Rule Five Laws of Economics Friday

This recently in from the economics deep thinkers over at the Mises Institute:  Ten Fundamental Laws of Economics.  Excerpt:

In the midst of so many economic fallacies being repeatedly seemingly without end, it may be helpful to return to some of the most basic laws of economics. Here are ten of them that bear repeating again and again. 

1. Production precedes consumption

Although it is obvious that in order to consume something it must first exist, the idea to stimulate consumption in order to expand production is all around us. However, consumption goods do not just fall from the sky. They are at the end of a long chain of intertwined production processes called the “structure of production.” Even the production of an apparently simple item such as a pencil, for example, requires an intricate network of production processes that extend far back into time and run across countries and continents.

2. Consumption is the final goal of production

Consumption is the objective of economic activity, and production is its means. The advocates of full employment violate this obvious idea. Employment programs turn production itself into the objective. The valuation of consumption goods by the consumers determines the value of production goods. Current consumption results from the production process that extends to the past, yet the value of this production structure depends on the current state of valuation by the consumers and the expected future state. Therefore, the consumers are the final de facto owners of the production apparatus in a capitalist economy.

By all means read the whole thing.  Rule #3 re-states Heinlein’s TANSTAAFL, but #9 is my personal favorite:

9. Profit is the entrepreneurial bonus

In competitive capitalism, economic profit is the extra bonus that those businesses earn that fix allocative errors. In an evenly rotating economy with no change, there would be neither profit nor loss and all companies would earn the same rate of interest. In a growing economy, however, change takes place and anticipating changes is the source of economic profits. Business that does well in forecasting future demand earn high rates of profit and will grow, while those entrepreneurs who fail to anticipate the wants of the consumers will shrink and finally must shut down.

To that point:  The reason socialism fails, every time it’s tried (the number and enthusiasm of the socialist state’s Top Men notwithstanding) is the lack of a profit motive.  This is not so much a law of economics as it is a law of human behavior, but people will always work longer, harder and more creatively for personal gain than for any other reason.  I need only look in the mirror for an example; having been self-employed since 2003, I can tell you without qualification or reservation that I drive myself harder than any boss ever did.

There’s a word for this model of economics:  Liberty.  Not capitalism; ‘capitalism’ is a term invented by socialists to describe a system in which people are free to do what they please with their talents, resources, skills and wealth, without interference by government.

Will the incoming Trump Administration move us away from the past few decades of increasing government meddling in the economy?  It’s hard to say.  But it’s damnably certain that Her Imperial Majesty Hillary I would have certainly pushed us farther down the road towards the path Venezuela is on.