Submitted by Patrick Barron via Mises Canada [2],
The basic unit of all economic activity is the un-coerced, free exchange of one economic good for another based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government. The exchange will take place when each party values the good to be received higher than the good that he gives up. The expected, but by no means guaranteed, result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.
Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party’s subjective preference is ordinal only. This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange and because the volume and dollar amounts of future exchanges are independent of past exchanges.
Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today–subsidized, protected, and mandated use of ethanol. Number one, the use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required. Therefore, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have “never had it so good”.
Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold a valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union’s commonly held resources was tallied by our CIA as meeting legitimate demand.
Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx [3] he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people’s legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. Maltsev, an Austrian economist, was unable to convince Gorbachev’s government to allow private ownership of the nation’s resources. Without private ownership of production resources, there could be no true ordinally held subjective preferences for their rational allocation. Gorbachev’s other reforms were half-hearted and mis-implemented. They were insufficient to prevent the imminent collapse of the Soviet economy.
With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke’s book No Harm: Ethical Principles for a Free Market [4], we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and un-coerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. The “no harm” principle can be enforced by normal commercial and criminal law. For example, since one may not pollute the waters that are used by others, normal tort law, which is based primarily upon precedence, would replace costly EPA compliance regulations, which are based primarily upon statute law and bureaucratic regulation. All labor laws can be scrapped, which would reduce the cost that businesses must bear to support extensive human resources departments, which have become little more than arms of government agencies. Freedom to engage in any economic exchange that causes “no harm” would extend internationally, too. All trade restrictions would be seen to be illogical and unnecessary. Satisfaction increases with greater opportunities for un-coerced exchanges; therefore, international trade restrictions are counter-productive. The revival of the free trade movement would benefit world peace and result in fewer scarce resources directed to national defense.
In conclusion we see the consequences that can accrue from a better understanding of the true nature of economic exchange. Be on your guard for those who claim to be able to improve our satisfaction and protect us from harm through expansion of government coercion in the market.
