Economics in Six Minutes
Economics is the science of utility, which includes people's
preferences and the satisfaction and importance they subjectively
derive from goods. Desires are unlimited, but people get less
extra value from more and more units of the same good.
by Fred E. Foldvary, Senior Editor
Demand is a list of prices and the quantities bought at those
prices. The law of demand is that at lower prices, people usually
buy greater quantities and never fewer quantities. The law of
supply is that, holding production methods constant, greater
quantities are produced and provided with higher prices. The law
of diminishing returns says that adding a variable input to a fixed
input eventually yields ever less output per extra input unit.
Where supply intersects demand is where market prices and
quantities are determined. Price controls above this equilibrium
such as minimum wages create a surplus, and prices below it such as
rent control create a shortage. Without price controls a surplus
drives the price down, and a shortage drives the price up, like an
invisible hand directing prices to equilibrium. Eliminating
restrictions and taxes on labor creates full employment.
Firms maximize profits at the quantity where the marginal (extra)
revenue equals the marginal cost. In a very competitive market,
economic profits, above normal costs, lead more firms to enter the
industry, increasing supply and decreasing price until the profits
are just normal. Losses lead to fewer firms and a shift to less
supply until profits are normal.
The factors, categories of inputs and resources, are land, labor,
and capital goods, yielding land rent, wages, and capital-goods
rentals. Entrepreneurs organize the factors and drive the economy
to better directions with better products and marketing, earning
their wages in the form of economic profits. Other labor earns
its marginal product, what it contributes to output.
Land varies in quality, and the production in the better land
relative to that of the least productive marginal land yields a
rent to the more productive land. Speculative holdings reduce the
margin of production, hiking up rent and pushing down wages.
Civic services such as parks, streets, and security increase the
demand for land, raising the rent. If these are paid for by taxes
on labor and capital goods, the users pay both the tax and the
extra rent. When rent is used to pay for the public goods, the
landowners get neither subsidized nor penalized, since they pay
back to the provider the rent generated by the works. Paying the
rent to the community and charging market prices for utilities also
eliminates urban sprawl by making the best use of urban land.
Taxes on labor and goods must be added to the costs, raising prices
and reducing quantities, placing an excess burden on the economy
beyond the actual tax. Land is fixed in supply and has no cost of
production, so taxing the rent does not shift the supply or reduce
the rent. Taxing the rent keeps wages high and eliminates poverty
both by letting workers keep their full product and by making the
most productive use of resources.
Folks tend to prefer goods today rather than in the uncertain
future. This time preference and difference in present versus
future prices gives future goods a discount and present-day goods
a premium, the difference creating the natural interest rate.
Market interest rates then make savings equal to investments as we
get more investment with lower rates.
Money is a medium of exchange and can either be based on a
commodity such as gold or be fiat, based on nothing but laws and
custom like today. If the growth of money is greater than the
growth of goods, this is monetary inflation that leads to a
continuous increase in the level of prices, or price inflation.
Free-market banking with money based on a commodity leads to a
flexible supply of money and purchasing media without inflation.
Business cycles are caused by speculative real-estate buying and
building, fueled by excessive money growth. Depressions can be
avoided by using the rent for public revenue and with free-market
banking, avoiding the financial and real causes for cycles.
Pollution is caused by making the public rather than polluters pay
the social cost. Charging polluters will make them avoid pollution
or pass the cost to consumers, reducing quantities and pollution.
Likewise, cars and parking should be charged during the most
congested times. Eliminating restrictions on private transit and
using rent for more public transit eliminates traffic congestion.
Trade is mutually beneficial. Even countries with higher costs
benefit from free trade by concentrating on their comparative
advantage, what they are most productive in. Global free trade
with a common environmental policy leads to universal prosperity.
Public choice is the branch of economics that studies the decisions
of voters and government officials. Having concentrated benefits
while spreading the cost thinly among consumers and taxpayers leads
to seeking privileges, subsidies, special protections, and other
transfers. Mass democracy and the need for expensive media
campaigns leads to this transfer seeking. Switching to small-group
voting with bottom-up multi-level governance, along with
constitutional constraints, minimizes this corruption.
The French Physiocrats of the 1700s such as Quesnay advocated a
single tax on rent and also free trade. Adam Smith in the late
1700s said a market turns self-interest into public benefits, but
benevolent giving in addition to that is virtuous. David Ricardo
came up with the margin of production and comparative advantage.
Karl Marx thought labor creates all value and get exploited when
they don't get the whole value, but the Austrian economist Carl
Manger said no, values are subjective. American economist Henry
George said the surplus is rent, so tax that, and have free trade.
Austrian economist Ludwig von Mises pure socialism would be
hopelessly inefficient, and government intervention makes the
economy worse. Friedrich Hayek said so too, because knowledge is
decentralized, so just let the spontaneous market order work.
John Maynard Keynes in Great Britain thought government should make
and spend money during depressions, but New Classical economists
point out that when people expect inflation, government stimulus
just raises prices. Milton Friedman in the USA says don't try to
manipulate the money, and let folks choose for themselves.
The bottom line to all this is that economic freedom leads to the
most prosperity. Don't restrict labor and capital other than to
prevent coercive harm to others. Don't tax labor or enterprise.
Get public revenues from rent and pollution fees. Let the market
handle the money and banking. True free trade and enterprise are
good; decentralized and market-based governance works best. As
Henry George said, economics and ethics are one. The environment
and the economy are one. Good governance and economics are one.
Share rent, charge for damage, don't steal wages.
That's economics in six minutes, and the path to prosperity.
-- Fred Foldvary
Copyright 2000 by Fred E. Foldvary. All rights reserved. No part of this
material may be reproduced or transmitted in any form or by any means,
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transmission, photocopying, recording, rekeying, or using any information
storage or retrieval system, without giving full credit to Fred Foldvary
and The Progress Report.