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February 23, 2006

Economic Psycho Babble
by Ed Bugos

Economists deal in principles that are universally valid for all time in the realm of human action; they deal in the apodictic laws and limitations governing cause and effect between man and the world around him; they deal in the reality of action. Science does not bend to the changing fashions of the day influencing the ethical doctrines, or to the malleability of empirical observation in the social sphere. It is value free (or "wertfrei" in German). The Austrian School's position on liberty is a utilitarian one; it is not based on the ethical arguments of John Locke. It is based on the idea that more economic freedom produces better conditions for the enjoyment of life than less economic freedom... that freedom and voluntary exchange is the best answer to the main economic problem as stated below - and not that it is a just or natural right.

That is not to say that the economists from the Austrian School do not subscribe to the natural rights doctrine; many of them believe, though, that science and truth itself is a means to ultimate justice.

According to the yet to be recognized father of economic science - Ludwig von Mises - the main economic problem facing society is similar to the one that individuals are faced with in organizing their lives: "...to employ the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed -- wasted -- for the attainment of a want less urgently felt" (Human Action).

Economist John Cochran adds: "The very nature of this economic problem is misstated in standard textbook presentations. The problem is not the allocation of known scarce resources to satisfy known wants of known consumers based on a known lowest cost method of production for each known good and/or service. These 'knowns' are not given, but are the elements that must and can only be discovered through a market process."

I say the same thing with regard to the concept of value - it is not static. It cannot be known (there is no intrinsic value in the real world). It is and must be discovered in the market, continuously.

It has little meaning otherwise, at least for economists.

[It is duly noted that Smith's influence on value theory means that many economists continue to separate the concept of "value in use" from the concept of "value in exchange," unfortunately; but the two concepts cannot be sundered anymore than the concepts of investment and saving.]

One area of policy impacted by this theoretical fallacy in the real world extends to the theory of competition, itself a process of discovery. Social engineers cannot comprehend the intricacies of these market processes, and thus they purport to know already what kind of results a competitive environment would, or should, bring about - the equilibrium rate of profit, prices and wages, the size of firms should be yay high and number so far, the most suitable methods of production... and so on, as if actual competition were but a destructive nuisance.

Consider the following quote by Ruth Holmes Cameron, a "Former Florida Teacher" that led a successful lawsuit against a federally chartered voucher system ostensibly aimed at increasing competition in the public schools:

"To say that competition is going to improve education... is just not gonna' work... you know, competition is not for children, it's not for human beings, it's not for public education... it never has been, it never will be" (from a segment on 20/20 that I clipped earlier this year)

Since when does competition not work for customers?

It might not work so well for the second rate producers (teachers in this case)!

So what does this have to do with gold, you ask? Everything. The biggest obstacles to the gold standard and, ironically, the fundamental drivers of gold bull markets, are ground in the public's attitude toward competition as well as its misunderstanding of the basic economic problem. The state basically fear-mongers people about the negative consequences of competition while offering them an illusory haven from it - thus we get public schools, central banks, large standing restless armies, poor quality (expensive) healthcare... you get the picture I hope.

Indeed, gold's biggest rival is the very banking CARTEL the Gold Antitrust Action Committee accuses of rigging the gold price through the late nineties. The point is that it is a cartel and legal tender monopoly, if you allow me to sunder the two concepts. And it is the centralization of banking that makes inflation possible in the first place:

"The real obstacle in the way of an unlimited extension of the issue of fiduciary media is not constituted by legislative restrictions of the note issue, which after all, only affects a certain kind of fiduciary medium, but the lack of a centralized world bank or of uniform procedure on the part of all credit-issuing banks" (Mises on Peel's Act - Chapter 20: pp. 411, Theory of Money and Credit).

Granted, a centralized world bank is a political quagmire, thank goodness. But the world is moving toward a "uniform procedure on the part of all credit-issuing banks" - see the Basel accords - and the B.I.S. is already considered the world's central bank by many uninformed economists. The bottom line is that like any monopoly, a fractional reserve banking cartel can only be hoisted upon the public by appealing to the state apparatus and the force of law in order to restrict competition in banking and money. Only force can help the producer attain a monopoly price. The corollary of all this is that free unregulated decentralized banking is the holy grail of sound and stable money... the ultimate solution to society's problems, or at least to one big problem: inflation.

But no one will believe it.

In truth it has never been tried, even in the US (see Rothbard's History of Banking - Rothbard's earlier writings presented evidence that free banking existed in Scotland prior to the 1850's, but he later retracted it). In one instance, the consumer determines the object and value of money (and credit); in the other instance, the producer (the cartel), having borrowed its power from the monopoly of monopolies, is sovereign in this matter.

So, you MUST accept your central bank notes as final payment for goods and services rendered, you CANNOT accept gold (in most cases) and you DO NOT determine interest rates. The net result is that these steps enable a central bank to control and coordinate expansions in the quantity of money that cause large variations in the value of money and the business cycle (boom-bust) which depletes real savings pools (capital decumulation) and redistributes wealth from the savers and fixed wage earners to speculators, bankers and the state.

Finally, the less competitive a given economy is, the harder it is for central bankers to hide their inflations.

There is no way to understand what I'm saying about gold unless you have some good economics. In this case it is merely important to understand that the current attitudes with respect to competition are LT bullish for gold.

I don't mean to sound like an expert in economics, I'm only a very (vested) interested student. However, it is painstakingly evident that most market participants would sooner make their appeal to the laws of physics and astrology than the laws of economics in the interpretation of, well, economic phenomenon... or concepts.

Edmond J. Bugos
GoldenBar.com

Ed Bugos is a former stockbroker, founder of GoldenBar.com, one of the original contributing editors to SafeHaven.com and former editor of the Gold & Options Trader. He continues to publish commentary on market and economic trends; and provides gold, economic and mining research to private clients worldwide.

The editor is not a registered advisory and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.