Economics for Citizens : A 15 minute Introduction to ‘The Market Process’

The human body and the numerous “systems” that coordinate it like the respiratory, nervous, and digestive “systems”, is the result of the actions of some 30 trillion cells but obviously NOT the result of any conscious planning, designing, or conspiring by them. The brain does not tell cells what to do either. Similarly, the economy is also coordinated by a “system”, by what 1974 Nobel Laureate in Economics F.A. Hayek and his great mentor Ludwig von Mises referred to as “The Market Process”. The workings of ‘The Market Process’ and the “parts” it is composed of like money, prices, and economic competition is one of the most important concepts informed citizens should understand because a smoothly growing and progressing economy is the real source of our prosperity.

The Cycle of Production and Consumption

Social orders (individuals or companies) are in cycles of production, trade, and consumption. If you are a freelancer you produce a product/service and trade it directly with society (customers) for money, and then trade the money back with society for the wealth you consume. The production of wealth requires the consumption of wealth. For example, if 10,000 men are to spend 2 years producing an airplane factory, they must consume/use the concrete/materials/food/energy/transportation/shelter/wealth that they (as well as their dependents/family) need while they produce the factory. In other words, there can be no production if there does not already exist enough wealth that can be consumed while production takes place. If you work for a company, you produce your labor and trade it for money with your “employer” who combines it with the labor of others to produce a product/service which is then traded with society for the money from which your paycheck comes. Whether you are a freelancer, employee, or company, what is commonly referred to as sales revenue (your paycheck), is an estimate of the total amount of wealth produced. Costs, like employee wages which will be used by them to consume wealth(food, energy, housing, etc.), are an estimate of how much wealth is consumed from the economic pie. And profits, which are the difference between sales revenue (production) and costs (consumption) are an estimate of by how much additional wealth the economic pie has grown. A profitable order is an order (person/company) that produces more than it consumes and is therefore self-sustaining/alive. The global economy or ‘Social Organism’ is really a vast collection of orders that are constantly trading with each other, each trade taking each participant/order from an inferior to a superior state of well-being from its perspective, otherwise the trade would not occur. Each trade can be seen as nourishing each order with what it needs from its own perspective. When Carl trades a dollar for a hamburger he values the hamburger more than the dollar and the restaurant values the dollar more than the hamburger so the action of trading takes place, which like all action which is not coerced, takes each participant from an inferior to superior state of well-being.

The link between ‘private property’, economic competition, and superior morals.

In the socioeconomic order new/superior information arises and spreads thanks to ‘economic competition’. Why are BMW, Ford, Toyota, Microsoft, Google, Amazon, and all private sector companies in the planet constantly innovating and copying each other’s innovations thus continuously discovering superior information with which to reorder mankind in more prosperous ways as fast as humanly possible/profitable? Because the concept/tradition of ‘private property’ gives everyone the ‘freedom to trade’ our life/order-sustaining wealth for what we calculate/think is best. This freedom in turn motivates everyone, in our role as producers, to discover how to order ourselves in a manner that produces something society/customers value. Most of us produce our labor and trade it with a company which knows how to further combine it with the labor of others to then profitably create some product/service/wealth.

Companies that don’t successfully compete (innovate/learn) won’t get enough revenue to pay a competitive wage, motivating employees to use their freedom to quit and join the increasingly better-informed higher-paying companies. This process continuously innovates and reorders labor/resources in the most productive and prosperous way. Just like in the Olympics we can discover the best athletes in the world due to global competition, so does free-trade among all nations/peoples/orders allows the best ideas to compete and spread globally thus ensuring the best possible global order. As cost-cutting ideas emerge and inevitably spread via competition leading prices to continuously fall, new profitable ideas easily arise and once again spread via competition in an endless cycle of knowledge generation/innovation. For example, computers were once very expensive, but once the price of making them came down enough, people easily realized that every home could have them, which gave birth to our computerized world and the Internet and all the great things that flow from it. The more wealth is produced, the more wealth has to be offered in exchange for labor as entrepreneurs/companies/orders compete against each other for the labor they need which helps explain why the economic pie grows for everyone. We should also quickly add that morals are simply ways of acting, they are knowledge, which like most knowledge, emerges and spreads via economic competition. Companies that hire/nourish/‘trade with’ lazy, disrespectful, or corrupt people will be less competitive and be inevitably pressured to hire people with better morals which in turn forces everyone to be respectful and hardworking regardless of race, sex, etc. Similarly, it is hard-working, tolerant, courteous people who thanks to competition inevitably force everyone else to be likewise. As Hayek tells us:

“Competition is, after all, always a process in which a small number makes it necessary for larger numbers to do what they do not like, be it to work harder, to change habits, or to devote a degree of attention, continuous application, or regularity to their work which without competition would not be needed.” (Hayek)

As millions of Italians, Britons, Germans and other immigrants from all over the world came to America, it was ultimately the competition which grows from ‘private property’ and thus individual liberty/freedom which stripped these people of their otherwise nationalistic/ethnocentric/tribalistic identities and evolved what came to be seen as the classic American character/ethos of wanting to be seen as a reputable/honest businessman/professional who treats everyone with respect and wears a business suit as opposed to older religious/ethnocentric dress. So not only does ‘private property’ “turn on” or leads to economic competition and other aspects of the market process and resulting social order/civilization, it also civilizes our morals.

Prices and why Socialism/Communism must always lead to chaos and starvation

How much wealth had to be consumed in order to produce a gallon of gasoline that sells in Seattle for $3.50? Or a pound of beef that sells in a store in Miami for $5.35? We can’t know for sure, however, we can be fairly certain that it was less than the advertised price which on average must include the costs. The price of any item in the world lets us know that there is an order at that particular place and time that is coordinated by information that can produce the item while consuming less than the advertised price. THAT IS AMAZING! This allow goods to be purchased and combined in a manner that ensures that the combination (like a car) can easily have a price set that properly accounts for the costs/consumption of the whole (car) by just adding the prices of the parts used to produce it (wheels, glass, robotics, labor, etc.), parts which themselves had a price set that included their costs/consumption and so on, each part/input managed/ordered by entrepreneurs with highly specialized time-and-place specific information who are always using profit/loss calculation to ensure they are increasing the economic pie. The concept of ‘private property’ plays a vital role here as well, it is not until things are privately owned, that they are coordinated by brains/CPUs that are incentivized to use or reorder them in the most productive/profitable way possible.

In order to have life, the social order must be coordinated by information that leads to more production than consumption. This information and coordination is IMPOSSIBLE to achieve by governments/’Central Planners’ regardless of the genius of their “experts” or their good intentions. The following simple example suffices to show this. A restaurant in Miami sells a burger for $8. The $8 price provides vital information. Perhaps $1, might be profit, and $7 will be spent in costs, in other words, in the necessary consumption or use of wealth needed to produce the burger, things like equipment, labor and everything employees will consume at home (food, energy) thanks to their paychecks that came from the $7/burger. The businessman discovered 1) that there are enough customers nearby willing to patronize the restaurant at the $8/burger price and he also discovered 2) how to reorder $7 worth of stuff(labor/supplies/etc.) to produce the burger. If he sets prices too high, customers will choose other superior competing options, if too low, they might not cover costs and cause the business to consume more than it produces leading to an overall shrinking of the economic pie and thus go out of business. Socialism/Communism can’t work because only businessmen dispersed throughout society are at the right time and place needed to discover people’s desires(1) and (2) the information needed to properly set prices and thus create a profitable order (one that produces more than it consumes).

Government/’Public Sector’ is an Inefficient Monopoly

Governmental/’public sector’ orders, being COERCIVE MONOPOLIES which get their life/order-sustaining wealth through taxes/compulsion are immune to the competitive-information-spreading incentives/pressures which motivate private sector orders to be efficient/innovative/hard-working. This helps one further understand how Communism, which abolishes competing orders and replaces them with a single competition-less monopolistic bureaucracy, leads to a massive lack of production/innovation and eventually socioeconomic chaos/starvation as the economic pie continuously shrinks as has happened in every country that consciously attempts Communism/Socialism or inadvertently drifts in that direction as their governments get bigger and bigger (USA/Word). Central plans, of course, can’t work if people are free to not go along with them — so they inevitably require compulsion/slavery. For example, it is a criminal act in Communist countries like my native Cuba to start a business, in other words, to attempt a superior restructuring of society because it interferes with the plans of “the experts” who run the government. It is also a criminal act everywhere to not pay taxes that sustain public sector bureaucracies like “public education” so there is little incentive or wealth to sustain other, more desirable/superior competitors. For example, the NYC public(monopolistic) school bureaucracy consumes about $29,000 per year to “educate” a K-12 student. Refusing to pay a single dollar that goes to this bureaucracy is a criminal act. Socialist regimes and public sectors in general also face an “incentive problem.” In free societies, or the private sector, each person/company is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers. The image below is one of our most powerful memes for explaining the difference between competitive/private orders(South Korea) and monopolistic/government orders (North Korea). Again, keep your eye on how information arises/spreads and continuously restructures the social order. Taxes just transfer wealth from the private sector which is profitably ordered thus constantly increasing the economic pie/life/order to coercive monopolistic governments which mostly consume such wealth depressing economic growth/order/life.

Regulatory Paralysis

With our focus on how information arises and coordinates society, we can see that a government regulation is essentially a “way” of doing things, it is information. But unlike information that arises in the private/competitive sector and is constantly being replaced by superior information due to economic competition, a government regulation is information that arises out of a few brains and is then forced upon the entire social order via the law and can only be changed via a painfully slow monopolistic/bureaucratic apparatus made up of economically ignorant politicians, lawyers, lobbyists and special interest groups who always lack the necessary local time-and-place-knowledge and incentives to discover what is the best way to do something. The more the government regulates, the more it paralyzes competitive knowledge discovery. As government regulations have increased in the health care sector, turning it into a sort of island of paralyzed top-down competition-less/socialist central planning, so have costs. These increased costs have led the sector to grow from consuming just 5% of the American economic pie in 1960 to 16% in 2006 and about 20% by 2020. The image below helps explain the regulatory paralysis/bureaucratization of the entire medical sector which is responsible for the skyrocketing costs.

Below one can see how the less regulated a sector is the better it functions.

The IT sector is relatively unregulated, teens can work at Google/Microsoft and write the software in medical equipment that keeps people alive, yet there is no American Association of Computer Programmers dictating what or where such knowledge can be obtained similar to how the government via the American Medical Association regulates/paralyzes the medical sector via the licensing of doctors, medical schools, insurance sector, etc. At places like people learn to be highly-paid computer programmers for free. In the IT sector millions of people are ordered efficiently via smooth competition and are highly productive thus most make good salaries. If the medical sector, or better yet, the entire world-wide economy was as deregulated/free/competitive as the Software/IT sector, the rate of innovation and prosperity would skyrocket and I would guess that people who as of today have 10 years left to live might be able to beat dying of old age. But human flight is impossible obviously.


More money does not equal more wealth. Imagine if everyone in the world suddenly had an extra billion dollars. Would this make society wealthier? No. The amount of REAL wealth(goods/services) has not increased by a single toothpick. It would actually lead to less wealth since many people wound stop working/producing seeing their new-found fortune. Would the 10,000 men above be able to produce the factory if instead of having real wealth to use/consume had to consume pieces of paper with dead presidents on them? Of course not.

More money just leads to and enables higher prices. For example, if there are 1,000 people in an island (BlueIsle) and each has $100 for a total of $100,000 in the island, can anything sell for $200,000? Of course not, even if they all combined their money such a transaction could not happen because there isn’t enough money, but what if each person had $500 so that there is now a total of $500,000? Then yes obviously, prices could go up to $500,000. So for general prices to go up there HAS to be more money. And who creates the money and is ultimately responsible for a general increase in prices? Generally speaking, today all money is created by governments via their central banks (Federal Reserve in USA) and they are thus responsible for the price increases. Let’s say you print yourself 1,000 trillion dollars and start offering people in the USA’s West coast ridiculous amounts of money for their goods/property/wealth. You buy all the wealth in California, Washington, Oregon, etc. As this is happening Americans are growing richer in terms of money but poorer in terms of what really matters, homes/property/wealth. At some point you make it to Florida, by this time it will be packed with about 300 million Americans and perhaps the 1,000 trillion dollars or more you kept offering people. The price of wealth tends to be the amount of money that is offered in exchange for it given all the other things the money could be traded for. With so much money and so little wealth left, the price of everything would be astronomical and people would be much poorer given that you are the one that possesses most of the wealth in the country. Assuming the total amount of money remains stable, if the economy/wealth is expanding, which can only happen if the rate at which goods/services/wealth is produced is faster than the rate at which it is consumed, we expect general prices to go DOWN because the money will sort of get divided among more goods/wealth so less money per item/wealth means a lower price. If the amount of wealth remains stable or grows slower than the amount/supply of money, then we have more money per item, thus higher prices.

Let’s go over a final and very important example. Keep your eye on how much wealth is being produced and consumed, and the relationship between the quantity of money, wealth, and thus prices. Let’s say Alan prints himself another $100,000 which is enough to hire half the people in BlueIsle for 3 months while they build him a small castle. Alan thinks this is a great idea, he is paying some people more than what they were making before, there were also a few unemployed or unmotivated-to-work people before but he is offering enough money to get everyone working thus achieving “full-employment”. Prior to trading their labor for Alan’s paper/money, people were producing stuff that they either wanted/needed to consume themselves or could be sold/traded to others who obviously wanted/needed to consume them, they were producing “socially desired” or “order/life creating/sustaining” stuff like oranges/apples/hair-cuts/blankets/baskets/etc. The day half the population begins working on Alan’s castle, the island’s economic pie begins to lose half its “socially desired” stuff/wealth since half the population is no longer creating it, and begins increasing the amount of rocks, ladders, and other things for Alan’s castle. These things, are NOT “socially desired” or “order creating/sustaining” wealth as judged/calculated by the inhabitants. Since the existing $100,000 will be distributed over half as many socially-desired-goods, this would eventually motivate their prices to about double. However, since Alan is further doubling the money supply as he pays people using his newly printed $100,000, on the last days of castle-building, when half the population is still working on his castle and they have also received most of the new $100,000, prices would have nearly doubled once again making them about 4 times higher than they were before Alan came up with his idea. It should be easy to see that Alan has reordered society in an inferior way. Everyone is “working” and making more money than before, but the unavoidable reality that they are ordered in a less productive way reflects itself in the much higher prices and smaller amount of wealth on average that each can consume. Ideally people now “lose their jobs”, and instead of working on the easily identifiable yet disastrous plan laid out by Alan, for a few days there appears to be “chaos” as people discover superior plans and likely transition to their old trades/jobs thus once again reordering society on a far, far more productive way. However, they are economically ignorant, so they tell Alan “Can you hire us again to make the castle bigger? You pay us more than what we used to make before. You are about to create massive unemployment”. Alan thinks to himself “Gosh! It is a good thing that by creating money I am preventing massive unemployment and chaos. Obviously I must keep providing ‘liquidity’!” So the relative suffering continues. Had Alan been a bad king, who instead of creating money to acquire the necessary wealth to create his castle, simply taxed people at a 50% rate, the people’s living standard would have suffered similarly, but they would have easily understood the fact that their wealth was taken from them for the creation of things they didn’t want or benefit from for a hopefully more obvious massive loss.

The higher prices that creating money brings about can be seen as a hidden tax on the public whose money/savings can now buy them less wealth than before. If you have $100 saved and can buy 100 hamburgers for $1 each and because of inflation their price is now $2 so you can only buy 50, you have essentially been taxed an additional 50% thus losing half of your wealth. Regardless of the amount of money, at any given time there exists a certain amount of wealth owned by certain individuals. The moment governments create money and give it to some entity they are allowing that entity to trade it for wealth and thus consume wealth without having previously increased production for a net loss/transfer from society. The creation of money by governments just transfers wealth from the public/savers to those who get the money. How much wealth was transferred? The additional wealth people’s savings could have bought them had prices not gone up due to inflation.


Freedom is not only indispensable for the competitive discovery and spread of superior information, but also for discovering the TRUTH! We only have to remind ourselves of the Catholic Church’s regulation of speech/thought which led to the persecution of thinkers like Galileo Galilei and thus the general retardation of scientific progress to various degrees. Bad ideas and the self-serving ideological and social structures that can sustain them, like Socialism/Communism/Coromunism must have intellectual persecution in order to prevent criticism or ideological competition.

Thus we can see how freedom is ‘The Ultimate Algorithm’. We just need to understand it, that’s all. The average citizen has no need to become an expert in nutrition, or economics, or history, or psychology, or whatever, what he needs to become an expert in, which fortunately is not hard at all, is ensuring that there is maximum freedom and thus competitive knowledge discovery everywhere. By focusing on economic education we really strike at the root of the ignorance and errors from which most of our problems arise.

Very good video showing the necessity of freedom for innovation and how the world innovates in general by Matt Ridley based on his new book “How Innovation Works: And Why It Flourishes in Freedom”

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