Real or Abstract: The Applicability of the Laws of Economics

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Economic
principles are crucial not only to arguments for economic freedom,
but also for personal and political liberty and for peaceful coexistence.
Yet many people are ignorant of economics, or have heard some misleading
or incorrect information. Still more people don’t see how economic
principles can be applied to everyday life, liberty, and the pursuit
of happiness. It is the job of the libertarian to show the world
how closely tied economics is to freedom.

Economics
and Abstraction

The
trouble that many people seem to have applying economics, or accepting
the libertarian view that economics is much more widely applicable
than traditionally believed, is that they view economics as an abstraction,
a set of patterns or guidelines, or some philosophy or social science
that attempts to model reality. Since economics is viewed only as
a model, when economics and reality do not coincide it is simply
assumed that the model is flawed, and thus economics is seen as
just one way of looking at things, that is sometimes useful and
often inaccurate.

Some
economics is abstraction. The supply and demand curves, for example,
are abstract, not real. There are no actual curves, physically manifest
in the real world, that are supply and demand curves. They are a
mathematical model, and as such, they are useful only in helping
us to visualize the data they represent – not to predict outcomes
with great accuracy.

On
the other hand, the core principles of Austrian economics are real,
universally applicable laws. In the real world, physically, things
are produced and consumed; they are supplied and demanded; the laws
governing these actions are just as real as the laws of the physical
world.

Every
action one takes involving any resource that is scarce, anything
that can be spent, is an economic action. Whether you are spending
money or material goods, or time, attention, or effort, or whether
you are spending any social capital, good will, influence, or credibility
– any time you shrink your pool of anything that’s available to
you, for any reason, you are engaging in an economic action. Taking
these actions while ignoring the rules governing them is just as
potentially hazardous as driving a car without knowing how to steer,
or walking around on top of a steep mountain while ignoring the
laws of gravity.

The
problem the libertarian faces in convincing people of the veracity
of these claims is that there is, within the field of economics,
a lot of junk science. Every time a war, hurricane or tsunami hits,
someone proclaims that the economy is stimulated, promptly convincing
practically everyone within earshot that what’s good for "the
economy" – an abstraction – is not necessarily good.
Actual economists cringe at this, pointing out the fallacy that
Bastiat is credited with exposing, which is that this view does
not consider the opportunity cost of the resource being spent repairing
the damage. In fact, disasters – natural or man made –
are disasters, and throwing the economy in front of the train
of public opinion is generally an attempt by those in power to placate
the population and maintain the status quo. After all, a public
that can see the positive side of hurricanes and tsunamis is that
much more likely to buy into a war or some other State-sponsored
disaster.

The
Market – Real or Abstract?

People
speak of the market very often in economics, so it’s of paramount
importance to determine the reality behind this term. Is the market
a real, actual thing, or is it an abstraction? The answer is both,
and neither.

In
some cases, the market is a real, physical place. When you buy groceries,
you buy them at a supermarket, or a mini-mart, or a convenience
store (the name convenience store is all too accurate, since their
main commodity for sale is not groceries, but convenience, and you
certainly pay for it), which is just as much a market as the supermarket
is. Generally, any place where you buy something can be called a
market. So in this sense, the market is real.

In
other cases, the market is not physical but inferred. You can buy
things on the Internet – web sites are "places" in
one sense, but not another. The market becomes a facilitator. When
we refer to the market value of a thing, we aren’t referring to
the price we saw the thing for sale for at the actual market. We
are in this case speaking of a metaphorical market. The black market
isn’t an actual place one goes that is actually colored black. It’s
an abstract term. (One could argue that the place where an exchange
takes place becomes a de facto market, so if I sell things at my
house, my house is an actual market for those things for that time.
Either way, the term market is sometimes used as an abstraction,
sometimes not.)

In
this sense the market is both real and abstract, depending on the
circumstance. However, the sense in which the term is often used
is neither a physical location nor an abstraction of such. It is
a situation, or a description of the state of things. When things
are traded "on the market" it means that ownership of
the things has been exchanged publicly, voluntarily, and legitimately.
When we refer to a market as free, we mean that there are no barriers
to these exchanges placed by others – in other words, no taxes,
tariffs, price controls, or other interferences. When we say that
something is "placed on the market" we mean that it is
being offered for sale or trade.

It
is important to distinguish between the abstract and situational
uses of this term. For instance, if something is "on the market,"
it’s available to be purchased – there is an actual good or service
that is really available. If something has a "market value,"
however, you can’t infer anything about that thing itself. "Value"
is subjective, and relative; "market value" simply refers
to the price one could fetch for the item if it were sold publicly.
It might be based on the MSRP (manufacturer’s suggested retail price),
or on the appraisal of a third party, or on the price that previous,
similar items have sold for. There’s no way to predict or know market
value – you can only guess, estimate, extrapolate, or average.

The
Reality of the Free Market

Detractors
of libertarianism complain that the free market is idolized and
worshiped by libertarians, and that it is just another abstraction,
that can never come true; they say it is idealistic or Utopian to
expect a free market to ever arise.

The
term "free market" often does not refer to a market at
all. For instance, some would claim that the free market reduces
prices and increases quality as time passes. However, there isn’t
an actual marketplace that accomplishes this feat. Rather, "free
market" is an abbreviation; what we are really referring to
is the collected efforts of individuals acting on the free market.
Markets don’t act – people do. The "free market" is simply
the state of people acting without barriers to exchange.

Economic
law proves that when individuals act without barriers to exchange
they bring about states of affairs more desirable to themselves
than if they act with barriers to exchange. When the "free
market" reduces the price of a commodity, what’s really happening
is that individual suppliers are reducing the prices of their goods
in order to maximize their profits in the face of competition. When
the "free market" increases the quality of a good, what’s
happening is that suppliers are making better products, in order
to maximize profit in the face of competition. When the "free
market" bankrupts one supplier and makes another a millionaire,
what is really happening is that individual consumers chose to spend
their money on the latter supplier’s product, in order to maximize
the utility of their money.

Libertarians
do not worship the free market; however, we hold as an ideal that
state of affairs brought about by the free market – a situation
where everyone is free to act to benefit him or herself, as long
as they do not harm others. Theory holds that this leads to maximal
prosperity. Empirical evidence shows that the fewer restrictions
on non-harmful, non-coercive behavior, the greater the prosperity
that is achieved. This is not because of an abstraction or a model,
but because of human nature and physical reality.

As
for the final accusation, the situation described by the free market
is not Utopian. Free exchanges are made every day. What prevents
many people from seeing this fact is the limitation of economics
to financial matters.

The
Scope of Economics

Economics
govern not merely financial exchanges but the allocation of all
scarce resources, and the actions people take to satisfy their desires.
People desire material goods, but they also desire other things.
Let us consider the example of interpersonal relationships, and
the applications of the free market scenario vs. the hampered market.

Daily,
we trade our affections for the affections of others. Friends, family
members, lovers, even pets, are capable and willing partners in
exchanges of time, energy, favors, and good will – and these
things are scarce resources. Governments do not currently place
a tax on any of these things; however, I am certain that if a politician
could figure out a way to do it it would happen. However, there
are plenty of limitations or restrictions. A person cannot legally
give a large monetary gift to their spouse, parent, child, or best
friend without the government taxing it, even if the giver initially
paid income tax on the money. A man cannot legally engage in sexual
relations with another man. Consenting adults are limited in their
behavior to varying degrees in different states.

Consider
the question of voluntary exchange in a romantic relationship. You
exchange affection, love, intimate relations, and promises of exclusivity,
among other things. In a free market, these exchanges are voluntary
and unrestricted. However, imagine if you had to pay a fee to love
someone. This is relationship tax. Imagine if you had to give affection
or romantic relations to a person who claimed to be unable to attain
these things from free exchange! This is relationship welfare. Imagine
if you had to marry someone of a specific race because statistics
showed it to be harder for people of that race to find spouses!
This is relationship affirmative action. Imagine if the State paid
some people to have relations with each other, but not others. This
is relationship subsidy. Imagine if the government provided everyone
with a pet and demanded extraordinary amounts of money from them
to take care of this pet. Yet this is what State roads, schools,
and every other State bureaucracy is.

We
live in a society with a relatively free market in interpersonal
relationships. Very few filial, friendly, and romantic relations
are taxed, limited, restricted, or forbidden. Many agree that the
few restrictions there are should be lifted. Most people would be
outraged by any further limitations or by any of the policies outlined
above. It is clear to everyone that when it comes to matters of
the heart, the freer the better.

But
when it comes to matters of the wallet, it’s not clear to them at
all. People are willing to force others to spend their money to
contribute to the good of society. Money is seen as the root of
all evil. Desire for material goods is looked down upon. The only
reason for this is that it’s easier to benefit from someone else’s
material goods than from their affections. Armed with enough firepower
you could steal a million dollars but couldn’t make one person love
you. Politicians have spent ages, for this reason, convincing us
that it’s their right to steal money from us practically at gunpoint,
and they have largely ignored our love lives – except to appease
their religious constituency.

Due
to centuries of influence by the political apparatus, many people
believe that we rely on government interference for our safety and
security and that it is necessary to sacrifice some freedom toward
this end. However, when we consider that our finances are not the
only economic situation we’re in, it becomes easier to see the stark
differences between liberty and oppression.

Conclusion

Whenever
an individual acts to meet his or her desires, he or she is subject
to the rules of physical reality – of cause and effect, of scarcity,
and of gravity and other physical laws. He or she is also subject
to the rules of economics. Free trade allows the most efficient
specialization, which means the greatest productivity. Disasters
are bad. People trade things they have for things they want more.
Scarcer goods are more expensive. These and other laws are immutable
and both empirically and aprioristically proven.

Abstraction
is a tool some economists overuse, but this should not be construed
to deny the validity of economic laws. The free market is not an
abstraction but an actual state of affairs, one that is to be striven
for. The scope of economics is wide, and the rules thereof apply
to things you might not expect them to – they apply to any action
taken to meet a desire.

The
denial of economic reality can be as disastrous as the denial of
physical reality. The belief that you can defy economics is similar
to the belief that you can fly by sprinkling fairy dust on yourself
and thinking happy thoughts – it’s a fantasy that could prove harmful
or fatal if taken too far. Libertarians should stress the applicability
of economic principles and attempt to educate the public about them
if we are ever to have victory for the cause of freedom and liberty.

January
20, 2005

Neal
Zupancic [send him mail]
is a bartender in New York City. He moderates the Knowledge
Is Liberty weblog
.

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