Monday, March 07, 2011

Reply To A Free Banking Critic: People’s Actions Represent Choices From Alternatives

A critic of free banking, asks

How much of the world’s problems are due to

Fiat money? Bailouts, Subsidies? Deregulation? Government deficits?

I’d say,

First, laws or policies shapes people’s behaviour

Second, people act for a purpose.

If a go to a burger store, I don’t usually ask how much of the burger I ordered consisted of

Mayonnaise, Tomato, Hamburger patty, Salt, Mustard, bread etc...

My purchase of a burger in that particular store represented my action out of the following possible alternatives:

-I am hungry (need to eat),

-I just want to eat (perhaps want to try out this new store),

-I am in a meeting

-I’ll buy it for someone else

Or etc...

In short, I acted on a ‘bundled’ product as a result of my choice from the above set of alternatives

As Ludwig von Mises explained (bold emphasis mine)

Action does not measure utility or value; it chooses between alternatives. There is no abstract problem of total utility or total value. There is no ratiocinative operation which could lead from the valuation of a definite quantity or number of things to the determination of the value of a greater or smaller quantity or number. There is no means of calculating the total value of a supply if only the values of its parts are known. There is no means of establishing the value of a part of a supply if only the value of the total supply is known. There are in the sphere of values and valuations no arithmetical operations; there is no such thing as a calculation of values. The valuation of the total stock of two things can differ from the valuation of parts of these stocks.

The simple message is that people’s actions are intertwined with the presented alternatives from where we make choices. One cannot draw the “valuation of a definite quantity or number of things”.

We cannot isolate one variable from the other. People’s actions are responses to an ever dynamic “bundled” environment shaped by laws, markets, culture, environment, etc...

So applied to central banking, for every transaction we make, half of it represents money issued by the government.

Thus if the central bank decides to inflate, people’s alternatives will be shaped by the changing state of the purchasing power of money. So it will be a feedback loop which spreads or ripples to most of human activity or the society covered by such policies.

As argued here, the central bank, inflationism, government deficits, welfare state, bailouts and political privileges can be seen as a holistic interconnected network of political economic arrangement. But you can’t isolate one from the other because these factors are sustained upon by each other.

And that’s also why the alter ego to inflation is usually price control. Because people’s response will likely be met by populist political policies which tries to mitigate the short term predicaments.

If people’s action can be isolated, then hyperinflation won’t result to societal devastation. And we would probably be still under the Roman empire.

The above is an example of an intellectual strawman. The logic tries to argue from an intellectual state, but in reality represents irrelevance to actual human conditions.

Finally it is further a non sequitur to say “no system is perfect” as an excuse to argue for central banks. It is NOT about being perfect, it is about being the most efficient.

Professor Ludwig von Mises has seen through such red herring...

The analogy with the state of perfection is obvious. The fully satisfied individual is purposeless, he does not act, he has no incentive to think, he spends his days in leisurely enjoyment of life. Whether such a fairy-like existence is desirable may be left undecided. It is certain that living men can never attain such a state of perfection and equilibrium.

It is no less certain that, sorely tried by the imperfections of real life, people will dream of such a thorough fulfillment of all their wishes. This explains the sources of the emotional praise of equilibrium and condemnation of disequilibrium.

We can chose to live in a perpetual state of (social utopianism) fantasy, or we can act to improve our lives based on economic reality.

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