The Caveman Explores Politics and Economics

Introduction

The purpose of this book is to educate people in the fundamentals of economics and politics. I am neither an economist nor a politician and I consider that fact to be an advantage in presenting the material in an understandable form for other non-professionals.

I chose to use a tribe during the caveman days to illustrate the concepts of money and government. Why pick a tribe and not a modern country? To put it simply: Concepts are far easier to understand when they involve a few people. If it works with a small group, one has to ask why it can't be extrapolated to a larger community. If that were not true, at what point would it fail? Large communities are made up of small groups. Even today, people's interactions with each other on a weekly or monthly basis are not far greater than the size of a tribe. We can argue that our society, as it is today, works much like a small tribe.

It is easy to see how principles that work for a small group could and should also work in a larger group. Society is made up of a large number of small groups. If principles work in small groups, then the same principles must work in collections of small groups. One might have to add principles as the society gets larger and more complex, but the basic principles should stay the same.[1]

The first part of this book places most of the story with the caveman so as to aid in the understanding of basic principles in a small group. As the story proceeds, we will move between modern society and the cavemen; we will use the caveman illustration to explore a principle, which we will then apply to modern society. As we cover many principles, we will also need to explore different alternatives to government and economic organization. One example is the difference between a democracy and a dictatorship. We will use the tribe in these different scenarios even though it is unlikely that a single tribe would have tried all of these approaches as their society grew.

One problem with trying to evaluate current issues in the context of an existing society is that we tend to accept the current structure without realizing that had the society made a few different choices in its history, things might have been significantly different today. If we start with a clean sheet of paper, as with the tribe, using what we know about human nature, we can see how a better system might evolve. We aren't burdened with the history of warring tribes, kings, despots or existing laws. There are many paths a country can take with regards to structure and it is difficult to imagine alternatives when their current structure is in place. These evolutions happened and indeed they were natural, but once going down the path of, say, dictatorial leadership, then it is hard to imagine how a certain country might have developed with, say, democracy from the beginning.

Although the story involves a fictional tribe, this is far from an Ayn Rand novel. I hope to put a little life into what might be considered the boring fields of economics and politics. I also hope to illustrate basic principles and prove their validity in order that citizens can guide their country down a more successful path.

Although the major lessons in this book might be condensed as I've attempted in the Epilogue, the full story needs to be read in order to understand why the conclusions I've reached make sense (or don't, as the case may be). With the hope of motivating you to read this book, allow me list some of things that you might appreciate when you have finished:

1. Why free enterprise works better than a controlled economy and at the same time promotes liberty for the individual.

2. How printing money can lead to (monetary) inflation.

3. Why lowering tax rates will increase tax receipts, to a point.

4. How banks making loans create money out of thin air.

5. How a Central Bank (the Fed) is supposed to create stability but may in fact lead to bubbles and instability.

6. How paper money can disrupt an economy and why money based on a hard asset (like gold) doesn't.

7. How politics could be kept out of Central Banking and yet supply adequate money for a growing economy.

8. How human nature affects the economics of a society: Including Liberty, the Tragedy of the Commons, and Rent Seeking (complex names for simple concepts).

9. How governments are necessarily monopolies and how to minimize the negatives.

10. Why governments are the peoples' choice to solve societal problems and why this leads to huge budget deficits.

11. How justice and laws affect the liberty of individuals.

12. A few basics on companies, unions and foreign trade.

13. And finally, an analysis of how much money an economy needs and how that works with a foreign trading partner.

To further your curiosity, I've placed a question at the beginning of each Chapter. If you choose to think about the answer for some part of a minute or so, you might find yourself pondering an answer. This form of learning is quite useful.

ACKNOWLEDGEMENTS

Writing my first book has taken a lot of time and concentration. I want to thank my wife for putting up with my idiosyncrasies during this time. I also wish to thank Justin Rietz, a graduate student in economics at San Jose State University for reviewing the manuscript to catch any glaring errors from my lack of higher education in the field. That said, he is not to be held responsible for any crazy ideas that I have put forth.

PART I:

MONEY, GOVERNMENT,

TAXES AND BANKING

1. THE SCENE

A QUESTION FOR THE READER: To simplify an economic society to its simplest terms, what would you choose as the scenario?

Our story begins in a primitive village setting in the foothills of a mountain range. A river runs nearby and the village people live in caves in a bluff. Between their caves and the river is a reasonably flat region where agriculture can be nurtured. Beyond the bluff is a forest replete with wild game and wood for fires.[2] The village consists of several families all of whom band together to survive the elements of nature. This village is isolated and the residents are unaware of other tribes anywhere else in the world.

These people began their existence in this village as self-sufficient families, each having capabilities to survive with their own skills and hands. Most men were decent hunters[3], who also grew gardens and kept chickens or rabbits to nourish their families. Women in the tribes focused on preparing the food and sewing clothes for warmth. The tribal children aided in the family unit by collecting firewood for cooking and keeping warm.

The families formed the village as a means to protect against wild animals and other threats to their well-being. They learned that people who banded together were more likely to survive a bear attack or a natural disaster than single individuals or single families.

Though most male members of the tribe are adept at hunting, there are some who are better than others. The top hunters spend more time preparing their arrows to shoot straight; their superior stealth enables them to sneak up on game more successfully; and they enjoy hunting more than other male members of the tribe.

Conversely, other tribesmen are better at agriculture. They seem to know when it is the right time to plant seeds, how much water is needed to nourish the plants, and when to harvest. Still, other tribesmen excel at animal husbandry, taking care of chickens and rabbits.

Likewise, some women are better at sewing while others know how to best preserve food for winter. As time goes on, certain people become known for their expertise. The less skillful members of the tribe take notice and follow their superiors. Some might help the hunter flush out the game and carry it home. Those with some ability at farming will help the farmer with the more menial tasks. As a tight knit village, everyone pitches in to help and by and large, everyone shares in the bounty. This is an ideal situation, one that philosophers over the years tend to label as nirvana.[4]

THE VILLAGE AS A COMMUNITY (COMMUNE)

If each tribe member practices their talent, the village should operate efficiently. The hunters bring in the game, the farmers supply the corn, chickens, and eggs, the women sew garments to keep warm in the winter, as well as cook and preserve the food. Everyone has a job and everyone shares in the fruits of the community's labors.

In small communities like our tribe, this approach may work as each family benefits when everyone works together. Peer pressure also forces everyone to do his or her part. Even in this situation, problems can exist because there may be more people who would rather hunt than farm. Imbalances occur when people have preferences as to what they want to eat, which might be inconsistent with what providers enjoy supplying. Unless there is another mechanism to constrain people's ideal wishes, someone will have to make a decision on who hunts and who eats chicken.

The commune (Communist) approach is: Each produces according to their ability and each consumes according to their needs. This is a fine sounding philosophy, but obviously in practice there must be a person or process that needs to be in place to make decisions. Where Communism has been tried, the decision-making body has become a dictatorship, as we have seen in the Soviet Union and China.

As we explore further in this book, we will identify different methods of economics and governing, pointing out the good and bad points. We will see where free enterprise largely obviates the necessity of governing in that the free market will make most decisions, simultaneously enhancing everyone's liberty.

Human nature is not as simple as the ideal situation where everyone pitches in to get the job done for the same rewards. An issue arises as to what is the relative worth between the deer that the hunters brought home and the corn that the farmers harvested. What about the women who preserved the deer meat or processed the corn? What happens when the deer move on to other pastures and no matter how hard the hunters try, success escapes them?

The hunters feel it is a waste of time to scour the woods when no game is available and they decide to stay home. Should they share in the bounty provided by the farmers?

Nature plays a role in the tribe's survival and well-being. Suppose a hail storm destroys the entire crop of the farmer. Does the farmer get to share in all the other food? Should he suffer from this act of Nature? Is this just bad luck that the farmer has to accept or prepare for?

Another example of the real world: One member of the tribe is born with little ambition. He doesn't contribute his fair share to the overall well-being of the tribe. What to do with him? In some tribal structures, he might be kicked out to fend for himself. Fairly heartless to say the least, and his parents probably feel an obligation not to let that happen. Even if his parents do their fair share for the tribe’s welfare, how much of the bounty should they get? Should it include enough for their lazy son?

An added problem surfaces when one family decides that it doesn't want any wild game. They are early day vegetarians. Instead of splitting up the elk and other wild game evenly among all the people, we have a family that doesn't want game but wants more corn and other vegetables. What to do? Making matters worse, the other families do not want the extra portions of game; and they just want their share of vegetables, not less because one family took more than an equal share.

A further problem surfaces when production timing is considered. Suppose the clothes-maker supplies heavy coats that under normal use last 5 years. Does the hunter build up credits over a five year period so that he can obtain that coat? And what if he is careless and ruins the coat earlier or loses it? How will the tribe feel about the clothes-maker having to do extra work? Does she get paid anything extra for the additional work?

Or suppose the lady of the cave decides to save on food and instead wishes for a fancy pair of moccasins. How to divide up things when one member wants more of one thing and less of another? Distributing things equally will not satisfy people's wishes.

These questions and others show the need for an economic and political system that can equitably distribute the efforts of the tribe to those who earned their fair share.

2. TRIBAL DECISIONS

A QUESTION FOR THE READER: What would be highest priority for our tribe? And should the tribe be organized to solve the problem?

SURVIVAL

Our tribe is initially a voluntary association of members where everyone is expected to contribute to their survival and well-being. Survival might be more than protection against exterior forces like bear, but one of the fundamental issues about survival is hunger. The hunters do their best to bring home game to the village; the farmers do their best to grow food, chickens and rabbits, while the women prepare the food and clothing. Everybody does their part, or at least that is the theory. Let's see how it works in practice.

• Certainly, one of the fundamental features of humans is their innate desire for survival. As a tribe, it is first and foremost important that everyone pitches in to make sure everyone survives. Not only is it in their best interest as a tribe to keep all its members, but no single member wants to die. Indeed, they have an appreciation for each other; they actually like one another, of course some more than others. Depending on what crisis they face today, past disagreements might be forgotten when the bear is attacking the village. It is safe to assume that humans have this appreciation for their fellow man, and the appreciation is stronger as their association is closer and more agreeable. It is intensified as the threat is larger.

This bonding is perhaps strongest with husbands and wives, as the mutual support is closer than with almost any other relationship. Mothers, fathers, and children likewise form a close bond. Neighbors are usually supportive of each other, which makes this tie reasonably strong. As the relationship gets further away, the closeness tends to diminish. Think of the hunter (his name is Harry) who goes away for extended periods into the forest. Harry brings back game and the whole tribe appreciates it, but when he is gone and the bear attacks the tribe, few will consider Harry an important cog. Through no fault of his own, Harry is no longer the highest priority for the tribe.

On the other hand, Harry's wife Hanna is high on the tribe's list of priorities. Hanna is home alone while Harry is out shooting game and she has no one to protect her. As human nature will protect a helpless baby, the tribe will pitch in to protect Hanna.

When a group is faced with a threat, the human reaction is to rise up to counter that threat in order to protect the whole group and in particular its weakest members.[5]

Once the basic needs of life are satisfied and external threats are curtailed, things begin to change. People begin to think more about their own well-being. Why should that be? Under threat of starvation or bear attack, all tribe members have a common goal: Survival. And to survive, they need to work together.

As soon as the threat passes, each tribe member begins to think about his next priority. Survival is a high priority for almost all people, but beyond that, the next level of priority is likely to be different for each tribe member.

Harry would like a better bow for his arrows, Fred the farmer wants a better hoe, and Hanna wants a better knife to scrape the animal skins when making clothing. Some in the tribe wish for more free time to spend with their family or to pursue a hobby. Each tribe member has his or her own set of priorities and depending on their lifestyle and their work. Each person has their own priorities and the number of possibilities expands when the whole tribe is considered.

Ted is the toolmaker and how does he decide whether to make a better bow, a better hoe or a better knife? Harry says that with a better bow, he can shoot twice as many animals in a day, or looking at it another way, he can shoot in a half day all the animals that are needed by the tribe that day. An afternoon sitting in the sun by the river doesn't sound all that bad. Fred says a better hoe would allow him to plant more vegetables and Hanna likes the idea of a new knife. But Ted can't do everything so somebody has to make a decision as to the highest priority for Ted.

Ted could make the decision himself as he much prefers carving out a new bow than working on a hoe or finding just the right rock to make a knife. What if Ted's decision is not the best for the tribe? Suppose the tribe is malnourished in vegetables but has plenty of meat. Shouldn't Ted work on the hoe instead? Hanna's current knife works just fine even though its handle is not so pretty. If Hanna were in charge, she would want the new knife. Who decides?

SOLE LEADER (DICTATOR)

Within the tribe, a particular member is recognized as the strongest and best fighter. Moreover, he is older and wiser. He is called Chief by the tribe and he is looked upon for leadership. The tribe could decide that the Chief would make the decisions such as Ted's work priority.

If the Chief is God-like, he might well make the right decisions, but few in the world are perfect. Suppose that Hanna is the Chief's daughter. Do you think that maybe the decision on Ted's efforts might be swayed toward Hanna's desire for a pretty new knife?

Suppose further that the Chief hates vegetables but loves meat. Do you think Fred will get a new hoe? It takes an unusual person to ignore their own biases; such a person might not exist.

The other characteristic that our Chief must have is the ability to delegate. If every decision is brought before the Chief, little gets done. Should Harry go up on the ridgeline or in the gully to hunt today? If Henrietta is picking berries in the gully, maybe somebody needs to decide whether Harry goes in the gully or whether Henrietta does. It is doubtful whether the Chief knows which is better for the tribe. Or which has the highest probability of success.

Throughout history, dictators have had temporary successes; but temporary they have been. Either the breadth of the domain has overwhelmed the dictator or he has succumbed to the idea of conquering other lands, which ended with uprisings or he has died with no successor. Dictatorship benefits from the ability to make rapid decisions but not always smart ones.[6]

THE TRIBAL COUNCIL

Moving away from single leaders, a council of elders is another approach to government. The disadvantages of a single leader are somewhat ameliorated when you have the checks and balances of multiple people in power. Giving preferences to the Chief's daughter is harder to do when several elders need to give their assent.[7]

At least here, the wisdom of several people is involved in decisions; presumably a debate can take place before decisions are made. Thinking before acting is usually a good strategy, at least with policy decisions. Life and death situations require faster actions so that a group decision is not usually appropriate. That is why a tribal council usually still has a single leader. Hopefully he is open-minded about policy issues but when action is needed, a single leader is probably better.

Similar to a single leader, a council is also likely to make decisions that are less than beneficial. Some members of the tribe will be unhappy with almost any conclusion. The council may decide to build a footpath to the fields for the benefit of Fred. Harry may question why he wasn’t chosen: How come I don't get a path to the forest? In almost all cases, a decision benefits some portion of the tribe but not all.

The real issue is how unhappy are the people with a certain decision? It is called rational apathy, where members of a society individually decide that an issue is not worth the effort to do something about it.[8] This is one of the main causes of government budget excesses. If the cost to an individual voter is small, even though the collective cost is large and makes no economic sense, such a vote will likely pass if it has a strong proponent. If a park initiative is placed on a ballot, the cost to the individual voter might be small, but suppose that only a single proponent is in favor of the park. The total cost might be exorbitant for the amount of use, but since the cost is small to each voter, through the goodness of his or her heart, the voters approve the initiative.

PURE DEMOCRACY

The tribe could try a pure democracy where every decision is brought before the entire tribe for a vote; majority wins (51%). As with the other forms of government, some people end up being unhappy, sometimes as many as 49%. If every decision is brought before the people, then they are burdened with a multitude of issues. Should Harry hunt for deer or pheasant today? What do the people want to eat? Maybe they want duck instead. Imagine the burden of trying to bring every decision to a vote.

Well, you say, why not let Harry decide? Sure that is fine, except how does Harry know what people want without a vote? He can collect preferences as he comes back to the village with his game and he can tally the complaints about not having what is desired. Also suppose that the real delicacy for the tribe is quail but that it takes all day to capture just a few quail. Who gets the quail and what about everyone else going to bed hungry? How do you take a vote on who gets the quail?

AUTOMATIC DECISION MAKING (Letting economics make the decisions)

Obviously the forms of government outlined in this chapter all have difficulties. Decision-making becomes overwhelming, far too much for a single leader, a council, or for democracy. Even if the tribe were organized under a typical organizational diagram where various people were delegated certain decisions, their biases and personal preferences would result in a sub-optimal decision-making. Plus all tribe members will still not be happy with every decision.

What is needed is an automatic decision making process.

Let's take Harry as an example. Harry goes to the woods and shoots a deer. He brings it to the tribe but instead of passing it out evenly, he sets the cut-up deer on a big flat rock and waits to see what people will bring him in exchange for a chunk of deer. Fred has a nice collection of corn and he offers five ears for the chunk of deer. A deal is made between the two men.

Jones is the tribe carpenter and he offers Harry a nice cabinet to store his meats in return for two pieces of deer meat. John is another farmer and he offers up tomatoes for a share of deer.

Then, here comes Sue the sewer, she makes clothes for the tribe. She asks Harry what he might want in clothes in return for some deer meat. But Harry already has a new wardrobe from Sue and he doesn't need any more clothes right now. Is she to go without meat?

Then she thinks of Ted the toolmaker. Maybe she could make Ted some clothes in return for arrows and she could trade the arrows to Harry for the deer meat. Well, that is fine except that she wants ten arrows for a new coat, but Harry only wants one new arrow.

This system is called barter and it improves on centralized decision making to some extent. Victor the vegetarian is not stuck with deer meat that he doesn't want. And if Fred has left over meat from the last meal, he doesn't have to accept more.

Generally, the barter system leaves the choice up to the individual rather than any governmental organization or leader. Of course, some people might be unhappy when Harry doesn't bring any grouse, but nobody is stopping them from being their own hunter. If they want grouse, they will have to hunt for it themselves. They really have the ultimate in decision-making power. This is called liberty.

Bartering is still complicated. For two people to barter, they both need to have what the other one needs.[9] If not, then the transaction gets far more complicated because third parties need to be involved. Though the deer can be cut into many pieces of almost any size, not all products work that way. The clothes-maker has a hard time bartering with half a coat or just a sleeve.

3. MONEY AND ITS USES

A QUESTION FOR THE READER: Why was money invented?

We've seen how bartering eliminates some problems of a planned economy, but it is cumbersome. At least, people have the choice as to what to buy (barter) but they must find a willing seller that wants what you have to trade. If they can't find that seller, then the transaction becomes more complicated with three or more parties. This all takes time and effort.

The Chief, being a chief, spends a lot of time at the river just gazing at the running water. While thinking about the problems of barter, he remembers that certain pebbles in the stream