Economics and Liberty: A Pocket Guide for

Beginners

by Alex Merced

Copyright© 2010
 An Introduction

I only recently began to understand the real

workings of liberty and economics. In retrospect,
there was always a part of me that understood. At
a young age I already began talking of the benefits
of autonomy and learning from one's mistakes
without realizing I was talking about core
economic concepts. Even after taking one or two
economic classes in my undergrad, economics just
seemed trivial with the focus only on policy in
optimizing results. It was not until a congressman
by the name of Ron Paul ran for president in 2008
that economics really connected to my everyday
life in a way that made sense and awoke a
feverish interest in it.
By following Ron Paul's campaign I learned
of Austrian economics and the Mises Institute. I
have read, learned and listened to as much as I
could from this institution. I wrote this book in
hopes that you, the reader will seek out the Mises
Institute after this brief primer in economics and
liberty.
− Alex Merced (AlexMerced.com)

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 Table of Contents

Chapter 1 – Capital and Risk Pg 4

Chapter 2 – Money, Prices, and Marginal Utility Pg 11
Chapter 3 – Banking, Interest, and Inflation Pg 17
Chapter 4 – The Entrepreneur Pg 22
Chapter 5 – Innovation and Competition Pg 25
Chapter 6 – Liberty, Property and The State Pg 29
Chapter 7 – The State and Taxes Pg 32
Chapter 8 – The State and Money Pg 35
Chapter 9 – Conclusion Pg 39

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 Chapter 1 – Capital and Risk

Let's begin the story of Capitalism by

discussing what is Capital and why it is important.
Capital is the factors of production, the resources
needed to produce some good or service. So for
example, I want to build a log cabin and in order
to build it I'll need some resources or capital,
specifically I will need logs. I need logs but all I
have is coal, yet another member of the local
community is looking to build a fire so he may
need some coal so me and him can agree to
exchange my coal for any logs he may have. This
is the basic premise as to why capitalism, or the
belief that people have the right to individually
own capital is vital to prosperity and liberty and
vice versa. It may not be obvious quite yet but
let's examine this scenario more in depth.

Both parties in this transaction originally

had some sort of capital whose subjective value
relative to the capital they wanted was low, this
difference is also known as their preference. So

4
when faced with the opportunity to trade, they see
that they will receive capital that's more valuable
to them than the capital they own so they will
make the exchange. In this voluntary exchange,
both parties resulted in owning something they
value more, so this exchange has created an
increase in value or prosperity. The ability for
them to enter this or any other voluntary exchange
is relative to their liberty or freedom to make their
own individual decisions regarding their life, and
property without the threat of violence. Thus,
liberty is necessary to have the benefits of this
type of exchange.

For example, if there was a law or some

other barrier preventing me from trading my coal
for those logs, I could not build my cabin and the
other party couldn't build a fire. In this case, we
are now less prosperous than we could have been
if there was no prohibiting of the voluntary trade.
This prohibition also prevents both the instant
increase in value from the trade and the future
value from the goods and services produced after
the trade.

So let's say our liberty was unhampered and

I built my cabin and the other party built their fire.

5
Both of us need to eat, so we will need more
capital to produce a good to satisfy our hunger.
What I will do then is maybe offer to let people
stay in my cabin, as long as they bring meat in
exchange for shelter. Now I've become a
successful capitalist because I was able to use my
original capital to produce a good or service that
will get me even more capital, the meat, which
can be used to produce food. Everyone is better
off, I have my cabin and my meat, the first person
I traded with has their fire, and those who gave
me meat have shelter. We are all better off than
we began due to voluntary exchange.

What happens in an involuntary exchange?

What if a new law is made saying that 25% of all
the meat I get from people seeking shelter must be
given to the head of the community or else face
execution. While of course I value my life more
than the meat, I am not volunteering to this
exchange for the potential value I'll get in return,
but I am coerced through the threat of violence.
This meat I have given up could have been traded
for many other goods I may need such as raw hide
for clothing or coal to build my own fire. Alas, I
now have less capital to attain all the goods I may
want or need which also means less capital to

6
produce more goods and services. So once again
to believe in capitalism is to believe in liberty.

Up to this point we have seen how every

voluntary trade creates value, and how attaining
capital can result in more goods and services for
everyone. Now let's add a new variable, risk.
What is risk? Risk is the chance that you may
overvalue a good, and once attained will not yield
the expected value in it's use. Managing risk is
one of the most important natural regulators of
behavior in capitalism.

Let's go back to our original example: we

trade the coal for logs, but the second party
expected the coal to create a fire. On the way back
to his camp he dropped the coal in some water.
The person who wanted a fire did not get his fire
and no longer has his logs because he overvalued
the coal, or underestimated the risk of him
dropping the coal in water. This capitalist now has
less capital to make future trades, and as long as
he overvalues and underestimates risk he will see
his capital continue to shrink.

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 It's unfortunate that our friend lost his coal,
but in future trades he will be more careful when
he assesses risk. This change in subjective
valuation is the key function of risk. Risk allows
capitalist to learn to fine tune how they
subjectively value goods. If they don't learn from
bad risk taking it will eventually render them
without capital and in poverty. One's ability to
assess risk will determine one's ability to rise to
prosperity or fall into poverty. Since people try to
emulate those in prosperity, risk will make sure
that people who appropriately value goods and
services are emulated, and those who take too
much risk are not. This function of liberty and
voluntary exchange actually creates a more moral
and virtuous society since the good decision
makers are rewarded thus emulated, and the bad
decision makers are self-punished by the
consequences of their voluntary decisions.

Does every exchange have to be for capital?

Yes, because everything is capital. Everything can
be used to produce something else and be
subjectively valued. We have discussed so far
about tangible capital, such as the logs to make
the cabin or the coal to make the fire but what
about intangible capital? Our knowledge, traits,

8
emotions, and experiences are all capital that can
be used to produce things for exchange.

A teacher produces a lecture or a lesson with

his knowledge, he then may exchange his lecture
for other tangible and intangible capital such as
renown or reverence from another individual. The
charisma and wit of a comedian are used to
produce jokes which they use in exchange to
attain the goods they need to survive. Love can be
offered to a mate in exchange for their love. These
all don't obviously sound like your traditional
exchanges of capital but we now see that
intangible capital can be used to produce and
exchange for other tangible or intangible capital.
Both parties have attained something more
valuable from the trade.

In this we see that someone who has

overvalued and taken excessive risk might
actually result in not losing capital but entering an
exchange he was unaware of. What exchange is
this? In return for his loss of his original tangible
capital he has been given an experience which he
can turn into knowledge on how to better use
capital in the future. This may yield him more
value than his original valuation ever expected.

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 We have now seen the fundamental factors
of capitalism, in which people own capital. As
long as they have liberty and are free to enter
voluntary exchange they will continually produce
value.

Although if involuntary exchange is forced

by threats of violence we begin to see that not all
parties are generating value. This is why liberty
and capitalism are so intrinsically linked.

Risk we saw as the regulator of the free

market punishing the risk takers with a loss of
physical capital but rewarding them with the
experience and knowledge to better use future
capital they may attain.

Finally we've learned that everything is

capital and that to speak out against capitalism is
to speak out against human existence and
interaction.

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 Chapter 2 – Money, Prices, and Marginal Utility

Up until now as we've examined the

exchanges that happen between our actors we've
seen that it's all being done in a barter system. A
barter system is where goods and services are
traded directly without some medium of
exchange, also known as money.

So what is money and where does it come

from? No one understood money better than the
great economist, Ludwig Von Mises. Mises
understood that money came from existing
capital, and to demonstrate this let's look at what
has happened to our actors from the last chapter.

While the community has developed due to

free exchange, goods and services became more
diverse and it became harder to trade. The capital
I had may have not as been in such demand by
those who had the capital I demanded. For
example the person who had the coconut that I

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wanted would not accept the string that I had and
I did not want the ax the person who wanted my
string had. This creates a slow down in the
creation of value which can inhibit the future
growth of the community. Later on looking for
tradeable resources I had later come across
precious metal in the ground. The jeweler would
definitely be interested in this metal, or maybe
the blacksmith would be able to smith it.

This metal as it began to circulate in the

community began to have several uses such as
jewelry, decorative statues and conducting energy.
So now when anyone had this metal anyone
would take it for trade, because they knew they
could later trade it to someone who'd use it for
production. I can now use my metal to trade for
that coconut. The coconut man has no use for the
metal personally, but he's sure he can eventually
trade it since it's easy to carry and doesn't spoil he
took the trade.

Eventually, due to these characteristics of

this metal, everyone began using it to trade for the
goods they wanted and money was born. Instead
of trading goods directly, this “money” is used to
facilitate the exchange. This money was born out

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of a good with its own demand and subjective
value, and any other good could have just as
easily became the money, so why did the metal
become money?

Due to the convenience of being able to melt

and shape the metal it was easier to create
standard measures. The fact that it doesn't spoil
like food also doesn't hurt. Now that we have
money, people with capital will begin asking for
different amounts of this money for that capital,
and now prices are born. Prices are just the
amount of money needed to accept the exchange,
this allows an easy way to communicate value.

So let's say this metal has been forged into

coin for easier carry, and are called “Vat”. How
much Vats would I need to get the goods I want?

I go to the coconut man and ask him how

many Vats he wants for his coconut and he tells
me 10 Vats. Now I begin to subjectively value
the coconut versus other goods, services and
capital I can exchange for the same 10 Vats
because these alternatives would be my

13
opportunity cost or the possible value I'd forgo to
enter this exchange.

If I end up valuing the coconut more than

my alternatives then I'll enter the exchange, and if
not I'll forgo the exchange. This is fine, because
then the person who will eventually exchange 10
Vats for the coconut would have valued the
coconut more than I have. In this case the coconut
will have gone to the person who valued it more,
creating more value. Although, what if no one
else valued the coconut enough to exchange 10
vats? Then the coconut would spoil and the
coconut man will lose his tangible capital for
overvaluing it, but once again gain the knowledge
to produce better prices with his future tangible
capital.

So allowing both parties to take risk will

help adjust prices to meet a point where both
parties walk away with value, or neither party will
enter the exchange. Although since things are
priced subjectively we have to go back to
economist Carl Menger and the economic theory
developed since him and explore marginal utility.
This is the idea where every unit I consume of the

14
same good doesn't have the same value which will
effect my willingness to enter exchanges.

Let's use the popular analogy of pizza slices.

As I eat the first slice of the pizza it satisfies my
hunger so I will get a great amount of value from
it, including the enjoyment of the taste. When I
eat a second slice my hunger has already been
satiated, so now the only value I get is the
enjoyment. After so many slices of pizza I no
longer desire or value to eat another. This
diminishing return is based on its marginal utility
or value that I get for every unit consumed after
the first.

So even if the coconut man sets his price at

10 Vats, I may have been willing to pay 15 Vats
for that first coconut. In this case, I may decide to
buy more but subjectively I don't place the same
15 Vat value on the second coconut but it's still
more valuable than 10 Vats to me. I may continue
to buy coconuts until this is not the case or until I
find some alternative that gives me more value
than purchasing the next coconut would give me.

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 So as goods become more diverse eventually
certain goods will show a higher ability to trade,
also known as liquidity and one of these goods
may eventually become money. As money begins
to get used, capitalists will begin attaching money
prices to their goods which allows a better way to
compare different alternatives of exchanges they
can enter with their money. Although my ability
to assess which prices I'm willing to pay will
change with the marginal change in value that
occurs in every exchange.

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 Chapter 3 – Banking, Interest, and Inflation

With success in trade and exchanges I've

accumulated a lot of Vats which are metal coins I
can use for trade. Carrying around these metal
coins can become somewhat cumbersome but the
risk of leaving them at home where they can be
stolen is also an issue.

Someone in town has had the blacksmith

forge a safe, and this person is now willing to
warehouse Vats for people for a small fee. Now I
can keep my Vats safe and withdraw them when I
need them. This is the original essence of a bank.

Eventually this bank may want to develop a

money substitute, which is a certificate or receipt
that represents a portion of the capital you have
deposited at this bank. So instead of bringing 10
Vat coins, I can bring one certificate that is
redeemable at the bank for my 10 coins for the
coconut. The coconut man can go redeem this and

17
get 10 vats; since he trusts that the bank will
honor his certificate he can just use the certificate
itself in trade and save himself the trip to the
bank.

Since people trust that the bank will hold

their coins until redemption they just use the
money substitute for exchange and most of the
coins stay in the bank. With this being the case,
the bank begins to worry less about all the money
substitutes being redeemed and they begin to
create more money substitutes than actual Vat
coins exist in the safe. This practice is known as
fractional reserve banking. The money in the safe
or in reserves, is fractional to the money
substitutes in existence.

The bank may initially have set ratio of

reserves to money substitutes at some moderate
level. For example, for every 1 Vat coin deposited
in the safe 2 Vats worth of money substitutes will
be created. So essentially since these money
substitutes can be traded and used as money, the
circulating money supply has just doubled. When
the money supply increases it's called inflation,
and when it decreased it's called deflation.

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 So what is the effect of this? At the moment
these substitutes are created, nothing really
changes. The bank may decide to lend out all
these newly printed money substitutes. Currently,
the subjective value to the bank is minimal since
they currently have a whole lot of these money
substitutes printed. The subjective value to people
who want to borrow them is currently higher
because of the current ability to use these money
substitutes for trade. The ability to use these for
trade is called purchasing power.

The bank subjectively values these money

substitutes minimally when created, how can they
accordingly price these? It will use something
called interest. The money substitutes represent
someone's ability to consume or trade goods, so to
borrow them would be showing a preference to
consume now versus later. I must sacrifice later
consumption for present consumption and this is
the interest or the price to borrow or lend money.
For example if I wanted to borrow 10 Vats at 10%
interest so I can buy a coconut today, at some
point in the future I must forgo consumption to
return the 10 Vats to the bank plus 10% for a total
of 11 Vats. In this case I've spent 11 Vats of

19
future consumption for 10 Vats of consumption
today.

As interest rates falls, current consumption

becomes cheap so I'll borrow more than I will
when interest rates are higher. Now with the extra
ability to consume coconuts I'll buy 3 or 4 instead
of 2 or 3 as I usually would have. The coconut
man has only so many coconuts, or so much
supply and he has an increase in the amount of
them demanded by me and other people. From
borrowing money, the subjective values of
coconut versus the money substitutes has now
changed and he may increase the price and sell as
many coconuts as he would have previously. If he
does not, he will sell too many coconuts and have
none to sell later which is known as a shortage.
This shows how prices help regulate consumption
against the supply of goods and services, and how
inflation decreases the subjective purchasing
power of money and money substitutes.

As people continue to borrow from the bank,

the supply of these money substitutes at the bank
begin to fall and eventually it will have no more
to lend out. In this case it has two choices:

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 It can change its reserve ratio so it can print
more money substitutes which will mean more
inflation. This will also put the bank at more risk,
the smaller the reserves versus redeemable money
substitutes the bigger the chance enough of these
money substitutes may be redeemed at one time
and may cause the bank to fail.

The bank's second option is it can give

interest to those who deposit at the bank to
encourage more people to deposit coins at the
bank which will allow them to lend within their
current reserve ratio. Although, if they begin to
give interest to depositors, they must demand
even more interest from borrowers to cover the
cost and then some. This would cause a rise in
interest rates meaning the value of current
consumption has increased. People may begin to
forgo current consumption for future consumption
and save their money at the bank to collect
interest on their deposits.

Once again we see how the pricing function

helps regulate demand to supply if prices are
allowed to move freely with the subjective value
of capital.

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 Chapter 4 – The Entrepreneur

Let's introduce a new player into our

economic environment, the entrepreneur. The
entrepreneur will put capital to use to produce
goods and services and assumes the risk for doing
so. An entrepreneur is someone with an idea and
to get the capital to put his idea into action he may
borrow money from a bank.

The entrepreneur uses this money to hire

people and buy resources he can use to put his
idea into action. Once the good is produced he
must price it like anything else and begin to sell
his good or service. If his idea is valued by people
the way he expected, he will succeed and have
more capital in which to hire more workers and
create more value. If he doesn't then he will have
closed his enterprise and labor to pay his debts to
the bank, a risk he agreed to when he borrowed
money.

22
 This is why a free market with freely
determined prices are important to an
entrepreneur since it is these prices which help
indicate the values of consumers. By having an
understanding of what others value, it is easier to
determine if the idea is worth the risk, and if so
how much capital is worth investing in the
venture.

Another price that is important to

entrepreneurs is interest rates. These indicate the
cost of capital to start the enterprise and also the
environment the entrepreneur will begin the
business in.

If rates are low it is a signal to the

entrepreneur that capital is plentiful to start new
enterprise. It also indicates consumers have access
to funds to consume the goods or services of this
enterprise. This environment is ripe for new
enterprise because people have been saving and
are now ready spend some of their savings.

23
 If rates are high it is a signal to the
entrepreneur that capital is not readily available
and consumers will prefer to save money so they
will be less receptive to new goods or services.
This signals to the entrepreneur that the risk is
high and that unless they feel they can produce
significant value that it might be more prudent to
wait a little longer.

While many economists from different

schools of economic thought encourage keeping
rates low artificially to encourage enterprise, this
is a trap for entrepreneurs. If rates are artificially
made low or high they do not reflect the true
economic environment and can cause budding
entrepreneurs to borrow too much when they
shouldn't or invest too little when they can invest
more.

Once again we see how prices freely

roaming are all indicators of economic behavior
and people's preferences and values. This is all
vital because all these prices will help signal the
parts of the economy we'll see entrepreneurs
produce the most important thing of all,
innovation.

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 Chapter 5 – Innovation and Competition

Nothing can produce an enduring value as

innovation. Innovation is a new idea that changes
or revolutionizes how something is done or
thought about. Innovations make our day to day
life easier by making tasks that would take large
amounts of time take only a fraction of that time.
This additional time allows for other pursuits.
Innovation in thought allows us to look at the
world in different ways that can allow for peace as
we further understand the world around us. Most
of all innovations reduce the capital needed to do
certain tasks, and increase the quality of them,
meaning the purchasing power of money and
money substitutes increase.

Innovation takes time and investment which

means there is a level of risk in developing any
innovation. Once again, interest rates being the
price of capital and consumption are an important
indicator to innovators on how much to invest in a
particular innovation.

25
 The prices of everything else also serves as
indicators of where consumers value an
innovation the most. While it's not obligatory for
an innovator to innovate where he sees the highest
prices, these sectors would probably facilitate
larger investment than others without taking on
more risk.

Prices are not the only elements of the

market that breed innovation. Many innovators
happen to be entrepreneurs as well, or many
entrepreneurs like to hire innovators. The reason
for this is because these innovations in goods and
services mean more success for their businesses
because of the value added to the consumer.

It is never just one entrepreneur who makes

the same good or service. If a new person started
selling coconuts next to the coconut man he may
lose some of his consumers and this creates
competition. The coconut man can do a few things
to get back his consumers, he can lower the price
although he can't lower the price below where he
subjectively values the coconut himself or there

26
will be a loss of value in the exchange. His other
option is to innovate his good or service in order
to add value over his competitor. This innovation
has made it easier and cheaper to buy coconuts, so
everyone has won except the competitor who will
begin working on his own innovations in
response.

This process will continue until one party

can't innovate promptly enough to win back
consumers. At this point there is only the coconut
man. Since the coconut man is the only person
selling coconuts he has become a monopoly, an
entity many economists fear.

Typically it is feared that the monopoly

without competition has no reason to innovate and
can raise his prices as high as he wants beyond
where consumers subjectively value their good or
service.

This is false, the coconut man does have an

incentive to innovate out of fear of future
competition. If the coconut man does not continue
to produce value for the consumers, they will
demand an alternative and sure enough someone

27
will eventually fill that role as long as there is no
barriers to entry beyond the costs of production.

In terms of pricing, if the price were to raise

beyond the subjective value of the consumers
once again they would demand an alternative. In
the coconut man's case it doesn't mean an
alternative is necessarily another coconut vendor,
but maybe a pineapple or orange vendor.

The bottom line is that natural market

monopolies only occur after one party has been
shown to produce value better than any other.
This party will keep this monopoly status as long
as they continue to produce this value.

No matter how big or small the market is,

innovation is always demanded in the market
when left to its own devices. Innovation just like
anything else works at its best when prices are
accurate to subjective values of all those
participating in trade.

28
 Chapter 6 – Liberty, Property and The State

At the core of the free market is liberty, a

free market can only exist if people retain their
liberty. Liberty is the right of an individual to
their property. An individual's property is their
life, their body, their labor, and anything else they
may come into ownership of.

First we must understand how one comes

into ownership of property, basically by having a
prior claim to anyone else. There are two ways to
accomplish this:

The first way is if the property in question

was never previously owned by another
individual. One would claim ownership by
transforming the unowned property and creating
borders to define where his ownership ends and
begins. This is best seen in unowned land; the first
person to transform and border the land has a
prior claim to anyone else who comes afterward.

29
 What if the property was owned by someone
else previously? I cannot claim ownership
because my claim is not prior to theirs, but they
may relinquish ownership to me voluntarily. This
can occur in the will of an individual who has
passed away or in an exchange for other property
or capital.

What I can't do is use violence to coerce

someone to give me their property, this is a
violation of their liberty. Violations of one's
liberty do not create value and begin to diminish
all the benefits of a free market such as the pricing
system, enterprise, and innovation.

Our liberty is a natural state like a tree is in

its natural state, but there is nothing stopping
someone from grabbing an ax and chopping down
that tree. The tree's natural state is only as good as
its ability to protect it, and so is our liberty.

Eventually in order to protect our liberty and

the free market the people will endow a monopoly
over violence to one entity. This one entity will be

30
known as the state. The state is created to protect
the individual liberties of its creators, the people.

In order for the state to serve this function it

will need capital, so the people will relinquish
ownership of some capital to serve this basic
function of defending their liberties. The state
itself is merely an institution run by other
individuals in charge.

With this monopoly over violence, the state

can use it to punish those who violate the liberty
of its creators. As the state does its job defending
liberty, people begin to feel more safe each day
which makes them worry less about threats of
violence from others. They will worry less about
who and how the state is being run and this is
when trouble begins.

It is when apathy begins to set in that

individuals get into positions of power in the state
to use it for their own means and ambitions. If the
state does not have the power to serve these
means, they will seek the power to do so. While
with no state our liberty was at constant threat by

31
others, now with the state our liberty is at constant
threat from the state.

32
 Chapter 7 – The State and Taxes

When the state was first formed, the people

who created the state may have decided to pay a
fee or some sort of compensation for the service
of protecting their liberty. In its creation it is
meant to protect our ownership of our property.

This always comes to an end as individuals

begin to use the state to their own means. As the
state begins to operate outside the bounds of
protecting liberty it will begin to need resources
for these operations. Since the state has a
monopoly on violence it can coerce the people it
was made to protect for their property; this is
called taxation. A state can tax the productivity of
its people through an income tax. It can also tax
the consumption of its people by a sales tax. The
state can tax anything because it can always
threaten violence if the taxes are not paid, thus we
begin to lose the benefits of voluntary exchange
as taxation increases.

33
 Whenever there is taxation of anything, this
will reduce the amount of activity in that area. If
you tax consumption there will be less
consumption, and if you tax productivity there
will be less productivity. Taxation destroys value
creation anywhere it exists.

Eventually the state will use this to its

advantage to push the values of individuals
currently running the state. There are two ways
they can do this; first by increasing spending in
areas the individuals in charge value. This may
not be as valued as the people whose property
they used to spend on these projects.

For example, while I may have had enough

capital to buy coconuts and pineapples, because of
taxation I now only have enough to buy one.
Instead, the capital that I was forced to relinquish
is used to build a building far away which I
receive no value for. Meanwhile either the
coconut man or the pineapple man has less
consumers.

34
 The second method is by giving tax benefits
for certain types of consumption such as a tax
exemption or deduction. This usually seems like
an ethical move on behalf of the state because the
property they seem to be forgoing is really the
property of someone else. They are not forgoing
the threat of violence but giving it a nuance. By
giving special tax treatment to certain goods or
services you increase the subjective value of that
good and decrease the subjective value of others.
This perverts the pricing system of voluntary
exchange.

A more philosophical problem with taxation

is that it presupposes that the state has ownership
of its people and their property; not that people
have ownership of the state which can lead to very
dangerous outcomes.

While a state may seem necessary to protect

liberty, the free markets ability to function begins
to diminish as taxation increases. Taxation will
reduce the amount of capital to express the values
or preferences of the people and manipulate
subjective values of goods and services typically
to push some ideological end.

35
 Chapter 8 – The State and Money

Up until now money substitutes have been

managed by competing banks. If the reserve ratio
of the bank began to get too high I would
withdraw my coins from the bank and deposit
them in another bank. This mechanism keeps the
banks from causing too much inflation or
increasing the money supply.

Leaving this function of storing money and

creating money substitutes to private banks is
important in keeping trade from sudden stops.
This free market constraint on money can really
inhibit the ability for the state to expand its
operations to push the values of those running the
state.

The state can only increase taxation by so

much in order to increase their resources. With the
threat of violence, they may create a monopoly of
money and money substitutes. Typically this

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monopoly is given to a central bank who will
serve as the bank of all the private banks, or the
bankers' bank. When banks take on too much risk
they can just borrow money from the bankers'
bank or central bank. This makes banks willing to
take on more risk and leaves no alternative for
consumers since all banks are tied to one central
bank.

How does this help the state fund its

operations? If the state can't raise enough tax
revenues to pay for all its operations it will have
to borrow money. When a state or enterprise
needs to borrow large sums of money they issue
bonds which are sold and then later repaid. Like
anyone else borrowing money the state must pay
interest and if they borrow a lot of money it will
cause interest rates to rise since there will be a lot
less capital to go around.

In order to avoid paying higher interest the

central bank can print more money substitutes and
give them to the banks in exchange for the states
bonds. This creates demand for the state's debt
since they can be traded for these newly printed
money substitutes. This increases the perceived

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amount of capital allowing the state to borrow
money at lower interest rates.

This will cause several problems including

the inflation problems we addressed earlier. The
artificial demand for the state's bonds means less
demand for the bonds or debt of enterprises,
which allows for less investment into innovation.
Interest rates are being pushed down even though
capital is becoming more sparse; it sends the
wrong signal to entrepreneurs thus causing over
investment. This all happens because the state
wants to expand its operations.

As this central bank warehouses coins, it can

only raise its reserve ratio versus its Vat coin
reserves so much. Eventually the state will cut the
ties to the underlying money. It will declare that
by the decree and the threat of violence that the
money substitutes is money and is the only
money. Now only this paper or fiat money printed
by the central bank can be used in exchange. This
allows the central bank to increase the money
supply unrestrained by its reserves of the previous
money.

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 This facilitates for unrestrained growth of
the state to tax and borrow as much as it wants.
Now people's wealth is entirely dependent on the
central bank's ability to restrain the money supply
from growing too rapidly. The incentives for the
central bank are generally the opposite of this.
What eventually happens is that the bank will
grow the money supply so much that the paper
money becomes worthless. Now the people have
nothing to trade in its place and no way to prepare
for such an event since there is no alternative
allowed.

As the state begins getting more and more

involved in the money supply the more it will try
to take control. By taking control of the money
supply we destroy the wealth of the people who
the state is supposed to serve. This also creates the
wrong signals to entrepreneurs of value and
available capital. The state's increasing
involvement in money, even indirectly through a
central bank can only spell out poverty in the long
term.

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 Chapter 9 – Conclusion

Liberty is the blood of a free market, by

allowing free trade between individuals it allows
for prices to develop which tell other individuals
about their environment. These prices tell people
and entrepreneurs how to best use their capital
and how much investment should occur.

These entrepreneurs with real prices can

compete and breed the innovation to constantly be
improving our standard of life. As we see these
innovations we'll have more leisure time to spend
with those we love or pursuing anything of
interest. The most useful innovations can only
come from real prices from voluntary trade, not
from the values of any individual dictating where
innovation should occur through state spending or
granting tax benefits for investments in their
values.

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 In order for prices to be accurate the money
supply must have natural restraints, such as
competing banks and money. These are an actual
good in itself like a precious metal that retains
value even when the bank goes bust and the
money substitutes become worthless.

In a world without the state we worry about

threats to our liberty from each other, but with the
state we worry about threats to our liberty from
the state. There is no guarantee as to the safety of
your liberty, only through awareness and
involvement in your environment can your liberty
be protected and can the market truly be free.

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 About the Author

Alex Merced was born in Connecticut in

1985. He received his Bachelor of Arts in Pop
Culture Studies and a minor in Marketing at
Bowling Green State University. During his years
in undergrad Alex became involved in local radio,
print and started his own concert promotions
outfit and a comics and gaming store.

On a trip to the Philippines in 2007, Alex

Merced saw his first Ron Paul debate and has
been championing liberty and Austrian economics
since. This influence him to move to New York
City where he now works for Greico Financial
Training, instructing new and established
members of Wall Street to pass securities
licensing exams and using the opportunity to
sprinkle some liberty in his lectures. He produces
media for his website, AlexMerced.com.

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 People you Should Learn About

Ludwig Von Mises

Murray Rothbard
Carl Menger
Ron Paul
Thomas Woods
Robert P. Murphy
Hans-Hermann Hoppe
Friedrich Von Hayek
Robert DiLorenzo
Walter Block
Robert Nozick
Isiah Berlin
Art Carden

and many more which you can learn about at

Mises.org, FEE.org, or CampaignforLiberty.com

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