We somehow inherently know that we are better off when the farmer uses tractors rather than people to plow his 150 acres. We know this in spite of the fact that one tractor replaces hundreds of employees. Somehow we know that what was introduced by the tractor is efficiency which allows for the higher standards of living we now enjoy in modern society.
If our thinking is static or narrow we may not see beyond the unemployed farm workers. But if our thinking is dynamic we realize that the tractor didn’t just pop out of thin air, nor did the steel from which it was made, nor the gas in it’s tank, and so on. All of these required people, indeed employees.
So come on. You can actually enjoy that .25¢ banana, that somehow found its way from somewhere in Central America to your air-conditioned grocer, and that you lugged home in the comfort to your air-conditioned car, and are now eating in your air-conditioned house as you gaze at your 92 inch plasma, without worrying too much about unemployed wagon wheel makers.
I enjoy articles on economics. The first thing I attempt to determine however is the writer’s starting point.
If a writer starts from the premise that “government planners” can successfully control the allocation of scarce resources better than free markets, then I know that the author isn’t living in reality. He instead lives in a daycare world. His “finish”, no matter how sophisticated his thinking, can be summed up as all us children nicely sharing our little resources like Tonka Toys. Of course those who write from this perspective see themselves as the grownup women watching over us selfish children and our resources with a keen eye on who gets to play with what.
Many “economists” still live in such a world. Because resources like, say, food, simply appeared on their tables at dinner time, and cars appeared in their driveways at 16, and a full government or daddy-funded education just appeared, seemingly from nothing, experience has conditioned them to feel that resources simply appear from nothing and the driving question then is not how to create more but rather how can what already exist be fairly distributed. That homes, medical care, education, or food are not a right that can be guaranteed by one man to another is utterly unfathomable to those who start with such thinking. Such starting points determine the finish; though like all Utopian dreams, that finish must ever be in the future requiring patience from those who suffer interminably from the inevitable hardships that come with them.
On the other hand, writers whose starting point is the realization that resources are the result of risk, work, and production, not to mention human factors such as self-interest and motivation, are much more trustworthy. Good thinking must necessarily be aligned with reality.
As for me, I’m much more confident in the economics of one whose thinking was forged in making payroll and successfully competing for business in a hostile world while simultaneously thwarting greedy lawyers, and power-hungry politicians and their bureaucrat dogs. I’m much more inclined to think this person’s economics more insightful than those of tenured theorizers whose circumstances insulate them from the consequences of their stupid “ideas”.
Why can’t government use its power to force equality?
What are some real problems with Marxism’s idealistic theories?
Does Capitalism really exploit the weak?
This video is a great short lesson in answering these questions:
Bob And His Apples
Suppose you’re a farmer. Come spring you plant your crop and then wait for nature to take its course. As you wait, you eye the horizon for clouds, realizing that you are at the mercy of the elements. Anything could happen, and that anything could cost you your crop.
Then someone knocks on your door. It’s a man in an expensive suit wanting to buy a portion of your crops while the seeds are still in the ground. But there’s one catch to his offer; he’s offering you a price below market.
You understand the benefit in his offer because you know that your crop could fail. His offer looks and feels much like insurance to you, the price of which is the sharing of profits and risks. You both understand this.
At stake in such a transaction, just as in our discussion of debt, is the future, and future production.
If you do decide to sell then a contract is drawn up and signed. That contract now becomes part of the “futures” market, and since it derives its value from a portion of your future production, it is called a “derivative“. This derivative can now be bought and sold by the owner of the contract.
This derivative’s value will probably vary. If a dry season threatens your crop its value may go down. If crops elsewhere in the world fail it may go up. It could very well be bought and sold several times with profits or losses for its owner while your crop sits in the field.
These kinds of contracts do not apply to crops only however. They could apply to all sorts of other contracts that derive their value from future production. Even portions of your own future might be winding their way around these markets. If you have signed a contract to repay a loan for example, as with a mortgage, you can almost bet on it.