Sunday, November 16, 2008

The Scale of Economies part I

When people are confronted with the idea of a society devoid of government, they inevitably ask how the economy would work. How would people purchase goods and services? How would those goods and services be produced? How could people have faith in any monetary system which wasn't universal and monopolistic? How could competitive forms of currency be accepted consistently by varying businesses as means of exchange?

It's easy to understand how this kind of question can be raised. First of all, many people have little or no education in economics. I'm not saying they're stupid, or that their question is stupid. I'm just pointing out that they may have never been instructed in some basic ideas about markets, competition, and currency. Think back to your education. How many classes did you take in high school that dealt specifically with economics? What instruction did you receive, even in basic household economics such as budgeting, and balancing credit and debt? How many college courses were you required to take which addressed free market economics? What did they teach you in school about the gold standard, commodity based currencies, planned economies, supply and demand, or basic business structure?

Unless you chose a career in accounting or business, your formal education probably didn't include much about these topics. I know mine didn't. Even if you went into finance, you probably only learned a little about economic topics not directly related to your specific field of expertise. That's why I say it's easy to understand why people would ask these questions. For most people, their understanding of money, and it's role in their lives, is limited mostly to their day to day financial concerns. And that's what lies at the root of this question.

When people ask how an economy would work absent state oppression, they are asking a question which on its own may determine their position on voluntarism. What they are really asking, at its most basic, is will I survive. Will I be able to buy food? Will I be able to heat my home? Will I be able to even pay for shelter? Clothes? Much less other services such as education, transportation, and entertainment? What they are asking is, if the state disappeared, would I be able to survive, or would I die starving to death, alone and cold in the dark?

Fair question. Fortunately, the answer is that yes, you would survive. In fact, the quality of your life would improve dramatically. Freeing the monetary system from the currently established violent state monopoly would introduce more value, greater reliability, and more stability to all forms of currency. In a number of ways it would lead to both an improved quality of life for everyone, and a more efficient means of exchange, resulting in less waste and more purchasing power.

I've already established that our currency is worthless. It's backed by nothing, accepted in trade only because of the threat of violence, and has actually lost the vast majority of its theoretical value since its inception. In addition, the government has gone to great lengths to stamp out any perceived attempt by private individuals or groups to set up a competing form of currency. They have also attempted to teach in their government schools that un(state)regulated forms of currency and banking lead to chaos and suffering.

But the reality is actually quite different. Free banking, or systems of private currency and banking, benefit from the positive effect of competition which exists in any market system. In fact, an objective look at the history of free banking, will show you that while the systems were effective, it was repeatedly government intervention in the market system which led to bank and currency failures. When the government put laws in place which gave banks legal protection to change interest rates in violation of their customer contracts, they did so. Many of the concerns raised by people new to the idea of competitive currencies, such as would competing banks accept each other's currencies, have in fact already been encountered and addressed successfully.

But before we get too far ahead of ourselves, we must establish what it is that makes money uniquely important, and what features and benefits we would want to see in our currency. Remember, features are something a product does, and benefits are something a product does for you. Since under a free market system of banking and currency money would be bought and sold and subject to the same forces as any other good or service, providers would have to cater to us, the customers. So as a customer, what would I demand in order for them to secure my patronage?

Well, the value of money is that I can use it as an agreed upon basic unit of exchange to enter into commerce with a wide variety of individuals, offering a variety of goods. Instead of only trading the chickens I raise on my farm for everything I need, I can simply trade those chickens for units of currency and then trade those units of currency for the things I need. That way, I'm not prevented from acquiring milk just because the dairy farmer is a vegetarian.

So, understanding the importance and role of money, I would want money which was easily portable, widely accepted, held its value over time, and could be exchanged on demand for real asset. Not everyone will have the same criteria for their currency, and so competing currencies will inevitably arise. Some may wish their currency to be environmentally friendly. Some might wish it to be aesthetically pleasing. Some might wish it to be backed by specific industries or accepted internationally. Ultimately, it isn't important. Where there is a demand for a service, the market will meet it.

What we need to do is examine some ways that demand could be met, and how the consumer could protect himself from fluctuations in the marketplace. While opponents of free banking and alternative currencies will always resort to scare tactics and appeals to emotion, we must instead appeal to our rational selves, and seek the truth of these matters.

Please allow me to present you with my two cents worth.

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