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CHAPTER 4

Why the Marketplace Fails

 

In The Wealth of Nations, Adam Smith argued that labor is "the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places."1 However, he added, "the whole produce of labour does not always belong to the labourer."2 According to Smith, the laborer shares his produce with the employer, in the form of profits of stock; and with the landlord, in the form of rent. To complicate matters, the market price of a commodity is not necessarily the same as its natural price. The market price depends on supply and demand; but, since supply can be controlled, regulated, or manipulated, the consumer suffers.

Here are some of the problems identified by Smith:

  1. Landlords "like all other men, love to reap where they never sowed."3
  2. "[G]reat improvements" can seldom be expected from "great proprietors," but the "work done by slaves . . . is in the end the dearest of any"4 [my emphasis].
  3. Corporations keep prices up.5
  4. Industry benefits the rich and powerful.6
  5. Merchants and manufacturers extort legislation in support of "their own absurd and oppressive monopolies."7
  6. The crown extorts money.8
  7. Where they are defective, laws "put all borrowers nearly upon the same footing with bankrupts or people of doubtful credit . . . "9 [my emphasis].

What were some of Smith's conclusions regarding the MERCANTILE SYSTEM?

  1. " . . . [I]n the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer . . . "10
  2. "Commerce . . . has become the most fertile source of discord and animosity."11
  3. The management of the American colonies: " . . . in the system of laws . . . the interest of the home consumer has been sacrificed to that of the producer with a more extravagant profusion than in all other commercial regulations."12 Not only was the consumer burdened with inflated prices, the national economy was burdened with massive "new debt."13

It is evident, that, despite free trade, such as NAFTA, many of the absurdities and oppressions of today's Mercantile System bear considerable resemblance to those of England in 1776, the year The Wealth of Nations was first published.

Hayek, and other supporters of the marketplace, have contended that the price system is the best mechanism for conveying information -- about the value of goods and services and about profitable or favorable opportunities.14 But, if price conveys information, then, what of price when it conveys false information? or disinformation? Recently, the prices of commercial properties and houses in Canada and elsewhere melted down. Did their value really melt down? Or, did the price system melt down? Let me examine this question for a moment.

  1. Adam Smith argued that money is "the instrument of commerce" and "the measure of value."15 The fact that money is used to measure value does not mean that what cannot be measured has no value. Therefore, value cannot be measured by money alone. Smith distinguished between value in use and value in exchange. Air and water have value in use but little value in exchange. Could this have been the sufficient justification for industrialists to pollute or poison both air and water -- two commodities which, in David Ricardo's words "are indeed indispensable to existence"?

Adam Smith. Adam Smith distinguished between two meanings of the word Value: value in use and value in exchange. According to Smith, the first meaning refers to "the utility of some particular object"; the second to "the power of purchasing other goods, which the possession of that object conveys."16 Most interestingly: "The things which have the greatest value in use [e.g., air and water], have frequently little or no value in exchange"17 -- and vice versa.

David Ricardo on Value. David Ricardo pondered intensely the question of price and value. According to Pierro Sraffa and Maurice Dobb, Ricardo puzzled "beyond measure" over the "law of price."18 For Ricardo, a commodity must possess utility to have an exchangeable value. The exchangeable value generally derives from the commodity's scarcity and from the quantity of labor required to produce it. However, the value of some commodities, such as "rare statues and pictures, scarce books and coins, wines of a particular quantity . . . " is derived exclusively from their "scarcity" -- "and varies with the varying wealth and inclinations of those who are desirous to possess it."19 Ultimately, the price of a commodity is regulated by its cost of production, which is determined by costs such as those of capital, machinery, and quantity of labor.

Ricardo distinguished between value, riches, labor, and capital. By increasing the facility of production (or productivity), a capitalist can use the same amount of labor to produce more commodities. In other words, he can use the same value (quantity of labor) to produce greater riches (a greater abundance of commodities).20

  1. Power derived from traditional sources of wealth, such as real property, is increasingly being challenged by a new source of power -- intangible intellectual capital, held in grey matter. Monetary Authorities can increase the money stock, banks can create credit, but neither the central bank nor its member-banks can alienate a free mind. The rich can buy, or, as creditors, can physically seize, real estate or a manufacturer's patent; but they cannot seize intangible intellect in grey matter. In a world where more and more labor can be replaced by intelligence and knowledge, money alone cannot be a measure of value.

IN TRUTH, HOWEVER, THE USURER, WHOSE BUSINESS IS THE INTANGIBLE, CAN POSE A DANGER. IF HE CANNOT DOMINATE MAN AS MIND, HE CAN AT LEAST TRY TO INDENTURE THE MIND'S OWNER. THIS IS PRECISELY WHY SO MANY USURERS NOW OFFER STUDENT LOANS. THE FRONTIER MARKETPLACE OF THE USURER IS THE ONE THAT WILL INDENTURE WHOLE NEW GENERATIONS OF MINDS.

Gibran on Reason. In his meditations on reason and knowledge, Kahlil Gibran held that "[r]eason is not like the goods sold in the marketplaces -- the more plentiful they are, the less they are worth."21

  1. For Hayek, money may be "one of the greatest instruments of freedom ever invented by man."22 But the fact still remains that money has also been an instrument of subjugation, coercion, and control. We must extend Adam Smith's categories of values accordingly.

THE POTENTIAL EVILS OF THE MARKETPLACE --

  • MONOPOLY, AS UNNATURAL CONCENTRATION OF POWER
  • REAL OR TACIT COLLUSION
  • MISDIRECTED RESOURCES
  • COERCIVE CORPORATE ADMINISTRATIVE POWERS
  • PROPAGANDA AND PSYCHOLOGICAL MANIPULATION
  • BIASED NET ADVANTAGES, MASQUERADING AS RULE OF LAW
  • LOW MORAL OR ETHICAL STANDARDS, MASQUERADING AS HIGH VIRTUE
  • ECONOMIC DIRIGISME, MASQUERADING AS SPONTANEOUS MARKET ORDER
  • MARKET DESPOTISM, MASQUERADING AS FREE TRADE
  • ECONOMIC OPPRESSION, USURPATION, AND EXTORTION
  • WICKED EXPLOITATION
  • DECEIT, FRAUD, ETC. --

MUST BE EXPLICITLY INCORPORATED IN ALL SERIOUS CALCULATIONS OF NET PRESENT VALUE. THE ECONOMIC VICISSITUDES ARE A FUNCTION OF THE RELATIVE EXPECTED COERCION IN, OF, FROM, AND THROUGH MONEY.

Timothy on Money. The First Epistle of Paul to Timothy provides the fundamental insight: "For the love of money is the root of all evil . . ." [Timothy 6:10].

 


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1 Adam Smith, The Wealth of Nations (1776), edited by Edwin Cannan, with a Preface by George J. Stigler, 1976, Vol. 1, at 41-42 (labor -- the only universal standard of value), 33 (market price and natural price), and 54 (wages and profit).

2 Ibid., Vol. 1, at 55 (sharing of the produce of labor).

3 Ibid., Vol. 1, at 56 (landlords).

4 Ibid., Vol. 1, at 411-412 (slave labor).

5 Ibid., Vol. 1, at 138 (corporations).

6 Ibid., Vol. 2, at 161 (industry, for the benefit of the rich and powerful).

7 Ibid., Vol. 2, at 165 ("absurd and oppressive monopolies").

8 Ibid., Vol. 1, at 138 (prerogative of the crown: extorting money).

9 Ibid., Vol. 1, at 107 (when contracts cannot be enforced).

10 Ibid., Vol. 2, at 179 (the mercantile system).

11 Ibid., Vol. 1, at 518-519 ("the sneaking arts of underling tradesmen").

12 Adam Smith, The Wealth of Nations, Vol. 2, 1976, at 180-181 (system of laws for managing the American and West Indian colonies).

13 Ibid., Vol. 2, at 180.

14 See Friedrich A. Hayek, Law, Legislation and Liberty, Vol. 2, 1976, at 116-121; and The Road to Serfdom, 1944, 1972, and 1994, at 55-56 ("price system"), and 103.

15 Adam Smith, The Wealth of Nations, Vol. 1, 1976, at 450 (wealth and money).

16 Ibid., Vol. 1, at 32-33 (value).

17 Ibid.

18 See David Ricardo, On The Principles of Political Economy and Taxation (1817), edited by Piero Sraffa with the collaboration of M.H. Dobb, Vol. 1, published for The Royal Economic Society, 1951, by the Press Syndicate of the University of Cambridge, at xv-xvi.

19 See David Ricardo, On The Principles of Political Economy and Taxation, Vol. 1, 1951, 11-20 (On Value), especially 12.

20 Ibid., Vol. 1., at 273-288 (Value and Riches, Their Distinctive Properties).

21 Kahlil Gibran, Secrets of the Heart, Meditations of Kahlil Gibran, selected and with a Narration by Stanley Hendricks, with an Introduction by Manoocher Aryanpur, 1968, at 36.

22 Friedrich A. Hayek, The Road to Serfdom, 1944, 1972, and 1994, at 98-99.

  

 


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