Money, Trade and the Laws of Supply & Demand

‍Fundamentally, Azadism is based upon the free interactions between people, constantly exchanging with each other to satisfy needs and wants in a society. Azadism promotes a system in which people, acting out of their own self-interest (within a certain limit), can freely exchange goods and services to meet the societal requirements of production, consumption and distribution of wealth. Human beings are in a unique position in a variety of ways, and one of the early developments that was necessary to produce the level of success we as a species have had has been the ability to cooperate, compete and communicate. These traits culminated into a system in which we were able trade and barter for resources rather than having to just kill and steal in a constant struggle for survival.

Consider the example of early human tribes, whereby one tribesman becomes an expert in hunting and can acquire more meat than he is able to consume all by himself. However, due to his success his weapons constantly need repair or replacement. Another tribesman finds that he is better suited at repairing or making better quality weapons rather than hunt himself. The hunter recognises the potential for these and decides that in exchange for those weapons he will give him some of his extra food. The weapon maker needs the food, and the hunter needs the weapons. Or, in other words, the hunter values the weapons more than he values the extra food that he does not consume, and on the other side, the weapon maker values the food more than the weapons he cannot use as effectively as the hunter. By having a system of exchange, the hunter has another option instead of simply fighting with others and taking what they have. There is now an opportunity to cooperate. The hunter recognises a greater benefit in cooperating in this way as the superior quality weapons makes his hunting easier, and more fruitful. The weapon-maker, instead of having to go out hunting can devote his time to hone his craft and perhaps innovate further.

This example forms the basis of what is known as the market, which is run upon the subjective value each participant places on different goods and services. In time, this symbiotic relationship would develop as more people enter the market to exchange what they value less for something they value more. As this occurs different areas of specialisation develops, since more time is devoted in other areas of the survival process¹. Now, not everyone has to be a hunter and instead may provide other goods or services to trade with the hunter for food. From this, even secondary markets can be developed to exchange more than just food. It became unnecessary for everyone to revolve their lives around finding their next meals like animals. People were now able to devote time to new ways of producing things that others valued and were willing to trade for. It is from this type of cooperation in a society in which tasks could be broken up into parts, and individuals could focus on delivering a part of the process rather than the whole. The hunter no longer needs to spread out his time to cover making weapons, hunting, and cooking. Through trade, these tasks could be handed over to others, freeing up time to focus on one in order to specialise and gradually build valuable experience and efficiency. With trade and markets, people become free to pursue and develop many other necessary crafts that have led to the innumerable innovations of the human race. Allowing the opportunity for people not to just focus on their base requirements and mere survival gave way for the formation of key institutions in our evolution as a race. This included things such as agriculture, arts, religion and more.

Eventually, a common medium of exchange had to develop due to the following issues. Imagine a farmer who owns a large herd of cows but owned no horses. From his point of view, he may value a horse being worth three of his cows, and so looks for a seller that will be willing to trade with him. When he enters a marketplace, he may realise that horse sellers generally would exchange for a different number of cows. The farmer will weigh up his options. If he finds a seller that is only asking for three or fewer cows then he is likely to trade otherwise if the price of a horse in terms of cows is more than this, he may not trade. However, what happens if horse sellers do not want cows but need bread instead? They could possibly buy and sell the cows in the hopes that a baker wants them, but then this poses another problem. A single cow may be worth 100 loaves of bread, but how many cows would exchange for a single loaf? Unless you cut the cow into parts and hope the bread maker wants that, this transaction would be unlikely to occur.

Therefore, over time money was introduced as a common object that everything in a market could be exchanged for. This has taken many forms throughout history, but most popularly it has been in the form of precious metals such as gold and silver. These could be subdivided or melted together easily into different weights representing different values. They could be carried around conveniently and also act as a store of wealth. A few ounces of gold could represent many cows, without having to take the entire herd with you to the marketplace. Instead of butchering the cow to buy bread, they could sell it for some silver, and maybe use a tenth of an ounce of it to get their loaf and know that it will be accepted. This is a key advantage of giving money the ability to determine prices more accurately. Through different weights of gold, you can calculate in terms of that gold, how many cows are worth one loaf of bread. Suppose one cow was worth a hundred ounces of silver and a loaf of bread was worth one ounce of silver. In effect, you are now able to sell a hundredth of a cow for a loaf without having to cut off parts of the cow. Over time, civilisations were able to standardise these weights to make exchange more accurate and trade easier. Later on, this was made even more easier by banks who could hold your physical gold in their secure vaults and issue you a paper note. This would represent a “promise” from the bank that you could redeem your gold at any time. This paper currency would be then used to transfer ownership of that gold in market interactions². But what determines how much money can be traded for an amount of goods or services? How is the price of something calculated?

In a market, there will be many buyers and sellers with a variety of wants and needs to be met. Due to the self-interest motive, buyers aim to purchase at low prices and sellers are aiming to get the highest price. However, in a competitive market there are many options, and so a seller cannot just raise their prices excessively since buyers will just go to another seller. Similarly, a buyer couldn’t offer to pay a price too far below what other buyers are willing to pay, since no one would sell to them when they know they can get a better deal. This conflict of interest between buyers and sellers allow for a natural, market price to be determined for goods and services. This is known as the the supply and demand of goods and services. Where the supplier produces a quantity of goods at a price meeting the amount demanded at that same level, this is known as the equilibrium price (the natural, market price).

It is important to recognise what the price is composed of, and perhaps more fundamentally, value itself. Traditionally this was usually thought of in terms of the costs incurred upon the supplier of a good or service in the production of them. Adam Smith in his ‘Wealth of Nations’ mentions some of these primary factors in determining prices as: the time and effort (labour) that went into it, the costs involved with purchasing or using materials, and/or the land required in the process. It also includes a profit which is the extra amount of money obtained in a sale beyond the costs that went into production³. This profit incentive is what tends to drive suppliers the most, since it is through this profit that they can go on to purchase other items in the market that they need. Why would anyone go through all this effort and take on the risk involved if they just break even or make a loss? There is a place for this in charity, but for the most part, people create something that is valued in society so that in return, they can get something that they value back⁴.

Although the idea about the amount of labour put into the production of a good determines its price is relatively correct and is still a valid theory applicable to many goods and services, it does fail to account for all instances⁵. If the costs of the factors of production increase, then usually things that rely on those factors also raise in price. For instance, if the cost of metal rises for whatever reason, then the cost to produce a sword from that metal would also rise. This may then be reflected in the price the final customer must pay for that sword. Later however, certain limitations to this theory of value became apparent through economists such as Carl Menger, the founder of the Austrian School of Economics. Instead, he argued that the value of a good was determined by how useful it was to the buyer, not how much work went into producing it. The buyer generally doesn’t care or even know in most circumstances. A diamond found in the dirt would sell for the same amount as one dug out after a thousand days of hard labour in a mine (given the same size and shape)⁶. As was touched upon in the previous section, even this perceived value on the buyer’s side is not fixed. Someone stuck in a desert would value water far greater than someone living next to a river, and would therefore be willing to exchange far more in a trade for it than the latter person⁷. Another example would be umbrellas. An umbrella when it’s raining is worth more than when it is not, despite the fact that the exact same labour went into producing it. Further to this, it is unlikely that an extra umbrella would be valued the same to you after the first one. The same way, gradually if you keep selling water to someone in a desert, after a certain point, each extra bottle would be worth less and less to them⁸. The same product is valued differently based on the subjective beliefs of the one purchasing it, which is affected by all sorts of circumstances. Some people are willing to pay more, and some less. The average price we tend to find on things is therefore the combined subjective values of everyone participating in the market.

Combining these ideas, a suitable answer arose to the infamous “diamond-water” paradox that had perplexed Adam Smith. This was the confusion as to why diamonds were worth more than water since water was far more important in sustaining life. Diamonds on the other hand have far less usefulness in comparison for survival. This is because, although water may be more important, it becomes less important to you the more you have it. Since water is not scarce like diamonds, it would naturally be valued less since you can easily satisfy your need for it. There is less to give up on your side in a trade for it. Diamonds on the other hand are far harder to come by, and so each additional unit of water is worth far less than each additional unit of diamond⁹.

In the study of economics, scarcity is one of the initial concepts that is introduced, which is the reality that there is a limited amount of resources compared to an unlimited amount of wants and needs. Where a certain amount of resource is used up, it is in effect preventing those resources to be used elsewhere in a different way. What markets allow for is a system in which resources are allocated to wherever the people themselves deem relevant. If the demand for cars increase, then the supplier of cars make more since there is a higher rate of income available for the production of that good. If the resources to produce them begin to deplete and become harder to obtain, then the supplier has to raise prices. As prices rise, demand falls on the consumer side, since more people cannot afford it.  They would value the money they have now more than what they can buy with it, and so either hold on to it or spend it elsewhere. Those who can still afford it are essentially signalling that their subjective value of that car still matches with the supplier’s price for it. This then rebalances production levels to reduce the amount of resources used to make cars in order to meet this new reduced demand.

The self organising qualities of a market requires no central authority to determine how much or how little something should be produced. It will adapt depending on the scarcity. There is also no need for a central planner to decide what should and should not be produced, since whatever there is a demand for will be made available by those seeking a profit, and what people don’t want or need won’t be supplied. This is known as “price signalling”, which is the market’s own way of communicating where resources should be allocated. However, under Azadism there are some restrictions to this relating to the NAP in order to avoid some undesirable markets arising that destroy human freedom¹⁰.  

As we can see prices are the essence of the market, and any state manipulation of these through artificial price controls can lead to surpluses and shortages. A government backed price control system contributes most to the inefficiency in allocation due to the principles of supply and demand being distorted. If the state says no one can sell over a certain price then shortages occur since there is less incentive to produce that product. If it mandates that no selling is allowed below a certain price then surpluses (and waste) arise since there is a guaranteed above natural price payout for that good and so more people want to sell it¹¹. Azadism does away with needless and ineffective government interference with natural market forces. Free market interactions, absent of state intervention, are a self-regulating system that requires no central authority determining where resources should go. It is the people themselves determining resource allocation through the voluntary interactions with each other. When something becomes scarcer, it becomes more expensive and because of this price signalling, people will demand it less. This will remain the case until suppliers are able to produce more and bring the prices back down through competition. Not only does this mitigate the hazards of bad economic policy, but also allows a better probability that resources will be used efficiently in respect to what people in a society actually need or want, rather than what a central planning authority decides for you. Why do you need someone you have never met, who has not lived any of your experiences, to decide what’s best for you? And even if they are representative of you and your community, it is very unlikely that they will represent everyone else due to the sheer diversity of thoughts, needs and wants in a society. This does not justify the so-called “representative” to take off a certain group in order to meet the needs of another. In any other situation, that so-called “authority” would be labelled a thief.

Another way to combat scarcity is by reducing wants and needs of the people. However, achieving this is far harder than it may seem. Religions have been trying this for thousands of years. Even if desire for unnecessary goods and services were eradicated, people still need food, water and shelter. As the population grows, so does demand for these bare necessities. It is unreasonable to build a society on the assumption that when it is set up everyone will turn into Mahapurakhs and leave all worldly attachment and subsist only on air. The reality is that the vast majority of the world live in a state of Kalyug, and idealistic societies where everyone can just stop consuming only exists in Satyug. This is not to say that those ideals should not be strived for, but it is to say that to get there requires spiritual progress which must be done independent of state coercion. You cannot force anyone to be spiritual, so a society that builds upon the “lowest common denominator” of spiritual attainment is the only reasonable and realistic option in the meantime.

The Dark Age of Kali Yuga is the knife, and the kings are butchers; righteousness has sprouted wings and flown away.

― Sri Guru Granth Sahib, Ang 145

To conclude this section, a final example to showcase the broadness of markets is the concept of language. The revolutionary Austrian school economist and philosopher, Friedrich Hayek, elaborates that it is a mistake to think that language was thought up by wise men of the past¹². Instead language development is a result of millions of interactions between people, each adjusting and adopting vocabulary as needed. If enough people call something by the same name, it was known by that label and added into an unwritten societal lexicon, common to all. If certain mouth noises were unpopular, they never became formal words. There was no authority decreeing what constitutes as language or mere noises. Instead, it was the independent, voluntary market transactions between the people themselves, who traded words to reach a mutual benefit in what was considered language. Only afterwards, were dictionaries written, not to invent language or even set the boundaries of language, but to record what was already in existence. The history of the first Oxford English dictionary was a monumental effort to scour through every major document and piece of literature available to them at the time. Although the first editions were finalised in 1928, the nature of having a dictionary for a “living” language means that it will never truly be finished until the language itself falls out of use. This is why even today words are still being added as society continues to engage in the trade of words and phrases¹³.

Azadism promotes individual responsibility on the people themselves, and in the process removes the over reliance on the state to manage people’s lives. People should be free to interact with each other in order to reach a common consensus without the need of a central planner dictating what is best for them. The only role of an Azadist government is to maintain the freedom of those interactions and protect the market’s existence from any external or internal threats. Any interaction of a coercive nature would be dealt with as a threat to the functioning of an independent and free market.  In any market interaction where one party is not satisfied, the other party cannot force the transaction to go through without breaking the NAP. This also applies to any market interactions between two parties that effect a non-consenting third party. Wherever the NAP is broken, it is the Azadist government’s role to protect those affected and punish the aggressors. The primary function of the government is therefore largely limited to the justice system, police force and military. This inadvertently means that an Azadist government is a small one, and most other services are provided by the market and not the state.

Other Useful Resources

Please take some time to understand Supply and Demand, as it is a crucial element of economics.

Link: Law of Supply and Demand Definition (investopedia.com)

Link: Explaining supply and demand - Economics Help

Link: Simulating Supply and Demand - YouTube

Understanding of the pricing mechanism and markets forms the basis of economic thinking. This is only a brief summary of these concepts, and in order to avoid this paper becoming an economics textbook, it is recommended that the curious look into this further for a deeper understanding. I have included only as much as required for the purposes of this manifesto and as an introduction to arguably the most important concepts in economics and human behaviour as a whole. Some of the concepts mentioned in this section included: supply and demand, opportunity costs, subjective theory of value and marginal utility theory.

Footnotes