THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, July 1, 2009

On Usury and Other Dishonest Profit, Part XXV

People with a moral orientation seem to have a tendency to excoriate the free market as the source of many of the evils that afflict the modern economic common good. The fact remains, however, that, as an application of the human person's natural right of free association ("liberty") and a manifestation of free will, a truly free market that has no barriers to full participation by any individual or group and protects individual and social rights by maintaining a strict juridical order is most consistent with the demands of individual human dignity and the common good as a whole. For this reason, the Just Third Way incorporates free and open markets as a necessary pillar of an economically just society.

Free and Open Markets

"Free and open markets" does not mean the socialist bogeyman of a capitalist laissez-faire Donnybrook. On the contrary, a free and open market is one to which everyone has free access, whether as a producer or a consumer, and as a worker or an owner. Common sense implicit in Say's Law of Markets tells us that, just as every consumer should also be a producer, every worker should also be an owner of the means of production. This enables anyone to produce either by means of his or her labor, or by his or her ownership of capital. Ideally, all these roles — producer, consumer, worker, and owner — should be combined in every individual. The alternative is a society in which a few produce so that many might consume, and a few own so that many might labor.

When the four roles of the market are filled by free choice by every member of society (or at least a determinate number), the action of the market is circumscribed by a strict and just juridical order, and there is an adequate flow of accurate information, the free market is the best means that can be constructed by humanity for determining just prices, just wages, and just profits.

In its function in determining just wages, just prices, and just profits, the free market is an application of Aristotle's "theory of universals." Without perfect knowledge (something normally beyond human realization in any event), however, we can never know a universal exactly or in its entirety. We can, however, approach a reasonable and workable facsimile of a universal by aggregating the "particulars" or specifics that we observe. This is because one and the same universal (the substantial nature of a thing) appears in its entirety and in the same way in every member of a class, although obscured by the particular form ("accidentals") of each thing observed, and inadequacies and errors in human understanding.

As the theory of universals applies to determining the just price for a particular good or service in a free and open market, then, we have to realize that the universal we are working to discern is the price itself — and the price of a thing must be clearly differentiated from the cost of the thing, as well as from the thing itself. We have to realize that an "accidental," that is, something that is related to a thing but not part of that thing's substantial nature, itself has a substantial nature.

This is because everything that exists, exists as fully as everything else that exists, and exists in the same way. Thus, a loaf of bread possesses the substantial nature of "breadness," or the capacity to acquire and develop "bread virtue." Similarly, a human being possesses the substantial nature of "humanness," or the capacity to acquire and develop human virtue. The aroma, freshness, ingredients, price, cost, and many other things, while characteristics of a loaf of bread, are not themselves bread. A loaf of bread would remain a loaf of bread even if it lacked one or more of these characteristics, as long as the capacity to acquire and develop the missing, un- or underdeveloped characteristics remained intact.

With this understanding, it becomes clear why, in a free market, David Ricardo's labor theory of value, congealed by Karl Marx into an absolute dogma, simply does not make sense. According to Ricardo, "correcting" what he perceived as the mistake of Adam Smith and Jean-Baptiste Say, the value of a thing, and thus its true or universal price, is the cost of the labor that went into it. Unfortunately, cost and price, while accidentals of the good or service produced, each have a substantial nature of their own, as shown by the fact that they have different definitions.

We can therefore discern that cost and price are different from the simple fact that two words exist. Unfortunately, many people use the terms cost and price interchangeably when employing them in ordinary speech, as demonstrated by the definitions in the American Heritage Dictionary: A "cost" is, "An amount paid or required in payment for a purchase; a price. To have as a price." (American Heritage Dictionary.) A "price" is, "The amount as of money or goods, asked for or given in exchange for something else. The cost at which something is obtained." (Ibid.) These definitions make it sound very much as if "price" and "cost" are simply different words for the same thing. That is, in fact, how many otherwise intelligent people understand them.

We, however, are concerned with the technical meanings of cost and price, not the popular meanings. Technically, then, price refers to the amount of money you give up to acquire a good or service. Cost, on the other hand, refers to the amount paid to produce a good or service. Cost represents the sum of the value of the inputs to production — capital and labor — and can be objectively determined on a case-by-case basis. Price, however, is subjectively determined on a case-by-case basis, depending on the perception of the value of the good or service to the buyer.

This is because while price is a function of many things, such as quantity, quality, utility, and so on, the primary determination of price is what a knowledgeable consumer is willing to pay for the thing. This can be, and often is unrelated to what it cost the seller to acquire or produce the good or service. It is an economic and financial decision whether to provide a good or service based on a comparison of the cost to acquire or produce it with the anticipated price at which the good or service can be sold. Pricing being more of an art than a science, there is no necessary correlation between what it costs the provider to produce or acquire something, and the price that can be realized from the consumer.

Individual consumer's subjective decisions on whether or not to buy at a particular price can, however, be objectified after a fashion. By aggregating the prices that individual consumers are willing to pay for a thing in a free market, we approach an approximation of the true, "universal" price of that thing. Paradoxically, we can never know the actual, precise universal price of a particular thing because such factors as quantity, quality, utility and, above all, the price a consumer is willing to pay for a thing are (like society itself) all in a constant state of flux. Within a free and open market maintained within a just and stable social order, however, we can get a good approximation of the objective price of things, and thereby determine just prices, just wages, and just profits in as objective a manner as possible.

Wide fluctuations in prices, wages, and profits, inflation or deflation of the currency, and so on, are all therefore good indications that the institutions of the social order (particularly money and credit) are seriously flawed and that the free market is not operating in a manner consistent with the demands of human dignity.

In the next posting in this series we will examine the third pillar of an economically just society, the restoration of private property, especially in corporate equity.