Economics is about individuals and individual decision-making. That’s not how it is packaged by the government, academia, or the media. That’s because the government wants to control our lives through central planning, legislation, bureaucratic rule-making, and interventionism. They can’t do that one individual at a time, so they make up aggregates like GDP and total employment and the inflation rate, tell us they can manage those aggregates, and then make great sweeping collectivist rules and laws and mathematical models that claim to do so. Academic economists seek jobs and consulting contracts and research grants helping the government, and so they crony up. The media is mostly an arm of the establishment, and so they tag along too.
Economics At The Margin.
Thinking about economics as the study of individual choices, and about how to give people the means to make choices that improve their circumstances, leads to an entirely new and different realm of action than government planning and intervention. One example of innovative individualist economic thinking is what Professor Mark Skousen calls the Marginalist Revolution. The concept of marginal value originated with the Austrian economist Carl Menger. He demonstrated that, when we look at economics through the lens of the individual, all value is subjective – it depends on the feelings and emotions of the individual, and his or her individual preference scale. Whether or not a sale can be made, and at what price, is a subjective decision by one individual.
Moreover, each sale is at the margin, i.e. it is a matter of whether the individual wants one more of the item, and their perceived value of that one item, here and now, compared to what else he or she could purchase right now, irrespective of any historical or average or nationwide or worldwide “price”. For example, if you check into a hotel late, and you are thirsty for a Diet Coke, and the most convenient location is the vending machine, which requires you to deposit $3.00, you may well make the purchase. At the margin, it’s the most convenient and desirable alternative, compared to leaving the hotel and spending time searching for an all-night convenience store. Alternatively, if you are doing your weekly shopping and you see a 12-pack of Diet Coke for $9.99, or roughly 83 cents per unit, you might not make that purchase because you have two 12-packs in the refrigerator at home, and you don’t feel like a Diet Coke right now, nor do you feel like carrying the 12-pack home. At the margin, the 83 cents price is not a good value for you.
Marginal Value In Real Life Individual Decisions.
Professor Skousen relates marginal value to investing in the stock market. First, all prices on the stock market are created by a relatively few marginal buyers and sellers. Only a few of them call their broker or click the trade button on their E-Trade dashboard on any given day. Therefore, it takes only a marginal shift in investor sentiment to change the direction or accelerate the movement of stock prices on that day. He cites an example of a day when the stock of a leading technology company fell by 14% in one trading session, after an announcement that the company missed its earnings estimate by one penny. 70 million shares traded that day – but that was less than 6 percent of the outstanding shares. A marginal number of shareholders can make a huge difference when their sentiment changes. A similar principle can be identified in the real estate market. At any one time, only 5% or so of houses in a neighborhood are up for sale. If there is a shift in sentiment at the margin, and suddenly 10% of houses are for sale, the price level for all houses for sale in the neighborhood could drop by tens or even hundreds of thousands of dollars.
Trump At The Margin.
There have been a lot of articles recently to commemorate the first anniversary of the Trump Presidency, and a lot of discussion as to whether Trump should take any credit for a 31% increase in the Dow Jones Industrial Average. There are arguments on both sides, but no-one is thinking about the individual and marginal decision-making. For example, Ed Yardeni of Yardeni Research was quoted at CNBC as saying
“….coinciding with Trump’s victory was mounting evidence of a global synchronized boom. In our opinion, the run-up in stock prices over the past year has been a continuation of the bull market…”
Global synchronization? Hardly. All it takes at the margin is for a few investors to change their sentiment in response to Trump’s deregulatory actions, tax cut, and renegotiation of trade agreements, and to begin to feel positive about the future. Or for a few employers to take early steps to add to their workforce because they have an anticipatory feeling about economic growth.
As Mark Skousen, says:
“….marginal changes in government policies regarding inflation, interest rates, taxes and spending can make a huge difference in …investment decisions. One leader can make a difference. The right kind of leader can be bullish and the wrong kind of leader can be bearish.”
The Marginal Revolution.
Taxes may stay broadly the same, but marginal tax rates can be reduced, unleashing a few optimistic investors. Inflation may still exist, but there may be a marginal decline, perceived as positive by a few people. We may not be able to eliminate government, but we can begin a program to reduce it at the margin. And that change can start a revolution in the way political leaders think and act – a marginal revolution.