Government’s Role in Early Stage Growth Companies: An Austrian Perspective to the Finnish Innovation System

Professor Risto Harisalo (Department of Managerial Studies – University of Tampere, Finland) has written the following about the book:

“The current financial downturn emphasizes at least two important questions. The first is how to create favorable conditions in which new companies with great growth potential can emerge and develop. The second is how to sensibly analyze this process on which the future of society is so dependent.

The book of Petri Kajander grapples both of these theoretically and practically complex questions. He elaborates main features of how small companies are being originated and developed in market process. Then he goes on to evaluate to what extent this process is being supported by financial institutions in which, he shows, are some serious imperfections.

His analysis is well written and justified in the Austrian tradition which is gaining ground from traditional economic analysis which proved incompetent to predict the financial crisis and provide ideas and means to get out of it. He shows that there is continuous demand for spontaneous process of mutual discovery but it is not matched by financial support systems which are mainly public. He locates his analysis into the specific aspect of all areas of human behavior, the human choosing, in universal science, praxeology.

The author writes clearly and understandable. He provocatively challenges orthodox economic thinking. His book is worth reading even if a reader disagrees with his arguments.”

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(Next guest appearances on Evident Footprints on 12th and 25th of March at

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Medium of Exchange, Barter, and Money

“A Resource-Based Economy is a system in which all goods and services are available without the use of money, credits, barter or any other system of debt or servitude. All resources become the common heritage of all of the inhabitants, not just a select few. The premise upon which this system is based is that the Earth is abundant with plentiful resource; our practice of rationing resources through monetary methods is irrelevant and counter productive to our survival.”

Money is only a medium of exchange. It is not the wealth. It only presents the future wealth we believe it can provide us in form of goods and services from other people whom we hope to accept our money in an exchange for our desired goods and services.

Wealth is created by people who produce goods and services. We use money as a middleman to satisfy our current and future needs. What we do not consume immediately we can store for later day, save (i.e. invest).

Basically anything can be used as a medium of exchange. History knows many commodities used as money. Currently we have accepted printed-paper notes as money which have no other productive use.

Demand for Money and Supply of Money from Human Action by Ludwig von Mises:

“A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.

Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.[3]

Media of exchange are economic goods. They are scarce; there is [p. 402] a demand for them. There are on the market people who desire to acquire them and are ready to exchange goods and services against them. Media of exchange have value in exchange. People make sacrifices for their acquisition; they pay “prices” for them. The peculiarity of these prices lies merely in the fact that they cannot be expressed in terms of money. In reference to the vendible goods and services we speak of prices or of money prices. In reference to money we speak of its purchasing power with regard to various vendible goods.

There exists a demand for media of exchange because people want to keep a store of them. Every member of a market society wants to have a definite amount of money in his pocket or box, a cash holding or cash balance of a definite height. Sometimes he wants to keep a larger cash holding, sometimes a smaller; in exceptional cases he may even renounce any cash holding. At any rate, the immense majority of people aim not only to own various vendible goods; they want no less to hold money. Their cash holding is not merely a residuum, an unspent margin of their wealth. It is not an unintentional remainder left over after all intentional acts of buying and selling have been consummated. Its amount is determined by a deliberate demand for cash. And as with all other goods, it is the changes in the relation between demand for and supply of money that bring about changes in the exchange ratio between money and the vendible goods.”

The purchasing power is based on the exchange of goods and services between individuals in any society. In order to get something you have to give something. One can do this directly by bartering fish to bread or use a medium of exchange in between. For example buy ‘money’ by selling the fish and then sell the money and buy the bread. (see The Pattern of Indirect Exchange from Man, Economy and State by Murray N Rothbard)

Provided that the society is based on trust where no one is cheating (i.e. getting something for nothing-stealing) in principal it does not matter what is used as money. Mises has theoretically proven (regressium theorum) that for example gold and silver evolved as the commonly accepted medium of exchange by having an alternative productive (i.e. economic = scarce) use first.  Later they became the de facto standard ‘money’. For example gold can be used for jewelry and semiconductors as well as a medium of exchange.

Our current fiat money is not backed by anything. This means that one can fabricate more money and thus steal/cheat from the society. By printing more paper notes one can exchange those notes to real goods and services (provided that people still believe in the money and are ignorant of the scam) without giving anything back. Thus getting something for nothing. The overall wealth in the society has not increased as a result of printing more paper notes, ‘money’. There are no more goods or services for the members of the society to enjoy and consume. (see What Has Government Done to Our Money? and The Mystery of Banking)

Alan Greenspan wrote in his article Gold and Economic Freedom in 1967:

“Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.”

No system is ever moral (or immoral) – only people are. Our current fiat monetary system is based on a governmental controlled banking cartel but it is not certainly the only option available (see e.g. free banking and Free Choice of Currencies). It is far stretched leap to state that no system will work because our current one is at fault. Money is only a tool, an objective means to ends, in itself it is a neutral carrier like energy that can be utilised to constructive or destructive purposes. (see Francisco’s Money Speech)

Abundant Resources and Planned Economy

“The premise upon which this system is based is that the Earth is abundant with plentiful resource; our practice of rationing resources through monetary methods is irrelevant and counter productive to our survival… It is only when resources are scarce that money can be used to control their distribution.”

I find this a bit confusing about the abundant resources if abundance is defined as something that is available in large quantities and available to all. It can be understood such a way by this quote: “Although air and water are valuable, in abundance they cannot be sold.” Our natural resources are limited on Earth. Certainly each individual’s time is limited – we cannot do everything, we have to make choices and decide upon different alternatives. The limitations we have mean that they are scarce. If we decide to build a house there is something else that we cannot do at the same time. The Resource-Based Economy does not remove scarcity. (see The Fundamentals of Human Action and Acting Man)

“In an economy based on resources rather than money, we could easily produce all of the necessities of life and provide a high standard of living for all… With automated inventory on a global scale, we can maintain a balance between production and distribution”

The key problem with the Resource-Based Economy is the fact that there is no economy at all. There is no money, which means that it is impossible to define prices for any resource, work, material, or production. And without any valuation method it is impossible to have a rational basis for selection and decision-making. This is the core problem in any planned economy. Somehow it has to be decided what is to be produced, at what quantity, when, by who, and for what purpose on behalf of the community. But there is no objective yardstick available that enables to satisfy individuals different and variant needs and desires.

The following are some quotes from Ludwig von Mises works where he has shown that planned economy results chaos and problems that cannot be solved by more planning: 

“The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the –continually changing–state of the market are the [p. 258] value judgments of these individuals and their actions as directed by these value judgments. The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell. There is nothing inhuman or mystical with regard to the market. The market process is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society.

The market process is the adjustment of the individual actions of the various members of the market society to the requirements of mutual cooperation. The market prices tell the producers what to produce, how to produce, and in what quantity. The market is the focal point to which the activities of the individuals converge. It is the center from which the activities of the individuals radiate…

For monetary economic calculation is the intellectual basis of the market economy. The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. The market economy calculates in terms of money prices. That it is capable of such calculation was instrumental in its evolution and conditions its present-day operation. The market economy is real because it can calculate.” (http://mises.org/humanaction/chap15sec1.asp)

“The paradox of “planning” is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible [p. 701] attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.” (http://mises.org/humanaction/chap26sec1.asp)

“Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.” (http://mises.org/econcalc/ch2.asp)

(see Socialism: An Economic and Sociological Analysis and Economic Calculation In The Socialist Commonwealth)

Even without the rational decision making problem the Resources-Based Economy raises several questions:

• who controls the resources and makes the decisions (and based on which criteria)?
• who allocates the work needed?
• who is behind the law and order, and their enforcement?
• By who’s standards, beliefs and values the society operates?

If the system is not based on voluntarily and mutual interaction between members of the society without any coercion and force against those who do not want to participate to the community it is no different from our current centrally controlled and manipulated (often tyrannical) structures.

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