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Deflation

Keynesians, monetarists, and other non-Austrian economists all support inflationary policies and view deflation as a very dangerous phenomenon, as it purportedly can cause a self-reinforcing spiral of lower wages, prices, and economic activity.  However, this is a totally unfounded concern, and such a deflationary cycle simply would not occur in a free market -- it is only the attempts made to curb deflation that could possibly cause such an ill effect.

The first thing to understand is why deflation might occur in the first place -- while there may be more causes, I see three obvious ways in which deflation might occur:

• Increased Productivity: I would call this the most prevalent of all production-related market phenomena -- under a system of free markets, increased competition and efficiency would cause the general price of any particular good to go down over time.  Barring a rise in other factors, producers competing to provide the best quality good at the lowest possible price will produce a long-term trend towards lower prices of a good.  Taken at a market-wide scale, this phenomenon should produce a natural decline in price levels over time.
• Market-clearing: When a good has been over-produced, that is to say, the demand for a good at a particular price level no longer supports consumption of that good in a broad way, the price of the good will need to change.  This is the market-clearing effect of the free market -- producers will be forced to lower the price of a good, even to unprofitable levels if need be, in order to sell it.  This behavior becomes widespread during a recessionary period of the business cycle, and would lead to short-term deflation.  This deflation should be short-lived: once the market has cleared, the deflationary effect will be gone.
• Increased preference for saving vs. consumption: Sometimes market conditions may change such that consumers generally change their appetite for consumption in favor of savings.  The effect of this could also be deflationary, as suddenly the existing price level for many goods no longer supports their purchase, or amongst capitalists they choose not to invest now in additional production, but rather save or "hoard" their capital goods.  The market serves to coordinate this effect as well through the freely-fluctuating interest rate -- the prevailing rate at which market participants will borrow and loan money.  This is also short-lived and naturally corrected by the market: as consumers and capitalists save more money vs. consuming or investing, the rate of interest will fall in response to this change until it again becomes more advantageous to consume and invest vs. saving.

So looking at those potential sources of deflation, it seems clear that deflation has a legitimate function in the market, and a free market will correct that trend in all cases regardless of it's source.  However, it is entirely possible to prolong those deflationary pressures and indeed trigger a dangerous self-reinforcing deflationary cycle, but ONLY through government on non-market interruption.  For instance, non-Austrian economists always are in favor of policies that prevent markets from clearing, prevent prices from generally falling due to increased productivity, and prevent the interest rate from freely fluctuating to reflect consumer and investor preferences in saving vs. consumption and investment.  In the case of Japan, monetary policy intentionally aimed at all of these things, and rather than allowing the market to quickly adjust, it has prolonged the deflationary cycle for nearly two decades.

Free Entry -- an under-recognized aspect of the Free Market

Perhaps the most overlooked element of a free market -- amongst free trade, free exchange, etc. -- is the concept of free entry into the market.  Probably the single largest hurdle to the general acceptance of free markets is the problem of monopoly.  The fear is that, in a free market, the inevitable outcome of market activities would be either a single firm or a collection of firms conspiring together (a cartel) dominating the market.  What is chiefly overlooked here is that a truly free market also allows for free entry into the market, which is the single most important counterbalance in the system.  The fact that this is overlooked speaks directly to the degree to which free entry is not permitted in most current and historical markets -- in fact it is almost inconceivable that such a force would come into play in a free market system.

The simple fact is this: in order for a firm or a cartel to even attempt to dominate a market, they necessarily introduce bads alongside their goods or else their goods simply become bads.  To understand this, let's examine the nature of monopoly itself: under a monopolistic system, there is a tendency for the quantity and or quality of goods to decrease while the price of those goods increases.  Right?  That is the entire fear of monopoly in a nutshell.  So they are essentially producing less goods.  What is the bad?  Through their monopolistic behavior, they are preventing other producers from competing with them.  Well the solution here is obvious -- if a monopolist or would-be monopolist is producing fewer goods at a higher price, then it should be quite simple for another producer -- if even on a small or localized scale -- to produce better quality goods at a lower price.  Would not then, almost immediately, consumers turn to this new producer for those goods? If you dispute that, then why will thousands of people line up outside Best Buy on Black Friday to save a few bucks on a television set?  Consumers aren't dumb -- they are constantly looking for the best deal and taking their business there.

So the only way, truly, for a monopoly to succeed is to prevent free entry into their market.  It would be impossible to do so economically for a monopolistic entity to do so -- they would have to buy up every would-be competitor, and constantly forcing their business partners to take anti-consumeristic behavior in order to economically prevent free entry.  This would crush them very quickly, as the costs would be too great.  So the only mechanism for truly preventing free entry into a system is ultimately violence: competitors or would be competitors must ultimately be coerced (through violence or the threat thereof) to not compete.  But in a free market system, where property rights are considered absolute, such behavior would likewise be extraordinarily costly, as a monopolist or would-be monopolist would either lose their own security provider, be forced to pay exorbitant rates by their security provider, AND would be the target of every other security provider in the entire world.

Monopoly is only possible in the absence of free entry into a market.  Free entry can only be suppressed through a violation of property rights.  A free market respects property rights.  Therefore, a monopoly is impossible in a free market.

Digital Money

It's been a long time, dear reader (some writers use that term as a way to personalize what would otherwise be the equivalent of a mass email...in my case I well realize that the singular use of "reader" is accurate at best -- you know who you are).  I was reading an article over at mises.org and drinking some whiskey (what else is new) and was suddenly inspired to pickup the old pen again and make a few scribbles.

The article was about gold and it's function as "money," and it was generally a good article.  That said, while I'm in complete agreement about the fact that paper "money" is a sham, and that commodities like gold and silver can possibly make a good money, there's one key point that I think is either omitted or not considered by the modern "gold bug" and that is this: there's no way in hell I'm going to carry around a pocket full of coins no matter what their fungible properties might be.  I don't even carry keys at this point, and it annoys me that I need a wallet -- a very minor upgrade in technology should allow me to use my iPhone for all monetary transactions, identification needs, and God willing a lighter and cigarette holder.  You ladies out there might say, "well I always have a purse, so keeping coins is no problem."  Yeah, I've seen your purses and they're a wreck.  They're a place for lipstick, tissues, assorted garbage, and tampons as needed.  If you could do away with coins, your hands would be cleaner in the long run, I promise.

At any rate, while I agree that real assets should underly any "money," the knee-jerk reaction to gold and silver is overblown.  Modern technology can render those things largely obsolete -- let's look at the definition of good money as described in the aforementioned article:

"A convenient money will have several properties. For example, it should be physically durable and easy to transport. It should also be easily recognizable and homogeneous across units. Further, it should be easily subdivided into smaller pieces. Finally, its market value should be convenient for typical purchases."

The truly important part about money is the last piece -- convenience.  I have goods, and I'd like to get some other goods by exchanging them.  Well, as the author of this article points out, if I were an astronomer and wanted to trade one of my hand-crafted telescopes for a dozen eggs, a gallon of milk, a few shirts, and a night out on the town, it would be difficult for me to accomplish that via direct trade.  Perhaps it could be arranged, but it would indeed be highly inconvenient.  Rather, by inserting some medium of exchange like gold or silver, I can swap my telescope for that and then more readily go buy whatever I want.

Again, great concept when technology is lacking, but for a guy that doesn't even like to carry keys I don't find a pocket full of krugerrands particularly convenient.  Okay -- if you insist that it's got to be gold and silver, fine, but I don't want to ever touch the stuff.  Put it in my account when payroll does their work, or transfer the balance to my account when someone drops me some dough through PayPal, but don't expect me to trade you 13 coppers for a sandwich.  Get real -- it's 2010 and while we're not cruising around in flying cars or living in Utopia, the money revolution need not revert to such old-school concepts.

Let's get back to the point -- convenience is the real key, coupled with backing by tangible assets.  So if I want to trade my old sofa for a six pack, a carton of Marlboro Lights, and a porno mag, why does gold need to enter into it?  Couldn't, given a very sophisticated global market, I basically post my couch online, get some "credits" when it's sold, and then swap those credits for whatever I want?  Theoretically, Sheebu at the convenience store could go buy my old sofa for almost the exact value of the sundries he sold me, but that need not be the case.  A "medium of exchange" could well manifest as some strange combination of eBay and Bank of America like some kind of meta-barter arrangement.  In a market so efficient, trading goods for gold or silver and then back into other goods would simply be a waste of time, not to mention a pain in the ass lugging all that metal around!

I'm being a bit silly here, and I realize that most likely gold and silver still have their place, but I'd be perfectly happy to have that sitting at a bank (provided I could readily remove that as physical gold and silver should the state of things so move me) and just transfer everything digitally at all times.  Don't make me lug around a little man-purse full of metal -- please.  Next thing you know I'll have chapstick in there and it's only a step away from metrosexual-city.  I want all monetary transactions conducted through my iPhone either at the POS (point of sale) or on a P2P (peer to peer, dude) basis.

So Goldbugs: don't sound like you're from the dark ages -- if you want to sell this idea, let's tell people that there's a way to do away with the wallet and the coint purse once and for all.  The youth of today will respond -- they're already so overburdened with mandatory handheld goods and accessories as it is.

Private Law Society: Section 2 - A Positive Account of how a Private Law Society Functions

This is Section 2 of 3 of the broader construct of a Private Law Society (click on this link to view a full overview).  While it largely stands alone as an independent work, it may be helpful to read the preface and introduction to this work if you need some context.

Section 2 at a glance:

• 2.1: Security
• 2.2: Justice and the Legal System
• 2.3: Market Governance
• 2.x: The Environment
• 2.x: Education
• 2.x: Healthcare
• 2.x: Transportation
• 2.x: Immigration and Travel
• 2.x: Money, Banking, Credit and Finance
• 2.x: Social Welfare
• 2.x: Intellectual Property
• 2.x: Communication and Information

Private Law Society: Introduction -- I.1: General Overview of the work

This is the first part of the Introduction to the Private Law Society.

Outline of the work: The main body of this work consists of three sections, which I will describe here.

Section 1: In the first section, I will broadly introduce the concept of a Private Law Society and describe the general way in which it is expected to function.  I will also lay out the basic principles on which it is founded.  The purpose of this section is to provide a basic understanding of the concept from both a descriptive and theoretical perspective such that as the reader moves on through the work they have a proper orientation.  I will not in this first section argue on behalf of a Private Law Society per se, but rather offer this as a purely factual account of what a PLS is. The reader need no "buy into any arguments" in this section in order to read the rest of the work, but merely understand the concepts in preparation for dealing with the main arguments.

Private Law Society: Introduction

This is the Introduction to the broader construct of a Private Law Society.  It may be helpful to click on that link to grasp a broader view of the overall project, or read the Preface.

Introduction at a glance:

• I.1: General Overview of the work
• I.2: Examination of Historical Thought
• I.3: Examination of Existing Systems and Prognosis for their future course
• I.4: The Theoretical attraction of a Private Law Society
• I.5: Theoretical foundation for the work and generally assumed principles
• I.6: Why this will work

Most people have probably never heard or conceived of a "Private Law Society," and perhaps rightfully so.  While elements and aspects of the theory have existed throughout the entire history of political thought, only recently has the theory been crafted into a fully coherent system of principles and propositions that give it the promise of a proper standing as a Political Philosophy.  I credit Hans-Hermann Hoppe with making this jump --  from a  loose connection of related concepts and thoughts into a properly developed theory.  Within the circles of adherents to the Austrian School of Economics and more broadly in the more radical edge of libertarian circles, this newly-formulated concept of a Private Law Society has made a very rapid ascension to prominence and indeed has established itself as the primary political doctrine of these groups.  Despite this success, the body of work on the subject remains woefully incomplete, due in part to the fact that it is very difficult to systematically describe given it's very radically different nature from the vast history of traditional thought.