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Foreign. Principles of Economics. My complete guide to understanding Economics is now available in hardcover, audiobook and ebook from seifeddin.com, amazon, and many more booksellers worldwide. And now I am also teaching a course based on this book on my website, seyfeddin.com Principles of Economics will run the whole academic year from September to June and will have a new lecture every two weeks, as well as weekly live online discussion seminars open to learners from all over the world and from all walks of life. Whether you're a student, a professional, or a retiree, you are making economic decisions every day. And this course will arm you with the wisdom of centuries of economists to improve your economic decision making. You'll also get a free book of Principles of Economics. If you sign up for the course, go to seifedin.com and sign up now. Hello and welcome to Lecture 16 of Principles of Economics. Today's lecture's topic is violence. In this lecture we begin the final part of the book, the three chapters of the book that discuss the topic of civilization, and that is also the topic of the last chapter of the book. So everything that we've discussed in this course so far has been about human beings interacting consensually with one another. People agree to trade with one another, to cooperate with one another, to engage in the division of labor, to take part in sophisticated capital production. Everything that we've described so far has been done voluntarily. It was with the consent of everybody involved. Now, this does not mean that this is the only way that people can interact. Of course people can interact in different ways ways, namely in one other way categorically, which is violence or coercion. And so in this final chapter of the book, we discuss the concept of violence and coercion. And then. And we discussed that in this chapter. In the next chapter, we discuss how human beings defend against that and how this is ultimately an economic good, like all other goods. And we're going to analyze it using the same economic tools that we've used to analyze all the concepts that we have discussed in this course so far. Having established our understanding of violence and defense against violence, we then present the final chapter of the book, which is the culmination of everything that we discuss, and that is the concept of civilization and why economics is so vital toward understanding how civilization emerges. So what is coercion? This is where we begin today's lecture. Coercion is the imposition of one's will on another, and that is done using violence or the threat of violence. And so if you attack Somebody physically, if you kill them, if you take their things, if you violate their property rights, these are all forms of violence. Or if you threaten to do those things, that is a threat of violence. And you effectively coerce people by violating them and committing violence or threatening violence on them. Now this is a problem, of course. If human beings were to start fighting and hitting each other violently, then we are unable to engage in all of the nice things that we have discussed so far. It's not easy to maintain property if you are constantly fighting over property with everybody because people are trying to take your things. It's not easy to trade with people. If they think they can resort to violence against you, then they're not going to trade with you. And there's no opportunity for gaining from trade. All of the beautiful things that we've discussed in the first 15 chapters are not possible if people choose to engage in violence. And so that's why, from the Austrian perspective, or from the Rothbardian perspective, we present this concept of the non aggression principle as the only way in which a society can work effectively. So there are two ways for human beings to interact with one another. They can interact voluntarily, in which, in which case all participants expect to benefit from the interaction and that's why they choose to take part in it, or they can interact coercively, in which case at least one participant expects negative consequences from this interaction. So violent aggression, when human beings aggress against each other, is like animal attacks or natural disasters. It's undesirable. People value not suffering these catastrophes and so they work to protect themselves. Defense against violence is just another economic good, a human act, important to distinguish between violence and the initiation of violence. So people don't want to suffer violence and so they find ways of protecting themselves against it. And one of those ways is the use of violence in defense. But there is a distinction between the use of violence in defense and using it to aggress. In other words, to initiate aggression. Initiating violence violates victims property rights in body and objects and likely leads to retribution, or at least the absence of cooperation. It's hard to cooperate when people are violating each other's property rights. So the extent to which groups of individuals, small or large, agree to reject the initiation of violence is the extent to which they can live in a peaceful, extended market order and benefit from the division of labour. The extent to which societies believe some groups or individuals have the right to initiate violence is the extent to which conflict becomes a regular feature of society. Ultimately, the more people internalize in their Mind the idea that it is legitimate for someone somewhere to initiate aggression against others. The more aggression is going to be there and the less likely people are to cooperate. And therefore the less they cooperate, the less we see all the amazing products of the capitalist division of labor and property rights that we discuss in this book so far. So the problem with violence is that if somebody has a concept of someone, anyone having the right to initiate violence and use violence legitimately, the question then becomes, well, why should they have it and not others? And then you get into an eternal conflict over who gets to use violence. And of course that's a conflict that is going to likely turn violent. So when someone accepts the concept of initiation of violence, we end up in a society that is marred by violence. If, on the other hand, we accept that violence is only legitimate to be used in the case of self defense, then we find that we can exist in a world where nice things can happen, where we can have the capitalist modes of production that we discussed earlier. It's possible to have a large functional society and division of labor in which violence is acceptable as self defense. But initiating violence is not accepted. This is a universal rule that can apply to everyone in society and allow for peaceful cooperation, production and prosperity. It's what is called the non aggression principle. And this allows society to scale. Anyone can join a society successfully and productively by abiding by this rule. It's not based on the authority of anyone. This is the only way in which a human society can function effectively. It's if people accept and understand the idea that they cannot begin violence, initiate violence against others. And this is what is called the non aggression principle. And Rothbard defines it as no one may threaten or commit violence, in other words, aggress against another man's person or property. Violence may be employed only against the man who commits such violence, that is only defensively against the aggressive violence of another. In short, no violence may be employed against a non aggressor. So you can only apply violence in defense. If you accept that concept, then we're able to live together as a society and we can join each other productively and we can see the benefits and reap the benefits of working together productively. Nice quote by Edward Fuller, which I quote, who's written a nice paper on the history of this concept. He says a large and diverse group of history's most eminent thinkers have expressed ideas very similar to the non aggression principle. The rudiments of the principle were known to the ancient Egyptians around 2000 BC, the ancient Hindus around 1500 BC and the ancient Hebrews around 1000 BC. Around 500 BC the ancient Chinese and Greek philosophers expressed the underlying logic of the principle. Cicero came close to articulating the principle in its modern form. Thomas Aquinas reasserted something strikingly similar to the non aggression principle after the Dark Ages, and the scholastic philosophers carried the idea into the early modern period. During the 17th century, the non aggression principle rose to the pinnacle of Western philosophy. If you work for yourself or run your own business, you already know what it means to take responsibility for your life. When you deal with the medical insurance system, you realize there has to be a better way. Crowd health is that better way you can look after yourself, your family and the people around you and join a community that helps you do that. Instead of handing more money to an industry that profits from sickness, Crowd Health gives members tools to take charge of their health, helps them negotiate medical bills, secure prescription discounts, and choose the doctor they want. Each month, members crowdfund eligible medical bills. They have a 99.9% funding success rate and the funding takes an average of just seven days. So far, CrowdHealth members have saved over $56 million in healthcare expenses because they refuse to overpay for healthcare. Take charge of your health expenses and be part of a community. Join CrowdHealth to get started today for $99 a month for your first three months using code SAFE@JoinCrowdHealth.com that's JoinCrowdHealth.com code SAFE. CrowdHealth is not insurance. Opt out. Take your power back. This is how we win. Join CrowdHealth.com this is the concept that allows society to get around violence. But of course things are a lot more complicated. We can't just say this and then tell everybody to believe it and expect them to go ahead and just be civilized human beings. As you look around you, you see people behave very differently. We see a lot of forms of violence, but in fact, probably the most significant form of violence out there these days and form of coercion is government coercion itself. Now we're going to discuss this topic in this chapter and also in the next chapter. We're going to discuss in this topic first what government does when it interferes in the economy or in the dealings of individuals with one another. What are the societal implications of the this and why Effectively government action is a form of coercion. And then in the next chapter we're going to see how people defend against coercion and why government is usually not part of the solution. In other words, the point of those two chapters is to communicate the idea that government is usually part of the problem rather than the solution for the problem of violence. So, so in this chapter, I mean, most economists and social scientists present government as the solution to society's problem of aggression. Since aggression and violence are part of human nature, they cannot be eliminated. They can only be managed. And the only way to do so is by monopolizing them with one entity. So when everyone accepts the legitimacy of the monopolist, acts of violence committed by anyone else are considered illegal and punishable. That's the basic idea of how government is presented as the solution for the problem of aggression. And this is something that Mises himself says. So there's a quote by Mises where he says, government ought to do all the things for which it is needed and for which it was established. Government ought to protect the individuals within the country against the violent and fraudulent attacks of gay gangsters, and it should defend the country against foreign enemies. These are the functions of government within a free system, within the system of the market economy. Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its jurisdiction. But in the market economy, the main task of the government is to protect the smooth functioning of the market economy against fraud or violence from within and from outside the country. And that is the classical liberal conception of the state. And that is something that most economists in the Austrian tradition historically would probably fall under if you ask them about their conception of what the state should do. Well, maybe most. I'm not so sure about most, but I would say a significant number of Austrian economists would call themselves classical liberals and that they believe that the government should have the role of securing law and order, but not interfere in the market. It just provides the legal framework that allows the market to function, but it does not interfere in the market. So why would you not want the government to interfere in the market? We're going to first look at the problems of government intervention in the market, and then we're going to ask the question of why don't the those things apply to government intervention in law and order and violence? Why is it that government can manage production of goods and services, but not the production? Or the government can manage defense, but not the production of other goods and services. So. So for Mises, in the classical liberals, government is unable to perform economic calculation over production decisions because of the economic calculation problem, which we discussed in chapter 12. So I think Mises did an excellent job of explaining why socialism fails and that is because of the absence of property rights. And so it is because governments, when they interfere in economic production, when they own the means of economic production, they are unable to perform economic calculations. This is why you don't want the government to be initiating violence against the market economy. You don't want it to be taking money from people as much as possible. You don't want it to be telling people what to sell for as much as possible. And so we're going to see why this is the case specifically, because we haven't discussed it yet. In this book, 15 chapters, we haven't really spoken much about why government interventions fail. Oh, well, I mean, we do did, but I guess not as much as we could have. So now we're going to make up for it by explaining why government intervention essentially fail and ultimately comes down to the fact that government intervention is aggression. It is violence. It's initiation of aggressions. It's initiation of violence. So government can protect property and protect against foreign enemies, but it cannot protect against. But it cannot protect against manage the production of simple economic goods. But isn't protecting property just another market good? Why can government produce property protection but not apples, for instance? So let's look at how government coercion fails. Well, one great example is price controls, which we've discussed earlier in this course, always result in shortages, surpluses, black markets, highly wasteful methods of rationing supplies like queues and, and coupons. All of these things happen when you impose price controls. And I recommend 40 centuries of wage and price controls, how not to Fight Inflation, a great book that mentioned in earlier chapters in this book. So government cannot magically make the producer profitable at a lower price. It could just stop him producing, which results in reduced supply. If you try and make prices of goods low, you don't make it so that producers can magically make them at a low price. You just make it difficult for producers to sell them at that price. And so they go out of business or they reduce their production or they start selling them on the black market. So the black market secures the good for those who need it at a higher price and imposes added risks and costs, prosecution, confiscation and imprisonment. A big part of the cost of production when you make something illegal or when you impose a price control that fixes the price is that now there is a significant risk of prosecution, confiscation and imprisonment, and that goes into the cost of the production. So specialist black market traders emerge and capture the profit at the expense of the producer, making him invest less in future production. So when you are a producer and your good is sold on the black market, some people are handling the black market aspect of production because it involves criminal activity and it involves risks and so they get a big chunk of the money and you don't get that money to go and try and make your production. 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Better you don't get to invest it in capital that is going to make your products cheaper. So this is why black markets are so counterproductive or price controls are so counterproductive. It's that even though people can find ways around them, they always find ways around them. Still. It's very destructive that they have to go through black markets because now the premium that is paid for the black market is money that the consumer and the producer don't get. And it is not going to give more resources for production. It's just going to make production more difficult because so much of the production process goes underground. And so instead of having more resources for the producer to be able to invest in capital production, these resources are going to subsidize crime effectively. Black markets, price controls end up being a tax on production and a subsidy for crime. Queuing is another way in which the market gets around violence by the government in trying to impose prices. In other words, people end up having to stand in line waiting to get access to a limited number of goods. And what this does is that instead of paying for the cost of the good with money, you pay the extra cost in time. And so the people who are willing to spend more time waiting for the good will be able to get it. And of course, the problem here is that the people who end up getting it are the ones who value their time the least. And the problem there is that they don't. That time that they spend, that money that they spend in terms of time is not resources that are going to be given to the producer to invest in production, to have more capital to be able to increase production. It's just waste. All of that time is being wasted. And it doesn't go to the producer producer, which was what would happen if the producer was allowed to charge that price. So this is what happens when the government tries to set a price that's low for a good. Same thing happens when they try and set a price that's high. Similar. The example here is the minimum wages, which we discussed in chapters one and four. So the root of the problem of prices is always inflation. It's always why prices are too high and why wages are always too, too low. Inflation takes real wealth from savers, devaluing their money and raising prices of the goods they purchase, while allowing the government to spend with little constraint. Mainstream economists sometimes believe that government spending can fix inflation, but that's because they don't understand opportunity cost. All money spent to meet government needs is money not spent to meet individual needs. And so one way to fix inflation, well, they'll tell you, is government just spends money, gives people money, and then you get over the problem of the rising prices. But of course, the government's money itself is going to come from inflation or taxation, both of which are going to make things less affordable for people. Another intervention is to subsidize specific goods. If Government covered a part of the cost of an important good, it becomes more easily affordable for society, at least so the thinking goes. But that also ignores opportunity cost. At the margin, funding is directed toward the goods the government wants citizens to have, and away from what they would want to have themselves. At the end of the day, it isn't as if the government is just going to generate economic resources and dedicate them toward the production of the new good that they are interested in subsidizing. They are going to take resources from society and direct them toward the good that that they want to subsidize. So effectively, they're taking resources away from where people would have spent them themselves and directing them to where the government wants to spend them. And so effectively, subsidies for cheap foods just make other foods more expensive, making everyone fat and sick, which has been the case all over the world over the last century, as governments continue to make the worst foods, the cheapest foods available, and cheaper and more predominant in people's diet at the expense of healthy foods, mainly meat, which rarely ever gets the subsidies that cheap foods get. Another example is unemployment subsidies. They'll incentivize and they'll give money to people who are unemployed, but all that does is incentivize unemployment and punish employers who have to pay for it, and employees as well. So you tax people for working and you incentivize people to not work. Similarly, needs based welfare encourages people to remain poor. If you get rich, you stop qualifying for welfare. So another example is for government to produce things. Well, if these things are expensive, then government should just nationalize this industry and produce and sell it at a low cost. But government, and the idea here is that government doesn't have to chase a profit, so it can focus on inclusion and access. But this fails because it misunderstands the nature of prices and economic calculation. Prices are not just a way for greedy people to get rich. They allow economic calculation. Eliminating the profit motive from economic production does not lead to selfless, abundant and affordable production. And it leads to a failure of economic calculation, causing large amounts of waste. Government spending has to come from taxes or inflation, both of which destroy savings, reducing the incentive to save raising time preference. So ultimately, all these issues that we are discussing so far boil down to the idea that all the things that government can do are by their necessary nature are coercive. And they involve taking money from people, whether it's through taxation or inflation, because that's how government finances itself. And so ultimately all of that involves coercing against others and all of that involves creating economic outputs that people wouldn't have chosen themselves. And that's why it is destructive, because it takes away what people would want to do themselves for themselves. Now, most mainstream economists, they, they do understand these problems. They talk about a lot of these problems. And your average econ textbook will tell you about the problems of price controls and so on. Even Samuelson's textbook has some of these issues. But even though those problems exist, they still have all kinds of rationalizations for government to intervene in the economy. And the most broad umbrella term for these rationalizations is what is called a market failure. Effectively, what a market failure is, is a product of free human interaction that is unfavorable to an economist. So if you're an economist and you don't like something in the world, you just call it a market failure. People are doing things that I don't want, so therefore government needs to interfere and make sure that they do the things that I want. That's essentially what it is. This is my spoiler alert to try and explain it to you before you before giving you their perspective on what it is. If you ask mainstream economists what is a market failure, they'll tell you that left to their own devices, free individuals will produce outcomes that are infinite, inferior and suboptimal in many fields, in many issues, in many economic products, the market on its own does not produce the socially optimal. Now for a quick word from our sponsors. 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If you want to give someone the gift of Bitcoin, get them this professional service that will ensure they start off knowing exactly how to manage their coins and not lose them. Go to thebitcoinway.com and start bitcoining more confidently. Outcome and that outcome requires government intervention so the government can interfere and produce a better outcome. Now from the get go, the problem with this is that it posits an omniation central planner capable of deciding what would be the optimum outcome of individuals free interactions, then denouncing the actions of free individuals as inferior and in need of change. So there has to be somebody in a position of passing moral judgment on other people's preferences saying no, you shouldn't be doing this, you should be doing that. So while this is couched in terms of the public good, methodologically this approach simply consists of a central planning declaring their will to supersede the will of all freely acting individuals. This notion that this person is acting in some kind of public interest or a public good is really just cover for the reality of the fact that this person is just imposing his will on others without having the ability to tax those people without having access to their money. These people would have the money and they would do with it what they want. And they're capable of doing all the things that they want without having to have a gun to force them to do the things that they want. Because if it was a gun for put to their head, it wouldn't be something if you had to put a gun to their head, it wouldn't be something that they want now would it? So effectively what you see with so much of modern economics is that an economist will perform a large amount of theoretical or mathematical or experimental make work and then conclude that freely acting individuals are producing something sub optimal to Society as a whole, which they in turn call a market failure. They conveniently skip over the question of what allows an academic who has to write government research grants to eat to pass judgment on the ultimate ends of every other person's actions and what goal they should meet. This is ultimately the question that all of this approach misses, which is nobody. Why should any one particular person get to decide what everybody else gets to do? Why can't people decide for themselves? Why is it that some people get to decide for others and others don't get to decide for themselves or for others? Of course, the answer is that by presenting economics as an objective method, mathematical function where economic value itself has no unit with which it can be measured, government economists can conjure any numbers needed to justify any form of aggression against the individual property effectively. Remember we said all of this mathematicization stuff in economics suffers from the problem of the absence of a constant unit of measurement. Because we don't have a constant unit of measurement, we don't have an easy way of being able to. We don't have a way, not an easy way. We don't have any way of being able to compare economic quantities and to perform economic calculus. We can compare them, I'm sorry, we can of course compare our preferences and our valuations, but we have no way of performing economic calculations on actual valuation. And therefore we have no way of establishing objective measurements of valuation. And we have no way of performing economic calculation with these kind of without a constant. So therefore, the way that we find the way we perform economic calculation is through individual economic calculation with property rights. When people own the things that they own, are controlling, they can perform economic calculation because in that situation they are measuring everything against their own individual preferences. So it's their property, their preferences, and they can ordinarily value things against each other, and they can perform economic calculation on those things because they have market prices with which they deal. On the other hand, when there is no private property, then there is no possibility for performing economic calculation because there are no prices on the market. And because there is no objective measure by which we can perform objective. By which you can measure valuations objectively and then arrive at a societal level calculation of how to increase utility or valuation or subjective well being. So because there is no way of performing these subjective calculations in aggregate, we must therefore resort to bogus math. And that's essentially what these economists do. And so because there is no. I remember as we discussed earlier, there's no valid mathematical way of making these economic calculations without a fixed unit, then you can make these calculations, say whatever you want. And that's why these sort of economic calculations are so popular when they try and measure things like the total social well being, or they try and aggregate individuals well being across society and then try and interact, introduce interventions to increase the well being. You have to understand that this is all fictional math. There is no unit of measurement. They are talking about things that don't exist. And so any result is possible. You can structure one of those studies to give you whatever result and it cannot be falsified because everything is up for your own specification and all the measurements are completely subjective. So it isn't comparable in any way to a kind of physical law that can be calculated and measured by others and verified and falsified by others. So this is why it's so popular, because it serves as an excellent rationale for the violation of individuals property rights. So whatever governments want to do, they can just come up with a bunch of mathematical equations and justify it. So rather than follow the Austrian school method of individual action as the basis of understanding economics, modern economists, in a bold display of cargo cult science, attempted to copy physics. Remember chapter one, There is no constant unit with which to perform measurement of utility and value in economics. So mathematicization is unworkable. But when has something being unworkable ever stopped fiat people from ruining your life through trying to make it work in order to get over the unworkability of the math? Several ridiculous assumptions are made by modern economists in most of their models that formulate what people understand about economics in the 20th century. Number one, all agents have complete knowledge. Number two, all agents are rationally self interested as defined by the economist. Number three, perfect competition. That there is an infinite number of producers producing the goods. Of course none of these assumptions hold in reality and nobody has complete knowledge of everything. There's always a difference in knowledge between any two people, even an identical twins. A sane adult would conclude the invalidity of the assumptions make modeling markets invalid. A fiat economist concludes that the invalidity of the assumptions makes markets invalid. This is an unbelievable sleight of hand done by economists, which is that they posit these ridiculous models of economics and then when they discover that their models are not real, they don't just say okay, we are wasted our lives doing something completely worthless, which is a pointless model. No, they conclude that markets don't worry, work. And the answer to fix the markets is guess what? More central planning. So they originally made the model to central plan the economy. And when they discovered that their model has no relation to reality. They still use that as an excuse for central planning reality. And so, with equally non existent reason, the economist concludes government can fix this market failure. Fiat economists built up the straw man of the mathematical model of the market economy and then dismantled it and concluded that its defeat means markets don't work, not that their models don't work. So here are the assumptions that go into the modern neoclassical model of economics and why these assumptions fail and why they are used as a justification for more government coercion. So the first one is information asymmetry. And the basic idea here is that two people taking part in a transaction will not know everything related to the transaction. One person might know more. The seller of the car knows about the car more than the person buying it. One party knows less, and so that one party is at a disadvantage. Therefore, the government needs to intervene to allow trade to happen. Government needs to provide the information in order to make trade trade possible. And this is one of these many give many rationales given for government intervention. But in reality, again, understanding the economic way of thinking, if people value it, if this is something, you know, the rationale here is that this is the information is something that is valuable for people, but it's not available and the government needs to provide it. Well, why? If it is valuable for people, why can't people just get it themselves? Why can't people just work to produce it for one another? Because they'll pay for it. Indeed, we see that this is the case. Billions of trades take place every day with both parties walking away satisfied without having to know everything. It happens every day that billions of people trade without having to know everything about the things that they do. But they know enough to know that this trade is beneficial for them and they concluded and they are happy with it. And why would the government know what the transacting parties do not know? Whose interest will the government really be looking out for? In reality, information itself is just another market good. If people really care about government, really care about having information about a particular product, that information itself is a market good other than the product. Information about the product is a market, just like the product. It's scarce. People value offers people utility. So why can't it just be another market good? There's no reason why government will know how to provide it. There's no reason why any market why, as a market good, it would be better provided by government. And in fact, this is what we see in the real world. The favorite example that economists give for how information asymmetry is Real and it necessitates government intervention, is usually the example of used cars. But since the early papers were published about the problem of the information asymmetry in car markets, we've witnessed the development of a gigantic global industry for information about used cars. And now when you want to buy a used car, you just go to the owner and the owner has a report that has all of the things that have been done to the car. Why does the owner do this? Because he knows that if he has that report, buyers would prefer to buy his car. So it increases the value of your car if you can offer your buyer the certainty to know exactly what has been going on with the car. So people have an incentive to do it. So the vast majority of cars are involved in something like this. And so the market on its own, provided that good now government, a government agency could provide it. But it's just another good, just like the car. And it's going the provision of this good is going to run into the same problems that the provision of the car runs into. So if they can't provide the car itself, why would they be able to provide the best information about the production of cars? Another example often given for why government intervention is needed and why markets fail is irrationality. And here there's a pseudoscience called behavioral economics which has produced a highly popular cluster of fallacies that are used to justify government coercion, and that is irrationality that people are just not rational and therefore government is needed to fix them. How does this work? Well, the way it works is this. Behavioral economists posit arbitrary and irrelevant criteria for what constitutes rational behavior and then test their university's undergraduate students as human lab rats and stand ins for all of humanity to see whether these criteria are fulfilled. Killed by humans. After the undergrads fail to give the researcher a result that meets his criteria of rationality, he smugly denounces the human race as irrational. Finally, he concludes that the only way to correct the behavior is through the coercive intervention of government. This is basically a summary of the majority, if not the vast majority, of behavioral economics research. Here's what we believe irrational human beings should do in this artificial, contrived setting in a laboratory. Now, let's get a bunch of undergraduates from the university in which those professors teach they and give them free pizza and ask them to do this thing that we are hypothesized are hypothesizing, defines what, what rationality is. And when they don't do what we want, we're going to Call them irrational. And therefore, since people are irrational, we need government intervention. But of course, the problem here is that economic rationality cannot be studied in the context of a lab experiment, as it is inherently subjective and marginal. It pertains to individuals decisions at the time and place where these decisions need to to be made. And in a lab setting, all decisions pertain to the lab, not to the real world. There's no good reason to accept behavioral economists contrived criteria for what constitutes rationality. And if you do accept them, why are humans irrational but behavioral economists rational? I mean, if their results are true, then why should we take their word for it, since they are also humans and they are also irrational. And if they're irrational, why should they get to define what is rational? Isn't that interesting? The entire thing is a cluster of fallacies, because ultimately what matters is how human beings behave in the real world to meet their own ends, not ends that are defined in the context of a lab setting. And the question then becomes, why do all of these biases not distort behavioral economists? More importantly, why would governments intervening in these markets be immune from this irrationality? And from these biases, wouldn't it be far more destructive if the irrationality is imposed at a coercive macro scale rather than individually voluntarily? In other words, if human beings are irrational, irrational, wouldn't you rather have a choice of which human being you're going to be dealing with at every particular point so that you can practice your irrationality, but at least get to choose, maybe have a choice in what kind of irrationality you're going to be subjected with from others. But when governments intervene, when they present governments as a solution to the problem of irrationality, what you're effectively doing doing is you are forcing people to deal with one specific part of or one specific type of irrationality, which is the rationality of people in power who have the ability to coerce people. So you have little to feel from others. Sorry, you have little to fear from others being peacefully irrational, but you have a lot to feel from a central planner being irrational. You can protect yourself voluntarily from voluntarily irrational people, but you can't protect yourself from violently irrational people as easily. The third kind of market failure that is used by economists to justify government intervention in the market and government coercion and initiation of aggression is the concept of imperfect competition. Essentially, without the assumption that we have an infinite number of buyers and an infinite number of sellers, the neoclassical model of the economy does not work work. Now there's only 8 billion people in the world. So we never have infinite number of sellers or infinite number of buyers. And in most things we have lots smaller numbers than infinity or 8 billion. So that in the model, in the mainstream economic model, this is considered imperfect competition. And so effectively all markets are imperfect. If you, if you define perfect competition as infinity, then everything is imperfect and everything can be improved, of course, with the intervention of the state. Of course. The only fix for a monopoly is to have a monopoly on violence, forcing all market participants to obey its edicts on how to operate in a market free of monopolies. That's the logic here that, oh, this market of people voluntarily dealing with each other continue. Contains an element of monopoly. So let's bring the mother monopoly of them all, the one that has a monopoly on violence, and have it manage this monopoly rather than having people willingly go and consensually sort things out. The scam here is obvious. They scare you of monopolies on the free market who have no power to force you to buy or sell anything and subjugate you to the monopoly that will destroy your life if you disobey. Disobey anything it says. And this is really the issue whether it is whatever happens on a market, if there is a monopoly, you don't have to buy, or you can set up a competitor and that's it. No, there's no legitimate recourse for the seller to force you to buy their stuff as long as it is a market monopoly, if it indeed such a thing exists. But a government monopoly monopoly can kill you if you don't buy its stuff. And bye bye its stuff means give it more money and obey its edict. So this is the lack of logic here, that they look at something that's not monopolistic and they present the monopoly as the justification for bringing in this actual monopoly, which is the violent monopoly, the state to come and manage this industry. In reality, free markets do not produce monopolies simply because anyone is free. Produce anything anyone else produces. There are no examples. I've never come across a single example of a free market monopoly. Anytime someone has a monopoly on a free market, there will be competitors. They will emerge and they will make what they're making, and they will do it at a better price and probably a better quality, maybe both a better price and a quality. As long as the producer has no recourse to the state to ban others from competing against him, then these monopolies cannot emerge. A producer who is charging an exorbitant price is powerless to stop others from undercutting him. But only government monopoly allows only government coercion, allows monopolies to exist. In decades of examining this question, I've never come across a single example of monopoly provider whose monopoly status was secured on the market peacefully rather than through government coercive intervention. Government regulations create the monopoly, and economists then call it a natural monopoly, which justifies more government intervention. Often government monopoly laws target a producer acquiring large market share through offering a superior product. In this case, they're not protecting consumers, but they're protecting the inefficient producer producers. So one producer will make a huge technological breakthrough in the way that they produce something and then is able to produce it at a much lower price than his competitors in a free market. He would grow and he would put his competitors out of business. And that would be a good thing because it means that everybody's being able to afford the good at a much lower price. And then others will come and compete against him and they will offer yet lower prices. And this is what ends up happening on a free market. And then if government tries to regulate this, then what they'll do is they'll prevent him from expanding and offering lower prices and protect his competitors who are able to offer higher, who are only able to sell at higher prices. So they are effectively hurting the consumers. Rockefeller's Standard Oil is the classic example here. When it was viewed as a monopoly, it was achieving the status of monopoly because it was buying all the inefficient refineries and it was making better refineries and it was able to sell at a much lower price. And it, to the extent that it was growing as a monopoly, it never was really in full control of the entire industry. There were always other small players, but it was only growing because it was continuously charging a lower price and was continuously giving the producers a low price, the consumers a low price. And eventually it lost its monopoly status, not because of government intervention, it lost it because it's simply other other technologies came about and other companies came up with inventions and they just couldn't keep up. It's just the nature of any industry that not one company is going to be able to keep up forever. So the case of the Rockefellers, in the case of Standard Oil, they did not think that there was going to be a lot of oil in Texas and California, so they did not invest heavily in prospecting there. And other people took a chance on Texas and California. And by the time the Rockefellers could go there, other people had already established massive fields and massive operations also. And another example, another Important point was the development of the car, which increased demand for gasoline. Whereas the Rockefellers had built their name on kerosene. So technology was naturally going to keep developing new products. And new people are going to come up with new ways of using new products better and making them them better. New oil fields were bound to be found in other places. And all of those things together just lead to a variety of new ways in which the market is constantly improving the products for people and producing new producers and finding new capitalists that are producing those goods, constantly competing with one another and constantly improving production. And then the fourth category of market failures are the two related concepts of externalities and public goods. And these are usually given as the things which most economists accept need to be provided by the government. We're going to see why these concepts don't really make a lot of sense. Most mainstream economists would accept that the market economy is the best way to organize the production of private goods. But they'll tell you that the market fails when dealing with public goods and when dealing with externalities. What are externalities? They are positive or negative economic implications accruing to a person as a result of another person's consumption or production decisions. So a positive externality is something positive happening to you because of something somebody else does. So for instance, my business booms because of another business opening nearby. So you've got a gas station, but then a big restaurant opens near you. Well, now your business is booming because a lot of people are going to the big restaurant that's near you. There's another example. The negative example would be a negative externality where the new business is pretty producing a lot of pollution. Or it has a factory that has a big pollution footprint that produces a lot of gas that are negative externality and a lot of emissions that are negative externality. For people in our neighborhood, these kind of things are usually presented as things for which the government cannot intervene, for which the market cannot find the best solution. And so government must intervene. But an externality is an economically incoherent concept. If you understand proper property rights, your actions either violate the property rights of others or they do not. If they do violate the property rights of others, then they are a form of aggression. That's not an externality or violating somebody else's property. If I throw garbage on your land, that's not an externality. That's a violation of your property. I'm violating your property in the land. But if they don't violate your property rights, meaning if my business doesn't enter Your business doesn't touch your land, doesn't touch your property. And then you're annoyed because my business gets a lot of customers and that's making the neighborhood loud. Or you're annoyed at the noise, or you're happy because it's getting you more customers to your gas station. All of these. As long as there's no violation of your property. Right. Then it's just emotions on your part. And the answer is for you to just grow up and deal with them. Pollution is a form of aggression. If I'm polluting in your water and your land, it is aggression I'm aggressing on your property. And so that can be resolved the same way. Violations of property are dealt with arbitration, police, justice, court systems, all kinds of forms of organization we're going to be discussing in the next chapter. But if an externality, it doesn't involve the violation of property rights, then these are just emotions. Anyone can decide to derive any positive or negative utility from anyone else's decisions, but none of that justifies violating property rights. So I can decide that I get a positive value from anything that you do or non negative value, but that does not mean that I get to violate your property rights. You don't get to violate people's property rights. It's still a violation of property rights if you are going to use this as a justification because you're not responding to an actual violation of your property rights. So a market economy necessarily involves an infinity of positive and negative externalities from others. This is what it means to be part of a society. People are going to do things all around you. That's why you want to be part of society, because of the division of labor. And so every day you're benefiting and being hurt from other people doing other things in, in, in an infinite way which you don't even calculate. Somebody decides to buy something from a restaurant and the restaurant runs out of the last donut that you wanted. Well, that's a negative externality. Somebody looks good and you see them and you feel good when you see them, that's a positive externality. Should you be forced to pay people who look good because you enjoy looking at them? Should you be forced to make sure, should donut producers make sure that they always have one extra in case you want to jump in? All of these things are meaningless. As long as no property rights violations are happening, there is no justification for the initiation of violence. The only way we can have a market economy is everybody agrees to respect everyone else's property. And so we all need to grow up and accept that if we're feeling bad about something that doesn't involve violation of property rights, then we need to just get over it, maybe talk about it, but not pull our guns at each other. Because if we let that become a precedent, if you not violating my property still means that I can violate your property because of feelings that I get about what you do with your property, then we're signing up for a world of pain, for a world of endless people trying to meddle with each other's lives. And so related to the concept of externalities is the concept of public goods. Public goods are defined as goods that are non rival and non excludable. What we mean by non excludable is that it is not possible to stop others from benefiting from the good. An example is like street lights or national defense, or national parks or clean air. If you put lights on your street, then anybody passing by the street can benefit from it. If you build a military to defend the country, then everyone in the country can benefit from, from the defense that this military provides. You can't exclude people. You can't say, all right, this person didn't pay for the military, therefore he is not going to be protected when there's going to be an invasion by the foreigners. When a foreign army is going to come, we're going to point out to them all the people that didn't pay taxes and they could come and they can take their property and kill them. Whereas our military is going to defend the rest of the country. Country. That's obviously not how militaries go. So therefore there's no alternative but forcing everybody to pay for the military, because otherwise we wouldn't have one. National parks is another example. People just enter these very large areas and you can't really stop them. So this is, this is an example of what is called a free rider problem. Since you can't exclude people, they have an incentive to not pay, which leads to underproduction. So if everybody knows that the military is going to defend everyone anyway, if you pay or if you don't pay, the military is going to keep the border safe, then why should you be the one who pays? Why not let the rest of the people pay? And that leads to most people not wanting to pay or trying to find a way to not pay. And that then leads to the underproduction of defense. But if, on the other hand, the government forces everyone to pay, it can be provided in the necessary quantity. We can get the right amount of national parks or national defense or street lights. If we force everybody to pay and pay their share of what we believe is the optimum outcome. But the fatal conceit here is to imagine that economists can decide what the optimal necessary quantity is rather than people's actions. Countless of these goods are provided non coercively. Private parks are very common. There are a sixth of South Africa, the area of six of South Africa, sixth of it is private parks. And they maintain the land from the fees that they charge people who enter those parks. There's also lighthouses all over the world. We see examples of lighthouses being built privately without taxes. Bari charging the docking boats in the nearby seaport. The fundamental problem with all of these externalities argument is the ignoring marginality in decisions. People carry out the decision at the margin and so people decide to carry out an act if its benefits exceed its costs. Whether others benefit from this decision or not is largely immaterial. You will not go for God. You will not forego a beneficial act in fear of others benefiting. Meaning if you benefit from doing something, you're not going to stop doing it just because others might benefit. Seaports will not self sabotage by not building a lighthouse. They can afford to build just to ensure they won't benefit. A distant boat that passes by and doesn't dock in the seaport and pay a fee. If it makes sense for the business of the seaport, you're going to build it. And if some people benefit from it, that's fine. You're going to benefit from other seaports, lighthouses at some point. Same with street lights. You put the street outside your house on the light. You put a light outside your house on the street, because when you come back home, you want to have lighting around you. You don't. You want to keep the area well lit. And then when you go walk in the street around other people's homes, you also find light. It's impractical that you charge them. It's impractical that they charge you. It's impractical that you force them to pay for your lights or they force you to pay for yours. It's just perfectly normal and natural to expect that we're going to get more and more street lights over time. Because people like this thing. And if others benefit from it. Countless examples also exist of the failures of the provision of these goods by governments. And when we try and provide those things as if they're public goods, we always end up with all kinds of problems. Roads are a great example. Congestion everywhere. But not just that. There are so many other examples of things when, of things failing when provided by government. So for instance, national defense, and we're going to discuss this in detail in the next example, in the next chapter, national defense is presented as this example. And here you look at the US tank today. It charges enormous amounts of money in taxes and inflation for Americans and people all over the world. And yet kids can't walk in the streets in the vast majority of American cities. Like they're not safe enough for people to just walk in the street. So what kind of national defense are you getting? I mean the border is being overrun and the military is abroad killing random foreigners and making more enemies for America. Americans, when you have this carte blanche for funding where people can just keep contributing without having to, without any kind of accountability because you're forcing people to pay, then necessarily this leads to these kind of failures where people just where the people who provide this good massively over provide it and massively spend on things, things that don't provide the good. You know, they're not actually providing you with actual self defense with actual national defense. They're not making you more safe. They're finding more ways for them to meet their own needs. And they're being subverted by all kinds of special interest groups like military, industrial complex and foreign lobbies that want the US to do their bidding. So ultimately with all of those things, unlike with the example of roads, because government can confiscate the land to build road, they do not face the real cost of producing the road. So they do not calculate rationally and always overproduce. And so the result is we end up with an overproduction of roads and we end up with more and more of cities being taken up in the form of roads. And that necessitates more people driving around and around more and more without roads being considered public, public goods, we would still have roads, but every road would be built when the land's owner calculates that the return from the road exceeds the opportunity cost. When government now has no opportunity cost for it, of course they over provide it. In conclusion, non excludable goods are not a rationalization for violating property rights. Another concept related to this is the idea of something being non rival. So we said public goods are non excludable and non rival. And non rival refers to one person benefiting from a good does not reduce the benefit others get from the good. So example of this would be something like a lighthouse or street lights or an army protecting the entire country. But this also Makes no sense. A non rival good is a non economic good. Only way to be non rival is to be non scarce. All of these examples are scarce economic goods. Street lights are a part of the street and there is a limit on how many people can be in a street. And the only way to figure out the right amount of lighting is through economic calculation. Each individual security adds to the burden the security provider. More people in more territory mean more cost of security. It's, it's not a switch you flick. Yes or no, More people, more territory means more security needs to be provided. Provided. All of this talk of externalities and unrival and non exclusive is sloppy thinking caused by not understanding marginalism. If it's scarce, it's an economic good. It needs to be economized. And that can only be done with private property and economic calculation. Whether it is a soldier, a policeman, a judge, a road or a lamppost, there are only individual units being deployed with an economic cost and benefit. Only through economic calculation with property rights can these these resources be deployed productively and rationally. There is no reason to assume any of these resources is in any way different from all the other resources. Violence. At the end of the day, defense from violence is just another economic good. So just like private property and economic calculation allows us to produce cars and computers and buildings and houses, it can also produce judges and roads and lampposts and all these other manifestations of these abstract goods that are presented as being public goods. So the point so far is that all of these rationalizations for government initiation of violence in the economy don't really pass the test of economic analysis. If you really look at it, government managing economic production doesn't work. Government managing prices doesn't work. Government trying to dictate economic production doesn't work for all of the obvious reasons that we've discussed so far. But even these modern new rationalizations for government initiation of violence centered around market failure and the need for government to allow markets to function properly, all of that also doesn't seem to pass the test of believability. It doesn't seem to be a justification for initiating violence, because all of the explanations for it do not change the fact that some person is enforcing their will over others and they're getting to make the decision over other people's property, in other words, violating their property. So now we see, I think, a very important. From this understanding, I've come across the work of an economist called Vernon Smith, which I found really, really interesting. And Vernon Smith had spent the vast majority of his career, not as an Austrian economist. And he only came to Austrian economics very late in his career in order to make a mathematical model of the way in which economy functions. These economists of the neoclassical economists in the 20th century introduced some assumptions that were needed in order to make the model work. And so, as we mentioned, there's complete, perfect knowledge, people are rationally self interested, and then there is perfect competition. The past 70 years of economics have primarily consisted of supposed geniuses receiving government paychecks to poke holes through this ridiculous mathematical model and then conclude that they have disproved the possibility of markets working and therefore justifying government intervention. I guess a good metaphor for this to try and explain the problem of most economic analysis of government intervention and market failure is probably good. To use an example with engineering and the flight of the bird. If you try to teach in a classroom how birds fly, you want to make a mathematical model of how a bird is able to fly. You want to look at the weight of the bird and then the amount of power that is generated by its wings and how that results in it propelling itself forward. You can demonstrate those things in an aerodynamics class with a simplified model. Obviously, you can't produce a 100% accurate calculation of everything about the bird because the bird is a very complex creature. But you can produce a general simplified calculation that's going to teach the students and help the students understand how birds fly in a very real way. And so in order to do that, you need to make a few assumptions. For instance, instance, you assume that the weight of the bird is uniformly distributed across its body. This is obviously not true. Some parts of the bird are heavier than others. But for simplicity, you assume the whole thing is evenly distributed. Now, this is a good way to explain how markets, how birds fly. But of course, it's not meant to be a 100% accurate mechanism of illustrating how birds actually fly. It's not meant to be a 100% reliable model of how birds function. So if somebody were to discover, well, it's not discover. Somebody were to say, well, actually this assumption doesn't hold. The weight of the bird is not uniformly distributed. What do you conclude? One conclusion is that, well, this model is not very useful. You could argue it's useful, you could argue it's not useful. But the only thing that should be concluded from this is that maybe the model is not useful. What economists do is that when they find that these assumptions don't hold, they tell you that the birds can't fly. This is effectively what they do when they say that markets fail, markets aren't really failing any more than birds aren't flying. Birds are flying, and birds, billions of people every day conduct market transactions that make their life better. Millions of people, billions of people every day buy and sell things that make their lives better, and they engage in trading. So markets do work. The fact that the assumption fails only means that the model fails. It doesn't mean that the market itself fail effectively. Modern economists are disputing the validity of the assumption and thus concluding that the phenomena itself that we're trying to understand is not occurring. So Vernon Smith was an economist who used to do experiments on this, and all of his life he's been coming across all these examples of. In an experimental setting, students are able to arrive at the market outcome without having to meet the assumptions that seem to be required for the neoclassical model to work and without a central planner. And so I really recommend reading his work and citations mentioned in the book and looking at it because I think it's really fascinating, because if you study mainstream economics, you're taught this idea that markets can't work, that markets are imperfect, and that they need these guiding hands of government regulators in order to make the markets work. And yet he keeps showing that even without meeting those assumptions, the markets just simply work. People find prices, and the prices that they find about work for everybody, and everybody's better off. So people are able to improve their lot by engaging in market transactions without having to meet any of the assumptions that. That the neoclassical model needs. And this drives Vernon Smith to distinguish between two types of what he calls rationality. There's constructive rationality and ecological rationality. By constructive rationality, Smith refers to human reason consciously designing things. Examples are cars, airplanes, houses, and so on. A particular design that a person sits down and creates is something that we rationally construct. This is what he refers to as constructive rationalism, things that are the product of human design. On the other hand, there is what he calls ecological rationality, and this is order or design that emerges out of human action and interaction without a designer. So an example of this would be phenomena that don't have a central planner that has planned them, but they still emerge on their own. Language is the best example. Perhaps there are. For the vast majority of languages, there's no single individual who was responsible for setting the rules of the language. The language itself continued to evolve over decades and centuries and millennia. Sometimes a good example is airplane routes. So engineers design airplanes. But who decides where airplanes fly, fly from, and where they fly to? Who decides the routes, yeah, the airlines decide, but they don't really make that decision as a kind of constructive top down decision. It's a decision that is a response to how the market reacts and how people move and market demand. And so he gives examples of how the model of airplanes and airplane routes over time has evolved and how that was not really the product of some single designer, but that over time it became apparent that the kind of hub and spoke model for airplanes was the more efficient model and that's how airline routes have developed. So this is an important distinction to understand between how the shape of something like the supply chain or, or the market structure of a particular industry or a language or airplane routes emerges is different from things like a car or a house or an airplane. These things are designed with a designer who sits down with a pen and paper and makes those things happen out of his mind. What is ecological rationality? Refers to things that emerge out of people's interactions. So people fly a lot from this town to that town through a layover, and then the airline realizes maybe we should have a direct route. And then they realize that another route is not being very active, so they're going to get rid of that route and replace it with another one to another destination. And so continuous process of people acting and interacting with one another under a basic abstract rule produces what is this ecologically rational order which is highly related to what, what Friedrich Hayek calls spontaneous order. These are complex phenomena that appear as the output of a designer's work, but are the product of human action and interaction under a set of agreed upon abstract rules. Markets are a great example of this. They're like language. Nobody designed them. So what designs the market system? There is no designer for who decides, for instance, who's going to produce how much copper in the world and who's going to consume it? Who's going to produce this or that good? Everybody's free to produce, everybody's free to consume. And then it's the decisions of people interacting under the set of agreed upon abstract rules of a market order where you buy and I sell and we accept the, the ways in which we do business. Under that kind of order, complex order emerges and we end up with, with a system that has a highly complex shape that looks like somebody had designed it. But it's a really important distinction to understand. And it's something that educated people usually fall for, usually fail to see that you look at something like the market or you look at something like the supply chains for a particular good and you think Someone sat down one day and drew up a plan for all of those things, and that if you were to be the person who sits in his place instead, you'd do a much better job. But in reality, with many of those things, these social phenomena, there was no single designer. This was the emergent process of people reacting and reacting and interacting with one another. And that is what markets are. Nobody designs markets. They emerge out of people's actions. They emerge in a world in which individuals are free to engage in the economizing acts discussed in the second part of this book. In a social order in which humans have justly acquired property and maintain ownership of their bodies, they are able to work, accumulate capital, increase their utilization of energy sources to meet their needs, and improve the state of the technology, they use all of these methods of economizing we discussed earlier. In a society where humans respect each other's property and reject the initiation of aggression, we can trade with one another, and from that emerges money, the division of labor and the modern capitalist system. There is no conscious designer directing the development of a market economy. It is the spontaneous order emerging from the observance of the abstract rules that govern modern civilization. This is an enormously important distinction, that markets are not the product of a designer. They emerge out of people acting under the set of abstract rules that govern modern civilization, namely, and most importantly, property rights. So the fatal conceit here, to borrow Hayek's term, is that by seeking to improve and mend the market economy with top down planning, coercive action will undo and disrupt the basic abstract rules that are foundation of the market economy, specifically property rights. This, I think, is the most important conclusion to draw from this chapter, which is that to the extent that we can have anything nice from all of the things that we mentioned in this chapter so far and in this book so far, the extent that we can economize is the extent that we respect property rights. And government intervention is always presented as if it is something that can improve the economy, that can improve markets. But that only makes sense if you think of markets as being the product of a design rather than the product of emergent, complex, ecological, rational order. If you think of markets as being something that can be designed, then you believe that they can be improved. And the way to improve that is to have government enforce things on people, either through violent dictate. You know, you have to do this or you cannot do that, or another way of governments influencing is, you know, centrally planning economic production or owning economic production, or taking money from people and taking resources and spending them. But all of these things violate property rights. And because they violate property rights, they violate the market order. And they reduce the, the ability of humans to economize and to meet their own needs and to meet the needs that they value. And that really is the dangerous thing. And why we cannot think of government as being the enforcer of property rights. I think government is better understood as the violator of property rights. And so to conclude, markets function regardless of economists objections and models. Markets fail when governments and economists coerce participants. It isn't humans that are just irrational, it's. It isn't humans that are irrational, it's just economists, really. It seems like it. But then again, maybe it is rational for an economist today to optimize their scholarship for justifying government intervention. So maybe they are, after all, rational too. Ultimately, what we're seeing in this chapter, what we've seen in this chapter is just an examination of the rationale of government as being the enforcer of property rights is the way that we can interfere in order to make property rights happen. And I believe I make the case for why this is not the case and why it's better to think of government as being the enemy of property rights. So the problem that needs to be solved because the government is aggressing against property rights, because as we saw in this chapter, all of their purported solutions and improvements for the market economy involve violating the property rights upon which the market economy rests. How do we solve for that? With defense. We defend against that. And that is the topic of the next chapter. Sa.