Mental Mistakes

Chapter 6
Thinking Shop

People who go to the flea market know it is a market, but they don't put it in the same category with a "Futures Market," or a "Commodities Market" or even a supermarket. They think about those markets one way, and about the flea market another way. The flea market is almost a pretend market, where you just go and wander around and try to strike a deal for something if you feel like it. It has no pretensions. It is too loosely organized to be taken seriously as a market. One might as well have a garage sale and refer to that grandly as a market.

A stock exchange, now, is a real market. There they open and close with a bang, and have strict rules, and intricate procedures, and numbers flashing by on a sign—the razzle-dazzle of a real market. Or the Zurich gold market: there's a real high class market, where you dress up, and your word is your bond, and billions change hands on a nod.

This dual thinking about markets is a good example of mental passivity. The flea market is something anyone can know about by simply going there. One can learn the principles of exchange by simply trading there. One can learn about business by renting space there. One can learn market ethics by conversing there. There is no need to be told about the market: it is there to be studied. You can make up your own mind.

Since it is easy to know about the flea market, it seems to the passive mind not worthwhile. To see that it operates on the same principles as any other market, one would have to make comparisons, which would require learning some truth about the other markets. That would take work. Since there are no college courses about the flea market, and no text books, it must not be worth studying.

Passiveman watches TV, and is told subjective fantasies about "market failure", and "game theory". Nothing he has seen at the flea market conforms at all to these claims, but that's not a real market. That's just where people work things out for themselves. This TV guy is talking about real markets, described by college professors.

That is why passivity is the basic mental mistake. Reality is all around you, to be studied first hand. No one needs this book or any other to find out about markets. They are all around you, to be studied at will. Are businessmen really exploiters? Go look. Stroll down the block. Is the barber an exploiter? What about the ice cream parlor owner? The kids that work there sure complain a lot. But, of course, they also mess up a lot. To be honest, who's exploiting who?

The operation of markets is considered a complicated and abstruse subject for one reason only: no one bothers to look. People hold garage sales, which could demonstrate to them the operation of the market. But it does not conform to what subjectivists tell them the market should be. So they suppose it is not a "real" market, in which trades benefit only the exploiters, and "fairness" must be made to happen.

The world's fanciest market, if it is free, offers the one thing offered by your garage sale: truth. It establishes the exchange value of things by actually exchanging them. To see which market offers more truth, compare several. Compare the drug dealer down on the corner, to the garage sale next door, to the Chicago Commodities Exchange.

The drug dealer offers a choice of illegal substances, all of which cost less than they did a few years ago. That is the result of competition in the market for illegal drugs. Part of the value of the transaction, fully reflected in the cost, is that it is thrillingly risky for both parties. The dealer charges a risk premium, and the buyer eagerly pays it. Those who do not value risk stay away from drug deals. Subjectivists try desperately to destroy the drug market, and fail. So it tells truths that we try to deny.

The garage sale offers a meager selection of unwanted items, and discovers whether anybody passing by values them. The truth it tells can be painful, or surprising. That's the fun of the garage sale: not making big profits, but simply finding out if that old picture really is worth something.

The Chicago Commodities Exchange, to the extent it allows free trading, tells important truths about a range of items. The drug deal and the garage sale shrink to insignificance compared to it. However, their truth is no less true. And their method is exactly the same: values in exchange are established by making exchanges. The difference is that in the small markets, goods change hands directly, while in the large markets, tokens are exchanged that stand in for goods. Sometimes the tokens are pieces of paper, sometimes computer entries, sometimes nods and handshakes. Jade rings would also work.

The method for finding the principles that apply to markets is called induction. It is the process of establishing that a basic commonality causes the same effect in all of a conceptual group. Water, for example, includes as a conceptual group a range of liquids which, when purified of incidental ingredients, are the same chemical. The principle that water freezes at a specific temperature and pressure is based on two things: first, the observation that representative samples of water change form when the thermometer reads the same; and second, the analysis of the chemical showing that, by its nature, those conditions cause that change. The same method gives the principle that water boils at another specific temperature and pressure. The method includes observation and causality, working together. Gravity was established as a principle when Isaac Newton not only observed its effect, but also showed the causality involved. He said that the apple not only does fall, it must fall, by the nature of things.

To establish principles that apply to markets, that's what must be done. One must say what does happen, and why it must happen, by the nature of things. The principles of markets are easy to induce, because in this case, what does happen and what must happen are the same things, by conscious design of the participants.

The basic action of a market is trade, as we see at the flea market or any other. The basic principle is that the trade is voluntary. This is true by definition: if a robber accosts you, takes your wallet, and leaves a bruise, you did not trade the wallet for the bruise. If things are exchanged by force, it is not called trade.

The market, as a process for determining objective value, is a mechanism for making voluntary exchange possible. It is not accidentally voluntary, or voluntary as long as it is fair, or voluntary when legal. It is voluntary by conscious design, in each and every case without exception.

To confirm this, you do not need to study theories, take courses, or read books. You need only buy something. Imagine for a moment that the thing you bought was the one and only thing available, and that the price you paid was set by the government, and that a policeman was on hand to arrest you if you did not buy the one thing at the set price. Would you call that a purchase?

Subjectiman says, "No! My trade was not voluntary! I had to pay twice what I should!" Unstated is the method for determining "should." The subjectivist does not notice that his statement proves the opposite of his complaint. The reason he "had" to pay so much was not that a policeman was waiting to arrest him, but that he wanted the thing. Among his choices of ways to get the thing he wanted, paying the price was by far the best.

Imagine yourself at a remote vacation spot in the Canadian Rockies, enjoying the sun, the sights, and the setting—but not the prices. Good God! Here's the only coffee shop in town, and a cup of plain coffee is five dollars! Surely no economist can justify robbery like that! How can anybody call that voluntary?

The real question is: what are you doing in such a place? Did you actually save up for a year to go to this place where the coffee shop robs you? Of course, it might not be cheap to put a coffee shop in the middle of the Canadian Rockies. It is possible that a cup of coffee on the corner is worth somewhat less than a cup of coffee in the splendor of the Canadian Rockies. There do seem to be people here voluntarily.

Subjectivists tell themselves that whenever reality does not conform to a wish list, they are "forced" to compromise. Real prices are determined not by wishes but by actual exchanges. Prices arrived at in voluntary trading cannot be "wrong", or "unfair", or "outrageous". They are objective. They tell the truth. If truth is what you want, objective prices are what you need.

Try running that coffee shop in the remote Rockies. You are the only shop in town, so why not charge ten dollars for a cup of coffee? Well, because people will bring instant coffee with them, and you won't make any money. So try charging two dollars for a cup. Now you're losing money, because transportation costs alone are eating you up. Your only hope is to try different prices until you find one that people will voluntarily pay, but not too eagerly. That way, you won't run out, or go broke.

The reason that high prices get charged in remote locations is that supply is necessarily restricted. The reason people pay high prices is because it is nice to have things in remote locations. That's how the market operates. The value of a limited item in a remote location turns out to be higher than the same item in unlimited quantities next to home. Nobody but a subjective thinker would be surprised.

If you notice that induction uses essentials, then you would expect subjective thinking to get induction wrong by habit. A subjectivist, for example can show you that gravity is wrong. Take a pin and a feather, both weighing the same. Drop them together. The pin falls at one speed, the feather at another. Gravity operates differently on them.

Well, no, gravity operates the same, but air resistance operates differently. To see the universality of gravity, you have to look at essentials. To see the universality of the principle that all trade is voluntary, you have to look at essentials. Subjective thinkers look instead at preferences. They take the essential of trade not as choosing but as winning and losing. Prices, to them, are not accepted but surrendered to. Prices are right and wrong, fair and unfair.

To see the scam, ask a simple question: right and wrong compared to what? Fair and unfair compared to what?

Compared to a wish list. If I want to buy lower, then the higher price is wrong and unfair. If I want to sell higher, then the lower price is wrong and unfair. Since poor people need lower prices, then high prices are wrong and unfair. Since poor people need higher wages, then low wages are wrong and unfair.

Passive minds do not ask compared to what. They accept that prices are unfair, and wait to be told what to do about that. When somebody promises to fix it, they vote accordingly. So a should committee takes over and sets the price where it stifles trade, but is more "fair".

An active thinker looks for an objective price, because that tells the truth. To lower a price so poor people can pay it, you need to start by knowing what the price is. Then you can remember the second principle of the market, the law of supply and demand. Then you can work to increase supply, to lower the price. If instead you decree a lower price, then the supply will dry up, so you will have to impose a production order. Then the trade will not be voluntary. The market will become illegal, and go underground, where poor people will have to pay higher prices.

The way to fix disliked prices is to analyze the market by comparing everything about it to the principle that all trade is voluntary. That will show you that mandates will make things worse, and that prices are lowered by making production more efficient, which a producer will do in order to make more profit. What to say to an "overcharging" merchant is: "You need a better profit on this."

A subjective thinker's hidden position is: "I should get what I want without paying any price." He wants to handle reality by making demands. Because of this hidden position, the social system that seems obviously fair to him is socialism. We can learn a lot about mental mistakes by examining the essentials of that system.

Next Chapter Previous Chapter Contents Home