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All knowledge is hierarchical, which means we learn in layers, and each layer is built on what went before it.  You have to learn the letters of the alphabet before you can grasp how they go together to make words, and you have to master the concept of words before you can formulate sentences.  The same principle is true of economics or financial literacy.  You have to master basic concepts before you can move on to more complex, higher intellectual planes.  So let’s take a few baby steps here, and make sure everyone has a grasp of the fundamentals.

 But before we begin, once again let’s deal with the issue of Why bother?  Economics is generally considered to be the dismal science, and even the briefest mention of the subject causes the eyes of most people to glaze over in disinterest.  Paradoxically, let them lack for money and they will riot in the streets, kill each other, and overthrow governments.  We are so accustomed to technological progress, and we have become so certain of its inevitability that we become intellectually lazy and expect things to happen today and tomorrow as they did yesterday.  We do not want to trouble our pretty little heads or interrupt our texting, youtubing, or endless chatter on social media to really learn what causes an economic chain of events.  So we blithely throw around terms such as money, markets, investing, supply and demand, or wealth without any comprehension of what those terms mean. 

We tell others we have a position on matters, such as ‘we are for free markets’ or we are ‘against bailouts’ without realizing that we are using labels as a substitute for thinking.  I do not write to tell you what you should think, or what positions you should adopt, or what conclusions you should draw.  I write to give you the tools with which to analyze and make your own judgments.  And I AM here to tell you that when the crowd is going North, you almost always want to look South.  But it takes more effort and learning to be an effective and intelligent contrarian.  Taking an opposition viewpoint without solid information is as ignorant as traveling with the herd and rivals adolescent behavior for conformity.

I have written repeatedly that money is NOT the same thing as wealth, and yet folks still don’t get it.  If you asked most anyone on the street, if they had one wish, what would it be, the answer for most would probably be “More money.”  They are equating money with wealth, and that is totally wrong.  As a matter of fact, if you make that mistake in your mind, you are going to make a lot of financial mistakes because of it.  Once again, money has no value in, and of, itself.  Money is a symbol, and it draws its value from what it symbolizes.  Money represents the use of the human mind to create value. 

What is value?  Something people will act upon to gain or keep.  If you value your car, you will change the oil and maintain proper air pressure in the tires.  If you value your house, you will mow the lawn.  If you value your spouse, you will show a sustained interest in him/her.  Value means there is a valuer.  Value is not an abstract concept; it implies there is someone who is doing the valuing. To value implies action.  Therefore different people will value things differently.  In any given society, people trade values, and they use some form of money as the medium of exchange.  There is no absolute, intrinsic, abstract value to anything.  The value is assigned by the person doing the valuing. 

A powerful speedboat may be worth $75,000 to you and of no value to me whatsoever.  For you, the speedboat may serve as a totem of your financial success, or it may help you attract the beautiful chicks.  For someone like me, who maybe has violent motion sickness, can’t swim, and is happily married, such a boat would represent a needless expense and headache to maintain.  So if I won the speedboat in a sweepstakes, its only value to me would be to trade it with someone for something else.  If we did that, we would, again, use money as the medium of exchange.  For me, money permitted me to exchange an asset, my speedboat, for someone else’s asset, and the transaction was made possible by our mutual acceptance of a currency. 

All assets are created, or enhanced, by the creative use of the human mind.  The asset itself is wealth, not the money you paid for it.  The money you paid for the asset is the numerical value you attached to that asset.  The production of that asset required raw materials, tools, a place to manufacture it, and people to perform the specialized functions to make it all happen.  Every single person involved was trading with everyone else, and in every case, the medium of exchange was some form of currency, or money.  The system of exchange only worked because everyone involved accepted the currency at the same face value.

Because people do not understand money, they are quite flippant about taking someone else’s money or about dictating to them how to dispose of it.  Because money represents the use of your strength, time, mind, and other resources to create something trade-able with others, your product, or what you trade, is your private property.  If you were a part of a team effort, which is most often the case, your particular contribution is also valued in currency, or money, in the form of a wage.  A wage is nothing more than a price for your labor.  The higher your skill level, or the rarer your particular knowledge, or even the value of who you know, the higher price you will be able to command in free trade with others.  To help you grasp this concept, remember that there would be no such thing as employers and employees were it not for government wanting employers to be their tax collectors and bookkeepers.  This is not a job employers ask for, nor do they get paid for it, but if they refuse to do it they go to jail.  If they had not been conscripted for compulsory bookkeeping service, employers and employees would be contracting with each other, and there would be no “class” issues or grave power issues.  They would be buying and selling to each other.  It is interesting to note that the IRS has detailed laws to make sure no one is illegally “contracting” with someone who “should” be labeled an employee, thereby shorting the tax man.

 Those who insist that there is a “fair” price to any form of human labor do not understand money or value.  Again, value is not intrinsic.  God doesn’t send down prices from heaven, but some think society should send them up from the bottom.  What creates the value of what you produce?  A valuer, also known as a Buyer.  A Buyer is someone who is going to take his own money (which represents the value of his creative effort trading with others) and exchange it with you for some service you will perform at your Buyer’s request.  The price will be determined between the two of you, and you will both have to come to an agreement on a number, and the medium of exchange will again, be currency, or money.  If you cannot come to an agreement, no exchange of values will take place.  Each of you will continue to seek other trading partners with whom you can exchange at a value more to your liking.  Who knows, at the end of the day you might come back together and make the deal of the morning work, because neither of you has been able to get the price you wanted.  Since you are both free to dispose of your effort, how can anyone say it was unfair?  To say one or the other should  have gotten a higher price is to deny the whole concept of value; that value is not assigned by some elite Know-it-All, but by Buyers.  And folks, some stuff never gets bought because there are no buyers at an asked-for price.  This is called the market, and the market can be humbling.  I may delude myself that I am a terrific writer, and I may further delude myself that I have just completed the next Nobel Prize for Literature.  When my novel bombs commercially, I may console myself by stating that the market obviously doesn’t appreciate true literature and good taste (which of course may be true), but the fact remains that I am going to be poor because good, bad, or indifferent, the valuers in my marketplace didn’t value my book enough to open their wallets and hand over their money in exchange for it.

Now in my example, the critics may differ from the public at large, and may give my book high praise.  As a matter of fact, I may actually win the Nobel Prize for Literature, but I am still very unhappy because once the prize money is gone, there is no ongoing commercial value to my book because the public ignorantly, and stubbornly, still refuses to buy it.  If my book is for sale for $30, and a bricklayer makes that same amount of money for one hour of masonry work, he may decide that a competing value would be more to his taste, perhaps a DVD of a new movie he wants to watch.  So he will trade his product (completed masonry work) for his movie instead of my literary masterpiece.

In a free market, there are always lots and lots of people unhappy with how well, or more likely, how poorly, they are trading.  They insist that there are intrinsic values that a market does not recognize; they believe in a value without a valuer.  Actually, what they believe in is not a free market, where everyone makes their own choices about their money (the symbol of what they worked to produce and trade).  Rather, they believe in forced trade, by coercion.  They don’t believe that what people earn really belongs to them; they subscribe to a form of altruism that in actual practice becomes slavery; they believe that what each earns according to their ability, belongs to others, according to their need.  In fact, everyone has become a slave to everyone else.  They therefore subscribe to a control economy where a group of Know-it-Alls can dictate value for everyone, and the result is price fixing.   So if I cannot sell my artistic product satisfactorily on the open market, because no one is particularly interested, or at least not at my price, the superior valuers can subsidize me through the National Endowment for the Arts.  This is using your money, taken by coercion, to pay me what you wouldn’t of your own free will.  Apparently only the superior valuers were able to identify the intrinsic value of my opus.  It was necessary to override the obvious poor taste of the bricklayer in the free market who wanted to watch a movie instead of buying my classic.

Price fixing, dear Reader, is all around you; you just don’t know it.  Minimum wage, for example, is a form of price fixing.  A wage is a price, and the government sets a price floor below which no trading for labor may take place.  Now obviously, this is not the same as a free market choice, because the price floor is only set because some folks, both Sellers and Buyers, absent the government’s involvement, would willingly trade below that price level in a free market.  The person selling their labor and skills in this transaction is the Seller, and the person acquiring their services and skills is the Buyer.  Why would anyone disagree with two people who voluntarily came to a trade agreement and price?  Only if they believed there was an intrinsic value that the free market would not recognize.  So government coercion is used to mandate a higher-than-market price.  If it weren’t higher than market, at least in some geographic areas, there would be no point to the legislation.  Interestingly, whenever you hear minimum wage legislation debated in Congress, you never hear the debate framed in moral terms, that it is price fixing, applying coercion to what otherwise would have been a free market transaction.  No, the debate is always limited to whether or not minimum wage legislation creates higher unemployment, jobs reduction, layoffs, etc.  What everyone is overlooking is that some people, the elite Know-it-Alls, believe they have a superior capacity to determine value than the individuals doing the trading.  And in so deciding, they have also de facto declared that the product of your time, energy, skills, and mind, are not your personal property to trade as you see fit, but subject to their superior valuing skills.  This is a control economy.

Another and very current example of government involvement in “free” markets is the issue of health care.  Legislation presently on the table for consideration will fix prices of services and some service providers.  As with the partially nationalized banking sector and automotive sector, the government will establish the permissible compensation of health care providers.  The first issue is, and the one most ignored, of course, Is health care a moral right, and on what basis?  Read Professor David Kelley’s answer here:  For more information on the disinformation we are being fed on the subject, read Health Care Mythology by Clifford Asness, founding principal of AQR Capital Management here:  And finally, since the argument for government mandated health care is based on it being a survival issue, that begs the question of how is health care different from, say, food production, which is also a survival issue?  Should the government also fix the price of bread?  Or does it already?  Read an excellent response from Bradley Doucet here:

Those who favor a control economy always see themselves as the elite valuers, or at least being prominent or influential in determining the final result.  They pride themselves in creating social justice, and their vehicle for fixing the world is your earnings.  They do not see your earnings as your property, to dispose of as you see fit, but rather as public, or community property, to be disposed of by the community, as vested in them, the valuers.  There are quite literally thousands and thousands of manifestations of this throughout our economy, which is known as a Mixed Economy.  It is halfway between capitalism and socialism, or as the Republicans dubbed it recently, compassionate capitalism.  I guess that equates with a compassionate plantation owner who is well intentioned towards his poor, ignorant slaves.  The Big Boss in the big, white, plantation house knows best for all of us.

Every control decision has unintended consequences, because there is no way to predict accurately how the herd will react, or what will stampede them in this direction or that direction.  Predicting human behavior is a lot like predicting the weather; there are too many variables to get very accurate about it.  In a free economy, you don’t have the burden of predicting; you simply allow people to trade on a voluntary basis and things take their course.  Control is not an issue.  On the other hand, in a control economy, every control requires even more controls.  Combine that with the fact that in a control economy, every decision becomes a political decision, every decision becomes subjected to competing gang warfare among the special interests, all of whom are being paid to obtain and/or peddle influence.

It is extremely difficult to create and preserve wealth when a substantial part of all your earnings are expropriated in the interests of social tinkering.  Wealth is created when money is re-invested in additional assets, aka land, manufacturing plants, machinery, R&D, skilled labor to produce further earnings.  It is this reinvestment of earnings, through money as the medium of exchange, that results in productivity growth, or higher Gross Domestic Product (GDP).  Only an increase in real GDP results in wealth.  Wealth is wealth; there are assets at work that produce an excess over expenses that are reinvested over and over again, that lift a society out of poverty.  No society in the history of the world has ever taxed its way to prosperity.  Some borrowing, and therefore credit, contributes to the growth of GDP:  borrowing for further investment.  Borrowing for consumption is digging a hole with a shovel.  When governments borrow heavily, as the United States government has been doing, they destroy wealth, because the government is now competing with all business for the limited supply of credit available; the more the government sucks up (by offering higher rates), the more expensive commercial credit becomes (or it becomes unavailable altogether).  That drives up the cost of doing business, reduces capital investment in business, and halts the growth of GDP in its tracks.  Printing money is not the same as creating wealth.  The problem with printing money is that it confuses money with wealth.  Wealth is investment in assets that create new and further wealth.  Sucking credit out of the economy by borrowing so much that government is now competing with business for available capital, and politicizing business decisions, is not a road to financial responsibility, and recovery; business quickly focus on political connections rather than efficiencies and higher productivity.  After all, at the end of the day, it will be government that will decide who gets to survive and who won’t.

Sometimes because of a government’s actions, the public loses all confidence in the currency of the country.  The currency in effect becomes worthless, quite literally not worth the paper it is written on.  In time this could be the price the United States will pay for its present political decisions.  We’ll see.  When governments succeed in destroying their currency because of ill-fated attempts at social engineering through a control economy, they usually see their only means of correcting their mess to be, of course, further controls.  In its final stages this often involves physical repression, incarceration, labor camps, torture and death.  Some countries, such as France, during their Revolution, declared that anyone who refused to conduct trade using the worthless currency of the day was to be subject to the death penalty!  I have always found it ironic that the motto of their Revolution, that culminated in the Reign of Terror with the tumbrels carrying many thousands to their death at the public guillotine, was none other than the eloquent “Liberty, Equality, Fraternity”.  No one seemed to realize that the first two were mutually exclusive; that everyone cannot be free, and still achieve equal results.  We are equal in our title to individual rights, but unequal in everything else.  Their experiment in social engineering led to the inevitable bloodbath that has been the hallmark of every experiment at State control.  But still we persist.  Surely we will get it right the next time!???

As always, thanks for visiting.  Subscribe on the right side of this page (FREE)  and become financially literate!  John Bechtel