Voluntary Exchange
In deciding what property to acquire, whether necessities or luxuries, people have to make choices. Their wants are potentially insatiable, but their acquisition capabilities are limited by a finite amount of resources in the form of time, energy, and assets.
Like any shopping center, this outdoor mall in Santa Monica, California offers a selection of stores to cater to varying consumer preferences and values.
How people spend their limited resources depends on what they value.
The Austrian school of libertarian economists deserves credit for developing the idea that value is subjective. A competing idea, the labor hypothesis of value, is that all things owe their value to the amount of labor that goes into their production.
The falsity of the labor hypothesis of value is so easily demonstrated that it is rather startling that people still cling to it. Do you value a product by considering how much labor it took to produce it? You can observe that no matter how hard someone works at something, if the effort results in a product or service that is defective, consumers will value it less or not at all.
The BMW 3 Series is one of the most popular luxury automobiles around the world.
Over the last 40 years the labor of American auto workers may have been just as hard, skilled and diligent as that of Japanese and German auto workers, but car buyers in America and around the world valued the Japanese and German cars for their higher quality and better reliability, not for the labor involved in making the cars. Galambos stated that the theory of subjective value can be derived also from his postulates of volitional science, as follows:
All persons live to pursue happiness.
All persons live to acquire property which they value subjectively according to their individual preferences.
Vincent Van Gogh (1853-1890) whose paintings today sell for tens of millions of dollars each but in his lifetime, van Gogh made only $109 from sales of his paintings.
The subjective nature of value is demonstrated by the fact that the last statement – that all persons live to acquire property – would not be correct if it meant only that people live to acquire what is usually called property, namely tangible assets and financial assets. Galambos calls these “secondary property” because they are derived from primary property, or an individual’s intellectual property, actions, etc.
Predominant among the greatest values created by the human race are the values created by innovators, ranging from those who discover the laws of nature to those who use such discoveries to develop the technologies and labor-saving devices that in many parts of the world have greatly augmented productivity, the comforts of life, and the standard of living. Unfortunately for humanity, the greatest of such values, those of the scientists who discover the laws of nature, are the least well rewarded, if they are rewarded at all.
Nikola Tesla (1856-1943), one of history’s greatest innovators, died penniless in 1943 in the New Yorker Hotel.
Many intellectuals are not acquisitive when it comes to secondary property, but highly motivated to acquire primary property in the form of knowledge. This is one of the principal reasons why so many intellectuals lean toward the political left: A system that purports to reward all persons equally would seem more attractive than a system where scientific and intellectual contributions are often not rewarded in proportion to their value.
Johannes Gutenberg (1395-1468), the famous inventor of the printing press, died bankrupt after becoming embroiled in a dispute with a creditor.
To remedy this miscarriage of economic justice was one of the factors motivating Andrew Galambos to develop the ideas set forth herein. Rewarding innovators in proportion to their contributions is a principal subject of the part of this book devoted to an exposition of Galambos’ lecture course entitled V-201.
Prices
Prices provide important information to everyone: producers, consumers, entrepreneurs, and investors. Prices guide economic decisions. It is through comparing prices and one’s subjective estimate of value in relation to price that people are able to make choices on how to deploy their resources, in everything from shopping at the grocery store to deciding what line of work to pursue. In a market free of coercion, prices are an amazingly effective, constantly updated stream of information that signals the relative availability and desirability of all goods and services.
The Law of Supply and Demand
Most prices fluctuate constantly in a free market. Sometimes a shortage or a surplus of a commodity may develop, increasing or decreasing prices above or below their usual range.
When prices are high, calling forth increased production to take advantage of the higher prices, the increased production eventually causes lower prices because a high price causes demand to fall. Conversely, when prices are low and reduced production has reduced supply, there will be increased demand that brings about rising prices.
Diocletian, Roman Emperor from 284 to 305, attempted to curb inflation through his Edict on Maximum prices in one of history’s more quintessential economic failures.
In the long run, there will be price fluctuation around an equilibrium point, where supply and demand are in relative balance. Any time there is an imbalance, operation of the law of supply and demand will bring it back towards balance.
Galambos posits that the law of supply and demand is a natural law. Therefore, it cannot be repealed by political action. It operates whether or not politicians like the result, as shown by the immediate or eventual failure of price controls wherever and whenever they have been imposed.
A True Democratic Concept of Voting
In Galambos’ definition of democracy, everyone rules only himself and his or her own property. This definition of freedom requires not majority rule, but rather self rule.
In the case of voluntary exchanges, each person can make his own decisions about his economic life without interfering with anyone else. It works through a true concept of voting. A vote means a choice. Choices in the marketplace of voluntary exchange are, in effect, votes for the products and services of one’s choice.
Ludwig von Mises (1881-1973), economist and philosopher
This was explained by Ludwig von Mises in his economic treatise, Human Action as follows:
“In the political democracy only the votes cast for the majority candidate or the majority plan are effective in shaping the course of affairs. The votes polled by the minority do not directly influence policies. But in the market no vote is cast in vain. Every penny spent has the power to work upon the production processes. . . The decision of the consumer is carried into effect with the full momentum he gives it through his readiness to spend a definite amount of money.”
Most people upon initially encountering the foregoing concept of voluntary exchange as the source of freedom and democracy will think immediately that it could not work as the sole mode of human governance. If you continue through this book, however, you will see how the mechanisms of credit, insurance, and true justice in fact make self-governance possible. What we have now is not working, witness the numerous wars throughout the history of political democracies and the financial difficulties or impending bankruptcy of every modern political democracy which has evolved into a full-fledged welfare state.