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living at a subsistence level that its political leaders are, at this writing, in the process of removing many market constraints for fear of total economic collapse and political rebellion.

I bring up what may seem to be political issues for a very important reason. You cant separate economic thinking from a view of the nature of human beings. The dominant philosophic view of humanity in any culture will determine the nature of its political structure and therefore the nature of its economic activity. The closer that philosophic view comes to being correct, the more successful economic policy will be. The extent that people are viewed as rational beings, not infallible but nevertheless capable of providing for their own survival with actions based on the independent exercise of their minds, is the extent to which the society will be free and unfettered by govemment intervention. And the extent to which a society is free is the extent to which it will be successful in terms of a general and increasing rise in the standard of living of its people (i.e., in terms of the accumulation of wealth). 12

Just so you dont think Im getting too abstract, let me give you just one example of how I applied this thinking and profited from it. There has been a strong socialist-coUectivist element in France for most of the twentieth century. But in 1981, Francois Mitterrand, an ardent socialist, surprised the world by winning the Presidential election over the relatively moderate incumbent, Valery Giscard dEstaing. The New York Times wrote about Mitterrand with high praise, even though his platform was predictable for a socialist.

He promised to create full employment and prosperity by nationalizing major segments of ind ustry including the banking system, imposing heavy taxes on the rich, introducing massive social welfare programs, and stimulating the economy by inflating the currency. 13 I knew (and so did many others who understand economic realities) that Mitterrands attempts to control market activity would lead to disaster, and that the value of the French franc relative to the dollar would collapse.

I immediately went short the franc-it was 4 to 1 on the doUar-and covered approximately three weeks later when it was at 6 to 1 (it eventually went to 10 to 1), making a very substantial profit with virtual certainty that I was right. I knew I was right because, paraphrasing Aristotle, "something cannot be and not be at the same time and in the same respect." This trans lates in economics to "you cant get something for nothing." By 1983, the effects of Mitterrands policies were apparent. Prices were increasing at a 12% annual rate. The govemment had huge budget and balance of trade deficits. The people had suffered a general decline in the standard of living. The franc fell even further relative to other currencies. And unemployment was at 10% of the work force. Amazingly, Mitterrand still holds his office today! I suppose this is to be expected, for as our founding fathers stated in the preamble to the Declaration of Independence: "All experience hath shown that mankind are more disposed to suffer while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed."

Unfortunately, there are strong coUectivist elements in every nation in the world, including the United States. To some extent, people are universally regarded as being responsible not just for their own lives, but also for the welfare of others.

The purpose of govemment, according to coUectivist ideology, is to provide for the common good through forceful redistribution of wealth from those who produce to those who cant (or wont), or to those who dont produce as much. Consequently, markets in the United States and worldwide are, in varying degrees, regulated and controlled.

In particular, the supply of money and credit is totally in politicians hands, and therefore the markets are largely at the mercy of bureaucratic whim. But just as a good detective can apprehend a criminal by taking on his mindset, so it is possible to apprehend the course of govemment policy by taking on the mindset of key figures in power. The extent to which they are coUectivist is the extent to which they will intervene in the markets and create imbalances of varying forms. By examining the effects of their interventionist policies on production, savings, investment, and innovation and by analyzing the impact on supply and demand in the various markets (assuming of course the govemment doesnt change its policies in mid-stream, which it often does), you can predict the direction of price movements.

To anticipate future economic policy, you must understand the policy weapons available, as well as

the character and intent of the men in crucial positions of power. In the United States, the most fundamental policy weapons are taxes, the level and method of funding deficit spending, the Federal Reserve Boards control of money and credit, and specific laws restricting production and trade. Th e chief personalities to observe are the President, the Fed Chairman, the Secretary of the Treasury, and key Congressional leaders. By understanding first what these men can do, and then anticipating what they might do based on their view of the nature of human beings, you can position yourself to profit from future govemment action.

Analyzing effects is much simpler than anticipating new policy. As Adam Smith put it in his book. The Wealth of Nations:

That state is opulent where the necessaries and conveniences of life are easily come at. ... To talk of the wealth of nations is to talk of the abundance of its people. Therefore, whatever policy tends to raise the market price diminishes public opulence and the wealth of the state, and hence it diminishe s the necessaries and happinesses of people.

Govemment interference in the economy has consequences directed by distinctly market principles. One simple principle is: Price controls cause shortages, and price supports cause surpluses. For example, when Ronald Reagan was elected in 1980, the domestic oil production industry was enjoying a govemment-stimulated boom brought about by tariffs on imported oil, an artificial shortage induced by the OPEC cartel, and a complex system of price controls and tax benefits created by the Carter Administration which put a price limit on "old oil" but let the price of newly produced oil float. There was a drilling frenzy everyone was speculating on oil wells. ~

After his election, Reagan announced a plan to deregulate th e oil industry. Shortly thereafter, I got a call from a stock broker friend of mine who urged me to buy Tom Brown, an over-the-counter oil stock that had enjoyed a mercurial rise

from $2 a share to about $68 a share. I told him, "Jimmy, its over for the oil industry; I might want to short that stock." He pleaded with me not to short it because Tom Brown was a friend of his, so I didnt, but I did short many other oil stocks.

I told Jimmy that the oil cartel in the Mideast would soon collapse from com petitive pressure and that Reagans proposed deregulation would absolutely kill the domestic oil industry as free competition drove prices down. He slowed down his purchasing but held on to his positions hoping to close them out in 1981 for tax reasons. By January 1981, however, his oil portfolio was down about 25%. The S&P 500 index, which was heavily weighted by the oil stocks, topped in November 1980. Tom Brown eventually dropped back to about $2. Needless to say, I profited handsomely by acting on very simple principles.

Now let me project into the future a little bit using the same principles. The recent increase in the legal minimum wage will decrease the profitability of fast food stores and other retail outlets, forcing some out of business and others to lay off workers. Automation devices will enjoy increased use as they become relatively more valuable due to the increased cost of labor. Unemployment among the unskilled labor force and youth will increase, and the demand for govemment assistance pro grams will increase. "(I)n the name of caring for the people" the govemment will once again contribute to the impoverishment of the nation. Govemment intervention doesnt circumvent the laws of supply and demand; it simply maldistributes factors on both sides of the equation.

To reiterate, economics is important because it describes the instmments, methods, and activities human beings employ to achieve ends or goals. The focus of economics must be first on the individual acting alone, and then on the individual acting in a social setting. The principles that apply to one person apply equally to any group and to society as a whole. For economic principles to be correct, they must be based on a view of humans as independent, thinking beings in pursuit of th eir own fulfillment. Any other view will lead to contradictions-mistaken judgments that result in failure when action is taken based on them. Like Robinson Cmsoe, everyone must understand the concepts of evaluation, production, savings, investment, and innovation in order to survive and flourish as human beings. For the trader, speculator, and investor, a more detailed knowledge of these principles is an indispensable tool for market forecasting, particularly for evaluating the effects of govemment interv ention on price movements.


Opportunities multiply as they are seized; they die when neglected. Life is a long line of opportunities. Wealth is not in making money, but in making the man while he is making money. Production, not destruction, leads to success. -John Wicker

Suppose you went to work for someone, and every day you just sat and drank coffee, read the comic strips, and doodled on company stationery-thats it. How long do you think you would last? Not long, for sure. Your employer would justifiably fire you for not contributing anything of value to the business-for not producing anything.

It is an inescapable fact that human beings have to produce in order to survive and prosper. Production is the act of bringing something new into existence, by recombination and rearrangement of natural and/or man-made elements, which is designed for a specific purpose. By the phrase "bringing something new into existence" I dont mean to imply that something can come from nothin g. What was a fish, the fisherman turns to food; by his actions and innovation he brings food into being. What was steel, copper, aluminum, plastic, textiles, and so on, the auto maker turns into a car. The film producer combines the director, actors, writers, and crew to make a film for entertainment, advertisement, or education. The doctor attempts to produce the health of his patient. The stock trader brings into being an evaluation and an exchange. You get the idea.

The act of production can be simple r complex-from gathering food to the manufacture of plastics from refined oil derivatives. The products can range from biological necessities to abstract ideas -from food to poetry-but in each case, something new is created that is intended to serve a prede fined goal or end. There are some all too influential pressure groups that condemn production beyond a certain point. They say that through "overproduction" humanity is progressing farther and farther away from its "natural state" and speak of the "simplicity and beauty" of the few remaining food-gathering tribes in remote regions of the world. For example, the organization manual of Friends of the Earth declares, "The only really good technology is no technology at all," further declaring that economic dev elopment is "taxation without representation imposed by an elitist species upon the rest of the natural world." (I wonder where the artificial world is.) Others refer wistfully to the fabled "Garden of Eden" as mans ideal state and hold that productive work is mankinds punishment for seeking knowledge of good and eviL

Can you imagine living your life totally dependent on fickle mother nature, spending each day hunting and gathering food in never ending repetition? Can you really imagine living in a "para dise" where no thought and no action were required, in which "to produce" was inconsequential and irrelevant? What would be your source of pleasure and happiness if all your provisions for survival and all decisions were predetermined-if alternatives were neither necessary nor possible? Whatever this sort of "paradise" would be, it could hardly be called a "human existence, and I would have no desire to take part in it. I have to wonder why some people regard a beaver dam as "natural," but not the New York skyline-both ate the result of animals acting according to their nature.

The basis of production is, in Ayn Rands words, " the application of reason to the problem of survivaL"" People survive through the use of their minds; by identifying their requirements and desires, ordering them according to -the evaluation of their relative importance, discovering the means to achieve them, and

taking productive action. Unlike other animals, people create their environment by remolding nature in accordance with its laws. They can lift themselves out of natures harshness, make scarce necessities abundant, prolong human life, and open whole new frontiers of challenge and opportunity. But they can do to only as long as they are free to produce.

I have carefully defined production to include all purposeful action that results in the attainment of a goal or value in an attempt to dispel a mistaken notion, widespread in economic thinking, that only action which results in the creation of material goods is "productive." Many economists divide industry

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