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A Criticism of Liberalism


Liberalism Grew out Englands Unique History

In the late eighteenth and early nineteenth century developed in England a very special set of ideas on political economy, which was called liberalism. The english civil war Although it had grown out of England's special history, its supporters claimed that it was a universiel theory valid for all human societies.

Basically, the English liberalism comes from the political climate that was created by the English Civil War and the settlement between the king and the parliament.

In a similar way as Newton had discovered the universal laws that controlled planetary movements, uncovered Adam Smith, Ricardo, Bentham, Mill and their contemporaries the eternal and universal laws that govern a harmonious human society.

The liberal tradition is borne by three pillars, which are individual freedom, the eternal and immutable economic laws and the idea of harmonious balance between opposing economic forces. Just as in Newton's eternal and immutable laws of physics, where gravitiation force and the centripedal force keep each other in check, thus also the economic forces of supply and demand keep each other in balance.

The free market is often symbolized by the familiar graph where supply and demand intersect, forming the market price. The traditional representation of supply and demand The quantity provides the horizontal axis and the possible price are indicated on the vertical axis. The decreasing demand curve intersects the increasing supply curve, thus creating the stable market price.

As society's economy is the sum of such stable submarkets, the whole economy is also stable, the liberal theory says.

The problem with this representation is simply that it only fits in special cases. Everyone knows that the vast majority consumer goods become cheaper, not more expensive, the larger quantities are produced and marketed. This applies to flat screen televisions, computers, cell phones, solar cells, tents, yes to all products for manufactured goods market and on the market for machinery and production equipment. Therefore it is wrong to assume that the graph of the supply price generally is increasing.

It is also quite well known that demand and supply are not two independent functions as the liberal tradition defines them. The modern demand is in very high degree a function of the producing firms marketing.

Flat screen television Sun cells Mobile phone The classical economists tell us that an economy, where each agent is completely free to follow his own interest, spontaneously will create an optimal distribution of society's resources. Any interference in the market from state will most likely to prove disadvantageous in the end, they say.

Thus liberalism ascribes the business men and their firms freedom to follow their self-interest and take its own decisions on the market as long as they are not cheating, stealing or committing other criminal acts.

In a liberal society, the executive is not entitled to issue a vertical order to a specific company. For example, a king or a government cannot just command some specific Danish companies to establish branches in outlying areas, Kong Erik VIII Menved, who arrested archbishop Jens Grand The leaders of the Templars being burned on the stake in the same way as a military high command can issue a vertical order to certain generals about taking action.

Only in few and short periods of history we have previously seen that important society organizations thus have been granted freedom and in this way evaded the kings and the executive powers direct authority for a longer time.

The medieval struggle between the king and the church were for example just about that; the church sought to evade the secular power. The danish king Erik VIII Menved arrested in 1294 Archbishop Jens Grand for treason and threw him in a gloomy dungeon under Søborg Castle.

King Philip the Fair of France dissolved and ruined the order of the Templars in France in 1307, the leaders of the order were burned on the stake.

Margrete 1. of Denmark waged war against the Hanseatic League.

King Philip and Queen Margaret were neither socialists or communists, also they were not supporters of planned economy. Queen Margrete 1. of Denmark They did it because they were the ones who had power and thus the ultimate responsibility for the country and its people's future, and therefore they could not tolerate such multinational millipedes with a foot in every country, which only worked for their own purposes and in their own interest.

Liberalism also assume that what is rational and beneficial for the individual producer and consumer, is also rational and beneficial to the whole economy if everyone does it.

Precisely at this time a lot of companies take decisions to shut down their productions in Denmark, or not start them, because it gives a bigger number on the bottom line for their respective companies. However, when everyone does it, it will cause that all production activities in Denmark, yes all over Europe, will be closed and our countries will no longer belong to the group of industrialized nations. And it can not be said to be good for the whole economy.

One need not be in favor of a revolutionary -ism to appreciate ones own people and country and desire to support them.

A van from Dan Electric There are many, also in the private business sector, I think that would like to do something for their country. One can only drive along on the highway noticing firm names on the vans. They belong to such firms as Dan-Electric, Dan-Property, Dan-varnish, Dan-insulation, etc., not to mention Dan-foss. just try to make an entry in the database "Krak firm" and search for Dan-. The companies are probably named so because their original owners and first entrepreneurs saw themselves as good Danish men, who wanted to make their contribution to their country's prosperity and development. When the late Queen Ingrid years since mentioned the unemployment problem in South Jutland to Mr. Moeller from Maersk, he took immediate steps to create a container factory in the province.

In far most time of civilization history the nations have been organized so that the ruler, it will usually mean the king, has assigned tasks to his men. Some became responsible for defending the border, others were responsible for this or that province, and so on. Of course the trusted men had to do the job based on their own assessment and their own decisions. But they were not completely independent, the ruler always watched them over their shoulders, and a vertical order from the highest office always had to be obeyed.

Traditionel organisation through all history Thus, the Roman emperors governed their provinces and legions, and so have the Chinese dynasties ruled their vast empires. In the Middle Ages, artisan- and merchant-guilds were headed by aldermen, who ultimately refered to the King. Throughout the long history of civilizations, it has rarely been the case that important parts of the community body claimed "freedom".

The traditional organisation is still the basic principle of military organization and the internal organization of private firms. The tasks are delegated to the subordinate managers, who must solve them as best they can, except that top executives are looking them over their shoulders and can issue a vertical order, if he deems it necessary.

The main role of the classical economy today is to legitimate the big business organizations' freedom and independence of the power of the state. It has no practical use. You will not get very far by trying to use the classic diagram of the rising supply and falling demand for produkt pricing, or use the marginal principle or the like for production planning .

If the classical economy falls, then the big business organizations can only justify their demand for freedom by saying that it has been usual for a few hundred years.

John Maynard Keynes showed that instability is an intrinsic characteristic of the market and that there is no guarantee that it by itself finds a state or just touch a point, which implies full employment, while ensuring the best utilization of resources. His works represent a dividing line between nineteenth-century philosophy and twentieth-century in the same way as Einstein's contributions to physics. Keynes rejected the old world economic natural laws that describe how the economic forces by themselves pull the economy towards equilibrium with a gravitiation like force, as Newton had described the cause of celestial movements. University lesson in classical economy Keynes replaced the traditional economy with a more modern and more likely view that the economy is a dynamic process characterized by instability and uncertainty and it cannot be left to itself and the business men.

Such a perception, real or not, cannot be accepted by the large firms and thus not by the universities. If one imagines that a university placed the classical economics in a corner, its graduates would be labeled as "red", and they would find it difficult to get jobs in the big international firms. This would again cause that such a university would have difficulty attracting qualified students, which in turn would cause that the level would fall, and it will be further more difficult for candidates to find good jobs. A rejection of the classical economy would inevitably initiate the beginning of a downward spiral that would imply still more inferior scientific status and decreasing revenue.

The classical Economy

The logo of the JAK association Adam Smith introduced the three resources, which are the celebrated - Land, labor and capital.

By Land means farmland, forest and all sorts of minerals, at all natural resources. By labor it is to be understand the impact of the human effort. Kapital is factories, ships, buildings, roads, machines, at all production assets.

Prices of the three types of resources are determined on their respective markets, various markets for raw materials, the labormarket and the markets for machinery etc.

Since all resources are considered scarce, the possible prices as a function of the possible supplied quantities will be inclining. The possible prices as of a function of the possibly demanded quantity vil on the other hand be declining. Where the curves for respectively supply and demand intersect, the market price defines.

The market price represents an economic equilibrium, where supply equals demand. Since the supply and demand function in the classical economics always have different slopes, it is a stable equilibrium. Any discrepancy in prices or quantities will be driven back towards equilibrium by the increased spacing between supply and demand, as a pendulum that little by little stops in vertical position.

The traditionel concept of a capitalist The traditionel concept of a consumer Since the whole community's economy is the sum of such stable partial markets, the total liberal society is a stable economy.

The capitalists and the consumers are primary agents of the game.

Capitalists are such persons, who own capital, i.e. production plants and machinery. They demand for raw materials, labor and capital goods, also called capacity. They are able to bring together the three cost-types, raw materials, wages and capacity costs in different combinations, so that the result will be finished products, which are inytoduced on the market for end-products, where they are in demand of the consumers.

The consumer is the game master, swinging his conductors stick. It is the consumers endless and insatiable need for goodies that makes the whole system work.

What father does is allways right The consumers have wants and needs far beyond, what their restricted budget allows, therefore, they are assumed to be in the position in a rational way to select which objects that best satisfy their individual wishes. In the liberal theory the agents are imagined to shop around on the market selling, buying and swapping until they all are satisfied, what each has achieved. Maybe something like the father in H.C. Andersen fairy tale "What father does is always right ", he goes out with a horse and swap and trades numerous times until he comes home with a sack of rotten apples. Nevertheless, he gets a kiss from his wife for his achievement, and everyone is happy.

Supply and demand is supposed to be two independent functions. It is assumed that before consumers and sellers enter the marketplace from either side, they have in a rational way made themselves entirely clear what needs, they have, and in what sequence, they will satisfy them.

Demand and supply curves are cross sections in time. The alternative prices are such as now are believed and imagined that consumers would pay if the price was such and such, or the quantities that the factories right now would market if the price was such and such.

The companies are assumed to be profit-maximizing. As consumers they are likely to act marginally. Some planned additional units might be expected to cause a larger marginal increase in costs, than they would cause increase in revenue, and therefore the companies will choose not to produce them. Another possible extension of their production are budgeted to give rise to a larger marginal increase in revenue than the marginal increase in cost, and therefore they will choose to produce it.

The increasing marginal cost curve intersects the declining demand curve All production companies are assumed to be characterized by declining profits as a function of the volume of production. It is assumed that when the production volume is approaching capacity limits, the production cost will become bigger and bigger for each marginal unit produced. This is because of overtime work, increased maintenance, shift, newly recruited and inexperienced workers, etc., it is said.

The golden rule of Profit maximization requires companies to expand production unit by unit until the cost of the last unit produced is equal to revenue for this very same last unit. It can only be done by increasing supply curve, but this is always the case in the classical economy.

In Money market funds are offered by savers, the higher the interest rate the more inclined they are to save, and the greater the availability of money. Therefore, the supply curve is rising. For the businessmen, or shall we say the capitalists, it is just the opposite. The higher the rate the less likely they will want to borrow money and launch projects. Therefore, the demand curve is sloping downward. In modern times, this graph has been replaced by the IS-LM model, but the logic is similar.

Raw material markets, labor market, capital market, finished goods market and money markets are all like interconnected vessels. They make up a sensitive regulatory system that automatically adjusts the economy to the optimal allocation of resources after an exogenous disturbance.

Cross-elasticity in the classical economy A change in one market will quickly spill over to all other places in the system. For example, an increase of prices in the commodity markets will cause prices on the market for manufactured goods to increase, so will the produced volume decrease, the price of a working hour will also fall because workers no longer can sell so many man hours to the high price. Therefore they will lower their salary and in this way try to get back on the market, says the classical theory.

All goods has more or less close substitutes and complements. The classic examples of substitutes are butter and magarine and petroleum and gas (for heating). For example an increase of the price of butter will increase the demand for magarine; in commodity markets an increase of the price of alluminium cause some producers to replace aluminum with plastic or steel and thus increase demand for these materials.

Complements are something that belongs together, like beer and snacks

The total of the theoretical market system can be compared with a complicated technical regulation system in which each units in the system exchange hydraulic pressure or electrical voltage. However, in the classical economics it is information on prices, which are exchanged. It is therefore, that textbooks in classical economics are often called price theory.

The classical economics is a very beautiful and wonderful simple theory. All what is needed is that we indulge ourselves to our selfish ego and follow our own self interest. Magically, without any intervention or control from the authorities, all societal resources become allocated to their most effective use, for the best benefit of the whole community.

Friedrich List's Attack on the Classical Economics

Friedrich List

Friedrich List, 1789-1846 Friedrich List was born in Wurttemberg in the current Germany, in 1789, the year of the French Revolution. In 1817 he was appointed professor of management and policy in the University of Tübingen.

However in connection with some political turmoil, he was in 1822 dismissed and sentenced to 10 months of hard work in the fortress of Asberg. He escaped to Alsace, spent some time in France and England, and returned back to Würtenberger in 1824 to endure the rest of his punishment. He was released on condition that he would emigrate to America.

He showed up in the U.S. in 1825 with an introductory letter from La Fayette. He was introduced to President Jackson. In the U.S. he earned his living as a farmer and journalist; he edited a German language newspaper in the city of Harrisburg in the state Pennsylvania.

In 1832 he was appointed as an American consul in Leipzig.

He had the intellectual driving force in establishing the Common-German Zollverein, which was established for a large part thanks to his enthusiasm and vigor. He was a great proponent of the expansion of the German railway system.

In 1841 he was offered a position as editor of a newly established liberal newspaper in Cologne named "Rheinische Zeitung. However, he declined the offer on grounds of poor health. The position was instead given to the young Karl Marx.

In the last years of his life he suffered from a fatal and very painful disease, and the 30. of October 1846, he chose take his own life at the age of 56.

The German economist Friedrich List had no great thoughts about the classical economics. The purpose of the English liberalism was clear, he argued. "They monopolizing islanders," he wrote in 1841, "has reduced the Germans to hewers of wood and drawers of water for Great Britain."

The British argument that free trade is a universal good, was nothing less than hypocrisy: "Any nation which by means of protective tariffs and trade restrictions has increased its productive power and its marketing to such a degree of development that no other nation can sustain free competition with it, can do nothing wiser than to throw these ladders away, which led to its greatness, to preach the benefits of free trade to other nations, and in penitent tone, declaring that they have hitherto wandered in the path of error, and that it now for the first time have managed to discover the truth."

The subtle nuances in the debate between Smith and Ricardo were totally wasted on List. To him they were simply "the British school," which, regardless of how they expressed it, was merely a tool disguised as an economic system that supported British domination.

Zollverrein Friedrich List was the driving intellectual force in creating the German "Zollverein". He argued that the correct rate of custom tariff was about 60%, which in turn should be lowered to 30%. He was opposed to subsidize exports, since he believed that money could be better spent on developing new projects than to attack markets where the competitors already had a solid foothold. His recommended method was that the State should create conditions for the production activity and then leave the rest to the private initativ - despite his emphasis on the role of government, he had no ideas about planning economy.

He made fun of Adam Smith's "confusion" that he called Smiths various value-price terms, the "natural price", "market price" and so on. He attacked Smith pin factory. The important thing were essentially no the division of labor, he wrote, but the important fact is that the workers are united in a union production in their efforts. A pin factory would never be created by the market forces alone. It does need mines and mills, which can deliver steel. It needs transport roads and rails to supply the raw material and to distributing of finished goods. It needs numerous retail stores to distribute its products. It needs experienced workers to operate the machinery and skilled engineers to design the engines. It needs an organized society, law and order and a stable currency. All this must be created and launched by a general organization, namely the state. To claim that such a plant can grow out of the market by itself is entirely speculative, said List.

German factory 1840 Every community that has developed its trade and industry, has done it supported by the state, wrote List. Whether it was the Hanseatic city-states, the Netherland, the Republic of Venice, the Portuguese or the Spanish. To deny that the state plays a role in "The Wealth of Nations" is to play games with the facts.

There is one important difference between the classical economists and Friedrich List. The liberal economists speak of increased "wealth", i.e. riches as the overall objective of the economy. Production plants is to them merely means to create that wealth. However Friedrich List wrote: "The productive power to produce wealth is immensely more important than wealth itself. It ensures not only the possession and increase of what had been gained, but also compensation for what has been lost."

In modern times, many business owners make themselves busy by closing down Danish production plants, yes business leaders across Europe dismantle their production lines and move the production to Asia. They do this, because it will increase their expected incom, the bottom line, thus increasing their "wealth". They could learn something from List, "The productive power of producing wealth is immensely more important than the wealth itself."

Friederich List has been criticized for not having anything to offer except for the now a days so despised protectionism. He has not drawn any sophisticated curves and set up equations, which describes and predicts the economy and the market as a function of this and that.

That might be because he believed that the economy is created by human decisions more than it is decided by economic laws of nature. Shall we say the Volkswagen factories development, just to take an example, are also not determined by eternal laws of nature appearing in various equations, but by human decisions.

Karl Marx We must recognize that Marxism is a variant of liberalism. Karl Marx was also one of the classical economists.

If we reject the classical economics and liberalism, we must by logical necessity also reject Marxism.

Karl Marx sat in London and studied the classical economists, Smith, Malthus and Ricardo in particular. He accepted all the classical economics ideas and concepts. The idea of eternal and immutable economic laws governing society, concepts like supply and demand, equilibrium, market price and the variety of price and value definitions.

He did, however, give the liberal theory a twist toward that the economic laws were such that they were predestined to destroy the capitalistic economy after a certain time. In the ensuing chaos, a revolutionary and decisive working class would have their chance.

If it is true that the economy is controlled more by human decisions than it is controlled by the eternal economic laws, then Marxism's idea of self-acting economic forces that bring society in crisis, can hardly be true.

Unlike Karl Marx, Friedrich List never accepted the conceptual framework of liberalism.

Friedrich List and his contemporaries laid the foundation for modern Germany and its major companies, Krupp, Siemens, Thyssen, etc. Regardless what we think about german policy in modern time, one has to acknowledge that through Germany's eventful history during the past century, these companies have loyally supported their homeland through thick and especialy thin. There is a difference between the Anglo-Saxon liberal tradition, where nothing is sacred, and the continental tradition, where the state and the motherland plays an important role also for the companies.

Supply and Demand

The familiar graph showing the rising supply curve and the falling demand curve has become the symbol of the free market. However in the real world the characteristic rising supply curve is only valid in special cases.

Textbooks in classical economics says that the curve is rising, because when the actual production is approaching its capacity limit, the companies will have ever increasing costs for overtime, shifts, problems with inexperienced workers, repairs of production equipment and so on. It sounds plausible, only it is not true.

Boston Consultancy Group - The Experince Curve Boston Con 1974 Everyone knows that the offered prices fall in step with that production volumes increase. Flat panel displays, cell phones, computers, solar cells, tents, tools of all kinds, everything has become cheaper with increased production volume.

Looking up from the harmonic curves in textbooks on classical economics and asking a production engineer, he will answer that long runs of large volumes is simply just good. They open up opportunities for further automation and labor division. It is the short series that pulls nails out, he will say.

Already in 1974 the famous report by Boston Consultancy Group, "The Experince Curve Reviewed", proved that the added costs per. unit fall from 20 to 30% in real prices every time the productions volume is doubled. This figure does not include savings due to improved design or production layout.

The report concludes with the follwing remark: "The Experience cost effect is an observable fact. It can be confirmed by observation and can be displayed as a graph of a price experience curve for Model T Ford."

Learning effects Since Boston Consultancy released their report, learning curves for countless companies have been made. It is an established fact that the cost decreases when the volume grows. See table to the left. PV mean Production Volume, and PR means progressions Ratio.

The market supply of goods depends a lot of the technical development, which comes in waves. Every time there is invented a new technology that enables new products, there will be new business opportunities. The invention of computers meant a new generation of all products; flat panel technology meant a new generation of computers and television and so on. Consumers' expected response to the availability of goods is actually quite dynamic and is not suitable to be represented as a static graph.

No one knows in advance how consumers will receive new products. An error margin of 30-40% to each side is not uncommon. So what is the idea of drawing a supply curves that creates an illusion of an exact knowledge of consumers' future response?

Ford T production line In classical economics it is assumed that human needs are infinite and insatiable. But this assumption is wrong.

Demand curves for specific products are always shown declining, and they are probably also so in the real world. If you have already acquired some pieces of the commodity in question, you'll be less eager to acquire another one. But then it must also bee so that consumers' overall needs for goods must be declining and eventually final.

It is also logical and obvious that the need for the last marginal benefits are decreasing, not only because consumers can not afford an unlimited number of benefits, but mainly because they do not have time to consume them. Because the day has only 24 hours, and life is final.

One often hears families complain that they have accumulated too many things of all kinds, and they find it difficult to pull themselves together to throw out, as the things have no defects, and some time in the past they had paid money for them.

Learning curve for automated external defibrilators It is not true that human needs are infinite and insatiable, there are limits to how much consumers will gather together and brood over.

The conclusion must be that both the supply curve and demand curve in general is declining. Nobody knows, if they ever will intersect. We remember that according to the classical economics a stable marketprice depends on that the supply and demand curves have different direction of incline. Only then prices will be driven back to equilibrium, represented by the market price. So we can shoot a white stick after most of the stable segment markets. Since the whole society's economy, following the classical theory, is the the sum of segments, we must also question the stability of the economy as a whole.

The Market

Contemporary classical economists are uncompromising supporters of business freedom and reject any notion about interference from the state.

Milton Friedman founded the economic school, "Monetarism", which is a modern variant of the classic economy. He is an unreconcilable opponent of government interference in the economy, and can be quoted for such comments like: "If you put the federal government as Head of the Sahara desert, in a five years time there would be a shortage of sand. "

Ludwig von Mises - the founder of the austrian school of economics Representatives of the "Austrian School of Economics" usually express themselves in a more subtle and philosophical way. But they are even more negative against government interference in the economy. Founder of the Austrian School, Ludwig von Mises, said for example: "In history the state may and often have been the main cause of discontent and disasters."

As companies in modern times have grown bigger and more powerful, and markets simultaneously have developed to non-transperant oligopols, the classical economists have become increasingly more dismissive of giving the state a role in the economy.

They praise the nineteenth century classical economists as their spiritual origins, but they seem to have forgotten that Adam Smith himself supported government intervention.

Adam Smith supported a series of protectionist English laws called "Navigation Acts", which stated that all goods sent to England, Ireland or the English colonies were to be transported on British ships, and that the plantation owners and merchants in the colonies were only allowed to sell their products to English merchants, or pay a custom duty, when they sold them to other countries' merchants. Colonies exported such things as tobacco, sugar, cotton, timber and so on. The Navigation Laws were a major reason for the rebellion in the American colonies in 1775.

Thomas Malthus

Thomas Malthhus 1766-1834 Thomas Malthus was born in England in 1766. His father educated him at home himself. In 1793 he became professor of history and political economy at the East India Company College at Haileybury, which position he retained until his death.

He was best known for his contribution to population science, "An Essay on the Principle of Population". Population growth would overtake the world food production and trigger a global crisis, he wrote. Earth's resources are final, but humans natural instincts will motivate them to multiply themselves unlimited.

Malthus, however, was one of the most well-known economists. He joined the Royal Society and later the political-economic club, where he met the classical economists David Ricardo and James Mill. He was among the founders of the London Statistical Society in 1834.

He rarely allowed himself to be pictured because of a harelip.

Ricardo and Malthus disagreed on many things. David Ricardo was a strong supporter of an complete liberalism, while Malthus did not believe that a competitive economy by itself could always would find a point optimal for the whole society.

Despite their disagreement Ricardo and Malthus were personal friends. Maybe they now and then were sitting in the gentlemens room and enjoyed a good cigar and a glass of port, while they discussed the society's economic condition. Ricardo is talking much about the port in his articles on the benefits of international trade.

Another of the classical economists Thomas Malthus warned against the rapid industrialization of England. Economic development had to be balanced between industrial development and agricultural development, he wrote. One-sided development of industry at the expense of agriculture would not only create moral and political problems but also the risk being strangled by its own success. Industrial Staffordshire The market would not spontaneously regulate itself in balance, and this brings the state into the picture. Malthus supported the idea of import duties on corn, to encourage agriculture.

There should be a demand for the products that the new industry produced, wrote Malthus. And when agriculture was backward and workers in principle were paid after Ricardo's "iron law of wages", i.e. excistence minimum level, then there would not be enough customers in the store.

But back then England, and especially the city of Manchester, were the "world's workshop", and Malthus fears were dashed by a very large English export.

However, his prediction that the market not by itself would find an optimal point, were realized almost a hundred years later in the United States of the thirties. The U.S. industry had evolved into the world's largest and most effective. they produced all kinds of goods. But large parts of agriculture was backward and the industrial workers earned not enough to buy all the new products. The factories could not sell, and they dismissed employees in heaps. The state had to step in with the "New Deal" policy, introduced by President Roosevelt.

Prior to the crisis of the thirties was a boom in stock, so some who had money to spare enough.

Malthus and later Keynes's idea of supporting an ineffective demand are no longer valid in modern times; as an increased demand will focus almost exclusively on imported products. But it highlights never the less that one can not expect that the market by itself always will find an optimal point.

Hvad ser du? We all know those trick images where, what you see, depends on the eyes that look. What represents this picture? Is this the face of a young woman seen partly from behind or the face of an old woman in profile?

A series of prices and quantities will in similar way be interpreted differently by economists.


A classical liberal economist will clearly see, how the dynamic market forces are in the process of forcing the market into balance.


The pendulum swings back and forth, but it will eventually settle on the optimal price. In the eye's of the classical economists prices and quantities are either in equilibrium or in the process of finding a new equilibrium after an external disturbance. Because of their special glasses they can not see anything else.

A more sober economist would see the dark forces of the future and uncertaincy in activity, he will not force reality into such fixed forms.

Many imagine the relocation of production activities from Europe to Asia as part of such a classic economic pendulum, which slowly swings back and forth - something completely natural, they are comforting themselves.

Initially the Europeans are earning close to DKK 200 each hour, and the unskilled Chinese and Indian workers earn DDK 10 per working hour. After the pendulum has swung to the east, the Chinese wages will inevitably rise and the Europeans will cut down their hourly rate in order to pull the pendulum back, some think. After some few hundred years, when the pendulum has done several swings, it might settle on a stable world market price in between.

Chinese factory Ordinary people are powerless and unable to understand the de-industrialization of Europe, perhaps they think and imagine that there is a deeper economic meaning, which common people are not granted to understand. For example, like such a big economic pendulum that slowly settles in balance to the benefit of all.

There is no deep and mysterious financial sense in the de-industrialization. And such economic pendulum will never be left in peace to complete its swings. There is simply the fact that the large international companies may have their goods produced in Asia for a fraction of the European costs. For example, it costs less than a dollar to produce a pair of socks in Guangdong province near Hong Kong; they can be sold in Europe for maybe 3 to five dollars. Transport costs are very small, for this kind of commodities neglectable.

That is really business which is understandable. The big companies know that de-industrialization of Europe will be a disaster for the nations, but it is a temptation they can not resist. After us comes the flood for our sins, and so far as it works very well, they seem to think.

Perhaps they reason that if everyone else does it, they also need to do it; or, if unavoidable, why not come first.

Western workers on strike The companies defend their actions saying that they have no other choice, the cost level in Europe is simply too high, they say. And there may be some truth in this.

Only the theoretical economists can see all the elegant curves and lines that extend in the price-quantity plane, marginal, average and total curves. Common practical economists can only note that perhaps a particular product on their shelves have been sold out faster than they had imagined. They will perhaps think that the price has been too low, but hopefully the customers have also bought something else. Viewed from the shop floor one can never know whether you have achieved the stable market price or not.

In the classical economics it is assumed that supply and demand are two completely independent functions. Before the potential sellers and buyers are entering the marketplace, they indipendently have made themselves entirely clear what they want, in what order, and how they will react to this and that price. The famous classical economist Alfred Marshall compared the supply and demand with the two knives in a scissors, which independently sets prices and volumes throughout the whole economy.

But it is clear to everyone that supply and demand are not independent. A very large proportion of demand are caused by the selling firms' marketing. Marketing is one of the most important subjects in economics.

The theoretical Requirements for an Effective Market

Textbooks in classical economics state always a rather long list of preconditions for the market to function. They are never satisfied. You sit and wonder if textbook author himself believes in his model.

Five commonly stated assumptions are:

1. There must be many suppliers and buyers, so none of them have any control over the price

In the old days in the fifties and sixties, there were many agents in each industry, small craftmen companies, retailers and small transport companies. It's all over. The thousands of small companies, self-employed and retail stores have given way to the big chains stores and international firms. The market Type is oligopoly. The small shops are briefly transformed into pizzerias, second hand cloth charity shops and convenience stores.

2. Products must be homogeneous. Companies must offer comparable products.

All manufacturers are doing their utmost to ensure that their specific product must be something special. They are trying to build a brand. It is called monopolistic competition. It is seen most distinct by expensive watches and ladies handbags. You do not buy just a watch or a handbag, you buy a Rolex or a Gucci - if you can afford. In general, the precondition about homogeneous products is only only satisfied for decidedly raw commodities like meat, fish vegetables, flour and such.

3. There must be perfect information. The market must be completely transparent. All agents should know all prices and qualities.

There are websites, which give a pretty good transparency, such as Bilbasen.dk and Boligsiden.dk. The websites of the large grocery chains aso do provide good information, foetex.dk, superbest.dk and so on. On the other hand markets for mobile phones and fashion lie in the outer darkness.

4. There should be equal access to technology. All companies must be able to buy all kinds of production machinery.

Any company can buy standard machines such as rollers, metal cutting machines, welding machines, molding machines, etc.. But many have developed their own processes as they of course do not offer to everybody. For example, Nokia will probably prefer to keep their battery technology for themselves.

5. There should be free access to the market. Any company and any person may be able to seek their fortune in any market.

In Denmark the law, "Næringsloven", of 1857 stated, that it is free for all to make business in any profession. However, most modern markets are oligopolies, it means that they are dominated by a few large companies that will do their utmost to prevent newcombers from gaining market share and get part of the profits.

The Economic Man

David Ricardo

David Ricado 1772-1823 David Ricardo was born in England in 1772. He was the youngest of 17 (seventeen) children. His Jewish family came from Portugal. They moved to England shortly before Ricardo was born. When he was fourteen years old, he began helping his father in his brokerage business.

When he was 21 he married a Christian woman and himself converted to Christianity. For this reason his family took away his right to inheritance.

Ricardo, however, was a brilliant investor, in a short time he earned a fortune, bought an estate and retired from business life at the age of 32 years. He became member of parliament and devoted the rest of his time to political economy.

He is best known for his treatise on the benefits of mutual international trade and for his theory of the "iron law of wages". However these were merely two sides of same coin, namely his lifelong struggle that England should become industrialized as fast as possible and at any price.

Industrialization required that British merchants could export the products. This brought the mutual benefits of international trade into the picture. The industrial products might be cheap. For this reason, factories cost must be low, especially labor costs. Thus brought his "iron law of wages" into the picture. But if wages should be low, so the food should also be inexpensive. Therefore he also called for import of cheap foreign grain.

England were truly industrialized quickly, but not without the moral and political costs, which his friend Malthus had warned against. Socialism was born as in England; as it is well known.

England's industrialization in the nineteenth century resembles China's industrialization, which is taking place right before our eyes. As Englishmen they attach great importance to exports. They keep a watchful eye on the wages, it must be low, so their products can remain cheap and competitive. If wages must be low, so the food must be cheap. Therefore, the Chinese peasants do not pay tax and they receive government subsidies by purchasing television and other modern appliances.

The liberal theory assumes that what is rational and beneficial for the individual producer and the individual consumer, is also rational and beneficial for the whole economy. The economy of nation is based on numerous individual choices and decisions. When decisions of the individual are rational and thoughtful, so they will also cause that the whole economy develops rational and beneficial.

As the liberal economist, Hayek wrote: "Individuals are in the best position to judge their circumstances, interests and what goods they prefer, and therefore individuals are best suited to make decisions in the marketplace." (1948: Ch.1)

One can say that liberalism assumes that society's economic decisions are decentralized down to the individual consumer and businessman. "The market is always right", as they like to put it.

But, when all depends on all these individual agents in the market, then the Liberals must also be able to show that these agents are sharp enough to make sound decisions that are consistent with their own objective interests. If they can not, it will be logically impossible that the individuals' decisions can be the basis for whole economy's positive development. This requirement is traditionally tackled by the theory of "economic man".

The term economic man usually refers to "a perfectly rational person, who by always thinking marginally maximizes his economic prosperity and achieve consumer equilibrium".

"The economic man" can be traced to Adam Smith, who wrote that "every man is in some degree a merchant" in his quest for "self improvement".

Marketing is a very important and usefull diciplin Before the economic man enters the marketplace, he has made his needs completely clear, he has ranked his wishes from the most desirable to least desirable. He will make his choices objectively, cool and calculating.

However, "the economic man" is easy to fool.

Marketing is one of the most important subjects in business. It describes how to advertise for and price products in the real world. Companies spend millions upon millions on marketing, and it is because it works. Experts in marketing pull the simple minded economic men around by their nose.

Some liberal economists are trying to save the situation by defining themselves out of the problem. For example, marketing can influence a consumer to choose specific products from an unconscious desire to signal a particular lifestyle and idendity. They write that the consumer precisely wanted to signal this particular lifestyle, and have had this desire in his list, even before he stepped into the marketplace. He got exactly what he wanted, namely a product that signals this lifestyle, and therefore he is a rational consumer, a true "economic man".

The economic man In this way, no matter what an agent on the market are tempted to buy, you can define that it was exactly, what he wanted, and therefore he is a true, rational, and calculating "economic man" and thereby save the liberal theory.

But a really cool, calculating and evaluating "economic man" will not be manipulated by a technique which utilize his unconscious dreams, fantasies and feelings. And when consumers so readily respond to sophisticated marketing, it is precisely because, they are no such rational "economic men", as the liberal theory requires.

The Rationality of Individual Decisions

Next, the Liberals must be able to show, that if the above is met, and the individual agents, the "economic men", really are such sober, and calculating persons, who objectively chose in strict accordance with their real interests, then their decisions will also contribute to the whole economy's positive development. So, what is good for the individual, is also good for the whole.

So the question is, if the rational individual decisions in the direction of individual self-improvement really will lead to a beneficial development of the entire economy, as the classical theory assumes.

Trafic jam on a American Highway We know this type of problem from the traditional discussion about motoring. For the individual, shall we say a family man in one of China's big cities, it's just happiness to have a car. Get the baby, the dog and and the mother in law into the back seat, and you're ready to go anywhere. But it is also clear that if all five million inhabitants in a medium sized Chinese city does this, then no one is going nowhere. Everything will be total chaos.

Malthus and Keynes later showed the problems with failing demand. Each firm is assumed to maximize profits. They may have managed to keep their labor costs down on a attractive low level, thus they get a good result on bottom line, and that is what the whole thing is about, it is assumed in the classical theory. But if all companies do, then a very large proportion of the population have very little purchasing power and the firms will have problems with sales revenue.

This means that what is advantageous and rational for the individual company will be disadvantageous to the whole economy, when many or all do it.

Malthus and Keynes was right about this for their time. But however, it does not work in modern times, because increased demand will be directed almost exclusively against imported products.

Hospital employees on strike So let's try to turn the problem around. In the classical theory it is assumed that all agents will work for their self-improvement not only the businessmen. Let us imagine that a single strong trade union managed to push through a very favorable agreement with the employers. There is nothing wrong with this? Is there? Everyone is in charge of their own happiness. Shall we say a thirty hour week and eight weeks of annual vacation. It will indeed be just happiness for the individual worker, plenty of time for family, friends and hobbies, and there is even the opportunity to go and say hello to the colleagues now and then.

It is clearly a significant self-improvement for the individual workers. But however, if many or everyone do it, the Danish economy will quickly get into trouble.

It would be in beautiful consistentence with the liberal idea that everyone should work for their own self-improvement. But again, what is rationally advantageous for some individuals, becomes disadvantageous for the whole economy.

Closed True liberals would argue that long before "everyone does it" will market forces be deployed and have established a perfect optimal equilibrium.

There is to say that it's not what happened. The labour market has stabilized, but at a point that is not optimal, as Keynes wrote is possible.

Liberals will now argue that in the long run, market forces will win and establish an optimal balance between supply and demand.

One can only reply with Keynes, that in the long run we'll all be dead. In any case, our motherland will have died as an industrial nation before this happens by itself.

Right now in this time many companies take decision to close its own production facilities in Denmark, or not to start them because it gives a bigger amount on the bottom line for the particular company doing so. This is in perfect agreement with the classical economics, which assumes that firms are profit maximizers. A ramschackle haus in the backyard of Denmark However, when all or many maximize their profits this way, it will be harmfull for the economy as a whole. It will mean an end to Denmark as an industrialized nation. The foundation, which the companies originally built on, will crumble beneath them.

Today the companies huddle together around Copenhagen with its high wages and property prices. The shives each to their bottom line, where they think they can see that it pays off to stay in the metropolitan area. In this way huge resources are lost in the less populated areas to the harm for our fatherland, thanks to the liberal principles that everyone is master of their own happiness, and all major economic decisions to be taken by the individual agents in the economy.

The Money Market

The money market is the greatest of all liberal illusions. The idea of money as a scarce resource that is allocated optimally in the market, where the savers create the supply, and the businessmen the demand, is the financial industry's legimentation to take their "cut" of the citizens' savings.

The classical economics assumes that savers delivers the money supply, and project makers are demanding money for their projects. Where the increasing supply meets the falling demand, the market price of money is determined, which is the interest.

Supply and demand for money In the classical theory is assumed that the higher the interest rate, the more disposed people will be to save, and the lower the interest rate, the more the disposed the businessmen will be to lend for their projects.

It is all rather logical, ceteris paribus, as it is said. But the problem is that the magic formula "ceteris paribus" cuts away everything that is important.

Ordinary citizens' savings is a function of stages in their lives, and not of the rate of interest. When student loans are paid, the house loan paid at last, and the children have left home, then they will start saving. They will do so whatever the rate of interest is, but of course it will look around for the highest possible return. If someone gets an unexpected fortune, an inheritance or a lottery win, they will also consider to save the money and earn interest.

It will seldom be the case that they are counting on the buttons, whether the interest is high enough for investment, or they should burn the money of for the sweet life.

So it is not true that savers' offerings is a steadily rising curve.

The entrepreneurs and businessmens demand for loans are primarily determined by technical and marketing aspects, far more than it is dictated by the rate of interest. The appearance of a new material, a new production method or a new technique will call for investments as fast as possible. New methods must be incorporated in the companies' products or production, it must be done before competitors do, and it can not go fast enough. If a new business opportunity shows up there must be invested as quickly as possible before the competitors wake up. The rate of interest has only minor influence on these decisions.

Basically, the money market can not at all be described by this kind of classical graphs.

Then, the link between savers and borrowers are not so intimate that such a graph misleads us to believe.

The government, the national bank and private banks can in cooperation create all the loanable fund that is needed, based on a very modest level of saving. The private banks can borrow money from the National Bank for zero point something of interest, which they can lend to the entrepreneurs and businessmen. Based on relatively small deposits, banks can multiply their lending through their credit multiplicator.

If it should happen that a sudden shortage of loan capital shows up, it will not be a big problem for the financial organizations to create the money that is needed, regardless of savers' behavior. It has been demonstrated very convincingly in modern times by the money creation of governments of Japan and the USA.

A man looks on stock index The sweeping victory of monetarists in the early eighties under the leadership of Reagan and Thatcher meant that everything should be privatized and left to the market - including private citizens' retirement savings. Suddenly millions of small private investors found themselves in the market for shares and bonds looking nervously around. Large funds and the banks investment departments have since had their heydays. As a matter of course they take their "cut" of ordinary people's retirement savings.

We must recognize that banks are doing something useful. All this with credit and payment cards, online shopping and online banking are actually very smart.

But banks' investment departments and all the other large funds do not contribute with anything usefull to the nation and the society. They have just their straw into ordinary people's savings. The classical economic theory clains that they are operating in the market for capital goods, allocating and optimizing the scarce capital to where it can be fully exploited for the benefit of the society.

But if investment capital is not a scarce commodity at all, but rather something that can be created and quite probably also wiped out as needed, then there is nothing to optimize and allocate. The financial industry will no longer have this legimentation for their right to exist and take their cut.


See: National System of Political Economy - Modern History Sourcebook af Friedrich List

See en criticism of Friedich List The Ghost of Protectionism Past: The Return of Friedrich List - Freedom Daily by Richard M. Ebeling, who is an economist of the Austrian School

A biography of Fridrich List - Epik

Full text of: David Ricardo: The Iron Law of Wages, 1817 - Modern History Sourcebook

A biography of: David Ricardo - New school med mange links

"The Revolution that never was" by Will Hutton - Vintage 2001

"Economic of the Real World" by Peter Donaldson - Penguin Book



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