Economics Brought to Life Through True Stories

It is often pointed out that man's improved circumstances on this Earth over the centuries has been the result of the accumulated knowledge that each generation takes from the preceding ones, to which it then adds its own contributions as its legacy to the generations that follow.

Understand the laws of nature and you can learn to distinguish between those things to which humans must adapt and conform and those things in nature that man can "harness" to serve his purposes.

Hit your head hard enough against a large stone block and you may seriously hurt yourself. Apply a set of properly positioned pulleys and levers, and that heavy, large stone block can be moved to where you want to position it in constructing a building.

One of the younger human sciences is economics. It began to be formally developed only in the eighteenth century, especially among a handful of Scottish and French thinkers. They discovered and explained that there are laws in the social arena just as there are laws of nature.

There are laws of supply and demand that reflect and emerge out of the logic of human choice and decision-making under conditions of scarcity in circumstances in which individuals discover potential mutual gains from trade.

There are certain institutional rules and relationships under which individuals will have incentives to improve their own circumstances while also and at the same time improving the conditions of others.

And there are government policies and interventions that, if in place or introduced, will prevent the smooth workings of the market order that spontaneously develops and coordinates the interactions of multitudes of transactors in the competitive processes of production, sale, and purchase.

But it often seems as if there is no successful accumulation of such knowledge about the competitive market system, because each generation appears to fall into the same misguided and disruptive government policies that prevent or retard the greater prosperity that could be man's if only he were left alone to peacefully and productively associate with his fellow human beings.

That is why each generation has to be taught anew the lessons of the workings of the market order. A recent attempt at this is John Tamny's Popular Economics. It is a uniquely readable, clear, and common-sense approach for understanding the premises and power of free markets.

Tamny devotes almost a third of the book to challenge the rationales and defenses of taxes on income, capital gains, corporate earnings, and estates. He asks us to realize that taxes are the prices that government imposes on us to be allowed to work and earn a living. Think of it as the extortion money imposed by a gang running a protection racket, if you are to be left alone to work, produce, and keep whatever you've earned after paying the thugs who otherwise can ruin you and your business.

Rewarding talent

The core of Tamny's argument is that production and jobs are dependent upon people's being willing and able to earn an income out of which they decide to set aside a certain amount as savings. By saving instead of consuming resources that otherwise would be employed for satisfying our more immediate wants, those resources are freed up to be used for making capital - machines, tools, equipment - that makes work more productive, increases the quantities and qualities of the goods available to all of us, and improves the standard of living for everyone in society over time.

Entrepreneurs may have brilliant ideas that can make our lives a lot better, but if there is not the available savings to provide the financial wherewithal and the real resources that enable investments to be undertaken, those great ideas remain unfulfilled possibilities in the minds of creative and innovative businessmen.

By taxing income, businesses, and estates, government siphons off part of the ability for people to do the work, savings, and investment out of which wealth, opportunities, and prosperity come.

Tamny then hammers away that government regulation of business not only is not needed to maintain and sustain an open and competitive market, but invariably misdirects market-based decision-making that prevents a more successful satisfying of consumer demands, and brings about inefficient uses of the scarce resources of the society.

Furthermore, he argues that the market always rewards talent. The successful and gifted earn high salaries or gain large profits precisely because they demonstrate their capacity in anticipating future market demands, directing production in the right way to satisfy consumers, and they do so better than their closest competitors.

On the other hand, who is likely to be drawn to the relatively much-lower-paying employments in government bureaucracies and regulatory agencies? The "best and the brightest," or the far more mediocre and uninformed in terms of the ways and workings of real markets?

Thus, with a frequent tone of both sarcasm and even contempt, Tamny asks why we should ever expect that those who do not demonstrate any capacity for entrepreneurial talent and ability to be able to understand and know enough to tell actual free-enterprisers in the marketplace how they should run their business, what products they should offer consumers, and with what investments and technologies? It is, as he says, the incompetent and uninformed bureaucrats dictating to the entrepreneurially talented and knowledgeable.

He also debunks many of the standard arguments against free trade: that trade deficits are bad for American prosperity, that "outsourcing" costs American jobs, and that America should be self-sufficient in certain "essential" raw materials.

He reminds us that in the division of labor all of us specialize in the supplying of some good or service. In doing so, we "export" our specialized good so as to earn the financial means to then "import" all the other goods and services that others are offering to us. We have a balance of trade "surplus" with those who buy more of our product or service than we buy of theirs, and we run trade "deficits" with those in society from whom we buy more of their products than they have purchased of ours.

But at the end of the day, our overall balance of payments must balance, since expenditures of all kinds cannot exceed revenues earned or received from all sources of income. This is no less true when we sum over all the individuals who are doing such "exporting" and "importing" who happen to live within a geographical area defined on a map as a nation-state.

Money

Finally, Tamny turns to the issue of money, inflation, and economic prosperity. He rightly reminds us that money originally is not the creature or creation of the state. It is a commodity selected by the participants of the market over many centuries, as they found certain goods most useful as a medium of exchange and as a unit of account to facilitate complex transactions that would be impossible under barter.

Historically, the commodities most frequently chosen by the market have been gold and silver. Gold's attraction and advantage, Tamny insists, is its far more stable and predictable value compared with other commodities and government paper monies.

Inflation is a devaluation of a government's paper currency relative to its market value in terms of gold. In an era of fiat monies, it is not so much that gold appreciates in value, as it is that the paper currency depreciates against its tradability for an ounce of gold.

However, I must say that I found this part of the book devoted to money and inflation to be the weakest. After debunking many of the wrong-headed explanations for the booms and busts of the last several decades, Tamny fails to present a logical and convincing "positive" interpretation of how and why the business cycle follows the course it does.

While he tips his hat to Ludwig von Mises at several points in some chapters of the books, he does not draw upon those insights by Mises and his "Austrian" colleague, F.A. Hayek, on money and the business cycle that would have enriched and strengthened his own arguments against government intervention in monetary and banking matters.

But regardless of that, I cannot praise John Tamny enough in presenting the case for capitalism, free markets, saving and investment, and entrepreneurial creativity in an especially breezy writing style that makes virtually every chapter an enjoyable read. This is especially the case because each chapter explains the principle and logic being focused on through down-to-earth, everyday examples taken from the actions and innovations of actual enterprisers from many walks of business and social life.

The ideas come alive in the lives of real people, through both their successes and their failures, but always with the underlying insight that only freedom makes a peaceful and prosperous society possible from which all can benefit.