Thursday, November 10, 2011

Natural Law: the transcendental importance of Supply, Demand, and Equilibrium Prices

11/10/2011 Portland, Oregon - Pop in your mints…
As Europe continues to unravel, we have been exploring, perhaps by accident, the foundations of society here at The Mint.  In case you have missed it, here is a brief recap:
Anarchy, the lack of government, is man’s natural state.  It is an ultimate given.  It simply is.  A clear understanding of the current state of affairs depends upon grasping this inescapable fact.
In response to Anarchy, man has two choices.  He can choose to mutually cooperate with his fellow man, respecting both his fellow man’s right to live and his right to property or He can choose to take his fellow man’s life and property through the use of force.
In other words, man may choose the path of True Capitalism or Might Makes Right.  Ideologically, there is no middle ground.  In practice, men live at various points on the spectrum between these two extremes.
We have argued that True Capitalism is the response which creates the greatest benefits to society in terms of peace, security, capital accumulation and material prosperity while the ideology of Might Makes Right by definition is the antithesis of the Truly Capitalistic ideology and consequently would create the greatest detriment to society.
Ironically, all of the Nation States in existence derive their power from the adoption of the Might Makes Right ideology by a majority of the people.  How, then, can we be so certain that True Capitalism is the proper response to Anarchy if the majority has embraced Might Makes Right?
The proof of the superiority of True Capitalism is that it allows man to best adapt and react to the inescapable demands of Natural Law.  Like Anarchy, Natural Law is immutable.  It simply is.  Man is bound to it whether he chooses to recognize it or not.  It does not change, for Its statutes are etched in the foundations of the earth itself.
It is as Ayn Rand stated:  “You can ignore reality, but you can’t ignore the consequences of ignoring reality.”
In our example, we take the reality that Rand refers to as Natural Law.  Natural Law may be ignored, but ignorance always comes at a price. 
The first of these Natural Laws is that of supply and demand.  The Law of supply and demand, simply stated, holds that supply of and demand for a good or service will tend to find a point of equilibrium at a certain price expressed in terms of money (the equilibrium price).  On a graph the relationship looks like this:

A Graphical Representation of Supply, Demand, and Equilibrium Price

It is a way of expressing what most people intuitively know about price and scarcity.  When an item is increasing in price, one of two things is happening.  Either people are demanding more of the good or service or the supply of the item at the previous equilibrium price point is diminishing.
Naturally, the opposite is also true.  When an item is decreasing in price, one of two things is happening.  Either people are demanding less of the good or service or the supply of the item at the previous equilibrium price point is increasing.
In either case, the change in the price of the item in monetary terms is providing crucial information to all of those either producing or consuming the good or service in question, for it guides their inherent speculations.
(Editors Note:  Speculation, far from being an illegal or immoral activity, is essential to everyday survival and without it, there is no hope of achieving equilibrium prices and therefore both production and consumption tend to cease.  It is important to clarify that the illegal or immoral speculation that is villianized today is generally the act of investing the money of other parties in types of speculations without the knowledge or consent of the other party to do so.)
As a producer, if one sees the price of the good or service that one provides increase, the producer will strive (speculate, as it were) to either increase production to take advantage of the opportunity to profit and/or others will strive to produce the good or offer the service for which the price is increasing.
As a consumer, if one if one sees the price of the good or service that one consumes increase, the consumer will strive to either decrease consumption to mitigate the effects of the higher prices or others will strive to find a less expensive substitute for the good or service  to offer in the place of the good or service for which the price is increasing.
Stay focused, here comes the important part.  The increase in production will increase supply which, as the Natural Law of supply and demand dictates, will eventually lower the equilibrium price as the increase in demand is satisfied.  Likewise the decrease in demand will have the effect of increasing the available supply. 
In either case, the individual decisions (again, speculations, as it were) of the producers and consumers serve to increase the available supply.  The process occurs tacitly, and is an example of what Adam Smith famously called the Invisible hand of the market.
To further sum it up in what may seem at first a paradox, the best cure for higher prices is higher prices.
There are no exemptions from the natural law of supply and demand, however, there are numerous examples of Nation States, guided by the principal that Might Makes Right, manipulating the pure message that price is intended to send to producers and consumers.
This manipulation may be achieved in overt ways, such as price controls (the setting the price of an item by decree).  However, most people understand that price controls are bad, so today’s Nation States commonly resort to other tactics.  Amongst these tactics are taxes, subsidies, and the granting exclusive privileges to either buy or sell the good or service in question via regulating the purchase of or granting monopolies to produce it.
Regardless of the tactic employed, the result is to always a manipulation of the equilibrium price for a good or service and consequently distort the signal which guides the speculations and ultimately the actions of all producers and consumers.  The result of society as a whole is always and in every case achieving suboptimum results to those that would be achieved if the price signal were as pure as possible.
In the case of Central Banking and centralized currency control, the Nation State, in addition to the tinkering mentioned above, adds the complication of manipulating the currency that the equilibrium prices are expressed in.  This further distorts the sacred price signal that is universally relied upon to direct the actions of producers and consumers.
You can imagine the confusion occurring all around us, every day.
The True Capitalist ideology, on the other hand, completely subjects itself completely to the law of supply and demand and, in return, provides producers and consumers with best opportunity to obtain and act on the most accurate price information possible.
A Truly Capitalist society quickly settles on Gold and/or Silver as currency and does not recognize the right of anyone to tax, regulate, or grant monopolies. The Truly Capitalist Society continually works to bring supply and demand into balance in the simplest, most efficient way possible:  By relinquishing all control to the market participants and by extension, natural law.
Inefficiency is naturally wrung from the system as firms that depend upon the false price signals or special protections or subsidies provided under the Might Makes Right ideology quickly go out of business.
True Capitalism not only quickly eliminates economic waste, it quickly directs the surplus capital into its most urgently needed employ, and it is accomplished by simply obeying and embracing the natural law of supply and demand.
Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at http://www.davidmint.com/
Key Indicators for November 10, 2011


Gold Price Per Ounce:  $1,749 PERMANENT UNCERTAINTY
M1 Monetary Base:  $2,122,700,000,000 RED ALERT!!!  THE ANIMALS ARE LEAVING THE ZOO!!!
M2 Monetary Base:  $9,507,600,000,000 YIKES UP $1 Trillion in one year!!!!!!!