Tuesday, December 24, 2013

Don't Trammel On Me!

 "Falling prices through increased production is a wonderful long-run tendency of untrammeled capitalism."

Murray N. Rothbard (1926-1995)

Untrammeled seems like a wonderful word to use here!  Understanding it as used in this context, but not familiar with the definition, I looked it up.

Oxford says that untrammeled is an adjective which means, "not deprived of freedom of action or expression; not restricted or hampered."

We call untrammeled enterprise by another term - FREE ENTERPRISE!

The knee-jerk reaction to that definition would be that this must never happen!  Why, in an untrammeled  economy the evil capitalists would mercilessly put their jack boots to everyone's face, grind them down, steal their money and their will, and move ahead with their stolen, ill-gotten profits!  The rich will benefit on the backs of the poor.

Not much could be further from the truth.  Where allowed capitalism has historically, and morally, and fairly, raised all boats in the sea of standards of living, and brought wealth and opportunity to those who participate.  Yes, capitalism demands participation.  Some participants do better than others, but societies, as a whole, advance without fail.

We have all had the experience of waiting until the price for something comes down over time.  But given the upward slope of the supply curve, and when demand increases for something, the price suppliers can ask for that product will go up.

For some things that will always be true - pristine baseballs autographed by Honus Wagner or an authentic, one-of-a-kind doodle by Michelangelo.

But for lots of things that will never be the case.  When I was in college we waited an entire semester for the price of a particular calculator to go down.  The demand for calculators was going up, but prices were generally coming down.

How could that be?

If I invented a new product, different in size and shape and abilities and ease of use, and called it the Incredible Product, I would really want to market it.  What better way to get into the minds of the buying public than to create a new-word paradigm and market it?  What if I called it the I-Prod?

And it catches on right away!  People see it, understand how it can change their lives, and want it.  They want it now.  Given what we know about supply curves, since I am the inventor and supplier, I can ask a higher and higher price.  I am riding high!  Market demand is pushing up the supply curve, and given what we know about the supply and demand graph, higher prices happen as more I-Prods are produced.  But this only happens to a point.

What's that point?  In untrammeled capitalism others want to benefit from the opportunity of providing this great product too!  They want a piece of the action.  And, untrammeled because it's a new market these new manufacturers enter the market with their version of my I-Prod.  


The nerve!  Their products look like mine, but they do different things!  More things!  Some better things!  And they steal my new product word - but they call their products different names.  They market their products.  One sells the Really Cool I-Prod, and another the Much Better I-Prod.  One comes out with the Super Fast I-Prod with lots of colors!  And my sales begin to decline.  Holy Cow!  Free enterprise is causing me to lose market share to competition!

I am forced to do two things - lower my price AND improve my I-Prod!  Why?  Because these new untrammeled entrants into the I-Prod market have effectively increased supply at the original given cost, which affects price.  They have shifted outward the entire I-Prod market (called aggregate) supply curve!  We have much more I-Prod supply, and all kinds of different ones!  As the demand curve is sloping downward, this increase in aggregate supply lowers price.

And, as Dr. Rothbard says, a hallmark of capitalism is "falling prices through increased production."

We didn't even talk about increased employment, more discretionary money for things other than I-Prods and increased standards of living.  Remember, economics is a system of interacting generalities, and in a capitalist economy everything affects everything else.  Of course everything affects everything else in a controlled economy as well, but only the capitalist system handles the causes and effects more efficiently because people are freely acting out of self interest.  They are LESS TRAMMELED!   And wealth is created!  All boats are lifted.  There is free enterprise.

So, when you are considering my I-Prod against all the other I-Prods remember - mine is better, the price will likely continue to come down so please wait for my next big sale, and when you finally decide on mine over the others it will be obsolete the moment you buy it.  My newer, cheaper version will be out soon.

Says he, with an untrammeled wink in his eye.

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