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September 12, 2005 / Gabriel

Economic Systems: Fear vs. Happiness

The question of economics is very simple: given that the world only has a limited amount of resources, how do you determine who gets what? After all, it is simply impossible for everyone to have everything.

Over thousands of years, men have tried all manner of economic systems to deal with this, from might-makes-right to feudalism to mercantilism to capitalism to socialism to communism to everything in between.

There are a lot of fancy names and theories, but the bottom line is that every single one of these solutions can be boiled down to this: who decides?

Think of it as a spectrum. On the far left of the spectrum, decisions on who gets what are made for everyone by a very small group of people—a centralized economy, like communism. They decide who gets what.

On the far right of the spectrum, decisions on who gets what are decentralized as much as possible—people decide among themselves through the process of trading directly with other individuals, as in free market capitalism.

Communism                                                                                                         Capitalism

<———————————————————————————————————————>

(centralized decision-making)                                          (decentralized decision-making)

This is nothing new or controversial. Under a purely communistic system, it is the government who decides how many chairs are made, at what price they are sold. And it is the government who decides how much each person makes.

Under a purely capitalistic system, anybody can make or not make chairs, and the price at which they can sell the chair is determined entirely by how much others are willing to pay for it. As for how much each person makes, again the government has no say and it is dependent entirely on what value others put on a given person’s work.

And of course there are all manner of systems in between, such as socialism, which splits the difference with the government deciding on some things and the market (i.e. people) deciding on others.

Now here is where it gets interesting.

In a true capitalistic system, any economic transaction occurs only if both parties are happier as a result.

For example, if I go to the store and buy a bag of cookies for $3, I do so because I am fundamentally happier with the bag of cookies than I am with my $3. If that weren’t the case, I wouldn’t buy it.

But exactly the same holds true for the store: they will only sell me the bag of cookies for $3 if they are happier with the $3 than they are with the bag of cookies. Otherwise, they wouldn’t sell it.

The same is true of work: a plumber will only go to work if he is happier fixing pipes and receiving $20 per hour doing so. If he was happier staying home doing nothing, there’s nothing preventing him from doing so. Conversely, the person hiring the plumber is happier paying $20 per hour and having fixed pipes than keeping that money and having leaky pipes. Everyone is happier by the transaction.

Thus, every single economic transaction in a true capitalistic system is one that increases the amount of happiness of everyone involved.

But, people ask, what if the plumber would have been even happier making $100 per hour like a lawyer does? That’s all well and good, but a capitalistic system only works when all people involved in the transaction are happier, not just one.

Just like the store owner would love to charge $300 for a bag of cookies, so everyone would love to make more money for their work. But the amount of money that you can receive—be it for a bag of cookies or the work you provide—is entirely dependent on how much value others put in what you have to offer.

Remember, not everyone can have everything. Under any system. But the rule of thumb under capitalism is that the more your work makes others happy, the more you will have.

Now let’s look at the other side of the spectrum: centrally-managed decision-making.

Under a centrally managed economy (such as communism), it is a subset of the population that makes the economic decisions for the whole population. This subset is always the ruling party, since making economic decisions for others necessarily involves using the threat of force to ensure compliance.

For example, if a store has a bag of cookies, in the centrally-managed economy the ruling party will determine the price. Let’s say it is $5. What if the person minding the store wants to sell it for $3 or $7? He is not allowed.

But it is not enough just to say that someone is not allowed to change the centrally-managed price. In order to prevent such action from happening, the ruling party is obliged to enforce its economic policies, and the only means the state has of doing so is the threat of harm.

There is no other option to the ruling party than to enforce its economic decisions by the threat of force. If it does not, people will make their own decisions, and we are right back to a free-market capitalist system.

Thus, any kind of centrally-managed economic decision-making is inherently based on fear. It is only effective if those making the decisions for the rest of the population have the ability to enforce those decisions, and to do so by coersion.

Therefore, our continuum from above could look like this:

Communism                                                                                                            Capitalism

<———————————————————————————————————————>

(Fear-based)                                                                                              (Happiness-based)

Now, some may say that these examples are of the extremes—that there’s a happy medium in between the two. But experience tells us that any system that takes economic decision-making out of the hands of individuals and puts it into the hands of a ruling class (i.e. the government) necessarily reduces happiness and increases fear.

For instance, take minimum-wage laws. These are common even in what otherwise would be considered very capitalistic countries. The government in this case dictates that employers may not hire anyone below a certain amount—they are making an economic decision for the population, and enforcing it by force (fines and jail time for violators).

What is the result of these laws? Very simply, employers are able to hire less people than they normally would without the laws (just like if our store raised its price on bags of cookies from $3 to $5, they would get less sales). And potential employees that would have been happy to work for an amount less than the minimum wage instead find themselves unemployed.

Thus, by inducing fear in both employers and potential employees and not allowing them to make their own economic decisions, the government has reduced the happiness of both (and increased the country’s level of unemployment).

Now, is there a legitimate role for government in the economy?

Absolutely: to maintain the peace, enforce honest economic transactions, and prevent economic monopolies that can distort the normal trade between people.

But other than that, the more government moves away from central planning and economic interference and towards individuals making their own economic decisions, the more society will move from a climate of fear to one of happiness

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