blog | 10 febrero, 2012

Economics and wealth

ILE

Professor Mark Skousen in his book “Economic Logic” defines economics as the study of how people improve their standard of living through the creation of wealth. This modern, realistic and suitable concept displaces other pointing to the economy as a resource allocation, holding economists thought arrogant.

In the past, who brought this mistaken idea ran from the government central planning of the economy that caused lack of economic freedom, increased poverty, social exclusion and injustice. With this new concept, the economy is limited to studying the economic development of the population, and assesses and analyzes the application of economic laws to make the system convenient and economic policies do not fail.

Another aspect of this new concept is the unit of analysis. People individually analyze the behavior by which people act to survive and achieve their goals. Only human action may enable the economy, so that everything produced, invested, consumed, exported and imported is motivated by this factor. Therefore, those wishing to better understand the economics are advised to be aware of the principle of causality, which will be discussed later.

As the standard of life it is given according to their components such as: quality, quantity and variety. People are given the label of poor when it has none of these three elements. On the other hand is not enough that people have goods and services, most importantly, these are quality in order to raise their quality of life. Another basic condition is the variety of products and services, for instance, the alternative of choice.

Finally, what is wealth? In this new concept of economic wealth are all goods and services. And why are called goods to products that meet the needs?. They are so called because they generate comfort to people and improve their standard of living. To the extent that people have more goods and services will be richer in material terms, psychological and even spiritual.

Therefore, it must be given the importance it deserves the employer, meaning the person «who discovers profit opportunities that others have not noticed, and acts accordingly to take advantage.» This concept comes from two eminent economists Israel M. Kirzner and Jesus Huerta de Soto, representatives of the Austrian School of Economics, a school of thought that promotes and defends economic freedom and entrepreneurship.

Having considered the definition of economy and stressed the importance of wealth as the natural effect of human action, we must explain how causal reasoning.

Everything we see around us: objects, machinery, buildings, food, clothing, education, services are products of creative action business. The human being is creative and productive and what it does not by chance but because of the causality of human action, which is the phenomenon by which relate causes with effects. The hard part is to establish cause and effect relationships from front to back so we can appreciate the different human actions that have been part of this complex reality of the commercial division of labor that Adam Smith noted over 200 years ago in his treatise «The Wealth of Nations «.

Consequently, none of the processed products could be sooner if they had not been for the business process of wealth creation. Therefore, if there is no corporate action creating wealth. For instance, a factor causing the other’s existence.

The right environment for business process

Economy operates on the insubstantial. Economic actions of individuals operating in an environment that ensures the production of wealth to sustain their lives. If there is no minimum guarantee of protection for entrepreneurs, failed to realize these goods or services.

In this context there is need for an entity that protects the right to life, liberty and private property and this is called Government. The famous economist Murray Rothbard in his book “Power and Market” considered the governmental agency that monopolizes the legal use of violence to protect the freedoms. However, if the state is exceeded in this way, causes serious damage to the commercial tissue causing poverty, unemployment, inflation, bankruptcies, changes in exchange rates, all due to abuse of its mechanisms and instruments to intervene in the economy.

Poverty is defined as the absence of wealth and there are two reasons why people are poor. The first is the impediment of an external entity (government) and the second by choice of people. In both cases, it is inevitable poverty. As for the latter is unusual, because it’s the same people who do not aspire to create wealth. So common is it realistic to consider that the external factor is the predominant or government to be a predator of the produce and thus causing this misfortune.

Although it is rarely used in current approaches on the economy, in my opinion, the law is the instrument by which the state intervenes to impoverish. With the legality controls, regulates plans, supervises, and implements interventions in the free actions of individuals, preventing them to achieve their goal of being prosperous. As pointed out by political scientist Alberto Mansueti in his book out, is the legislative hyperinflation that produces hipe inflation of poverty.

The laws of nature and man

Since, we identified the government as the cause of the massive destruction of wealth, we must know its main instrument negative for the business economy: positive law.

Nobody can deny that the free market economy is self-regulating with its natural laws. These laws were not created by humans either intentionally but arose from the interaction itself, for instance, spontaneously, as Hayek says in his book “The Fatal Conceit”. We refer to the laws: supply, demand, opportunity cost, time preference, non-discrimination, incentives, minimum waste, economy of scale, diminishing returns, marginal productivity, marginal utility derived demand, profit and loss budget constraint, substitution effect, effect of competition, accountability among others.

You cannot modify or abolish these principles. If we try to do this would cause damage, inconvenience and discomfort. This found that when a government seeks to control prices, for example, imposing a minimum wage, the effect it creates is rising unemployment and cost of production or when decreed wage increases threatens the job security of thousands of workers and pushes to micro and small enterprises to the informal sector because otherwise disappear from the market

The natural laws of economics have one purpose: to guide individuals to perform acts that are successful production. If you follow these laws you have ensured business success by creating wealth.

When we pointed out that the only purpose of existence of government is to protect the right to life, liberty and public and private property, it is understood that it must enact rules that prevent human conduct can come to peaceful acts and cooperative. It should be noted that any government regulation has its coercive and coercive as natural law.

Government laws should not only protect those acts cooperative economic market but also to punish those who violate aggressive and violent economic order. With violence there can be productivity, let alone the business may occur if they violate their rights to liberty and private property.

The coercive and coercive part of natural law is a threat to the economic meltdown that deliberately inflicts the decision maker. Failure to follow the economic laws, failure is a fact. The fear of frustration prevents you violate these rules. There is no government bureaucracy to monitor and punish the breach of an economic law. In terms of positive law this government has a cost because it requires more bureaucracy to prevent and control predators. If we were respectful of the moral law would have a minimal presence of government, therefore we would assume a lesser extent the cost.

The market order needs of economic laws to operate the exchange. The market is a complex network where individuals in their roles as consumers, producers, investors, exporters, importers and savers exchange values. In that environment works well self-regulation does not need more laws of nature. This complex commercial network is largely independent of political society which has its own market. Economists at the Public Choice School have identified different incentives where human actions in this market have negative sum (zero sum).

When political society superimposes its positive laws on the market two things can happen: 1) government regulations match the economic and 2) government regulations impede the proper functioning of the economy.

In the first case the effects are: increased wealth, savings, investment, employment, income, exports, imports, this due to the economic laws have not been interfered with but rather protected by artificial rules of government. It means that it has not been forcibly entered the merchant network, making it possible that human actions have deployed their full economic potential within the framework of respect for freedom and private property.

However, when the laws penetrate the commercial network violently, economic laws are affected and do not fulfill their function of guiding human actions. This displays all perverse distortive economic coordination creating unnatural phenomena as informality, unemployment, low income, low savings, low consumption, low production, low investment, dishonesty, corruption and pollution which would prevent the government if not legislate on economic .

It should be mentioned that the government as an entity legal monopoly on the use of violence can be legitimate acts in defense of life, liberty and private property. The mission of government is to protect the citizen and not interfere in economic matters that are private in nature. While human actions are peaceful, cooperative and there is no economic reason for government intervention, may do so only when life, property and personal freedom are endangered by the actions of others.

They are illegitimate because their actions beyond the limits of protection and enters the surgery. It interferes when there are not cases of deception, fraud, robbery or kidnapping. It is unfair, because all governmental intrusion is violent and causes damage to the economic fabric, which is counter to the very essence of government. So what is the real work of government in the economy? Course, is to ensure that every individual can exercise their freedom without harming others with their economic activities, activity peaceful principles.

Por Jose Luis Tapia is ILE’s General Director, economist and university professor.

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