How to Think about the Economy: A Primer

Competition is not merely the rivalry between two or more businesses producing and selling similar things, but the constant pressure to serve consumers better--both present and future. History is full of successful and influential businesses, many of them considered too big and "powerful” to compete with. Most of them are long gone and forgotten because someone figured out how to produce more value for consumers.

It is easy to jump to conclusions and assume that the bread is valued more than the ingredients because additional resources were used to make it. This is false. It is the other way around: we choose to invest the resources—ingredients, manpower, time—because we expect the bread to give us greater satisfaction. It is the expected value of the bread that makes the investment worth pursuing. If it were the case that something is worth more because we use more resources to produce it, then we are not actually economizing. We economize because using more resources than necessary is wasteful.

This means that a premium or luxury product is not more expensive to buy because it is produced using rare, expensive materials—it was produced using rare, expensive materials because the good is more expensive to buy. Value determines cost, not the other way around

Most currencies today are government monopoly monies, but that is not how money was invented or accepted as a medium of exchange--it is only how it ended up. The economic function of money cannot simply be created from the top down.

Purchasing power—and therefore consumption power—the extent to which people are able to satisfy their wants through goods—is consequently a reflection of one's contribution to the economy (as a producer). Simply put, what we supply constitutes our ability to demand.

Thus, market production is empathic—your ability to provide value for others ultimately determines the value you get in return for your efforts... The economy and society are two sides of the same coin. It is not possible to separate the market process from society and civilization. As with so many things in the economy, observable phenomena emerge from people's actions but are not created by any one person. Instead, they are patterns (order) that emerge from people's actions.

Looking only at the status quo—the economy that we can observe in the present—or the changes that have happened in the recent past, we could easily conclude that the economy is a fairly static system that is far from maximizing the use of resources. It would be easy to find inefficiencies and come up with other potential solutions. But this would be an enormous mistake. The market process is primarily about figuring out how to create new value for consumers—it is not about maximizing output in current production. It is an entrepreneurial process.

The status quo is merely the most recent expression of the process—it's yesterday's winners before they are replaced by tomorrow's. The market process is in constant flux and is characterized by renewal and progress. The market process goes well beyond simple production management. We should want businesses to have good management that streamline production, cut costs, and tweak and improve the goods they produce. But management is what takes place in production after the entrepreneur has been proven right.

As Mises put it, the manager is the "junior partner" of the entrepreneur. Simply put, management solves an entirely different problem than entrepreneurship. It is about maximizing the outcome of a production process (typically in terms of profit). It is a fundamental error to misconstrue the market process as mere production management.

In a world in which a newly imposed regulation is the only change that takes place, we could easily compare the state of the economy before and after and thereby assess its effect. However, as the market is a process that is in constant flux, the regulation is decidedly not the only change—it is an imposition on the market's ongoing unfolding and evolution.