Political Economy

1. Political Economy Free People, Free Markets The Vanguard School Colorado Springs, CO October 6, 2009 Paul T. Prentice, Ph.D. paul@PikesPeakEconomicsClub.com www.PikesPeakEconomicsClub.com Economic Liberty and Political Liberty Are Inseparable

2. -----------------------------------------Left Right Socialism Capitalism Collective Individual We Me Us I Ours Mine "What is common to many is least taken care of, for all men have greater regard for what is their own than for what they possess in common with others." - Aristotle

3. -----------------------------------------Left Right Group rights Individual rights Public property Private property Equal outcomes Equal opportunity G’vt gives rights G’vt secures rights

4. -----------------------------------------Left Right The individual The government exists to serve exists to serve the government the individual Their right to Your right to your property your property

5. -----------------------------------------Left Right Individual must Government must be limited be limited The people used to rule the government (right); now it rules us (left). America is split about 50-50 between these polar opposite philosophies. It is not a sustainable society.

6. Economic Principles(1) Human Action – Ludwig Von Mises • In any given situation, people take purposeful action to maximize their values (“utility” in econ-speak). • Values are subjective and individualistic (mine are not necessarily yours, and vice-versa). • Values are situational (subject to change, dependent on time, space, and circumstance).

7. (1) Human Action (cont’) • In a given situation, people rank-order their values from highest to lowest. • Subject to their resource constraint, people maximize their values at the margin (MB>MC). • Each choice implies a different choice not made (trade-off) • The cost of Choice A is the foregone benefit of Choice B (opportunity cost).

8. (2) People Respond To Incentives • “Price” is an incentive. • A high price is an incentive for consumers to purchase less. • But a high price is an incentive for producers to sell more. • A low price is an incentive for consumers to purchase more. • But a low price is an incentive for producers to sell less.

9. (3) Law Of Supply And Demand • Free markets solve this apparent contradiction through supply and demand. • If the price is too high, there is a surplus. Producers will lower price until consumer demand equals producer supply. • If the price is too low, there is a shortage. Producers will raise price until consumer demand equals producer supply. • Prices are relative: $2/gal. milk only has meaning compared with $3/gal. gas, or $10/hr. wage.

10. (3) Law Of Supply And Demand (cont’.): Markets Clear • Over time, markets clear: there is no sustainable tendency to have either surplus or shortage. • Prices are neither “good” nor “bad”. They are an objective reality. • The “right” price is the market price: the price at which the quantity supplied equals the quantity demanded. • Free people exercising their property rights, seeking their values in a moral framework, achieve the greatest value for the greatest number of people (A. Smith’s “invisible hand”). • The chances that a central planner could accurately determine the “right” price are virtually zero.

11. (4) Standard Of Living Depends On The Ability To Produce • Production must necessarily precede consumption. • Income is earned from production. • Factor payments exhaust the product (Say’s Law: Supply creates its own Demand). • In the aggregate, income equals production. • Therefore, to stimulate income you must stimulate production (supply-side economics).

12. (5) Trade Makes People Better Off • Misean Praxeology: People engage in free and voluntary trade because it maximizes their values. • Both parties are better off due to trade (the double “thank you”) • If this were not so, people would not trade. • Therefore, restricted trade makes people worse off. • Geographic or political boundaries between trading partners do not change this objective economic reality.

13. (6) Gross Domestic Product:Bogus Measure • GDP = C + I + G + NX • According to this formula, when government hires people to dig holes, then hires more people to fill them it, GDP has increased. • According to this formula, when government hires someone to sit at home and produce nothing, GDP has increased. • “Beware of accountants disguised as economists.”- Paul Prentice

14. (7) Government Has No Money • Before government can spend $1 dollar, it must first: • Tax it (take economic activity from one area and give to another). • Borrow it (take economic activity from the future). • Print it (devaluing all money). • Santa Claus; Easter Bunny; Tooth Fairy.

15. (8) Prices Rise When Government Prints Too Much Money • Inflation is not caused by higher prices. • Higher prices are a symptom, not a cause, of inflation. • “Inflation is too much money chasing too few goods.” – Milton Friedman • Therefore only government is responsible for inflation.

16. (9) Monetary Theory • Money is a medium of exchange (facilitates trade as the most liquid of all assets). • Accepted by all for legal payment of debt. • Money is a unit of account allowing people to make economic calculation (compare MB to MC of a given action). • Money is a store of value.