Econ 101 According to Reynolds


Morgan Reynolds

By invitation I gave a talk before the ‘Free Thinkers’ of Hot Springs last April on the assigned topic, ‘The Economy and Inequality,’ rather a large undertaking to do right and admittedly I never got very far on the inequality issue.  However, I like the fact that by starting with the origin of the term ‘economics’ (everybody economizes!) I squashed the inherent tendency for leftists to parade their altruism/selflessness and conceal their self interested behavior.  I like my occasionally cryptic notes for the talk enough to post them.  Questions?  If you ask maybe I’ll try to clarify!?

The U.S. Economy and Inequality
Morgan Reynolds
On Facebook and my blog is
April 1, 2018
[This talk is 57 years in the making!]
“We have now sunk to a depth where the restatement of the obvious is the first duty of intelligent men.” —George Orwell

I. Economics—oikonomikos Gr. “skilled in mgt. of a HH, frugal,” stretching a dollar; [we’ve already got the reason why there can be no socialist economy: no market-determined pricing for inputs imply no informed economizing]; is economics a science?; laws of behavior, strong regularities or patterns; self interest quite reliable even “I love you.” Greed: “inordinate or all-encompassing and usually reprehensible acquisitiveness esp. for wealth or gain: covetousness, avarice (a passionate [desire] for other people’s money)…”  Is that left or right wing!?
Size of economic pie and “distribution” of pie slices. Size/output depends on economizing: efficiency/productivity which, in turn, is linked, in part, to intensity of individual effort which in turn depends on prospective rewards. Who protects the consumer? Suppose everyone were to be paid the same, guaranteed, regardless of work product (perfect equality of money payments). Result: effort and total product collapse. What does this suggest about forced redistribution of income, etc.?

II. Prosperity/output depends on three key institutions:

1) private property/exclusive right of disposal (J.B. Say 1821: “There are some truths so completely self-evident, that demonstration is quite superfluous. This is one of that number. For who will attempt to deny, that the certainty of enjoying the fruits of one’s land, capital and labour is the most powerful inducement to render them productive?…Yet how often in practice is that inviolability of property disregarded, which in theory, is allowed by all to be so immensely advantageous?”),

2) an honest/reliable medium of exchange, and a

3) free price system. Example: availability of clean water after a hurricane; policy “cure”? Victims of race/gender/etc. labor market discrimination? Cure?

III. Given the institutional framework, “the wealth of nations,” to borrow Adam Smith’s term, depends on four things:
1) Quantity and quality of entrepreneurs, scientists, engineers, inventors, and managers, including their technological know-how (brains! IQ!)
2) Quantity and quality of capital (asset) services available for employment
3) Quantity and quality of employees—labor—including their skills, motivation, and availability for employment
4) Efficiency of coordination among these factors of production vs. discoordination: main obstacle: state intervention; why separation of church and state but not economy and state?

IV. Murray Rothbard, A History of Money and Banking in the United States, p. 162, makes this important point: “While there are many reasons why real wages increase, three necessary conditions must be present. Foremost, an absence of sustained inflation. This contributes to the second condition, a rise in savings and capital formation (Handout #1). People will not save if they believe their money will worth less in the future. Finally, technological advancement is obviously important.”
Warning: “Consumption precedes production only in the dictionary”—Phil Gramm
And “No mass consumption without mass production”—Morgan Reynolds
Real GDP per capita 1950-2017 (Handout #2).
“The direction of all economic affairs is in the market society a task of the entrepreneurs…A superficial observer would believe they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer…[disobey and] he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him” (Ludwig von Mises, Human Action, p. 270).

V. Every economy is a “political economy” or “mixed economy”; modern governments have intervened in virtually all aspects of human activity via taxation, regulation, spending and use of many other means (war, spying, etc., etc.). The mixed economy has grown increasingly political or “socialist.” The “middle of the road” keeps moving left. As Ayn Rand said: “There can be no compromise on basic principles. There can be no compromise on moral issues. There can be no compromise on matters of knowledge, of truth, of rational conviction.”

Origin of money: barter (direct exchange) limits exchange because both the necessity of “double coincidence of wants” and the indivisibility problem seriously impede division of labor; solution emerges: indirect exchange, that is, a commodity with great marketability/liquidity acquires the “money function” (becomes the medium of exchange). “Money is not an invention of the state,” wrote Carl Menger in his Priniciples of Economics (1871). It is an invention of the market. (Murray Rothbard: “…life blood of our economy and civilization itself”). Many commodities have served as money, though early it was cattle, superseded by copper, then gold and silver. What was money in WWII prisoner of war camps? “Economic Organization of a P.O.W. Camp” by R.A. Radford, 1945. One or a few commodities acquire the monetary function (= generally accepted medium of exchange).
What about the departure from precious metal standard (Au and Ag) to fiat paper money? This is bit complicated but it concerns the history of banking, “bank reserves” and “panics” and the difference between loan contracts and deposit contracts. Loan characteristics: an exchange of “present goods” for “future goods” (intertemporal transaction) must have a fixed term and an interest rate/price/reward/cost specified. Deposit contract, on the other hand, requires that the availability of the good not be transferred. The deposit institution is the fiduciary agent of the principal (depositor). This requires complete availability: the depositor may request the return of his or her deposit at any moment. The obligation of the depositary is to guard and protect the good with the extreme diligence of a good parent, and to return it immediately to the depositor upon request. No transfer of ownership allowed! Regular deposit is specific goods which are heterogeneous and an irregular deposit is of fungible/homogeneous goods (oil, grain, money, etc.). Law properly should require 100% reserve on “demand” deposits, aka checking-type accounts (no term for return of the money, no interest paid because no exchange of present for future). If banks did so, the risk of bank “panics” or “runs” on the banks would vanish. They would no longer be inherently insolvent. Private bank solvency ratings once flourished. Bank failure is a public/market enforcement mechanism like other bankruptcy though fractional reserve banking is inherently immoral and should be illegal.
Mises, Human Action, pp. 440-1: “…blunders committed by liberalism in handling the problems of banking were a deadly blow to the market economy…Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps…the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their unintended consequences by more and more government interference…In fact, the chief objective of present-day government interference is to intensify further credit expansion. This policy is doomed to failure. Sooner or later it must result in a catastrophe…the final collapse.”
Enter bank privilege: hence the need for FDIC and “lender of last resort” (bank cartel arrangement = government-created central bank = “The Fed”) because banks take DD $ and lend much of it out for a profit. Tight crony capitalist relationship between government (always needy) and the bankersters.
Overextension of loans/debt by banks (hyper-enabled by low-interest-rate and pro-money/debt-expansion policies of the Fed) causes artificial booms in the short run and inevitable busts/recessions/depressions/corrections in the medium and longer runs. The latter are the “hangover” or corrective consequences of the excesses of the boom, especially flushing out malinvestments. Artificially low interest rates “lie” about the structure of consumer time preference, therefore the temporal or longitudinal structure of production becomes misaligned with the structure of consumer demand. It is absolute nonsense to believe that there is a sound reason for government intervention to fix interest rates above or below market rates. Nothing but distortion and misallocation. Savers and borrowers interact in the billions. We have suffered MISSION CREEP by FED, just like POLICING THE WORLD/UNIVERSE by CIA, Pentagon, NSA, etc. The Fed is now a central planning agency.
Biggest knock on capitalism has been business cycle yet the crony capitalism alliance with government has been its principal cause, especially in banking. Capitalism never had its own, non-political money.
What is the optimal quantity of money? Any! Once something is money there is no further gain from artificial growth. The problem is artificial inflation; not that deflation of money supply cannot happen with hard money.
Disaster of 1913: 1) Fed Reserve created (‘creature from Jekyll Island’), 2) 16th amendment to Constitution initiated power to directly tax business and personal incomes (both policies destroyed fiscal restraint on government expansion) plus 3) direct election of U.S. Senators, replacing appointment by state legislatures, a feature of a federal system (“states’ rights”/sovereignty) instead of the unitary state.
Disaster of August 15, 1971 Nixon cut the last link between gold and paper dollar. No longer any restraint on printing $. Phenomenal printing (QE1-3) 2008-9 by the Central Planning and Control Committee. Advantages the rich, who get the new money first (plus government), especially bailed out banks, big corporations and others who own assets and enjoy their rising prices. Also, retirees ripped off by zero interest rate policy (ZIRP). Also, TARP (Troubled Asset Relief Program) 2008.
The Fed is essential to underwriting topsy growth of the welfare/warfare state. Like cocaine: pain goes away but underlying rot continues.  Price inflation of course robs from all who use the money, though big debtors benefit by repaying in unforeseen depreciated money.
Has government borrowing reached a crisis point? $21+ TR will double in 8 years at the rate it has grown since 1971. What if interest rates go to 15% as they did in 1981? Something-for-Nothing politicians. Kick the can. Result will be default, hard or soft, + dollar value plunge, and its replacement as the international reserve currency.

What about the trade deficit? Deindustrialization? Remember poor, exploited workers going into the Satanic factories to toil and be exploited? Yes, deind. but causation misunderstood. Post- WWII U.S. was undamaged, further agriculture and manufacturing have high productivity growth so employment declines compared to GDP share, important for high-wage nations to innovate and initiate cutting-edge industries, wage arbitrage exists, yes, unions in rust belt (where do foreign auto companies establish factories in U.S.?), U.S. first service economy (though consumer income elasticities do not appear lower for goods than services!?). KEY: Fed’s inflationary policies vs. self-correcting gold standard! Trade balance occurred naturally pre-Nixon before destruction of the dollar’s last link to gold. We’re now largest banana republic in the world. Federal Republic? Really? Handout #3.

Equality? Of what? Justitia (Roman goddess of justice) represents ideal of equality before the law.
Equality of opportunity? Political slogan with no precise meaning. Unobtainable? Just virtue signaling. Broad excuse for even more intervention? Besides, does the Left care about “the children”? If they did they would oppose the national welfare state, no fault divorce and anti-father family court rulings, national debt (to the moon and beyond!) owed by children, etc. Unmarried birth/Illegitimacy rates in 2015 were 70% for non-Hispanic black women, 49% for Hispanic immigrants, 57% for native Hispanics, 29% for non-Hispanic whites, and overall “The percentage of births to unmarried women was stable at 40.3%” —CDC, Nt’l Vital Statistics System; why do we wonder about social pathology in U.S. inner cities and a permanent underclass?
Equal treatment of equals? “There is a natural aristocracy among men. The grounds of this are virtue and talent”—Thomas Jefferson
December 1977 Jo. Political Economy article on “Income Distributions in Two Experimental Economies” Handout #4
Is discrimination by “victimizers/oppressors” against “victims/oppressed” a major source of industry, occupation and pay gaps/disparities? Tribalism. What is the cure for low prices paid? Low prices!  Firms throw away profit by not employing the underpaid and under promoted. There is no known association between rates of profit and female or minority employment. “Discrimination is usually its own punishment…[discriminators] therefore put themselves in a weaker position against their competitors who hire strictly on merit.” —Richard Epstein.
See Murray Rothbard’s book, Egalitarianism as a Revolt against Nature.
Easy to stir up race and ethnic hatred. Identity politics. Where is U.S. heading? South Africa—canary in the coal mine? Necklacing, farm murders. Lauren Southern: mentality stated: ”I’d rather have 100% of 10 than 10% of a billion.”  Hatred of the successful, not love of the ‘downtrodden.’
How come Jews, Japanese and Chinese are among the highest relative incomes among ethnic groups in America? Handout #5
Gini coefficients among selected nations Handout #6
The World’s Billionaires Handout #7
Left have won legislative/regulation interventions to force “equal opportunity,” “equal pay for equal work,” “comparable worth,” “affirmative action” (= discrimination in recruiting, hiring, promotion, and security against firing in favor of women and favored minorities, aka reverse discrimination), “diversity” requirements, quotas…, equity and inclusiveness, i.e., to fix problems caused by alleged demand-side prejudice and “perversities” rather than supply-side differences in performance/productivity. According to Thomas Sowell, “Affirmative action has become a goody to pass out to various groups…In India, for example, there is a big fight for the coveted title of ‘backward cast’ because that entitles you to various government benefits.” “Compassionate policies depend on dispassionate analysis, not good intentions.” —Morgan Reynolds, Economics of Labor (2000), p. 342.
Double standard obvious.
Distribution of women and men differ across industries, occupations and earnings, for example, women are underrepresented in goods industries and overrepresented in services especially health care and education. Handouts #8 and #9 compare women’s earnings as a percentage of men’s.
“Employment at will” contracts versus employment termination suits. Markets tend to remove arbitrary differences in labor markets just as they do in other markets. If so, pay differences basically reflect productivity and skill differences.
How unequal is the distribution of cash income among households in the United States? On a global basis, economist Gordon Tullock once termed such a comparison akin to millionaires comparing boat lengths at their yacht club.

For my podcast with Richard Syrett based on this article see

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2 Responses to Econ 101 According to Reynolds



    • Thanks Joseph for your kind words. Kinda funny, however, if admirable that you believe Ellen Brown might be susceptible to learning something from real economic analysis. Homey don’t think so!?

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