What a world! Terrorists, lying CEOs, stock hustlers, power-mad politicians, conniving regulators, and paid-off pundits: they seem to be everywhere. As the revelations about Enron and its political connections remind us, our world is horribly tainted by graft, special favors, blackmail, quid pro quos, duplicity, and dissembling. The government is the worst offender, of course, but apart from God Himself, whom or what can you trust?
There is a force in this world you can trust. It brought down the high-flying Enron and punctured all its pretensions, along with tens of thousands of other formerly infallible companies in the last two years. It has humbled those who believe they own the future. And just as easily it daily raises up the lowly from the depths to great heights. It thumbs its nose at legislatures and stomps all over the greatest central plan ever concocted.
It tolerates no lies, and, given time, always makes sure the truth will out. It accepts no bribes, it’s implacable in its inherence to principle, and it is utterly incorruptible. No power on earth is its master. It can’t be flattered or shouted down. It stands up to every government, even the most powerful ever known to man.
It is omnipresent. Yet it is a gentle and compassionate servant to those who go about their ways peacefully, working unceasingly with and for humanity. It is at work protecting the world from charlatans, day in and day out, never sleeping, never resting. And as often as people have tried to abolish it or wish it away, it has struck back with a vengeance to remind us that it is integral to the very fabric of the world in which we live.
I speak, of course, of economic law. This is not a law someone passes or someone enforces. It predates every state and legislature and executive fiat. It is built into the very structure of reality. It takes patience to understand, for its tenets are not catchy or flamboyant but instead quite dry. But it’s futile to try to avoid it, though man never stops trying.
Ludwig von Mises puts it this way: "Economics shows that there prevails in the succession and interdependence of the market phenomena an inescapable regularity that man must take into full account if he wants to attain ends aimed at. Even the most mighty government, operating with the utmost severity, cannot succeed in endeavors that are contrary to what has been called u2018economic law.’"
Economic law has many component parts. For example, there is the law of demand: all else equal, the lower the price of a good (or service), the greater the quantity of it that will be demanded by purchasers. There is the law of supply: all else equal, the higher the price of a good or service, the larger the quantity of that good or service that will be offered for sale.
There are myriad prior laws (like the law of diminishing utility) and derivative laws, like the law of money’s value: whenever the quantity of money is increased while the demand for money to be held as cash reserves is unchanged, the purchasing power of money will fall.
How are these laws enforced? They aren’t. They simply exist, and yet their power is ominous, and not only over economics but over all human affairs. These laws explain, for example, why it is that politicians have very little control over how resources are allocated in society. Sure, politicians can play with prices and wages, they can shuffle wealth around with spending and regulating, but economic law has its revenge by yielding discoordinations like surpluses and shortages and inefficiencies of every sort.
Thousands of big shots can pay $20,000 apiece to gather in New York and call themselves the World Economic Forum, but they are powerless to dictate the course of the inescapable regularity of market phenomena. Ultimately these people are in the position of observers of the vast and constantly changing global nexus of production and exchange going about its merry way. Whether they are businessmen, bureaucrats, politicians, or pundits, they can’t finally manage the world economy.
Economic law explains why prosperity and civilization can’t be created out of nothing. It dictates that there must be certain prerequisites to production, namely saving. Credit expansion by a central bank is no substitute. When you see massive economic growth being fueled by loose credit, you know that it cannot last. This law applies on the micro scale, as happened to many dot coms, and on the macro scale, as happened in the case of the 1990s boom. These periodic downturns keep the economy honest. That’s economic law at work.
Does it matter? Look at Argentina. A few years back, it seemed to be a thriving country. Income was up and the political system was stable. Then the politicians and their allied interests decided to take on economic law. They tied the peso to the dollar while making the value of the peso decline by printing them. They increased spending with no means of paying the bill. Economic law struck back, whacking the peso’s value and humbling the entire political elite. The country flew into chaos.
It’s the same way with other attempts to circumvent economic law. Consider protectionism. Right now US Steel is waging a massive lobbying campaign to keep out competitive imports. If it succeeds, consumers will be ripped off, but it will do nothing to make US Steel a more efficient producer. It only postpones the day when the company has to face reality, and someday it certainly will. That’s because economic law is vastly more powerful than the tariff collector or the political will to save an industry that is being out-competed.
People complain that economic theory is abstract and inaccessible. Maybe so. But it does no good to deny its preeminence as a tool for explaining human affairs. Learn about it or ignore it, it is still there, working its magic in the world. President Bush, for example, seems to believe that there is no price to pay for establishing a world military empire. But economic law dictates that all resources employed toward a particular end must come from somewhere.
Spending must be paid for somehow, and the government only has three tools: taxes, inflation, and debt. All three come out of the hide of the public. He says that he will spare no expense in giving us security, but it is the citizenry and not Bush that must foot the bill.
Another economic law is the law of exchange: it states that whenever one person voluntarily agrees to give up something he owns (whether goods, labor, or money) in exchange for something that somebody else owns, both parties end up benefiting. That is a short description of the core activity that generates prosperity and causes civilization to come into being and flourish.
It is this economic law of exchange — not bombs, government spending, regulations, loose credit from the Fed, or stock-market scams — that is the source of wealth, health, and security in our world. Politicians care nothing about it because voluntarism is not what they are about. But economic law always has its revenge. It brought down the Soviet Union, and it will do the same to any state or institution that believes itself immortal.