No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Two: Fundamentals of Economic Behavior 44 Similarly, the rule of law enables people to reach mutually agreeable arrangements that allow our individual plans to mesh; that is, it helps with what economists call plan coordination. Entrepreneurs are able to make individual plans because they know the law has protections to enforce agreements they may enter into. Contract law, for instance, allows individuals to contract with one another and stipulates the penalties for breach of the contract. If you need a car but don’t have the money to purchase one, you may take out a car loan. You will enter a binding contract that the government will help enforce. Let’s say you don’t make your payments on time. The car company can then take your car back, without your consent, based upon the contract you signed. Perhaps you have watched the TV show Operation Repo. While dramatized, this type of activity is sanctioned by contract law. When you don’t make payments, you forfeit the good. If the state did not enforce contract law, how many people would be willing to loan money? Very Few. Savers would have no place to put their savings to work, and borrowers would have no access to capital—a sure recipe for a poor economy. A related institution that we have already touched on is private property (or stewardship) rights . The essence of private property rights is that your property is yours; and no one else has a claim on it. You own yourself, and therefore you are entitled to the fruit of your own labor. If you own it, you can consume it, trade it, ignore it, or sell it. Private property rights means you can do anything you want with that property, as long as you don’t violate the law (e.g., you have a right to own a baseball bat, but not the right to hit my car with it). If someone doesn’t like that I buy a 1957 Chevy Bel Aire and leave it outside in the weather to rust away—well, tough. Beyond the strong biblical record of private property rights (see text box in chapter 1) , there is a compelling social reason to support the general concept of private property, even when we don’t like how some people exercise their stewardship responsibilities. The ability to own property provides a powerful incentive to save and invest, and therefore promotes economic growth. Economic growth provides a higher standard of living for everyone, as there are more goods and services for all of us to consume. Central banking that conducts monetary policy is another institution that enables economies to grow successfully. A low and stable inflation rate leads to significantly higher growth than high and/or erratic inflation rates. Let’s think about why. After WWI, Germany experienced a hyperinflation. What’s hyperinflation? Well, the government printing presses were printing so many pieces of paper and injecting them into the economy by government expenditures that the value of everything in terms of the paper changed by the hour. There were stories of people taking wheelbarrows full of paper currency down to the store to buy a loaf of bread; people being paid several times a day to allow them to spend some of their money before prices rose; bills adding multiple zeros (e.g., a $20 bill becoming a $20,000 bill) were not uncommon. This outrage was most recently perpetrated by the government of Zimbabwe, which in 2008 offered one hundred trillion dollar notes ( Figure 2.1 ) . As Figure 2.1, Zimbabwe Hyperinflation. In 2008 Zimbabwe’s inflation rate hit 89.7 sextillion percent! http://www.cato.org/zimbabwe