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April 2016

Individual vs. Group

As Ludwig von Mises explained in his masterpiece book Human Action, the economy consists of individuals performing actions based on their individual preferences and engage in market exchanges “catallactics” with other individuals. People act to satisfy their needs and the needs of other citizens involved. For example, an employee performs his job to meet the goals set by his employer and to earn compensation. We can understand what happens in the market through analyzing the actions people make and the needs they satisfy. For example, when an entrepreneur starts a business that provides a product or a service that meet a certain need, people who value this need will buy this product or service to meet that need and while doing that they satisfy the entrepreneur’s need to have a successful business. If that business doesn’t satisfy enough customers to generate a profit, the entrepreneur will have to either adapt his business to the market or go out of business freeing his time and resources to work on something else.

Many politicians rely on a different standard in the analysis. They explain everything as a conflict between two groups of people:

  • Karl Marx and his followers explain everything through a class struggle between the workers and the business owners, proletariat vs. bourgeois.
  • Progressives in the United States explain everything in terms of business exploiting customers and the need for government to protect the customers.
  • Race activists explain everything in terms of whites exploiting other races.

Of course, there are business owners that abuse their workers, businesses that cheat their customers and white people who discriminate against minority people. But there are also many business owners that treat their workers very well, many businesses that do everything they can to serve their customers and many people who don’t consider race at all in their actions.

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How to compare?

AvsB

Many of the political discussions we have every day involve comparison. Income redistribution advocates compare the incomes of the top 1% or 10% with the income of the bottom 1% or %10, Gun restriction advocates compare gun murder rates in the U.S. versus the same rates in France and Nationalized heath care advocates compare the cost of health care in the U.S. vs. the cost in U.K. or France. Activists cite these comparisons to create a single punch line such as “the top 1% control majority of wealth” or “Nationalized healthcare will save the U.S. a lot of money” but these are misleading comparisons.

When you shop for a car you don’t just look at the price then buy the cheapest option. You look at the individual features, safety, price, warranty and many other variables and then you make your decision. Not all aspects will have the same weight and you will take that into consideration but if you care about price more than anything you may still buy a car that is a bit more expensive if it has a nice feature and the difference in price is acceptable to you.

We should use the same mentality when we evaluate options offered by politicians for a certain problem. When socialists claim that it is unfair for a CEO to have much more income than a typical employee in a company, we should look to other differences between the two people such as education, skills and productivity.Read More »How to compare?

History of Money

Money

Money is medium of exchange and store of value. In the early days of human civilization people didn’t have money but instead they bartered together exchanging surplus products they produce for surplus products others produce. If farmer Joe has excess wheat and needs eggs and neighbor farmer Tom has eggs and needs wheat they would meet and exchange a number of eggs for an amount of wheat.

The above example could become more interesting if we added farmer Max who needs wheat but can only offer beef. If Max can trade with Joe exchanging some beef for some wheat then he will meet his wheat needs. If Joe doesn’t need beef but Tom needs beef then Max will have to do a double trade. He will first trade with Tom exchanging some beef for some eggs then exchange these eggs for some of Joe’s wheat. In that example Max used the eggs as medium of exchange, which means that he got the eggs to exchange them for other products. Max may keep some of the eggs so he can exchange them later for more wheat from Joe or other farmers who accept eggs. In this use case eggs function as store of value because Max is using them to store the value he got from trading the beef.

Of course eggs and perishable similar goods cannot store value for long and cannot be easily divided. People started to use goods that don’t perish and can easily be divided as storage of value and medium of exchange and these goods played the role of money in addition to their role as commodities. Different civilizations picked different types of commodities to use as money such as types of shells and rocks. The commodities that got used as money were usually scarce and valuable in that civilization. In larger civilizations gold and silver became widely used as money and they started to take the form of coins and governments played a role in standardizing the weights and shapes of these coins.

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Government Grants

MoneyWithWings

Yesterday, I received an email from my congressman, he was sharing with the citizens of the district some opportunities for federal grants. It turned out that there is a website called grants.gov that lists all grants available from the different departments of the federal government. I did a quick web search using few states and all of them have similar grant programs.

Can the government start and fund the right projects?

In the free market when an entrepreneur starts a project, he estimates the market need for the product or service the project is going to offer and the possible price to charge. He funds the project through his money, loans or partnership with investors. The market provides a signal through profit and loss to the entrepreneur and the investors to steer the project to success or shutdown. If the entrepreneur tried to continue a failing project his investors will not continue supporting the project and may go to courts to block the project and extract what remain of their money.Read More »Government Grants