The Free Market Center
"What makes you so smart? Based on your comments, you seem to think you know everything about free markets and the economy. "
To the comment above, I respond, "No, I don't think I'm very smart. Thus, I have to rely on applying some very fundamental principles to test comments I hear and read."
I learned early on that I didn't have the brainpower to retain all knowledge about anything. I did, however, come to understand that the universe operates on a few fundamental principles. For example, there are only four forces in the universe: the strong atomic force, the weak atomic force, gravity, and electromagnetism. Another example, nearly all mechanical mechanisms operate on a variation of the principles of leverage. There are numerous other examples, but they all point out that although the universe is extremely complex, it is not that complicated.
When I encounter new knowledge, I have to test it by asking whether it conflicts with fundamental principles that I know. If a conflict exists, I ask to resolve it. If I don't understand what someone tells me, I attempt to discover the fundamental principles upon which the speaker bases their comments.
I try to rigorously apply this approach to any discussions about free markets in which I become involved. In this article, I will introduce the fundamental principles I apply to any subject related to free markets (or anything else for that matter.)
This article is simply an introduction. I will discuss these principles frequently and in more detail in my newsletters and blog posts. (The order of this list does not reflect relative importance. )
Always and everywhere, only individuals can provide the source and measure of economic value. When anyone suggests the existence of intrinsic economic value, they confuse the listener/reader. Nothing contains intrinsic or objective economic value.
Ludwig von Mises developed the action axiom, which, because of its logical soundness, provides a basis for understanding all activities in an economy.
Prices, wages, interest rates, etc., all represent dependent variables. They cannot be set or controlled unilaterally.
Politicians and commentators frequently commit the logical fallacy of saying that some entity can control or set these variables.
The prices that result from market exchanges provide only evidence of relative values. They never represent absolute values.
When market actors exchange dollars for goods, the only thing that somebody can say for certainty is that one party valued the goods more than the dollars, and the other party valued the dollars more than the goods. This fact makes the phrase "market value" somewhat misleading.
Goods used as money and the claims against those goods cannot simultaneously act as reserves and money. For example, when the country used gold as money, a person deposited gold in a bank in exchange for a banknote, and the gold no longer played the role of money. Only the banknote that represented a claim on that gold played the role of money while that claim was outstanding.
This principle helps a person understand why the Federal Reserve system, which only creates reserves, cannot also create money.
The supply and demand of money determine interest rates, not the other way around. The time preferences of individuals represent the only source of interest rates. Interest consists of a quantity of a good exchanged for a different quantity of the same good at some time in the future. Because of this relationship, the relative quantities of present and future goods exchanged determined the amount of interest.
The fact that the supply and demand for money determines the interest rate calls into question many people's contention about the timing of the increase in the quantity of money and the effect on future borrowing.
Markets consist of complex adaptive systems (i.e., living systems.) This fact calls into question any contention that mathematical models can be used to explain or predict aggregate behaviors in markets. Mathematical models cannot predict with any accuracy when people will fall in love.
In a free market, all production, at all levels, exists to satisfy the desires of consumers. Ludwig von Mises coined the phrase "consumer sovereignty". Although some people have a problem using this term because of the authoritarian implication, it still reflects the importance of consumers in markets.
One must always ask how this ultimately satisfies a consumer's needs.
By applying these fundamental principles, I can determine whether to question statements about the market are accurate or inaccurate, precise and clear, or misleading and confusing.
I encounter numerous descriptions of market economics. Some of these descriptions are downright erroneous, but the primarily sound explanations frequently violate one of these fundamental principles. My role with my newsletters and blogs is to help you identify errors and inconsistencies, not to provide you with an entirely new explanation that does not rely on fundamental principles.
Always ask, "How and Why?"
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