CHAPTER 21: To finish up here are a few words on economic relationships between people in different countries.  The economics is basically the same.  People specialize in their respective areas of comparative advantage which gives them a competive advantage when it comes to selling their products or services at a price that is higher than their opportunity costs but lower than their competitors who have higher opportunity costs.  Got that?

Specialization leads to trade, only this time the trade takes place over some artificial line called a BORDER which separates one group of hierarchical central planners from another group.    Nevertheless it is still mutually beneficial and like all honest trade it tends to foster good will and good relationships.  Remember both parties to a trade should say thank you.

Inside the various borders there are different monies and different ways of interfering with natural rights and spontaneous order.  International trade involves not only trading goods and services for money but also trading money for money.

The amount of foreign money you can buy with one unit of domestic money is called the EXCHANGE RATE.  A dollar, for example, might buy you 1 English pound, or 2 German marks, or 3 French francs.

Exchange rates are determined like all prices by the forces of  supply and demand.  It's just a little more complicated.

When demand for the dollar rises (exports plus capital inflows) relative to supply the price goes up because of the resulting shortage (buyers compete).  This is called an APPRECIATION of the currency.  If the supply of dollars goes up relative to demand (imports plus capital outflows) the price goes down because of the resulting surplus (sellers compete).  This is called a DEPRECIATION of the currency. 

When a currency appreciates foreign goods and services become cheaper.  Imports therefore increase but also exports will decrease. This spontaneously resolves the imbalance.    Depreciation of a currency also resolves an imbalance but the effect on imports and exports is reversed.  

In the past, exchange rates have sometimes been set by the government which of course results in disorder.  When this disorder gets bad enough the official exchange rate will have to be changed (usually after controls have been tried and failed).  An official depreciation is called a DEVALUATION.  It makes buying foreign products more expensive (imports) and makes domestic products cheaper to foreign buyers (exports).

Bureaucrats keep track of money going in and out of countries using what is called the BALANCE OF PAYMENTS accounts.  This is actually unnecessary since countries do not export or import (methodological individualism) but once again it gives the planners information which they can use to try to improve on the natural order of the system.  Which of course never works. 

So this brings us full circle.  What can be done to improve on the natural spontaneous order of an economic system?   The answer should not surprise those who have studied thus far.  Can you guess it?

And a last footnote.  Intervention breeds more intervention.  It is cumulative.  At some point spontaneous order will ultimately break down due to the lack of flexibility, inoperative negative feedback loops, and lack of pertinent information caused by the increasingly complex regulations..  We get closer to that tipping point every day.  Unfortunately the more disorganized things become the more people want a central planner to "run" the system to make it work better.  This is like taking more of some medicine that made you sick in the first place. 

As the breakdown becomes visible to almost everyone people will naturally turn to their leaders to fix things and make them better.  The great paradox here is that the more we do to try to fix the problem the worse it gets.  Unfortunately since we live in a democracy and few people understand the economics of spontaneous order or subcribe to the moral system of natural rights the most likely scenario is for us to do things that will create even more disorder and conflict. 

Review Question:  Do borders serve any useful purpose from an economic point of view?

FINAL Review Question:  Watch this video. Do the farmers have a natural right to sell their cheese to anyone they want to or does the government have a right to regulate the production and sale of cheese to ensure consumer safety?  Use what you learned in this book to help you decide.   And try not to get too emotional about it (evolutionary psychology again). 

http://alturl.com/bkfa3



LAST WORD

Paradigm shifts tend to occur suddenly but usually only after sustained periods of cognitive dissonance when the theory and the facts tend to contradict each other.  For most people it is easier to ignore facts that don't fit your paradigm instead of giving up on a theory that you have believed for a long time and may have even taught to other people.  Therefore paradigm shifts are not common.  In my case the stagflation of the 1970s was not consistent with the total income/total expenditure Keynesian Cross model.  So I started reading and one book lead to another and then another.  I began to study not only economics but also political philosophy and history.  Here are a few of the books that had a big influence on my thinking.  All of them should be available on my favorite shopping website Amazon.com. 

1.   FOR GOOD AND EVIL
2.   COMPLEXITY
3.   THE FATAL CONCEIT
4.   BIONOMICS
5.   THE ROAD TO SERFDOM
6.   CHIMPANZEE POLITICS
7.   THE ORIGINS OF VIRTUE
8.   GOOD NATURED
9.   THE UNCLE ERIC SERIES
11. THE ETHICS OF LIBERTY 
12. THE MORAL ANIMAL
13. CHAOS
14. THE NOBLEST TRIUMPH
15. MAKERS AND TAKERS
16. THE MYSTERY OF BANKING 
17. EGALITARIANISM AS A REVOLT AGAINST NATURE
18. THE HISTORY OF CIVIL SOCIETY
19. THE GOD OF THE MACHINE
20. THE THEORY OF MORAL SENTIMENTS