Prices, Scarcity and Value

Posted by PITHOCRATES - December 12th, 2011

Economics 101

“Economics is the Study of the Use of Scarce Resources which have Alternative Uses”

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  And free labor sustained economic growth by increasing the number of people making economic exchanges.  Of course, we need something else to facilitate these economic exchanges.  Prices.

British economist Lionel Robbins defined economics as the “study of the use of scarce resources which have alternative uses.”  Resources are the things we buy.  Or they make up the things we buy.  We can use these resources to make many different things.  For example, we can eat corn as a food.  It can be an ingredient in food.  We can make it into a sweetener.  We can use it to make bourbon whiskey.  We can even use it to make fuel to burn in our cars.   So corn has many alternative uses.

Depending on the corn harvest corn can be abundant.  Or scarce.  We can have a lot of it.  Or if there was a drought we may not have so much of it.  For another example of scarcity you can consider a concert.  Whether it is for your favorite band or a Broadway show, ticket prices for that show will vary.  The pair of tickets that are front row center are the most coveted.  And typically end up with a service or a scalper.  Thousands of people may be able to enjoy the show.  But only two can sit front row center.  These two tickets are very scarce.  And if you ever bought a pair of these tickets you know how expensive these tickets can be.

We Agree to Economic Exchanges when both Buyer and Seller Agree on the Value which is Communicated by Price

Those tickets are expensive because they are scarce.  The price of these tickets tells us this.  There are more seats available that are not as good.  And they cost less.  Because there are so many of these ‘cheap’ seats pretty much anyone can buy them.  Unlike the front-row center seats.  The scarcer something is, then, the greater its value.  And the more expensive it is.

Something becomes scarcer when the alternative uses for it grows.  For example, we now use corn to make ethanol to fuel our cars.  Leaving less available for food.  So food prices rise.  Because with this new use for corn the users in the food industry have to compete with each other to buy the smaller amount of remaining corn.  Corn, then, became scarcer when we added another use for it.  And more expensive.

We determine the price we are willing to pay for something based on the value it has to us.  In every economic exchange both buyer and seller assign a value.  Of what the buyer is willing to pay.  And what the seller is willing to accept.  We communicate this information with prices.  And we agree to make the economic exchange when both buyer and seller agree on the value of what they’re exchanging.  By agreeing on a sales price.

‘High’ Prices make sure Scarce Resources that have Alternative Uses are Always Available for those Alternative Uses

In this way prices automatically ration limited resources that have alternative uses.  And directs these limited resources to where their use is valued most.   By automatically flowing to the highest bidder.  This is the hallmark of capitalism.  And why you can walk into any American supermarket and be overwhelmed by the choices available.  But when you interfere with prices you have shortages.  And rationing by government bureaucrats.  Such as the gas lines during the Seventies.  When price controls made gas cheap to buy.  But it was almost impossible to find any to buy.  Because that cheap price for a scarce resource (made scarce by the Arab oil embargo) allowed people to buy it up until there was no more left.  Had we allowed the price to rise we would have bought less gas.  Guaranteeing there would be gas available for those who needed it most.  And who were willing to pay the higher price.

During the height of the Cold War when Soviet defectors came to the United States the American supermarket astonished them.  They never saw anything like it behind the Iron Curtain.  For communism didn’t use prices to manage their resources.  Bureaucrats managed their resources.  Their decisions filled stores with things no one wanted to buy.  And made people stand in line for hours to buy their ration of soap or toilet paper.  Things these defectors could fill a shopping cart with on any day of the week in any American supermarket.  And have money left over to buy so much more.  Thanks to capitalism.

Prices are relative.  Prices that may seem high serve a purpose.  They make sure scarce resources that have alternative uses are always available for those alternative uses.  Yes, the prices may be ‘high’ from time to time.  But these high prices guarantee these scarce resources will always be available to buy.  Unlike a low price.  Which, if too low, it will make a scarce item unavailable.  At any price.  Such as gasoline in the Seventies.

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Aristocracy, the Old World, the New World and the American Civil War

Posted by PITHOCRATES - December 6th, 2011

History 101

General Robert E. Lee represented the Old World, General Ulysses S. Grant represented the New World

General Robert E. Lee represented the Old World.  The last of a long line of wealthy landowners.  The finest of inherited wealth.  With a lineage that went back to George Washington.  The Father of our Country.  On his wife’s side.  Through the Custis ancestry.  Lee fought to continue the old ways.  Magnificent landholdings.  Grand mansions.  Servants.  Balls.  Gentlemen.  And ladies.  None who worked.  But who enjoyed the very best of lives.  Because of a very good last name.  And Lee wanted to pass this life on to his heirs.

General Ulysses S. Grant represented the New World.  His father was middle class.  A tanner.  And Grant worked in his father’s shop.  But hated the blood.  And the horrific odors.  He left and went to West Point.  Saw combat in the Mexican War.  After the war he served in some lonely posts.  Away from his family.  And started to drink.  He missed his family so much that he eventually left the Army.  Tried and failed in some business ventures.  And ended up a clerk back at his father’s tannery.  Working for his younger brother.  To support his family.

Grant and Lee actually met once in the Mexican War.  When Lee visited Grant’s unit.  Lee remembered the visit.  But he didn’t remember Grant.  For Grant was a rather plain soldier.  When war came between the states the North offered Lee command of all Union forces.  But Lee could not draw his sword against Virginia.  His beloved country/state.  So he resigned his commission and joined the Confederate Army.  Grant raised a regiment so he could rejoin the army.  Lee won many victories against the Army of the Potomac.  Grant advanced Union forces to a series of victories in the West.  His successes earned him command of all Union forces.  And he travelled east.  To ride with General George Meade and the Army of the Potomac.  As it pursued General Lee’s Army of the Northern Virginia.

The Planter Elite had Poor White Southerners who did not Own Any Slaves Fight to Maintain the Institution of Slavery

Until Grant took over Lee had many successes besting the Army of the Potomac.  In Virginia it became routine.  After the Union suffered yet another defeat the Army would turn and head back north.  Not so with Grant.  When he came to that fork in the road, he turned south.  To try and outflank Lee.  And face him in battle again.  And again.  Until Appomattox Courthouse.  Where Lee found himself outmanned.  And surrounded.  Lee and Grant met to discuss terms of surrender.  Lee arrived first.  Expecting to be taken prisoner and possibly hung for treason, he arrived resplendent in his finest uniform.  Grant arrived later.  Muddied.  And wearing a private’s jacket.

Grant offered very generous terms.  Which had a very positive effect on Lee.  And his men.  There would be an end to the war.  And there would be no guerilla war.  Instead, Lee would do everything within his power to help bring the South back into the Union.  With Lee being more important than the president of the Confederacy, this mattered.  The people respected Lee.  And if he said the war was over the war was over.  It was time to be good citizens of the United States again.

The South fought valiantly.  For what turned out to be a dying cause.  Old World aristocracy.  Based on the institution of slavery.  Which is why the cause failed.  But before we get to that consider who fought for the confederates.  Like in the Old World, the majority of the people in the South were those who worked the land.  Black slaves.  Unlike feudalism, though, these black slaves did not fill the ranks of the armies led by their landowners.  So those responsible for war, the Planter Elite, did not risk their ‘property’ during the war.  Instead, they had poor white southerners who did not own any slaves fight to maintain the institution of slavery.  Who they lied to.  By saying the war was about states’ rights.  Or that it was to repel the Northern aggressors who wanted to change the Southern way of life.  But that’s not why the Planter Elite seceded from the Union.  It was to maintain their way of life.  An Old World-style of aristocracy.  Perhaps the greatest lie in all U.S. history.  Considering the Planter Elite killed some 618,000 trying to maintain that way of life.  Which was 2% of the total population.  Today 2% of our approximate 312 million population would be 6.2 million dead.  Just to give you an idea of how big killing 2% of your population is.

The American Civil War was the Final Battle between the Old World and the New World in the United States

So why did the South lose?  Because the world changed.  There was now a middle class.  Creating and innovating.  Expanding the Industrial Revolution to the New World.  In the northern states.  Where factories hummed with efficiency.  And produced a modern economy.  Whereas the South stayed primarily an agricultural economy.  Based on King Cotton.  With the majority of their population being slaves working in the fields.

The northern population swelled as immigrants filled their factories.  Railroads crisscrossed the North.  Steam-powered ships plied the rivers and coastal waters.  There was economic activity everywhere.  And free laborers earning wages everywhere.  And spending their wages.  Taking part in economic exchanges.  The North became advanced.  Efficient.  And wealthy.  Whereas the only wealth in the South was on the plantations.  Confined to the landed aristocracy.  And King Cotton.  When war broke out there was no way that the economic powerhouse that was the North would not prevail.  Especially when their factories could make rifles and cannon.  And ships to bottle up Southern harbors.  Making all that cotton in the South worthless.  And irrelevant.  As the British just turned to India to feed their textile industry.

The American Civil War was the final battle between the New World and the Old World in the United States.  Between the middle class of Ulysses S. Grant and the aristocracy of Robert E. Lee.  Between free market capitalism and the landed aristocracy.  And capitalism won.  Because it was the better system.  To produce wealth.  And to improve the quality of life.  For those free laborers who participated.   Allowing anyone to have a  better life.  Unlike the peasants, serfs and slaves of the Old World.

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Alphabet and Writing

Posted by PITHOCRATES - November 23rd, 2011

Technology 101

The Necessary Information to Survive in Prehistory was Minimal and did not Require a Written Language

Hunters and gatherers had little need for language.  For they did little in life but hunt, gather, eat, sleep and propagate the species.  Much like wildlife today.  Such as feral cats.  Abandoned house cats.  Who mate and produce more feral cats.  And these animals are survivors.  They hunt.  Gather food from human garbage.  Eat.  Sleep.  And reproduce.  If you ever had any in your neighborhood you know that they can be very loud, too.  Making a variety of sounds.  Meows, cries, growls and hisses.  Not an advanced language.  But sufficient to survive.  And enough to keep you from trying to pick one up.

Early man was similar to feral cats.  They had a limited language.  That allowed them to survive.  And make modest advances.  They made tools out of stone.  Used fire.  Made clothes from animal hides.  Even left art on the walls of caves.  Far more than any wild animal ever did.  But they didn’t do much more.  If they did it was probably nothing to write about.  Because they didn’t.  Write about it.  Either because they had no written language.  Or because they were a modest people.

History starts with written language.  Before that we have only archaeology.  And best guesses.  But based on the archaeology they weren’t doing much.  Other than surviving.  And in these prehistory times life was pretty simple.  See above.  The necessary information to survive was minimal.  Eat.  And don’t die.  It wasn’t necessary to write that down.  So they didn’t.  Memory was more than sufficient.  And it was like that for millions of years.

The Phoenician Alphabet was the Basis for the Greek and Latin Alphabets

But then the simple became complex.  There were food surpluses that allowed a division of labor that led to trade.  And a burgeoning economy.  Which required a more sophisticated way of communicating.  And a system of maintaining records of economic exchanges.  For memory and talking just wasn’t good enough anymore.

In the 4th millennium BC, in Mesopotamia, this began with clay tokens to represent an economic commodity.  And the first system of accounting was simply counting and storing these tokens.  But as the division of labor produced an ever more complex economy, the number of tokens used became too great.  So they represented the economic commodity with a symbol scratched in a clay tablet.  Instead of counting tokens they read these tablets.  We call this writing cuneiform.   Which was later used to write down the spoken Sumerian language.

Over time we developed alphabets.  We represented the sounds of the words we spoke with letters.  The Phoenician alphabet being one of the first alphabets.  Used by one of the greatest traders and merchants of all time.  The Phoenicians.  Which spread this language around.  Giving rise to Canaanite and Aramaic.  Aramaic giving rise to Arabic and Hebrew.  Incidentally, all languages without vowels.  But the granddaddy of all alphabets was Greek.  Which added vowels.  And formed the basis for Latin.  As well as all other western languages.

We Know about the Glory of Greece and the Grandeur of Rome because they Wrote about It

Athens was the cradle of modern civilization.  The Athenian empire grew because it was based on a complex trade economy.  Ditto for the Roman Empire.  At the height of their power the civilized world spoke their languages.  Conducted their trade in Latin or Greek.  Wrote their laws in Latin or Greek.  Conducted their diplomacy in Latin or Greek.  Why?  Because they could.  Their alphabets and their written language allowed them to manage the complex.

And they wrote.  A lot.  We know so much about Greece and Rome because we can read what they wrote.  And we can build on the glory that was Greece.  And the grandeur that was Rome.  Because we, too, have complex trade economies.  Giving us comforts in life that not even the Greeks or Romans could have dreamt about.

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