The Rising ‘Cost-of-Living’: Why Is It So?

Economist and LibertyWorks advisory board member, Darren Brady Nelson, expands on his previous contribution explaining the Rising Cost Living.

My recent LibertyWorks piece entitled “The Rising ‘Cost-of-Living’ is a Government Phenomenon” asserted that the drivers of the high and rising cost-of-living in Australia are all the plethora of government interventions that, not only increasingly skew the balance of ‘freedom versus control’ away from freedom, but also necessarily raise costs and prices and thus reduce growth and jobs. Key amongst these government drivers are tax, regulation and money. And key amongst the negative impacts are in energy, housing and utilities.

This piece is a prequel of sorts. It is based on my recent speech at the fifth annual Friedman Conference in Sydney Australia. It attempts to answer the question of “why is it so?” by stepping through the logic of why ‘free markets’ are economically and ethically good and hence why ‘Big Government’ interventions of tax, regulation and money are bad. The steps taken are: people; profits; property; prices; and purchasing-power. As will be seen, purchasing-power is the inverse of the cost-of-living.

Economics is about human action – ie people acting through time and space in pursuit of ends using means, none of which are infinite or free and thus are of value. All people are individual human beings, but who necessarily interact and cooperate with others such as family, friends, employers/employees and service providers. The late great historian and sociologist Franz Oppenheimer pointed out that:

[Th]ere are fundamentally two ways [or means] of satisfying a person’s wants [or ends]: (1) by production and voluntary exchange with others on the market; and (2) by violent expropriation of the wealth of others. The first method is the ‘economic’ means for the satisfaction of wants; the second method is the ‘political’ means. The State is trenchantly defined as the organisation of the ‘political’ means.

The outcome sought by all human action is profit – ie the ends achieved were worth the means including time and effort. Such profits can be any combination of monetary, material and ‘psychic’. For example, if I buy a coffee from a café then by definition I valued it at some level above the exchange price and at the same time the café valued it at some level below the price. Both of us profit – ie I get a consumer surplus and they get a producer surplus. This is by definition ‘win-win’, at least ex ante. This means that profits, even monetary ones, are not at the expense of other people like consumers or employees. But instead profits provide the incentives and information for entrepreneurs to provide goods and services plus jobs that wouldn’t otherwise be provided. Therefore, the statist cliché of “people before profits” is really saying “(my) profits before (other) people”.

Private property allows for the peaceful pursuit of profit (= ends – means) in cooperation with others, often countless others around-the-world. Property is so much more than just a ‘legal’ right to own and control land or so called ‘real’ property. It is the ‘natural’ right to have the freedom to own and control oneself (including ends), one’s stuff (including means) and one’s life (including profits) in differentiation from other people. In terms of the ‘economics’ of private property, the great Austrian School philosopher Hans-Hermann Hoppe said:

[P]rivate property … produces a higher general standard-of-living than any other one … [b]ut ultimately … such considerations can only convince somebody of [private property] who has already accepted the ‘utilitarian’ goal of general wealth maximisation.

More importantly, in terms of the ‘ethics’ of private property, Hoppe said:

[A] property right to one’s own body must be said to be justified a priori, for anyone who tried to justify any norm whatsoever would already have to presuppose the exclusive right of control over [one’s own] body as a valid norm simply in order to say ‘I propose such and such’.”

Furthermore, it would be equally impossible to sustain [such] argumentation for any length of time … if one were not allowed to appropriate in addition to one’s body other scarce means … For if no one had the right to control anything at all except [one’s] own body, then we would all cease to exist …

Prices are the key contractual term in any exchange of property whether it is, say, money for coffee, barter for coffee or labour for coffee. Prices at the same time are an objective benchmark, along with objective quantities and semi-objective qualities of goods and services, for comparison to subjective value. Thus prices, like profits, are incentives and information intertwined. Prices, however, can be known ex ante and profits, although expected ex ante, can only be known ex post. Furthermore, because value is subjective in the ‘eye of the beholder’, it is possible for two people to exchange some of their property at the one price and both ‘walk away’ with the ‘more valuable’ item. Hence voluntary exchange is always ‘win-win’, at least ex ante. As the late great Austrian School economist Friedrich von Hayek added:

Into the determination of … prices there will enter the effects of particular information possessed by every one of the participants in the market process—a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain … which [instead] exists only dispersed among uncounted persons, [more] than any one person can possess.

This brings us to purchasing-power, be it for consumers or businesses. As another late great Austrian School economist Murray Rothbard stated:

The price and purchasing power of the unit of a product are one and the same. … While recognising the extreme difficulty of arriving at a measure, it should be clear conceptually that … the purchasing power of is the inverse of whatever we can construct as the price level or the level of overall prices. In mathematical terms: PPM = 1/P; where PPM is the purchasing power of [money] and P is the price level.” (See Diagram 1)

When purchasing power decreases … say due to an increase in tax, regulation and/or money … this means that cost-of-living increases. Unlike tax and regulation (even income tax or energy regulation), increasing or inflating the money supply impacts on the entire economy over time as: 1) the boom-bust ‘business’ cycle, reflected in higher prices (and higher profits) for some in the boom; and 2) ultimately ‘inflation’, reflected in higher prices (and lower profits) for most if not all. This is discussed in more detail in another recent LibertyWorks piece be me entitled “Quantitative Easing by Stealth?”. By the way, tax and regulation put upwards pressure on prices and downwards pressure on purchasing power … not through increased demand for goods and services like money does … but through decreased supply for goods and services. Rothbard illustrates what happens to purchasing-power of money (PPM) when money supply (M) is inflated:

Having too much money ‘burning a hole’ in their pockets, people spend the [extra] cash balances, thereby raising individual demand curves and driving up prices. But as prices rise, people find that their increased aggregate of cash balances is getting less and less excessive, since more and more cash is now needed to accommodate the higher price levels.” (See Diagram 2).

All government policies either: A) reduce or remove market interventions; or B) add to them. “A” reduces the cost-of-living, whilst “B” raises it. Rothbard reminded that, in many ways, the history of humanity can be seen as a ‘race’ between ‘Bigger Government’ (and “B”) versus ‘freer markets’ (and “A”):

Always [people] – led by the producers – [have] tried to advance the conquest of [their] natural environment. And always [people] – other [people] – have tried to extend political power in order to seize the fruits of this conquest over nature. … In the more abundant periods, eg after the Industrial Revolution, [freer markets took] a large spurt ahead of political power [including over government intervention], which ha[d] not yet had a chance to catch up. The stagnant periods are those in which [such] power has, at last, come to extend its control over the newer areas of [freer markets].

To win this ‘race’ over time for ‘freer markets’ will require not only winning ‘minds’ through sound economics but also ‘hearts’ through sound ‘ethics’ … and maybe sadly ‘wallets’ through buying off cronies (eg taxis), threatening governments (eg succession) and/or bypassing cronies & governments (eg Uber).

Darren Brady Nelson is an Advisory Board member of LibertyWorks and an economic policy advisor to Senator Malcolm Roberts.

1 Comment on "The Rising ‘Cost-of-Living’: Why Is It So?"

  1. Mostly government interference, incompetence, and idiocy.

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