removed) Is it true then that FR banks will be outcompeted in the marketplace by 100%-reserve banks? Why was there no pressure on the part of honest banks to prevent the governmental protection of their fraudulent and less efficient competitors? Why did the conspiracy to set up the central bank succeed? Could it be that no bank will care to be honest and to advertise its honesty? Again this may have to do with the fact that the FRB’s victim is society as a whole rather than any particular person. Hence no push towards good banking policies.

Here is a typical statement from A Whore in the Temple of Reason: “Mankind is likely to ‘peter out’ before too much longer as a result of our environmental depredations.”

What environmentalists envision as an ecological ideal is a kind of an “evenly rotating ecosystem” (a play on Mises’s evenly rotating economy), in which there is a steady cycle of births, lives, and deaths, endlessly repeated, such that nothing changes: the same species continue to exist, prey on and eat each other yet without wiping each other out or evolving or perhaps getting intelligently designed or anything like that. This is supposed to be aesthetically pleasing, and the relevant sentiment was well expressed in the movie The Matrix:

The number of errors here makes it hard to know where to begin.

1. By “environmental depredations” our author more likely means pollution. But the simple fact is that waste is an inevitable byproduct of every productive or consumptive process. It can never be fully eliminated, but given the correct natural and social technology (e.g., as revealed by economic theory), it can be with time minimized. Further, environmental problems are most often due to lack of property right assignments and enforcement, tragedies of the commons, legal protection of polluters, explicit government subsidies to politically powerful yet environmentally dangerous industries, etc.

2. It is ironic that the value judgment of the desirability of evenly rotating ecosystems is made by atheists presumably committed to (1) evolution, (2) the equality of dignity of humans and dumb beasts. These folks hold that by fighting predators, diseases, etc. and in general creating civilizations human beings are “destroying” the “earth.” Well, what’s wrong with evolving things and changing ecosystems? It is well-known that most of the species who ever lived on earth are extinct and had ended up this way long before there were any humans at all. It might be argued that by making nature conform to their wishes human beings are preventing further evolution. But evolution is in no sense “progress.” It works blindly on machines that happen to be alive. There is nothing special, according to our atheists’ own worldview, about these machines and their evolution or lack thereof. If all of them disappear, who will care? And the alleged beauty of EREs is an entirely arbitrary value judgment.

3. Mankind will not die out from any environmental depredations. The idea here is that human beings are careless, destroying their own habitat with “greedy” pursuit of private profit. Added to it is the “self-evident” claim that the government (and the environmentalists love the government) should plan development and carefully manage environmental impacts of human actions. Once again the reply is that as long as there is extensive private property, negative externalities will be contained due entirely to the supposedly destructive (though of course nothing of the sort) private self-interest. And the government is the biggest polluter of all; e.g., Thomas DiLorenzo writes that “the U.S. military is spending about $1 billion per day just for gasoline in Iraq.”

4. Smith’s appraisal of the human race is absurd. We do not consume all depletable natural resources; we consume them up to the point at which further consumption of these resources leaves us worse off than consumption of their substitutes. Hence an explanation of shifts to new technologies. Once again, private property owners have every reason to conserve scarce resources, for which they pay or get paid. Prices are signals of the relative scarcity of and demand for goods and services. And as for renewable resources, their owners have every incentive to make sure that these resources continue to regenerate themselves. Just think of domestic animals and private forests.

In short, this is our world; we own it; hence we can do anything we want with it, as long as we act obedient to the natural law. Environmentalists ought to “help the planet” by privatizing it.

“They” are trying to turn us into obedient slaves! Well, not exactly, and there are easier ways. (Write columns for the NY Times, for example.) But here is an example of a private company blowing the lid off the problems with government water which, according at least to the NYC government, “continues to meet all federal and state regulations regarding drinking water quality in the watershed and the distribution system.” Be calm, therefore, citizen. The authorities will take care of it.

Give it a bit of time, and you’ll see bottled water suppliers get their water cleansed of all pharmaceuticals in response to these revelations. The governments will end up catching up years later.

And here is Rothbard on fluoridation.

I argued previously that government should not have a scope larger than that of a county or a town. But what makes a town special? Why not go below it and talk about independent town districts and neighborhoods and condo associations and finally private properties? It seems to me that the naturalness of a town as the biggest organization at the level of which government is legitimate lies in the fact that an average town is self-sufficient. Not, obviously (you don’t really think I’ve lost my mind), self-sufficient in the sense that it need not trade with the rest of the world, but simply in the sense that it will have most of the facilities to satisfy everyday human needs. Such as, in no particular order: grocery stores and supermarkets, drug stores, dry cleaners, car oil change stations and mechanics, restaurants and bars, electronics stores, pet stores, clothing stores, malls containing all of the above, movie theaters, FM radio stations, furniture outlets, gyms, Internet service providers, etc. etc. It may also have: a university, an airport, specialty food stores, opera houses, and so on.

In other words, one need rarely venture outside one’s own town or, at the most, nearby corporations in order to get most daily errands done. Most consumer goods are available within your own town or city. But, clearly, a lot of things may not be available in, for example, your own neighborhood yet which will be available in your own town.

What makes a town a well-defined community is not only that its businesses serving the public are jointly sufficient to make it self-sufficient but also that each business is to a large extent individually necessary. The division of labor within a town is in this sense fragile. It doesn’t take much to turn a thriving town into a dead one: just get the businesses mentioned above to leave, e.g., because of high taxes or trade barriers. Thus, all citizens of a town have a common end: a good political system which will encourage growth and prosperity and high property values. Everyone thus depends on one another in a profound sense. This causes a feeling of community to develop. And this means that even if the local government imposes a 2% income tax, this will not seem like much of coercion or a violation of rights.

In other words, as we go down (in the US) from the federal government to state to county to city, we retain self-sufficiency and therefore community. In fact, we highten the sense of community, because it is much more tempting and easier to loot one part of a country to subsidize another part than to loot one part of a city to subsidize another part. And hampering the free market within a city will do much greater damage than hampering the market within a continent-wide country. But in the process of removing outer levels of government we increase political competition and make the consequences of bad ideology, if it be held by a town government, much more acutely felt. On the other hand, moving from private property owners up to gated communities to districts to towns causes us to recognize that the sense of community is weakened precisely until we get to town, because even if a district is very well run, the surrounding town’s bad government can destroy the felicity of its inhabitants.

Moreover, it is true that in a democracy your vote matters very little, but it matters more on the level of a city than a state, simply because fewer people vote in the former, yet another community-enhancing fact.

Further, city roads (though not highways) are both public goods as traditionally defined (except that consumption may become rivalrous when roads are congested) and limited-space monopolies. This suggests that the local government may be the best entity to build them. Same with the police, because their deterring function applies to the whole area they patrol, and so it is hard to exclude those who would not pay from being protected. (Though I fully accept the possibility that private solutions can be found even in these difficult cases.)

See also Hoppe on this subject.

Here are two rules to keep in mind when thinking about the war in Iraq, etc.

1. No oil producer wants to exchange his oil for blood. Unless he is a leader of a huge clan of vampires. And also only if he likes to barter.
2. Oil prices go up in proportion to the amount of blood spilled to take ownership (illegally, by violence) of oil.

Thus, consider a vaguely plausible conspiracy theory like this:

Until July 2001 the US government saw the Taliban regime as a source of stability in Central Asia that would enable the construction of hydrocarbon pipelines from the oil and gas fields in Turkmenistan, Uzbekistan, Kazakhstan, through Afghanistan and Pakistan, to the Indian Ocean. But, confronted with the Taliban’s refusal to accept US conditions, the US representatives told them “either you accept our offer of a carpet of gold, or we bury you under a carpet of bombs.”

Given this background, it is not surprising that some have seen the US failure to avert the 9/11 attacks as creating an invaluable pretext for attacking Afghanistan in a war that had clearly already been well planned in advance. …

The overriding motivation for this political smokescreen is that the US and the UK are beginning to run out of secure hydrocarbon energy supplies. By 2010 the Muslim world will control as much as 60% of the world’s oil production and, even more importantly, 95% of remaining global oil export capacity. As demand is increasing, so supply is decreasing, continually since the 1960s.

This is leading to increasing dependence on foreign oil supplies for both the US and the UK. The US, which in 1990 produced domestically 57% of its total energy demand, is predicted to produce only 39% of its needs by 2010. A DTI minister has admitted that the UK could be facing “severe” gas shortages by 2005. The UK government has confirmed that 70% of our electricity will come from gas by 2020, and 90% of that will be imported. In that context it should be noted that Iraq has 110 trillion cubic feet of gas reserves in addition to its oil.

A report from the commission on America’s national interests in July 2000 noted that the most promising new source of world supplies was the Caspian region, and this would relieve US dependence on Saudi Arabia.

Etc.

But according to the theory’s own claims, Bush and presumably his connected oilmen who wanted to take possession of foreign refineries without paying for them and in order to benefit the American consumers, have failed utterly, as oil prices have reached a record $104 a barrel. What kind of a conspiracy is this in which the shadowy and (got to be) diabolically clever conspirators at the highest levels of our and British Leviathans don’t achieve the very goals ascribed to them? (It’s not impossible that the conspirators, drunk with power, decided that only they plan and act, and the rest of us merely obey. This delusion of the would-be central planners could have been their downfall. Still.)

The phrase “no blood for oil” refers dimly to the Marxian theory that capitalists urge their governments to start wars in order to open up markets. And there is truth to the observation that protectionism and nationalism generate bellicosity and ultimately wars. Further, open markets are a good thing; what is bad is the particular means to them, namely, war, if indeed it is a means. But it is obvious that Bush, in starting the wars in Afghanistan and Iraq, was not motivated by any desire to make gas cheap. If he did, he might have permitted oil drilling in places where it is now not legal. Or instituted the gold standard or simply legalized alternative money in order to, among other things, make the economy less volatile and eliminate the boom/bust cycles. Or even (heaven forfend) scrap the federal gas excise tax.

Further, from the consumers’ point of view it is perfectly irrelevant who owns the oil fields and the related businesses, as long as the owners are willing to sell the oil to them. The Iraqi oil could easily have been for sale before the war. It is the sanctions which ruined commerce and therefore resulted in more expensive oil. There was no need to spill any blood for oil; all that was necessary was to re-enable free trade.

As for Afghanistan and the pipelines, American entrepreneurs should know better than to rely on the state to force agreements on foreign regimes. The state is a crude, primitive, and, most important, highly unreliable tool of doing business: all it knows is how to destroy.

Update. There is no such thing as shortages under free markets, of any commodity, gas included, severe or not.

Consumers are passive in the sense that they are waiting to be presented with choices but are active in the sense that, having been presented with them, they do choose. Thus, it is true both to call entrepreneurs “the driving force of the market” and to see the consumers as determining which entrepreneurs will and which will not succeed.

The Human Action passage I quote in a post below is part of the Mises’s paean to birth control as one of the crucial features of civilization. I am going to quote him at length.

Rationalization of sexual intercourse already involves the rationalization of proliferation. Then later further methods of rationalizing the increase of progeny were adopted which were independent of abstention from copulation. People resorted to the egregious and repulsive practices of exposing or killing infants and of abortion. Finally they learned to perform the sexual act in such a way that no pregnancy results. In the last hundred years the technique of contraceptive devices has been perfected and the frequency of their employment increased considerably. Yet the procedures had long been known and practiced. …

With the spread and progress of capitalism, birth control becomes a universal practice. The transition to capitalism is thus accompanied by two phenomena: a decline both in fertility rates and in mortality rates. …

Historical experience shows that all Caucasian peoples reacted to the drop in mortality figures brought about by capitalism with a drop in the birth rate. Of course, from such historical experience no general law may be deduced. But praxeological reflection demonstrates that there exists between these two phenomena a necessary concatenation. An improvement in the external conditions of well-being makes possible a corresponding increase in population figures. However, if the additional quantity of the means of sustenance is completely absorbed by rearing an additional number of people, nothing is left for a further improvement in the standard of living. The march of civilization is arrested; mankind reaches a state of stagnation. …

The purposive adjustment of the birth rate to the supply of the material potentialities of well-being is an indispensable condition of human life and action, of civilization, and of any improvement in wealth and welfare. Whether the only beneficial method of birth control is abstention from coitus is a question which must be decided from the point of view of bodily and mental hygiene. It is absurd to confuse the issue by referring to ethical precepts developed in ages which were faced with different conditions. However, praxeology is not interested in the theological aspects of the problem. It has merely to establish the fact that where there is no limitation of offspring there cannot be any question of civilization and improvement in the standard of living. (668-672)

Although abortion is often euphemistically called “family planning,” if we take that phrase according to its plain meaning, then family planning must be and is resorted to by absolutely every couple contemplating having children. I was recently given an opinion, apparently common, that the Catholic Church is against birth control, because it wants large families which will likely add to the number of Catholics. And this is presumably to magnify the power of its priests. There are errors galore here. First, people don’t go into priesthood for power; one of the priests I know said, I think, correctly, that Catholic priests were “spiritual garbagemen.” Plus, they are non-profit, relying on voluntary contributions. It’s not always a pleasant job.

Second, there is no reason to hold that the Catholic Church is unaware of the connection between widespread sophisticated family planning and the general standard of living. The Church might indeed urge people to procreate, for such reasons as to

1. fulfill the first commandment to multiply and subdue the earth;
2. increase the number of the faithful and the saints;
3. have the parents imitate the creative power of God;
4. enrich the lives of the parents whose relationships with their children will help them to mature.

But all these reasons are surely to be balanced against Mises’s concerns. For example, the Church does not advocate having more children than you can support. Or having children out of wedlock.

Third, the Catholic Church distinguishes quite explicitly between permitted and not permitted methods of birth control. It argues, for example, that birth control pills are defective precisely from “the point of view of bodily and mental hygiene.” Whether it is right about that is an ethical and psychological question, and I don’t share Mises’s view of ethics as a non-entity. And whether its suggested methods of contraception, one of which is called, by the way, “natural family planning,” are reliable is purely a technological question. As time goes by, perhaps new and better birth control technologies will be developed, and the Church might adopt some of them.