The Rule of Law and Freedom

26 Jun

The Prague astronomical clock (in Old Town Square) was installed in 1410 by clock-makers Mikuláš of Kadaň and Jan Šindel, and is the oldest functioning Astronomical clock in the world - Rule of Law and Freedom

The Prague astronomical clock (in Old Town Square) was installed in 1410 by clock-makers Mikuláš of Kadaň and Jan Šindel, and is the oldest functioning Astronomical clock in the world.

Economics is human action in the field of buying and selling services and products while a law is a rule, a useful description that has some predictive value. Economic law concerns human action as it relates to the buying and selling of services and products. Economic law is a science but since it concerns human action, it is not a physical science. Both economic laws and the laws of physical science may be defined as useful descriptions in the sense that both have some predictive value.

Economic laws have just as much predictive value as the laws of any other science. Nevertheless, economics is not generally taught as a science for two reasons. 1. It is not possible to measure much having to do with human action as precisely as it is possible to measure that having to do with physical objects, and 2. Economic discourse has been perverted for political purposes. In much the same way that religion was used during the Middle Ages to sanctify central authority, economics has been used to justify state intervention in the free market. The theory of the divine right of kings has been replaced by the state’s promotions of general welfare.

To the extent that a person acts, it is possible to measure that action. For instance, we can measure whether a person buys or does not buy something at a particular price and at a particular time. To the extent that economic laws are based on what one person does at a particular time at a particular place, there is no problem. The problem arises when that action is used to predict a different person’s action or the same person’s action at a different place or time. The problem has to do with measuring value.

We may know that John paid two dollars for a glass of Coke in New York City on January 1, 2012 but that only means that John valued the Coke at that place and at that time more than he valued the two dollars. All economic valuations are subjective. We can report the fact of a price paid or of prices paid as, for instance, in reporting a market value. We cannot measure the value any one person, much less a group of people, places on, for example, a glass of Coke except to say, in this instance, John, in New York City, on January 1, 2012, valued it more than two dollars. We can only know ordinal values: the Coke first and the two dollars second.

Every science has its limitations. For instance, it would be ill-advised to use the laws of gravity to explain electricity or the economic effects of the concentration of state monopolies. To postulate or discover economic laws or useful descriptions that have predictive value in the exchange of services and products, it is necessary to understand that all individual action is the product of a choice between subjective valuations of competing alternatives. There is, however, a very important limitation. Since it is impossible to measure the amount of a subjective value or the distance between subjective values, it is impossible to accurately add, subtract, multiply, or divide numerical values as they relate to economic activity.

The reason economists use all sorts of statistical data to measure and predict the money supply, business cycles, interest rates, GDP, etc. is that most are in the service of special interests to justify some intervention in the free market for the benefit of a special interest group or central authority. They need the illusion of certainty. Statistics are used to both obfuscate and justify. They are useful tools of political manipulation. They are not useful in explaining or predicting because all value is the product of an individual subjective judgement that by its nature cannot be measured except with ordinal numbers.

Any science can be misused. Economics is not the only science that has been used for political purposes. Meteorology is another. But just as the study of weather remains valuable despite the political agenda of some regarding global warming, so does the study of economics remain valuable despite its common misuse for political and financial gain.

To know the truth and understand that you are being misinformed about economic matters, it is helpful to consider the issue logically. Firstly, something cannot at the same time be and not be. If, as discussed, all value is subjective, then value cannot be dependent upon labour or capital invested or material input. If it is true that subjective values cannot be accurately measured except by ordinal numbers then all projections based on adding, subtracting, multiplying, or dividing are inherently unreliable and most likely lies. If, however, the prediction is based on individual subjective value judgements of current or future market participants, then there is a basis for considering the analysis to have some value. That is not to say a prediction will come true, rather only that it has a sound grounding.

Economic activity, namely the buying and selling of goods and services, begins with a subjective valuation concerning various alternatives. We know this to be true from both observation and introspection. These subjective valuations of alternatives form a value scale. The first premise is that all value is subjective. The second premise is that people prioritize their values. For instance, between three alternatives there would be a first, second, and third ordinal valuation.

If a person only has 150 cents, is offered a Coke, orange juice, or coffee each for 150 cents, and buys the Coke, this proves that, between these three alternatives, she valued the Coke as number one. It is irrelevant that one minute later she regrets her choice and wishes she had bought the coffee.

Subjective valuations may change by the second and do not require any logical foundation or agreement with anyone. The only way we have of knowing what they are is by recording individual conduct and that is an objectively measurable criteria.

The third economic law is that the only way we have of measuring anything on an individual’s value scale is by recording what a person buys or sells at a particular time and place. The value scale information will be incomplete to the extent that any item on the scale is not bought or sold everywhere and at all times.

To summarize,

  1. All value is subjective.
  2. People prioritize their values.
  3. The measurement of any person’s value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.

Economics can be a science if we apply the scientific method to its study. The conclusions we derive from our study of economics will be valid and true if we start with premises that are true and then correctly apply the laws of logic. Controlled experiments in economics are problematic due to the issue of measuring value. If the science of economics is based on measurements of overt human actions and limited to expression in ordinal numbers, it will be no less scientific than any physical science. All science has its limits. Economists make so many errors in predicting the future because they extend economic laws beyond the boundaries of their own limits. Remember that all value is subjective, impossible to measure exactly, different for different people, and subject to change over time.

In the 1975 introduction to his book which at that time was the most widely used college economics textbook, Professor Paul A. Samuelson wrote that the USSR’s superior central planning system would result in the USSR’s GDP overtaking the USA’s GDP before the end of the 20th century. Mr. Samuelson had received the Nobel Prize for economics. Why was this Nobel laureate so wrong?

First, to correct a common error, there is no Nobel Prize for economics. Mr. Nobel did not provide for such a prize in his testament.

The economic prize is awarded by a committee of the Swedish parliament associated with administering the testament and is funded by Sweden’s taxpayers’ money, not Mr. Nobel’s testament. It is called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It is politically funded and controlled. The politicians have sought to control public perception concerning economic policy by attaching themselves to the prestige of Mr. Nobel’s testament. They have misused this prestige to promote their own interventionist socialist economic policies. Mr. Samuelson was awarded the “Nobel” prize because he served the political interests of the people who controlled the awarding of that prize. Mr. Samuelson called himself a “’modern’ economist . . . in the right wing of the Democratic New Deal economists.” See: nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html.

Clearly, the predictions of a recognized authority cannot be relied upon. Moreover, the institutions that sanctify what is authority in matters of economics have been corrupted by the political process. This can be proven using the three fundamental economic laws. Let us start with the first principle of logic or mathematics: a thing cannot at the same time be and not be. Either a centrally planned socialist economy, the USSR, is superior in that it results in a larger GDP than a free market system, the USA, produced over a period of time from 1975 to 2000, or it is not superior in that it does not result in a larger GDP. Mr. Samuelson maintained that the central planning socialist model was superior to the disorganized free market. Professors Ludwig von Mises and Murray Rothbard maintained that the central planning socialist model was doomed to failure.

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