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Q: What is economics?
A: Economics is human action in the field of buying and selling services and products.

Q: What is law?
A: Law is a rule, a useful description that has some predictive value.

Q: What is economic law?
A: Economic law concerns human action as it relates to the buying and selling of services and products.

Q: Is economic law a science?
A: Yes. But, since it concerns human action, it is not a physical science.

Q: How do economic laws differ from the laws of physical science?
A: In the sense that both may be defined as useful descriptions they are exactly the same.

Q: What do you mean by a useful description?
A: Useful in the sense that they have some predictive value.

Q: Do economic laws have less predictive value than the laws of physical science?
A: Economic laws have just as much predictive value as the laws of any other science.

Q: Why then is economics not generally taught as a science?
A: There are two reasons. 1. It is not possible to measure much having to do with human action as precisely as matters having to do with physical objects. 2. Economic discourse has been perverted for political purposes.

Q: In what way has economics been perverted by politics?
A: In much the same way that religion was used during the middle ages to sanctify central authority, economics has been used to justify state intervention in the free market. The theory of the divine right of kings has been replaced by the state's promotions of general welfare.

Q: Why is it not possible to measure human action as precisely as matters having to do with physical objects?
A: To the extent that a person does something it is possible to measure that action. We can, for instance, measure whether a person buys or does not buy something at a particular price and at a particular time.

Q: So what is the problem?
A: To the extent that economic laws are based on what one person does at a particular time at a particular place there is no problem. The problem arises when that action is used to predict a different person's action or the same person's action at a different place or time.

Q: Why is this a problem of measurement?
A: The problem has to do with measuring value. We may know that John paid two dollars for a glass of Coke in New York City on January 1, 2007 but that only means that John valued the Coke at that place and at that time more than he valued the two dollars.

Q: Are all economic valuations then subjective?
A: Yes. We can report the fact of a price paid or of prices paid as for instance in reporting a market value. We can not measure the value any one person, much less a group of persons, places on, for instance, a glass of Coke except to say, in this instance John, in New York City, on January 1, 2007, valued it more than 2 dollars. We can only know ordinal values: the Coke first and the 2 dollars second.

Q: Does not this make the study of economic laws of little value?
A: No. Every science has its limitations. You would not, for instance, be well advised to use the laws of gravity to explain electricity or the economic effects of the concentration of state monopolies.

Q: What is required in order to postulate or discover economic laws or useful descriptions that have predictive value in the exchange of services and products?
A: An understanding that all individual action is the product of a choice between subjective valuations of competing alternatives. There is however a very important limitation. Since it is impossible to measure the amount of a subjective value or the distance between subjective values, it is impossible to accurately add, subract, multiply or divide numerical value as they relate to economic activity.

Q: Why do economists use all sorts of statistical data to measure and predict the money supply, business cycles, interest rates, GDP etc?
A: Most economists are in the service of special interests to justify some intervention into the free market for the benefit of a special interest group or central authority. They need the illusion of certainty. Statistics are used to both obfuscate and justify. They are useful tools of political manipulation. They are not very useful in explaining or predicting because all value is the product of an individual subjective judgment that by it nature can not be measured except with ordinal numbers.

Q: If it is true that economics is used for political purposes to manipulate, then perhaps I should not waste my time in studying economics?
A: Any science can be misused. Economics is not the only science that has been used for political purposes. Global warming is another example. Just because some persons have a political agenda with regard to global warming does not mean we should all abandon the study of weather.

Q: How can I know the truth? How can I know that I am being misinformed concerning economic maters?
A: A thing can not at the same time both be and not be. If all value is subjective, then it is not true that value is dependent upon labor or capital invested or material input. If it is true that subjective values can not be accurately measured except by ordinal numbers then all projections based on adding subtracting, multiplying or dividing are inherently unreliable and must likely a lie. If however the prediction is based on individual subjective value judgments of current or future market participants then there is a basis to consider that the analysis may have some value. That is not to say that a prediction will come true but only that it has a sound grounding.

Q: I want to learn economics. I want to learn useful descriptions that have predictive value concerning the exchange of goods and services. I want to learn how to apply economic laws to predict human behavior to my personal economic well being. I want to become wealthy. What should I do?
A: To start, let us confine the discussion to economic laws. Becoming wealthy requires application and that involves a much broader scope of inquiry including personality traits and ethics.

Q: Will you also discuss the broader question concerning how I could use an understanding of economic laws to become wealthy later?
A: Yes, but only if you pass the ethics tests.

Q: Ethics tests? I do not understand.
A: You will, later.

Q: Ok, I will wait. Let’s start with economic laws. Where is the beginning?
A: For man, in the buying and selling of goods and services, the beginning is a subjective valuation concerning various alternatives. We know this to be true from both observations and introspection. If you wish to dispute this first premise, please say so.

Q: What do we call these subjective valuations of alternatives?
A: Let’s call it a value scale. The first premise is that all value is subjective. The second premise is that persons prioritize their values. So, for instance, as between three alternatives, there would be a first, second and third ordinal valuation. We know this to be true from both observations and introspection.

Q: But people make mistakes all of the time. They do things that are bad for them. How can you be sure that they have correctly prioritized their values?
A: By the objective criteria of what is done. If a person only has 150 cents and is offered a Coke, orange juice or coffee each for 150 cents and he buys the Coke then that proves that, as between these three alternatives, he valued the Coke as number one. It is irrelevant that one minute later he regrets his choice and wishes that he had bought the coffee. Subjective valuations may change by the second and do not require any logical foundation or agreement with any one. The only way we have of knowing what they are is by recording individual conduct and that is an objectively measurable criteria.

Q: What is the third economic law?
A: That the only way we have of measuring anything on an individual’s value scale is by recording what a person buys or sells at a particular time and place and therefore the value scale information will be incomplete to the extent that any item on the scale is not bought or sold everywhere and at all times.

Q: Can you summarize the first three laws?
A: Yes.
1. All value is subjective.
2. Persons prioritize their values.
3. The measurement of any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.

Q: How is this a science?
A: Economics can be a science if we apply the scientific method to its study. The conclusions we derive from our study of economics will be valid and true if we start with premises that are true and then correctly apply the laws of logic.

Q: Can controlled experiments be used in economics?
A: Controlled experiments are problematic because of the problem of measurement of value. If the science of economics is based on the measurements of overt human actions and limited to expression in ordinal numbers then the science of economics will be no less scentific then any physical science.

Q: Why is it that economists make so many errors in predicting the future?
A: All science has its limits. A major error is extending economic laws beyond the boundaries of its own limits. Remember: all value is subjective; impossible to measure exactly; different for different persons and subject to change over time.

Q: Professor Paul A. Samuelson, in the 1975 introductions to his, at that time, most widely used college economic textbook wrote that the USSR’s superior central planning system would result in the USSR’s GDP overtaking the USA’s GDP before the end of the 20th century. Mr. Samuelson had received the Nobel Prize for economics. Why was this Nobel laureate so wrong?
A: First, I would like to correct a common error: there is no Nobel Prize for economics. Mr. Nobel did not provide for such a prize in his testament. The economic prize is awarded by a committee of the Swedish parliament associated with administering the testament of Mr. Nobel and is funded by Sweden’s taxpayers money, not Mr. Nobel’s testament. It is called: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It is politically funded and controlled. The politicians have sought to control public perceptions concerning economic policy by attaching themselves to the prestige of Mr. Nobel’s testament. The politicians have misused the prestige of the Nobel Prize to promote their own interventionist socialist economic policies. Mr. Samuelson was awarded the prestige of the “Nobel” prize because he served the political interests of the persons who controlled the awarding of that prize. Mr. Samuelson called himself "a 'modern' economist... in the right wing of the Democratic New Deal economists." See: nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html.

Q: So, you are telling me that I can not rely upon the predictions of a recognized authority?
A: Yes. And, moreover, I am telling you that the institutions that sanctify what is authority in matters of economics have been corrupted by the political process.

Q: Can you prove this to me using the three fundamental economic laws?
A: I will try.

Q: Please proceed.
A: Ok. Let us start with the first principal of logic or mathematics: a thing can not at the same time both be and not be. Either a centrally planned socialist economy, the USSR, is superior, in that it results in a larger GDP, or it is not superior in that it does not result in a larger GDP, then a free market system, the USA, produced over a period of time from 1975 to 2000.

Q: Are there two sides to this argument?
A: Yes. Mr. Samuelson maintained that the central planning socialist model was superior to the disorganized free market. Professors Ludwig von Mises and Muray Rothbard maintained that the central planning socialist model was doomed to failure. See: www.mises.org/ Socialist planners could not rationally compute because:
1. All value is subjective.
2. Persons prioritize their values.
3. The measurement of any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.

Q: That much you set down as the three fundamental economic laws. Are you now going to postulate a fourth economic law or clarify or apply one of the three already discussed?
A: I will now try to extend the third economic law, clarify it and apply it.

Q: Remind me again. What was the third economic law?
A: The measurement of any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.

Q: Are there any additional facts you need to establish in order to proceed?
A: Yes. Free market pricing signals provide reliable indications of value that business persons could rely upon to make decisions concerning what, when, where and in what quantity to produce goods and services. Mr. Mises and Mr. Rothbard maintained that the “disorganized” free market pricing mechanism was the essential organizing factor around which rational decision making could be organized because it is the only way that values can be measured in useable units of information. Without this free market pricing information the socialist central planner could not make any rational decision concerning what, when, where and in what quantity to produce goods and services.

Q: So, what does that prove?
A: The events from 1975 to 2000 seem to have proved that Mr. Samuelson was in error and the Mr. Mises and Mr. Rothbard were correct.

Q: What do you mean?
A: That the USSR did not economically over take the USA is an undisputed fact. This was in part because socialist central planners were unable to make rational economic decisions. They lacked reliable information concerning values. That much should not be open to serious dispute. The record of USSR error in economic calculations is available to anyone who has bothered to look at the results in plain view.

Q: I agree that no one can seriously argue to the contrary. But, what does this mean for the science of economics?
A: The history of the USSR’s economic collapse, the results of central planning in Cuba and North Korea and all of recorded economic history support the premise that the only practical way to get useful information concerning the value of goods and services is by recording the price at which they are bought and sold in a free market. So, in the application rule #3: the ability to measure any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity; we may add that if we want the information to be timely and accurate (useful) then it must be freely available and not be the product of a coercion (it must be the product of a free market). If it is coerced, it is likely to be inaccurate and untimely. Only in a free market will the information be readily available as price signals freely made by consenting participants.

Q: Ok, so let me see if I understand this correctly. It is only through the free choice of, in the case of a national economy, millions of economic players that the price information that they provide by their buying and selling activity provides useful practical information concerning value. Without this accurate value information it is impossible to make any rational decision concerning what, when, where and how much to produce. It would seem axiomatic to me that without knowing how much it will cost you to produce something and how much it is worth when it is produced that you could not know if you have added or subtracted value by the proposed economic activity. It would also seem axiomatic that adding value is rational and subtracting value is irrational. That is, if the goal is to increase economic well being, it is necessary to know the value of what will result from the adoption of any project and that can not be rationally planned for if you do not have accurate information concerning the value of goods and services... How could any rational human being argue to the contrary?
A: Mr. Samuelson did argue to the contrary.

Q: How do you explain Mr. Samuelson’s error?
A: Let me try to do so by further elaborating on the corrupting influence politics can have on economic discussion.

Q: Please continue.
A: The institutions that sanctify what is authority in matters of economics have been corrupted by politics.

Q: How have you proved that?
A: There are two possible and mutually exclusive explanations for Mr. Samuelson’s error:
1. He was not intelligent enough to discern the truth; or,
2. He was intelligent enough to discern the truth but chose to write a falsehood.

Q: Where are you going with this?
A: You have stated that “It would seem axiomatic to me that without knowing how much it will cost you to produce something and or how much it is worth when it is produced that you could not know if you have added or subtracted value by the proposed economic activity. It would also seem axiomatic that adding value is rational and subtracting value is irrational. That is, if the goal is to increase economic well being, it is necessary to know the value of what will result from the adoption of any project and that can not be rationally planned for if you do not have accurate information concerning the value of goods and services... How could any rational human being argue to the contrary?”

Q: I think I know now where you are headed. Are you saying I conceded the point?
A: It seems to me that for the purposes of this conversation you have conceded the proposition that a person of normal intelligence would understand that a free market is essential to knowing what the value of goods and services are and therefore essential to rational economic planning. Without rational economic planning the USSR could not overtake the USA economically. Therefore, it follows that there are two possibilities: Mr. Samuelson was not intelligent enough to discern the truth or was in the service of some political group as a propagandist.

Q: Was there anyone who ever thought that Mr. Samuelson was not smart?
A: I exclude the possibility that Mr. Samuelsom is a dummy. Socialism was doomed to failure from it’s’ inception. It contained the seeds of its own destruction. Mr. Samuelson is an intelligent person. From all of the foregoing, I suggest that I have made the case that Mr. Samuelson was awarded the "Nobel" prize for economics by bureaucrats in Sweden, not because he spoke the truth but because he spoke falsehood in the service of socialist bureaucrats and their handlers.. This is not to suggest that there was any overt knowing conspiracy to lie. Rather, the bureaucrats, politicians and handlers that control the award process look in the mirror and like what they see and are incapable of sanctifying anyone that does not uphold their socialist views. Mr. Samuelson was politically controlled or motivated to spread erroneous propaganda in the service of a force other then truth. Mr. Samuelson has publicly identified himself as a Democratic New Deal economist. Can you imagine a mathematician or biologist identifying himself as a Democratic New Deal mathematician or biologist?

Q: Who else should I not trust to tell me the truth about economics?
A: Anyone under the influence of government bureaucrats, politicians or their handlers; anyone who has a self interest in telling a falsehood. Anyone corrupted by taking money or honor from any of the foregoing. Anyone getting a pay check directly or indirectly form the government is suspect. This includes most professors teaching at government funded universities. Most private universities also accept government funding for various programs and are therefore suspect. Additionally, many private foundations have come under the influence of collectivist, central planner one world government Fabian Socialists.

Q: You paint a very dark picture. Are things really that bad?
A: No, they are much worse.

Q: Why is that?
A: It is a matter of incentives. Every time there is a request to intervene in the free market, there is a small group that may have much to gain and therefore are willing to spend a lot of time and energy to, for instance, obtain a subsidy to grow sugar beets. On the other hand, there is everyone else who stand to lose s small amount and so are not willing to spend a lot of time, energy or money to fight the request of the sugar beet growers. The sugar beet grower may stand to gain 10,000 Euro while the general public may only lose 10 cents per day.

Q: There are people who understand this is wrong. Why do they not do more to prevent it?
A: Most of the people who understand economics are busy making money in the private sector. Those who do not or can not, often find government or academic jobs. It is unreasonable to expect that persons who are dependent on the good will of government will publish articles calling for a decrease in government funding and authority. Additionally, the private sector businessman is not specifically benefited by a free market. He profits from the difference between the cost to produce; and, the price at which he can sell. As long as the rules do not change during the process, the businessman has just as much an opportunity to profit by the difference between the bid and the ask in a partly socialist system as in a free market system.

Q: So who is benefited by a free market system?
A: Everyone in general but no one in particular. Economic laws apply equally to a free market and a partly free market. It is just that the results are different under different conditions. The laws stay the same.

Q: I thought that you were going to propose a forth law that only a free market can provide practical, accurate and timely information concerning the value of goods and services.
A: This begins to sound like a value judgment. I do not wish to engage in polemics. Perhaps we can say that based on the existing evidence, the free market system provides the most useful practical information about the value of goods and services so that market participants can make timely and rational decisions. This is inherent in rule number three “The measurement of any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.” If, we understand that in order for the information to be reliable, that is must not be coerced and must be freely made, then we can conclude that free market price signals provide the only know reliable practical useful information concerning value in a working economy.

Q: I am confused, perhaps you can summarize.
A: Yes.
1. All value is subjective.
2. Persons prioritize their values.
3. The measurement of any person’s value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.
Most of what is published concerning economics is political propaganda. It is deliberately designed to mislead. This includes the Nobel Prize for economics. The how, why and to whom it is awarded has been compromised and corrupted by politics. This corrupting influence pervades almost all reputable establishment institutions including universities and foundations. It is possible to understand what the truth is and what political propaganda is by applying the three fundamental laws of economics Based on the existing evidence, it appears that a free market pricing system is essential to a rational organization of production because it is the only know practical way to get useful information concerning the value of goods and services to market participants. It may be sufficient to say that this is so because all value is subjective. It follows that anyone who tells you that value is dependent on the investment of labor or capital is in error. Furthermore, anyone who adds, subtracts, multiplies or divides economic statistics to prove that this or that policy to subsidize or prohibit an economic activity will be beneficial for the economy is seeking to mislead you.

Q: So, who can I rely upon to tell me the truth?
A: You should rely upon yourself. Do you understand the three fundamental principals of economics? Do you dispute that they are true?

Q: I thought I was going to ask the questions.
A: Ok. Let us leave it at that. What is your next question?

Q: Can you give me a little more help on the issue of where and from whom I can get truthful information to advance my understanding of economics?
A: Start by reading yesterday’s news.

Q: Why?
A: You can compare what they said would happen to what in fact happened. Then you can know who told the truth and who did not.

Q: Can you give me a for instance?
A: Yes. Mr. Samuelson’s projection that the USSR would from l975 overtakes the USA economically by 2000 with Mr. Mise’s and Mr. Rothbard’s prediction that the USSR economy would collapse.

Q: You have a good point. Clearly, the establishment “Nobel” laureate got it very badly wrong. Tell me more about the people who got it right. How could they know?
A: They understood and applied the three fundamental principals of economics: “: All value is subjective. 2, Persons prioritize their values. 3, The measurement of any person’s value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.
They were both members of the Austrian School of Economic. They were both proponents of free market economics. Neither was able to get a prestigious academic post. Mr. Sameulson was able.

Q: Do you really mean to imply that there are respected members of the establishment, including “Nobel” laureates that are really no more then political propagandists?
A: It should by now be clear to everyone that the USSR’s Marxist Leninist economists were really no more then political propagandists whose function it was to sanctify the communist parties monopoly of political power. Religion was used during the middle ages in much the same way to sanctify central authority. Today economic propaganda is used to justify state intervention in the free market. The theory of the divine right of kings has been replaced by the state’s promotions of the general welfare. We have nothing to gain and much to lose by closing our eyes to the truth. If you want to learn economic laws, you must be willing to face the truth. Perhaps you will have to unlearn falsehood before you can learn truth. The process may not be pleasant but it will be rewarding.

Q: Ok. I understand the importance of the three fundamental principals of economics but why have you spent so much time in discussing the problem of political propagandists?
A: It is just as important to know what is a falsehood as it is to know what the truth is. This is especially useful information to have if everyone else is acting on false information and you know that this is false information. That can result in some very interesting situations that you can exploit to protect your financial interests and to profit from business and investment opportunities. Knowing when you are being misinformed may be very important. Since most of what is written concerning economic issues is propaganda, it is especially important to correctly classify this information as false. Any one false premise may cause the conclusion to be erroneous. It therefore bears repeating that most of what is written about economic issues is false.

Q: What is the best political system to promote economic wellbeing?
A: One that permits and promotes a free market.

Q: Why is that?
A: A free market is the only known way to get useful, accurate and timely information concerning the value of goods and services to market participants so that they can make timely and rational decisions concerning what, where and in what quantity to produce goods and services. In addition, private ownership provides the incentives and disciples required for the system to operate efficiently. Having your property at risk to loss provides the required concern and the opportunity to profit the required positive motivation.

Q: What is the worst political system to promote economic wellbeing?
A: One that does not permit a free market.

Q: But, all systems provide for some form of regulation. There is no such thing as a completely free market. Are you not talking about an abstract utopia?
A: Freedom is a relative concept. As long as man perceives reality through the five senses; he will experience a duality and an apparent conflict. We understand cold only in relationship to hot, wealth in relationship to poverty and freedom in relationship to slavery. This does not however mean that freedom is a meaningless concept any more then slavery is a meaningless concept. There are measurably significant variations in results dependent on the degree of freedom or lack there of in any economic system.

Q: So, may we view freedom and slavery as opposite poles on a continuum?
A: Yes. More freedom is better then less freedom. Slavery is detrimental to increasing economic wellbeing. Freedom promotes economic wellbeing.

Q: Can you be more specific?
A: Every government action that interferes with a free market decreases economic wellbeing and every government action that promotes a free market increases economic wellbeing.

Q: Should governments then stay out of the way and do nothing?
A: No, there are legitimate things that governments need to do to promote a free market economy.

Q: Like what?
A: The protection of personal and property rights; the enforcement of contracts, the promotion of civil order. If your neighborhood is ruled by criminal gangs, this will definitely prevent the smooth operation of a free market. The criminal gangs will engage in coercion and so market participant will not be freely able to buy and sell.

Q: So, some government interference in the free market can be good for economic wellbeing?
A: No. When government agents put bandits in jail, they are illuminating a source of coercion and an impediment to free economic choice. The enforcement of the rule of law promotes voluntary social interaction and cooperation. Free markets can not exist without a very healthy respect for the rule of law. That these are relative concepts does not make them any less true. All interference with a free market decreased economic wellbeing and all promotion of a free market increases economic wellbeing. Governments have a legitimate role to play in protecting a free market. Protecting is not necessarily interfering...

Q: How do we know when protecting becomes interfering?
A: The question must be formulated precisely: does the proposed action promote or interfere with economic freedom? Also: who benefits; who loses; in the short term; in the long term? Generally, governments interfere in the free market by prohibiting or subsidizing and they do so to benefit a small powerful well connected group to the determent of everyone else.

Q: Why do people permit this if it is detrimental to everyone?
A: A free market benefits everyone in general and no one in particular. We discuss this earlier: the problem of incentives. The small powerful well connected who have much to gain from a subsidy are prepared to put a lot more effort into getting the subsidy then everyone else that lose just a little.

Q: Is that the only reason?
A: No. Ignorance is another major reason. People are often fooled by the arguments put forward by those promoting government interventions in the free economy. They may incorrectly believe that the benefits outweigh the costs. This is generally because people have a tendency to look only at the short term benefit to the group being subsidized and ignore the long term results to the recipients of the subsidy and to other groups or everyone else.

Q: Can you give me an example?
A: Sugar beet growers in the EU get a short term benefit in the form of a subsidy for growing sugar beets. In the long term they may benefit more if they were forced to find economic activity that produced products or services that a free market system would voluntarily pay for. The public certainly would. The subsidy sugar beet growers receive is minus handling costs for tax collection and disbursement. The subsidy raises the costs to everyone else by either higher prices and or taxes. Furthermore, it misallocates capital. Absent the subsidy, business people would not invest money in growing sugar beets in the EU. They would, instead, invest their capital in producing products and services for which a demand existed without a subsidy.

Q: This is getting very confusing. Can you please simplify the matter for me?
A: The EU sugar beet growers, the politicians, their handlers and their paid propagandist argue that the sugar beet industry in the EU needs to be protected. They point out the benefits to gainful employment and tax receipts to the EU countries from keeping this economic activity within the EU. They appeal to our charitable nature and patriotism: let us help our less fortunate local growers: let us protect them from unfair competition from cheap labor from abroad. What they do not point out is the following. There are no free lunches. Every government program has a cost. The government does not produce anything. It only consumes. It must pay for everything it consumes by: taxes; borrowing or inflating the money supply. Either the government taxes everyone to pay for the subsidy or it borrows the money to pay for the subsidy or it gets the money to pay for the subsidy by increasing the money supply. The borrowing merely delays when the tax is paid. Inflating the money supply steals the purchasing power of everyone else that holds existing currency units and may therefore be viewed as a deceptive tax. So what ever benefit the sugar beet grower gets is more than off set by the cost in increased tax, delayed tax or deceptive tax. Additionally, there is the cost of administrations. There is the direct cost of administration: cost to collect the tax revenue and then the cost to administer the subsidy program to disburse the subsidy to the beet growers. In addition there is the cost to the rest of the society. If the price of sugar is raised to pay for the subsidy, then every one, including candy manufactures are put at a disadvantage. Their costs go up. They are less able to compete with candy manufactures outside of the EU that have a lower cost for sugar. This distortion of free market pricing sends false signals concerning real demand and real costs to market participants. This results in all sorts of market dislocations. Real market demands may not be met because resources are diverted to sugar beet production only because of the subsidy. In addition, it promotes politics over production. It elevates those who divide the production over the producers.

Q: Well, I accept that a free market pricing mechanism is essential to rational decision making and that a free market in the ownership of the means of production is necessary to both hold accountable and motivate managment. That you have show to be the case from the applications of the three basic fundamental rules of economic and what we know from the collapse of the USSR and the rest of economic history up to today. I can not find any flaw in your reasoning nor can I dispute any of your premises. Accordingly, so far, I can say that your science is sound. Never the less, I am bothered by what I see as a tendency on your part to moralize. You say that inflating the currency is a deceptive tax. Is not this just a value judgment on your part that has no basis is science?
A: No. It is an accurate description. The people who already hold the currencies pay by the loss of purchasing power that is now transferred to the newly created currency. Since the general public pays and the government gets to use the newly created money it is correct to call it a tax. It is deceptive in that no one in government ever explains how this works, puts it to a vote or asks the holders of existing currency for their permission to take some of their purchasing power from them in this manner.

Q: It seems to me that there is here someplace a very serious moral issue. Deception is wrong. Does not inflating the money supply amount to stealing?
A: I will not argue with your characterization. A free market can not exist without the rule of law and the rule of law can not exist without a free market.

Q: This is the first time I have ever heard it put that way. Is this an original thought on your part?
A: I think I am summarizing what should be obvious to everyone.

Q: Let me see if I have got this right. You can not have a free market without the rule of law because without the rule of law people may be subject to coercion and contracts might not be enforced. A free market presupposes voluntary consentual relations without the initiation of the use of coercive force. Have I got that right?
A: Yes.

Q: Ok, second half: why would it be that you could not have the rule of law without a free market?
A: I will start the discussion with a question. Name me a country that has the rule of law without a free market economy.

Q: There you go again. I am to ask the question and you are to give the answers. Ok?M
A: Very well, what is your next question?

Q: Is there now or has there ever been a country that has or had a civilized rule of law without a free economy?
A: Relatively speaking, no, if you mean by a civilized rule of law that voluntary contracts are respected and enforced and people are free to live in peace and are not subject to arbitrary state action. The issue is disposed of by the definition of a free market. In a free market economy there is freedom for all participants. In the law of the jungle there may be freedom of action for the strongest and lack of freedom for everyone else.

Q: Suppose that three rich bisnessmen get together and form three separate political parties that control the government. Suppose further that they now pass laws that benefit them exclusively at the expense of everyone else. Then, since the laws were passed by parliament and signed by the president and enforced by the courts, are these laws now in accord with the rule of law because they were enacted and enforced in accordance with the law of the land?
A: The rule of law supposes something higher then a formal compliance with the law of the land. Here, you have given an example where the political and legal system is used to take money from the general population and give it to three people.

Q: But, if the government is democratically elected and follows the law as accepted by the majority, is not that following the rule of law?
A: Democracy may be described as two wolves and one sheep voting on who will be dinner. The same analogy applies to the politics of economic issues. The two wolf majority can vote a tax that applies only to sheep and benefits that apply only to wolves. This certainly would be democratic and may well follow the law of the land but is it the rule of law? At what point is the lamb justified in resorting to violent action to protect person or property? The answer to your question is that it depends on your definition of the rule of law and whether the legitimacy of the rule of law comes from human beings or some higher source. It may be that society predates government and that a government, to be legitimate, must be limited to protecting the person and property of its members. It may be that if a government goes beyond that that it becomes illegitimate.

Q: Is it not then a moral issue?
A: Yes, it is a moral issue.

Q: So, why are we discussing it? What relevance does it have to economics?
A: We spent a lot of time discussing how politics has distorted the discussion of economic issues. If most of what passes for economic discussion is really political propaganda and you understand this then you are at a significant advantage over people who accept political propaganda as truth and act on it. Your understanding that something is false is important. Your understanding of why people disseminate falsehoods is even more important. In an environment where say over 97% of what is written about economic issues is political propaganda it may very well be essential for you to remember clearly why this is so. Otherwise, you may be swept away by the propaganda and forget that it is propaganda and so do many foolish things: acting on falsehoods as if they were true. Accordingly, it is essential to have a clear understanding concerning the moral issue of why people disseminate falsehoods as truth.

Q: Ok, so why is it that people disseminate falsehoods as truth in the discussion of economic issues?
A: The problem is that, on a moral level, too many people are prepared to steal when given the opportunity. This is especially so where they do not believe that they will be caught or punished. Studies have shown that 80% of the general public will steal if they are provided with the opportunity to do so under circumstances that they think that they are not being watched or otherwise not being held accountable.

Q: From where do you get the 80% figure?
A: There have been numerous studies. Every company the runs a store, bar or restaurant is faced with this issue. Studies have show that the 80% cuts across age, education, sex and ethnic groups.

Q: Can you please apply this to the three business persons who control the government and enrich themselves at the expense of everyone else?
A: What is the difference between the three business persons and the example of the two wolves and 1 lamb? Most people would immediately understand that there is something morally wrong with two wolves voting to eat the one lamb for dinner. Is it any less morally wrong to take the lambs property in this way? Can a majority of cannibals morally put you in the pot to boil your flesh and then eat it? Can they vote to take all or part of your property without your consent? Can a government morally do that which an individual can not?

Q: But the example of the three business persons is different. They were elected by the voters. They had the consent of the voters.
A: Now you have hit upon the reason why over 97% of what is written about economic issues is falsehood.

Q: How is this a moral issue?
A: The three business persons/politicians could not have been elected if they honestly explained to the voters: if elected we will pass laws that will result in our economic advantage and your disadvantage. They needed to disseminate falsehoods. They needed to lie about economic issues in order to fool the sheep. For instance: subsidizing sugar beet growers is good for our economy. The reality is that it may be to the short term benefit of the sugar beet growers and to everyone else’s disadvantage. For this short term advantage, the sugar beet growers spent time, energy and money. Some of the money undoubtedly went into the pockets of the three businessmen/politicians. They did not have the consent of the voters. The voters were lied to and mislead. An agreement requires knowing consent by at least two parties. A fraudulently obtained agreement is not consensual. If there is no consent by one party then there is no agreement.

Q: So, how could they have obtained the consent of the voters in a morally correct manner?
A: By honestly disclosing what they intend to do and what the consequences of that will be.

Q: Can you give me more details of such a disclosure?
A: Yes. We wish to use the instrumentalities of government to pass and administer laws and regulations in such a way that we benefit ourselves and those who finance us to get elected. You should understand that if you give us this power, we will benefit ourselves at the expense of everyone else. Furthermore, we will support such further intervention in the operation of the free market as we determine that we need to in order to buy enough support to maintain our power.

Q: Could any group get elected on such a platform?
A: Yes, if enough voters believe they are getting more benefit from government intervention then it is costing them and they have a low enough moral standards or other priorities.

Q: I find that hard to believe. Can you give me an example?
A: I will give you two examples: a cannibal tribe in Africa and the Russian Federation. There are many historical instance and current situations were economic well being is not the determining factor in how a society orders its economy.

Q: I am unclear on your moral point here. Can you please summarize?
A: Economic propaganda is used to fraudulently obtain the consent of the public to a system that benefits those who have political power at the expense of those who do not. The victims are frequently complicit in the fraud in that they consent in the expectation that they will be able to “steal” more in benefits then they have to pay in taxes and obstructionary regulation. Thus to the extent that the rulers and the ruled have a lower moral standard, that fact supports a system that has more intervention in the free market. All sorts of economic falsehoods are disseminated in order to hide what is really happening: stealing.

Q: So, your conclusion please?
A: A genuinely free market economy can not exist without a high moral standard as expressed in the rule of law. Who sets that standard may be beyond the scope of this discussion. That the rule of law comes from an organizing intelligence or creator that is higher then mere human beings is for some self evident and for others an unproven prejudice. It appears that people who argue for situational ethics also tend to support interventionist policies

Q: How does this relate to the three fundamental laws of economics?
A: If action is coerced or fraudulently obtained it may be false and so can not be reliably used to make rational decisions and so will result in a lower living standard. This relates to the third law. Additionally, it is a mayor disincentive to market participants

Q: Relate this again to the moral issue please.
A: I have sought to explain why the moral issue is important. A low moral standard explains why there is so much falsehood in the discussion of economic issues. If you do not understand that this is so then it may be that you will forget that over 97% of what is written concerning economic issues is political propaganda. For the beginning student this is the most difficult thing to understand but it is also the most important. It requires that you honestly look at yourself in the mirror and evaluate your own moral level. You can not apply economic law correctly to your own advantage if you continue to believe or behave at a low moral level: if you are yourself corrupted as for instance in using the coercive mechanisms of state political power to line your own pockets. And to repeat: if you can distinguish what is true from what is political propaganda and so remember what is false then you will have an advantage over all who are acting on falsehood. In this way you can use your knowledge of economic law to your personal economic advantage. The moral issue is central to your personal economic success because you will have great difficulty seeing clearly if you are living a lie.

Q: You are saying that unless I have a high moral standard that I will be unable to see the truth.
A: Yes.

Q: Is this an economic law?
A: No. We have now moved from discussing economic laws to how we can profit from using them. The correct application of economic laws to real investment and business situations presents many additional problems.

Q: Earlier you told me that you would teach me how to apply economic laws to my personal financial advantage but only if I passed a moral test. Have I passed it?
A: No. The test is not an abstraction. It must be understood and passed in the real world of human action. It is not what I say but what you do that is determinative of the issue.

Q: I do not believe that it is required that I have a high moral standard in order to make a lot of money. Take the example of the three businessmen that have three political parties and pass laws that are favorable to their economic interests. They can become very rich without high moral standards. They have very low moral standards but yet they can become very rich indeed.
A: You are right that they can become very rich. You are wrong in characterizing them as businessmen. They are not making money based on economic principals. They are making money baced on theft. Our discussion here deals with the issue of how to apply economic laws in order to become wealthy. If you wish to study the laws of how to become wealthy by theft then I suggest that you start by reading ”The Art of War” by Sun Tzu and “The Prince” by Machiavelli.

Q: Are you suggesting that I do not have high enough a moral standard that I can apply economic laws to become wealthy?
A: No. I am pointing out to you that there are two altogether different roads to wealth and that they have altogether different rules that apply.

Q: No one is a saint. Can I travel a middle road?
A: Perhaps we all do. Perhaps every time we are less then moral, we are less able to see the truth. Perhaps the loss from being unable to see the truth is greater then the gain we have from living with falsehood. Perhaps we only harm ourselves when we engage in force or fraud. Perhaps there is a creator to whom we will have to give an accounting?

Q: Perhaps I need more moral guidance then economic educations?
A: If you want to be successful then you need both. The same applies to the broader question of the economy. You can not have a free market without the rule of law and you can not have the rule of law without a free market. The moral issue inherent in the concept of the rule of law is unavoidable. The study of economics concerns what people do in buying and selling goods and services and moral issues effect people’s behaviors in that buying and selling of goods and services.

Q: Are you saying that without a high moral standard I can not successfully use economic law to become wealthy?
A: No, I am saying that it will be harder.

Q: How does this relate to economic law as you have expressed it in the three basic principals?
1. All value is subjective.
2. Persons prioritize their values.
3. The measurement of any person’s value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.
A: Each of these principals is true and 97% of what passes for economic discussion is false. In coming to any conclusion concerning an economic issue you must form premises in a logical construct to have a valid conclusion. In order for the conclusion, in addition to being valid, to also be true, the premises must be true. Your living a lie may result in your mind fooling you into thinking that a lie is true and that will result in error. A high moral standard for your own conduct will help you see the truth about everyone else’s conduct. A low moral standard and the truth do no seem to go together. How difficult will it be for you to see the truth in the application of all three laws to the problem at hand when 97% of what you are told is false?

Q: What is the mathematical probability?
A: .00000081. if we have a 3% chance cumulatively three times.

Q: It seems like I have virtually no possibility of coming to the right conclusion concerning an economic issue unless I have a high moral standard. Is that what you are saying?
A: The odds are very much against you.

Q: For financial and business success, how important is integrity?
A: I believe that the three most important things for business success are integrity, integrity and integrity. Being honest will help to keep your own analysis honest. A reputation for integrity will assure you a constant flow of people who want to do business with you.

Q: Are we still discussing economic laws?
A: What should now be clear to you from our discussion of the three fundamental laws of economics is that they all concern the subjective state of individual human beings. So does the issue of integrity. Lack of integrity interferes with the smooth working of economic laws because it interferes with the peace and harmony of person’s subjective states.

Installment Four

Q: Are you proposing another economic law?
A: Yes, let us call this the first law of applied economics.

Q: What is the first law of applied economics?
A: Personal integrity advances the peace and harmony of person’s subjective states and so promotes the correct application of economic laws. Dishonesty destroys harmony and so makes the correct application of economic laws more difficult.

Q: Is this a universal law?
A: I do not understand your question...

Q: Where or when does it not apply?
A: The more advanced the division of labor, the more it applies. Perhaps in a primitive tribe, it would be more effective to be a good hunter: one who misleads and then kills the prey. The more advanced an economy is; the more division of labor there is; the more dependent people are on other people honestly fulfilling their promises.

Q: So, integrity is central to effective economic interaction in an advanced economy?
A: Yes. It is central to the rule of law. The opposite may be required in war

Q: Can you connect this for me to economic law?
A; Integrity is essential to the rule of law and the rule of law is essential to a prosperous economy because without the rule of law we would not have practical useful information concerning the price of goods and services and so be unable to plan rationally. So, since integrity is essential to rational planning and rational planning is essential to a prosperous economy, it follows that integrity is essential to a prosperous economy.

Q: Is integrity then essential for the advantageous operation of economic law at the community level and the personal level?
A: Yes. All of this is inherent in the third law: “The measurement of any persons’ value scale is limited by the amount of objective information we have concerning a person’s buy or sell activity.”

Q: What causes inflation?
A: Inflation is caused by increasing the money supply.

Q: I thought that inflation was an increase in prices. Is that not so?
A: The traditional definition of inflation was an increase in the currency units and that cause an increase in prices.

Q: Can prices go down while there is an increase in the money supply?
A: Yes, if the increase in the currency unit is less then the increase in the production of goods and services.

Q: When would there be a decrease in prices?
A: If there was no increase in the money supply and there was a 2% increase in production then there would roughly be a 2% decrease in prices.

Q: Is deflation bad?
A: That depends on your personal financial position. In the last example where the money supply stayed constant and there was a 2% increase in productivity then everyone in that society would benefit equally with a 2% decrease in prices. Borrower’s, however, might find it 2% more difficult to pay off there debt as the real value of money increase by 2%. Then again, in a society that expected to have a 2% deflation rate, that fact should be factored into the cost of credit and so the interest rate my by lower then where there was a 2% inflation rate.

Q: I am interested in learning more economic laws that I can apply to advance my economic well being. I am not really interested in the mechanics of inflation rate computations. Please teach me more applied laws of economics. Perhaps you think I am not ready to learn more applied laws?
A: A theoretical framework, laid out in an orderly manner may provide a useful analytical tool. You should understand what is before you decide what to do about it.

Q: Good point, so what should I understand next?
A: Concerning inflation you should understand what it is not caused by.

Q: Why is that important?
A: Because 97% of what is written about inflation is a deliberate attempt to mislead.

Q: So what is not the cause of inflation?
A: Everything except in increase in the supply of money. Inflation is not caused by: an increase in the price of oil, labor, interest rates, etc. It is not caused by a wage price spiral.

Q: If that is so, then why is there so much said and written about the wage price spiral etc?
A: In order to deflect your attention from the fact that politically powerful forces are stealing.

Q: Stealing what and from whom?
A: Stealing the purchasing power of the existing money held by its’ exiting owners.

Q: Can you clarify please? I do not understand how this happens.
A: You are not supposed to understand. If everyone did, it would not be possible for the thieves to get away with the theft. Let’s say that there are 100 persons on an island and all are producing and trading their excess production. Let us further assume that they use USA dollars as a medium of exchange and that the total money supply is $100,000 or $1,000 per person. Now suppose that one of the 100 persons on this island was a printer and he printed an additional $100,000 and used it to buy goods and services from the other 99 persons on the island. Everyone would understand that this counterfeiting was a theft. Now suppose that we have a 300 million person economy and the government or a private central bank with government backing increases the money supply by 3% each year and does so by expanding credit through the banking system. Is this theft? On a smaller or a larger scale?

Q: Are you reffering to the USA?
A: Yes.

Q: Are you suggesting that the USA has a private central bank?
A: It is a fact that the Federal Reserve System is privately owned by the large commercial banks in the USA.

Q: How is the USA$ inflated by the Federal Reserve?
A: By the creation of credit through bookkeeping entries. Credit is money. Literally, they create money or credit out of thin air. The system has been designed to be difficult to understand so that the public would not object to the theft of the purchasing power from the holders of the existing money supply. Almost everything about the system is a lie starting with the name Federal. This gives the impression that it is a governmental agency. It is not. It is a privately owned and controlled and operated for the benefit of its private owners. It is a private cartel operated for the benefit of the cartel members.

Q: I am shocked. How could such a thing happen?
A: The central banks of both the UK and France were privately owned until after WWII. The cartel or monopoly power to issue a nation’s money has throughout history been the most sought after and fought over of all political privileges. The Federal Reserve is the third time the USA has had a private central bank. The first and second were closed down by presidents Jefferson and Jackson respectively. You should not be shocked. Most of what is written about economics is designed to advance the interests of politically powerful groups. It is not truth. It is designed to mislead. If you are still shocked then you do not yet fully understand our prior Q and A.

Q: How does this fit into the laws of economics?
A: We have discussed how integrity is essential to the advancement of economic prosperity because of the need for useful information concerning value and the limitation on that information as expressed in the third law of economics. You may recall that what we can know about a person’s value scale is limited to what we know about what has been bought or sold. Here we have a much more difficult issue because the system has been designed to hide the theft of purchasing power from the holders of existing money by persons who manipulate the system for their own benefit. Money is one half the value of every transaction. How then are we to know the real value of anything if the value of money is continually manipulated? In answer to this problem, I propose a law of applied economics as follows. In the application of any law of economics it is essential to determine the truthfulness of each premise used to come to a correct conclusion. Furthermore, since so much of what is written is a deliberate plan to mislead, it is essential to know the motivation of the party providing the information. So, in the practical use of economic laws it is essential to know the motivation of anyone providing information so that you may properly determining the reliability of the information provided.

Q: Do we need to know any facts beyond what people in fact buy and sell?
A: The price at which people buy or sell is an objective standard only if there is a consistence reliable unit of measure. When money is tied to a commodity there is a basis when it is tied to debt then it is a promise without a connection to a commodity and so without any basis except the police power of the state enforcing legal tender laws.

Q: Are you saying that unless there is a gold backed currency that the information expressed in currency units is unreliable?
A: Yes.

Q: How does that relate to your first law of applied economics that: in the practical use of economic laws it is essential to know the motivation of anyone providing information so that you may properly determining the reliability of the information provided.
A: Perhaps it may be helpful to ask the following question. What is the reliability of information expressed in fiat currency and what is the motivation of the people who have imposed a fiat currency regime to supplant a gold backed currency? Since half the value of every transaction is expressed in currency terms the issue is a very important one for the study of economics...

Q: You are not making sense. The average person does not consider the issue at all. They just use whatever currency is required. Please clarify.
A: You are correct as far as you go. The average person does not consider the issue but that is because he has become accustomed to having imposed upon him the possible use of force and fraud to compel his use of fiat currencies.

Q: What force and fraud?
A: Fiat currencies continue to be accepted in the market place because at one time they were tied to a gold standard. The modern banking system can be traced to the goldsmiths of Viennese during the 1500s. Merchants would deposit their gold for safe keeping with goldsmiths and the goldsmiths would give merchant’s paper receipts for the deposited gold. The merchants started to use the paper receipts for the gold in commercial transactions. This was easier for the merchants then the physical delivery of gold. Soon the goldsmiths started to issue more receipts then they had gold and so the fractional reserve banking system got its’ start. The fraud was that the goldsmiths issued more receipts then they had gold on deposit. They could do this because only a small number of their clients asked for the delivery of their gold at any one time. The force occurred when governments passed legal tender laws requiring creditors to accept paper instead of gold.

Q: I am having great difficulty following your point. Please explain in more easily understandable terms.
A: I will try with another historical example: the year 1066. That was the year William the Conqueror left Northern France and arrived in England with an invading force that over took over all of England. Norman declared himself king. He took control of all of the land and demanded tribute from the Anglo Saxons and Celtic peoples. If tribute was not paid to the military representing the Normans then the local population was very badly sanctioned. In time the tribute was called taxes and the military was replaced by bureaucrats called tax collectors. If you read the Magna Charter, which defines the rights of Englishmen, you will find roughly the following. The Lord created the earth. JC is the Lord’s only begotten son. The pope is JC’s representative on earth. The pope granted England to the king of England in return for payment and loyalty. The King granted parts of England the Noble Men in return for payments and loyalty. Therefore the peasants living on the land of the Noble Men must pay taxes because they are ruled by divine right. In order to make it easier to collect tribute the peasants were taught that this was their religious duty. Collection in monetary units rather then eggs, milk, wheat etc. further simplified the process and provided an additional opportunity to hide the taking by force of a new ruling class. Direct application of brute force in very costly and inefficient. It is much easier to steal by deception. Further, a one time taking is much less then what can be collected over a period of years. And so we have in every modern society a group that may be characterized as net tax payers and a second group that may be characterized as net tax receivers. The elite of the net tax receivers are generally referred to as the establishment and they are the ones that control the government. It is generally not possible for them to continue in their privileged position when a majority understands what is really happening. Therefore, all forms of deception are used to hide the truth. That is why 97% of what is written about economics is falsehood. This includes what is written about inflation and the monetary system.

Q: Please relate this back again to inflation.
A: Inflation is an increase in the supply of money. Money includes credit. The new money takes purchasing power away from exiting money. The holders of existing money lose. The recipients of new money gain. If there is a private central bank that is permitted to create new money at will, out of thin air, then it has the ability to steal all of the liquid wealth of the society where the monetary units being inflated is used. In an advanced economy, the people that have the power to issue a society’s money at will are the true rulers. Everyone else is paying them tribute and most people without knowing it.

Q: So maybe the third law of applied economics should say something about the importance of knowing the truth?
A: I propose the following laws of applied economics...
The first law of applied economies is: Personal integrity is essential. This is because personal integrity advances the peace and harmony of person’s subjective states and so promotes the correct application of economic laws. Dishonesty destroys harmony and so makes the correct application of economic laws more difficult. The second law of applied economics is: know the motivation of persons providing you with information. In the practical use of economic laws it is essential to know the motivation of anyone providing information so that you may properly determine the reliability of the information provided. Remember that 97% of what is written about economic matters is intended to mislead you. The third law of applied economics is: value, exalt and verify the truth absolutely. The common thread is to prevent the acceptance of a false premise as this would make the conclusion unreliable.

Q: All three laws of applied economics have to do with the truthfulness of the premises in applying the three fundamental laws of economics. Can we not just say that truthfulness in the application of the fundamental law of economics is essential when applying the fundamental law?
A: Yes. The first law, integrity, has to do with the truthfulness of the person applying the fundamental laws of economics. The second is concerned with the truthfulness of persons providing you with information and the third with your verifying the truthfulness of the first two. The critical point is that if your premises are correct, that is truthful, and you correctly, that is logically, apply the fundamental laws of economics then your conclusions will be correct in that they will be both valid and truthful.

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What is the Money Illusion? It is the belief that in increasing a nation's money supply, government is able to augment over-all economic well-being. It seems that a majority of Latvian residents and governmental leaders believe that all their problems would be solved if only they had more money.

Consider the following analogy. Is it possible to increase the water level of a swimming pool by taking water from one end and pouring it into the other? The answer is evident: obviously not. Any water taken from the South end draws water from the North, East and West ends. In fact, this operation will always produce a net loss due to the cost of moving the water around and the physical loss of water incurred while handling. Government subsidies are nothing more than this same kind of resource redistribution. Governments take wealth created by the private sector and give it to approved projects, public and private. No new wealth is created, just as the water level does not rise in the swimming pool.

If A, B and C are taxed to give a subsidy to Z, it is clear that the overall wealth of A, B, C and Z has not increased. A portion of A, B and C’s wealth has simply been moved to Z. Consider subsidies given to Latvian farmers. Money is simply diverted from all taxpayers to one group of people: farmers. To argue that this is a net benefit to society presupposes that politicians and bureaucrats are more competent decision-makers than individuals operating in a free market. It elevates political coercion over individual freedom. Who do we want to manage our wealth, the same people that run the post office?

To finance their programs, governments have three sources of income: taxes, borrowing and inflating the money supply. Taxes are taken under threat of force, borrowing is a delayed tax that must be paid with interest, while inflation increases the money supply thereby lowering the value of existing monetary units. When the state spends borrowed money, it consumes wealth it did not create in just the same way it spends money raised by taxation. Government borrowing is generally facilitated by the third income source, monetary inflation. This can be accomplished in one of two ways, by printing money or by creating bookkeeping entries when extending credit. In the case of credit, new money is created as follows. A borrower signs a promissory note for x amount. The bank takes the note and, on its books, credits the borrower’s account for x amount. This bookkeeping entry is then treated as a money equivalent and is traded back and forth within the banking system so that the original x amount multiplies. The elusive bookkeeping money is literally created out of thin air and is backed by central bank-issued paper redeemable in nothing.

There are two central truths about inflation: 1. Inflation is an increase in the money supply and 2. Credit is money. All other things being equal, an increase in the money supply will cause prices to rise while a contraction of the money supply will cause prices to fall.

In almost all countries today, central bank policy and the money supply are controlled by a small elite group. When this group increases the money supply, society as a whole does not benefit. The opposite is true. It is government and the establishment controlling it that benefit from access to newly-created money. And, when it is spent, the purchasing power of existing monetary units decreases. This new purchasing power is stolen goods. It does not create any new wealth or any real honest demand. Real demand is created by producing what the free market will pay for. The ability to exchange real production is real demand. Inflating the money supply does not create any new service or product. It is a fraudulent deception. It is thievery.

Spending by the holders of newly-created money masquerades as real demand from the income of the politically well-connected when in fact it is capital stolen from the holders of existing money. Taxing by theft of the purchasing power of existing money is the most devious and dishonest way to raise government revenue. It harms honest savers and elevates theft to statecraft. The government sets a very bad example. The harm done far exceeds any other form of taxation. It misallocates resources by sending false signals to economic players during the boom phase and thus results in serious misallocation of resources that must necessarily be liquidated during the bust phase.

It is true that you can keep warm by burning your neighbor’s furniture in the fireplace but you should not therefore conclude that you have discovered a new economic law that will result in a permanently high plateau for share and real estate prices. It is very dangerous to base your financial planning on such illusions. If enough people are deluded, it may even result in a worldwide financial crisis. No system based on theft can promote a healthy economy. Thievery destroys trust and without trust there can not be an efficient division of labor, the very foundation of a civilized economy. Honesty matters.

There are three major reasons why the money fallacy persists. The first is historical. All money has its origins in the marketplace as the most accepted commodity for use in indirect exchange. Gold and silver have historically enjoyed the widest acceptance as commodity money. They are valued for use in ornamentation, dentistry, electronics etc. They are useful as a medium of exchange and a store of value.

With Nixon’s closing of the gold window at the New York Federal Reserve on August 15, 1971 the US$ lost its last link to gold. Curiously, the reserve status of the US$, though battered, has continued until now. How can this be explained?

Governments are not able to define what money is. However, once the marketplace defines money, governments are able to debase it. They can today, through legal tender laws, force people to accept paper receipts as money in part because the receipts were once good for the delivery of a certain amount of gold. This is true even though they are no longer redeemable for anything. The public does not yet fully understand that today’s paper money does not have the commodity value of gold or silver, that in reality, it has no commodity value beyond the value of paper. The fact that the US$ was once a receipt for gold, as was the Lat in pre-World War II Latvia, supports the fallacy that an increase in the amount of monetary units increases wealth. This was partly true when the monetary unit was gold. It is not true of today’s money. Failure to understand this truth contributes to support of policies calling for monetary inflation.

The second reason this money illusion exists is because people tend to and want to believe that what is good for them as individuals is good for everyone in society. It is true that if I receive a sum of newly created money and spend it to buy a house, car etc., my living standard has increased. It is not however true that this has increased the living standard of society as a whole. The swimming pool analogy applies here. The increase in the money supply did nothing to increase the amount of goods and services produced. Nor did it do anything to create real new demand. It merely stole part of the purchasing power of existing monetary units and transferred it to the politically well-connected at the expense of everyone else. It is not always true that what is to the advantage of one person is to the advantage of the group. Greed may distort perception but a distorted perception does not change reality.

The third illusion is the fallacy of The Good Tsar, Our Dear Leader and all other forms of idol worship including substituting The State for G-d. The illusion that the ruling group has society's interests at heart is essential to the continued rule of the establishment. If the common person knew that he was being milked by a parasitic ruling cabal, the establishment would soon be replaced. Slavery is dependent on the consent of the slave. This is true of all forms of exploitation and oppression. In a democracy, consent is engineered through control over mass media. It appears that consent has seriously deteriorated during the current financial crisis and multi-trillion dollar transfers to the establishment ruling class. Still, on balance the illusion is holding. Obama has been served up as the new icon worthy of worldwide mass worship and it appears that a large proportion of the American and world public has accepted him as such.

To summarize: The money illusion is the fallacy that a society can increase its gross domestic product, its well being, by increasing the money supply. This illusion has wide support within society because of the following three errors in reasoning.

The truth is not complex. Real demand is created by production. Monetary inflation is used to steal the purchasing power of existing money. Government policy promotes and protects this theft for the benefit of the establishment that controls government. The money illusion is used to hide these truths.

Money is one half of every transaction. The monopoly right to issue a nation’s currency is the most valued and has been the most fought over political privilege. Since the issuance of new monetary units steals the purchasing power of existing units it is necessary to hide what is really happening: theft. This is why 97% of what is written about economics is deliberately intended to mislead. If you understand what is really happening, you have a significant advantage in investing, business and life. There are economic laws that are as immutable as the law of gravity. Unless, however, you are reading the 3% of what is written that is true, you will be at a very serious disadvantage to those who know the facts and so understand what is really happening. In making investment decisions, we are competing with everyone else. Knowing what most people do not know is desirable. Knowing what decisions people are making based on illusion is important. They will most likely lose money. Being on the other side of their trade should be profitable. Civilization is dependent on specialization or the division of labor. The division of labor is possible only when there is the possibility of making exchanges of goods and services. Theft, fraud and corruption obstruct free exchange and therefore retard the division of labor and civilization. Money is one half of every exchange in an advanced economy. Dishonest money is a serious impediment to economic well-being.

A panic is when people realize that the wealth is gone. The wealth was stolen years earlier when the newly-created money was spent. Today’s panic is simply the emotional reaction to that realization. If you do not suffer from the money illusion, you will understand. In the world-wide panic we are currently living through, most governments are repeating the earlier theft through more monetary inflation. There is absolutely zero possibility that this will increase society's living standards as a whole. When a critical mass of people understands this, paper money will be rejected and the crack up boom will begin. At that point, one of two scenarios could occur. Paper money may quickly lose all value, forcing the establishment to introduce a new currency backed by real value. Alternatively, we may see a new totalitarianism and a long and deep depression. Current government responses do not bode well for an early end to the crisis. The one exception is Iran. It recently spent $75 billion to convert all its foreign currency reserves to gold and is not keeping that gold in European or American banks. If Iran starts minting gold coins, we may see a new world reserve currency emerge.

Latvia, the EU and the USA have neither honest money nor a vibrant free market. To blame capitalism and the free market for today’s financial crisis is wrong. There is no real free market when governments inflate paper currencies and perpetuate the money illusion.

The solution to this global crisis is simple: stop inflating the money supply. In other words, stop stealing.

Let the free market correct the misallocation caused by the earlier theft. Everywhere and every time the free market solution has been tried, the results have been better than the results from government intervention

The question is: better for whom?

The free market solution is always better for the majority but the majority may neither understand this nor be in a position to control policy. The political class may be incapable of or unwilling to implement a free market because it does not promote their own narrow interests.

Politics is all about getting and keeping political power. Politicians do this in a democracy by giving and promising to give the jobs and money to persons who can deliver votes to elect and re-elect the politicos. The free market operates on altogether different principals: liberty; voluntary free choice; mutual consent; respect for the rule of law and peaceful interaction. All of these free market concepts are contrary to the essence of what politicians do to get and retain power.

Let us consider what actually drives an economy and therefore finances government through taxation. Almost 100% of tax receipts are dependent on businessmen doing business: income tax from salaries, social security taxes, value added tax; sales tax; and, real estate taxes on commercial properties. Real estate taxes on homes are the one major exception but if people did not have jobs, they would not be able to pay that either. If the businessman satisfies the consumer, he prospers. If not, he loses. A free market is the most democratic system possible. Everyone gets to vote with their money every day: buy, don’t buy. If you are really good at satisfying your buyers, then you are rewarded with lots of money, prestige and power. You could be the next Bill Gates. Politicians are playing a very different game. Their game is almost 100% about power. For the free market businessman, power is a result of satisfied customers. In a free market economy, politicians are not dominating. The consumer is king. In a collectivist system, bureaucrats, politicians, their financiers and hangers-on dominate.

What about Latvia? What needs to be done to resolve Latvia’s economic crisis?

We need to think outside of the box. Latvians bemoan the fact that the depression is worse in Latvia than in any other part of the EU. This should give us hope if we remember that the depression is not the problem but rather the solution. It will speed up the required readjustment process.

The following is a partial list of policy changes that would help Latvia get over this readjustment phase more quickly.

Implementing 1-8 above would promote a free market economy; increase the power of consumers and businessmen who meet the needs of the consumer; and decrease the power of politicians and their hangers-on. Therein lies the problem. Politicians, their financiers and their hangers-on do not want their power to be diminished. Power over other people is at the center of their life’s work. It is unlikely that they will promote any plan that diminishes their power unless economic circumstances, a financial collapse, or an informed public, with pitchforks, demands it.

The absence of income, capital gains, gasoline, and tobacco and alcohol taxes would make Latvia the Luxemburg, Hong Kong and Switzerland of the Baltic. It would attract businessmen, financiers and tourists. Living standards would double every five years for at least 15 years. It would produce real earning and so capital to invest in Latvia’s future. This has been a happy result everywhere and whenever free markets are promoted or permitted. Some examples: 19th century USA; West Germany for the years immediately after WWII; Hong Kong; Taiwan; South Korea; Singapore; Switzerland; Luxemburg; Liechtenstein; Grand Cayman and the USA in financial services from l982 to l992.

How do we get from here to there?

The solution: education; political action and non-violent protest a la Mohandas Gandhi. Slavery can not exist without the consent of the slave. Without consent you will have a dead slave, a dead slave master and/or a free man. You need not be a tax and regulatory slave. You can withdraw your consent. When enough people do, freedom will have won. For more information, visit www.briviba-net.lv, www.mises.org and www.lewrockwell.com.

Q and A

Q: In your plan for Latvia's economic recovery, you call for abolition of copyrights and patents. I disagree with this point. I feel that intellectual property is still property.
A: Copyrights and patents are a relatively new concept introduced to enhance state power by the granting of monopolies to be enforced by the state. The King of England granted patents for playing cards etc.
Mozart, Beethoven and Bach did fine without copyright protection. Plagiarism aside, copying artists’ work is free advertising. Authors get bigger fees for lectures, bands and singers for live concerts. Many artists have caught on and now provide their music for free on the Internet. Absent copyrights and patents, there still exist contract rights and trade secret protection. Unlike patents, this has no time limit. If you steal someone’s identity or trade secrets by bribing corrupt employees then clearly you have stolen.
But, how about the idea that one could dye one's hair blue. Say you are the first person to think of this idea. Should you have a property right in it? Should you be able to exclude others from dying their hair blue without making a payment to you? The reality is that we all copy the best ideas of others and try to improve upon them. That is how civilization has progressed over the centuries. Consider the developments of the latest jet liner.There are thousands of engineers working on such a project. Is any one of them the inventor? Each will use all prior accumulated knowledge and try to improve upon it a hundred times or more by adding something new and original to it. That process should be promoted everywhere and not retarded by granting every innovation a monopoly right based on timely filing of expensive legal documents with the government. Patent protection retards progress and makes all of us poorer. Lastly, the only way you can have a criminal penalty for copying someone’s idea is with a large and powerful government. I vote for small government and more freedom.

Q: Don't we need more regulation to prevent a repeat of this free market going wild?
A: No, what we need is more free market regulation as opposed to government intervention. Let the incompetent go bankrupt. Do not use public funds to bail them out. It should be clear to everyone from the Bernie Maydoff case that government regulation is used as a shield to protect thieves and has little power to prevent fraud.

Q: Would'nt a free market result in just a few people controlling everything? Wouldn't these few people be able to increase prices to the detriment of everyone else?
A: Please name me one monopoly that is not based on governmental force. Monopolies aren't created by a free market, they are created through government intervention. Are you satisfied with the services you get from the post office, electric company; gas company, police and government courts?

Q: I would not want private parties to be able to provide police services. That would result in private armies. That would be very dangerous.
A: True, there have been examples of private armies going wild. However, there is nothing in the eight points that requires or promotes private armies. As far as providing security services goes, in most countries, the private sector spends more on these services than the government does because the police are unable to provide competent security.

Q: I am a law-abiding citizen; I want the government to protect me. Is that wrong?
A: No, but perhaps you have fallen for the idolatry fallacy: that our dear rulers have our best interests at heart. During the 20th century, governments murdered approximately 200,000,000 of their own residents. This does not include wars. From the USA government genocide of the Indians, through Hitler, Stalin, China’s great leap forward, Pol Pot and Rwanda, the body count for government murder is about 8 times the count for private homicide. There is no safety in denying reality, nor morality.

Q: I receive a government pension now. How will I be able to pay for my living expenses if I lose that with the adoption of your 8 points?
A: On the public policy issue, your question relates to the fallacy that what is good for one person, you, will be good for the group, all Latvian residents. This can only be if the government of Latvia is able to make payments to pensioners without first taking more wealth away from Latvia’s residents by taxation, borrowing or inflating the money supply. Adoption of the 8 points includes the elimination of the social employment taxes from which government appears to be paying pension obligations. That money will not disappear. It will be left with all wage earners. The costs now incurred by government to collect and redistribute will be eliminated. There will be more wealth available to support pensioners.

Q: But how can I be assured that I will get what I need?
A: There will be individual winners and losers. The point is that there will be more not less available overall. For that practical utilitarian reason, it is good public policy.

Q: I do not care about public policy. I want to be sure that I get my pension, period.
A: Are you then prepared to use all the state’s powers to extract from Latvia’s residents, by force and the threat of force through taxation, borrowing and inflating the money supply, wealth sufficient to transfer to you an amount you think proper?

Q: Yes.
A: Are you prepared to put me in jail if I refuse?

Q: Yes.
A: Then you are a true socialist. Are you prepared to kill me?

Q: Now you have gone off the deep end. No. I see no reason to do that. Why should it get to that point?
A: This is simply the logical progression. It will get to that point unless we reverse the movement toward more socialism. The reality is that governments have murdered about 200,000,000 of their own residents during the last century. Perhaps you have been corrupted by the receipt of stolen property: your pension payments from the government of Latvia. This distorts your perception of reality. It results in your falling for the fallacy that what you perceive to be in your narrow interest, continuing to receive pension fund payments from the government, is the policy that should be continued for all of Latvia’s residents. You have perhaps been seduced by the money illusion?

Q: Is there hope for me?
A: Well, unlike Stalin or Hitler, you are not prepared to kill me. But, you are prepared, you say, to imprison me. I wonder, for how long are you prepared to imprison me: a day, a year or for life?

Q: Give me some time. I do not want to live under the influence of illusions, money illusions or otherwise. I will reconsider my position. I too want a peaceful, free and prosperous Latvia.