Monthly Archives: September 2012

Capitalism In A Nutshell From Its Founder, Adam Smith

Below I paraphrase Adam Smith’s words about the famous “Benevolent Butcher”.

We all need each other to survive. But it’s folly to think that people help others simply out of the goodness of their hearts. For this reason we all do much better if we can enlist our fellow man’s own self-interest in helping us; that is we must show our fellow man that his helping us is to his own advantage. We say to our fellow man “Give me what I want and in doing so you will get what you want”. This is the basis for every transaction we make from day to day. We eat food grown by a farmer we’ve never met. We live in houses, the builders of which we’ve never met. We have food and shelter, not because someone thinks we’re special, but rather because they got something they wanted out of the bargain. It is not because of the benevolence of the butcher that we expect to get our meat, but from the butcher’s regard for his own interests. And we don’t live our lives wondering if the butcher has what he needs. We assume the butcher loves himself enough to give us what we want because we have something he wants.

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Here is his original work.

[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages”.

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Filed under Economic Science, Economics, Harsh Reality, Human Nature, Morality, Worldview

There Are Many Ways Of Achieving Equality… Sort Of

We’ve all heard, I hope, of the economic law of supply and demand. This law speaks of a relationship between the supply and the demand of resources, but this relationship can be misleading. There is a third and silent factor in this equation: “price”. Imagine, if you will, a see-saw. On one side is demand and the other is supply. Price is the center on which these two find balance… or at least should!

Consider mansions. It’s safe to say that we all want to live in a fine mansion, except that very few of us can afford to. The “demand” for mansions, therefore, is relatively low, because of price. But it’s obviously not fair that some people get to live in mansions while others don’t. Enter compassionate politician. As one such politician put it, “[mansion owners] have won life’s lottery”, and we know that’s not fair!

So the well-intentioned politician enacts price controls so that everyone can afford a mansion. Nice guy, he.

But then, without any changes in the supply of mansions, demand skyrockets. And guess what else. What was once an adequate supply of mansions is now a limited supply; a shortage in fact. Since all can now afford mansions, they are now “demanding” mansions. To further aggravate the situation, the supply begins to decline because there is no longer any incentive to build mansions because there’s no profit to be made.

Since bad law begets bad law, “No problem”says the compassionate politician. So a new law is legislated to deal with the mansion crisis. A lottery is instituted to determine who gets to live in the limited supply of remaining mansions. Now, everyone is equal because no one is living in a mansion because of “life’s” so called lottery, but rather, because of a government lottery. There, problem solved. Feel better now?

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Filed under Economic Science, Economics, Equality, fairness, Government, Human Nature, Politics, Supply And Demand, Uncategorized, Worldview

I Vote For A 1000% Increase In Minimum Wage

How is something so arbitrary as the minimum wage derived? Did you ever think about that? What is the minimum wage? Do you know? Well, it’s zero. Any moron ought to know that. But not so for the politician. For him, it’s an arbitrary number drawn from an entirely different science than economics; which is political science. I also know that the daily exchange of resources, which is the economy, will respond to that number in an entirely different and un-arbitrary way than the politician envisions.

But it does raise a question that deserves an answer. If politicians can arbitrary legislate what ever income they think one ought to have, why is it so low? As the mantra goes, “who can survive on minimum wage?”. So who is the real devil here? Is it the politician who legislates sub-poverty wages, or the greedy business owner who is forced to pay them?

The answer to the question depends on the perspective. Politicians survive off votes, businesses off profits. Therefore, politicians are motivated by votes, and business owners profits. If politicians, who have their own image problem, hadn’t made “profits” such a dirty word, this whole thing really wouldn’t be that difficult to understand. Still, while neither of these motivations have the worker’s best interest at heart, only one of them “profits” by fooling the moron worker into thinking that he is actually the main concern. Care you guess which one does that: the politician or the business owner?

So the bottom line is this: if high wages actually can be simply legislated, then being a man of compassion, I vote that the minimum wage be raised 1000%, and let’s be done with this poverty thing once and for all.

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Filed under Business, Economic Science, Economics, Equality, Government, Human Nature, Politics, Worldview

Economics = Blackmail

Our existence confronts us with certain harsh realities. We’re so use to them that we don’t even think about them that much. While all people relish the thought of a paradise, our current reality reminds us that this is not it. For one we all die. Some get sick and die, others get old and die, and the laws of physics kill others in accidents, car crashes, bullet wounds and such.

When we face the science of economics this is no less true. If I lie on the sofa and never get up, I will die from lack of water. I must have water to live. Simple I know, but still, it’s a harsh reality that isn’t often considered. I have to procure water, either by getting off my fat lazy rear-end and getting it myself, coercing someone else to get it for me, or I could always do without and die.

The number one implication here is that our existence requires the exertion of effort by someone in order for it to continue. There is this sort of cosmic blackmail in play. We either exert the effort to put a log on the fire or be cold. That’s blackmail, though we don’t always see it as such.

The Hell of economics, when all the fluff is blown away, is that we want the resources without the exertion. As it turns out, the more complex economics become, the more it becomes about somehow coercing someone else to put the log on the fire, bring us a glass of water, and a sandwich too since you’re up. Such coercion can be managed so long as the sloths remain a fraction of the workers. But when the sofa gets crowded and the workers get tired, or hop onto the sofa too, economics breaks down… and then people start getting cold and thirsty as they fight over who ought to pay the extortion.

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Filed under Economics, Harsh Reality, Human Nature, Morality, Work, Worldview

How Did It Ever Come To Be That You Get Your Healthcare Through Your Employer?

The late Milton Friedman explains this quite well:

“We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical.  Why single out medical care?  Food is more essential to life than medical care.  Why not exempt the cost of food from taxes if provided by the employer?  Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

The revival of the company store for medicine has less to do with logic than pure chance.  It is a wonderful example of how one bad government policy leads to another.  During World War II, the government financed much wartime spending by printing money while, at the same time. Imposing wage and price controls.  The resulting repressed inflation produced shortages of many goods and services, including labor.  Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit.  That benefit proved particularly attractive to workers and spread rapidly.”

Pay particular attention to Friedman’s point that printing money and imposing price controls caused shortages.  Why is that?   If you don’t know, it is my hope that if you’re reading these short posts for awhile, in time, such will be second nature.

H/T The Nullspace

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Filed under Business, Economic Science, Economics, Government, Human Nature, Milton Friedman, Pay, Politics, Work

Trade-Offs

As the old saying goes, you can’t have your cake and eat it too.  The very nature of economics, or, the allocation of scarce resources, is one of trade-offs.  One can’t have their $10,000 savings account, and also have that car they want on Craig’s list. He must consider the trade-off and decide. Such is economics.

Everyone understands this in a general sense, but, apparently the reality of it often doesn’t penetrate to more abstract considerations of this truth. Take environmentalism for example.  It is an abstract idea to demand “clean” energy.  But then there is sticker shock when the demand is met. (this would explain why “clean” energy is usually a wealthy man’s focus. He can afford the trade-off with no disruption to his living standard) The question should be considered by the one demanding it “what are the trade-offs?”.  The bottom line is you can’t have your current standard of living and clean energy too.

There are a lot of other abstract ways that trade-offs come into play.  Take for another example bankruptcy laws.  When one files for bankruptcy the resources they will not be repaying don’t just disappear.  In this day and age it is assumed that it is the rich and powerful who end up loosing.  This simply is not true.  Everyone loses… including you.  It’s just that the increments are so small you don’t feel them, except over time.  Here is a great illustration of this.  Politicians and their media arms can showcase one side of the trade-offs, the winners, while ignoring the trade-offs that occurred.  These are the economic slight-of-hands that this blog hopes to clarify.

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Filed under Economics, Government, Harsh Reality, Politics, Worldview

More On Island Economics From Neil Simpson

I have a rule here at this blog that I’m going to break. It is that my posts must be around 300 words. actually I’m not breaking my rule because this is not MY post but Neil Simpson’s at Eternity Matters. Any way, enjoy:

For 12 years, I taught Junior Achievement classes to nearly every grade from K-12, but the Junior High classes were my favorites (I was as surprised as you are). They weren’t too cool to take part and had a lot of energy. They were quick to pick up business concepts such as supply and demand and even the elasticity of supply and demand (e.g., insulin has inelastic demand because no matter how low the price goes non-diabetics won’t buy it, but iPods have elastic demand because the lower the price the more people will buy). Even the non-egghead kids understood the concepts and actively participated in the lessons.

One of my favorite exercises was the Isle of Deserta. The kids pretended that they had won a trip to an exotic vacation paradise and would describe what they would pack. Once they got there they discovered that the island was deserted and they had to figure out how to survive (the exercise predated the Survivor TV show but had a similar concept).

They always created a consistently logical and workable society, but with the proper controls to ensure that it was sustainable. They realized that it was better to split up jobs to those most qualified and interested, such as some doing the fishing / gathering and others doing cooking and cleaning, as opposed to having everyone fend for themselves.

When asked what they would do for those who could work but refused to, the immediate reaction was something like “Make them shark bait!” But what about an injured person who couldn’t help? ”We’ll take care of them and give them food anyway.” What if the person gets better but doesn’t want to work? “Shark bait!”

They intuitively knew that a society should care for the weak and needy, but that it couldn’t survive if able-bodied people shared in the benefits but not the workload.

Even the Bible notes that, although the false teachers pretend this verse isn’t there or isn’t from God:

2 Thessalonians 3:10 For even when we were with you, we would give you this command: If anyone is not willing to work, let him not eat.

One of my favorite moments was when a girl went against her peers and insisted that everyone should get the same food and benefits regardless of how hard he or she worked. She was most adamant about this point, so I let her share her minority view.

But at the end of the lesson when I went to pass out some candy for their overall good behavior (Jolly Ranchers, the official candy of Junior Achievement), she pleaded for extras because she had participated more than the others. At first I thought she was kidding, but she didn’t catch the irony of her request. I didn’t want to embarrass her, but it was a teachable moment to point out that she was now proposing a system that was the opposite of her previous submission. I hope the lesson wasn’t lost on her, and that I cured her of her liberal inconsistencies!

The 7th graders intuitively understood the basics of human nature, especially when the situations were stripped of politics and sound bites. It is noble and right to help the truly weak, such as widows, orphans and the disabled, but a system without controls and accountability is doomed to fail. And a system full of entitlements, political payoffs and incentives not to do your best is doomed to fail more quickly.

I say with all seriousness that our country would be much better off if everyone, including every elected official, had to take Junior High level Junior Achievement classes.

Make sure to visit Neil's blog for links included in this post, and for great posts otherwise.

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