Wednesday, March 25, 2015

Free Enterprise Maximizes Happiness

 "...every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Adam Smith (1723 - 1790)
from An Inquiry Into the Natures and Causes of the Wealth of Nations

Adam Smith introduced the concept of "the Invisible Hand" into his economic thinking because he was a religious man.  This application of the invisible hand to economics, indeed, in his thinking, into many aspects of human life, was consistent with his understanding of how God oversees the universe.  In his thinking God, a benevolent, loving God, directs the universe in such a way as to maximize happiness for His children.

This must also be how the Invisible Hand of economies interacts with society.  Each individual is striving to improve his condition, to gain in life, and to make more happiness for himself and his family.  And while each must be doing this individually, he finds himself needing to exchange with others.  In the myriads and millions of such exchanges, one to another and to another again, each is offering as much value as possible and hoping for similar value in return.

This is how the standard of living of societies improves and advances.

Smith's thinking has caught on, with his Invisible Hand used as explanations for many things.  People interact!  And so often with one not knowing what another might be doing.  But if each has the freedom, the free enterprise,  to act in his own, individual best interests, what would come of society in general?  Of course - things would get better.  Happiness would be better maximized.

Each individual in the economic society is thus able to operate independently and intertwined.   In Smith's words, each advances "by his own gain."  And THIS is the invisible hand at work.  While each is operating in his own self interest, each, at the same time, and perhaps not intentionally, is operating to benefit the whole.

Utter decentralization reigns!  Contracts are implied in trade and individual interaction.  Goods and services are offered, bought and sold, and each seeks his own.  The self interest of "the butcher, the brewer, or the baker" brings the best it can for sale and exchange.  And expectations arise not because of their "benevolence" ... and profit happens because the entrepreneur acts in regard "not to their humanity but to their self love."  Self interest reigns on both sides - in the seeking and in the offering.

The buyer is seeking, and expecting, the cheapest price and the entrepreneur is seeking, and expecting, the most profit possible.  This was treated in a post just a while ago entitled Free Enterprise Always Goes To Market.

Is Adam Smith's Invisible Hand simplistic?  No.  It is attractive because of its simplicity!

This is the thing that advocates so strongly FOR free enterprise economics!

What can disrupt it?  What Milton Friedman called the "invisible hand and foot."  He said, "when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot tramples on people's hopes and destroys their dreams." (emphases mine)

This is the thing that advocates so strongly AGAINST statism!

Free Enterprise Maximizes Happiness.





Wednesday, March 18, 2015

Free Enterprise Requires That Everyone Plays

"The Crafts which require the most Time in training or most Ingenuity and Industry must necessarily be the best paid."

Richard Cantillon (1680-1734)

This is a wonderful quote.  It answers many questions.

Sometimes called the "Father of Economics," though that might be disputed by followers of other such "fathers," this is a most useful and applicable quote.

What questions does it answer?  Many!

It answers the question of "what might I do with my future?"  How?

Because it answers the question of, when one's traits and interests and skills are discovered, how one might consider what they do with their life.  How?

Because it answers the question of what one might do with one's education!  How?

The goal of education is to learn to think for oneself.  In school we are taught different subjects; have to read things in those different subjects we might not otherwise read; have to do problem solving in different subjects that we may not enjoy or understand; find via this diverse experience what we would enjoy studying more about.  The purpose of all that is to encourage us to think in different ways, and use our brains in different ways.  And think for ourselves.

Hopefully, through the experience of early education, we become a MORE WELL-ROUNDED INDIVIDUAL.

And, hopefully, as we study a subject, whatever the subject, we learn to think as an expert in that subject might think!  When an astronomer sees something through the Hubble telescope that no one has seen before, he/she can't run to a former teacher to ask what it is.  That teacher wouldn't know!  So, what to do?  That astronomer must think like an astronomer would think!  The astronomer must apply learning in astronomy to the problem/interest at hand, create analyses in experimental ways, and develop hypotheses or theories as regards that new thing.  And, AND, any conclusions reached might change next year anyway with a new discovery!   Which requires more "Ingenuity and Industry" by those in the field to further more learning and provide more understanding.  And the beat goes on!

From that early education, if we follow the Cantillon quote, one might seek further education to acquire more "time in training or most Ingenuity and Industry" as regards what one likes to study the most.  We go to college, select a major, hopefully study and learn diligently so we can apply understanding to principles, and become one that thinks like an expert in that field, maybe even seeking further and further education.  To quote a phrase, piling it higher and deeper later on.  We might not even go to college, choosing instead to develop the skill or service we want to provide.

However, in the end, we would be gainfully employed, or employ ourselves, in our chosen field of endeavor, or service offered to others.

How well are we paid?  We are paid based upon how hard it is to replace us!  We might find a niche that no one has found before.  We might develop a good or service that no one has developed before.  We might become better at our craft than anyone has become before.  And as such we become more and more indispensable.  

AND WE GARNER A BETTER INCOME.

Where does it begin?  In early education.  With stimulus and curiosity.  With support from parents and teachers and friends.  With personal leadership and self awareness that what we are trying to do is important to ourselves and society.  

And we are expected to do this when we are children!

Eventually we begin our individual quest.  Eventually we become a part of the mix.  Eventually we become players.  Or not.  We might choose not to do any of that and be dependent on others.

Free Enterprise Requires That Everyone Plays






Wednesday, March 11, 2015

Free Enterprise Sees The Forest And The Trees

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.'  But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."

Murray Rothbard (1926-1995)

How often do we hear somebody in the news, be it a political leader or news person, who states something so absurd economically as if it is fact, and expects everyone to simply accept it?

These "straw men" are put before us all the time.  "Economists all agree..."  "Soccer moms want..."  "The will of the people is..."  "The ______ community is in agreement..."  "The middle class..."

Any time you hear such talk you can discount it right away as incorrect and irresponsible.  Why?

Because such talk is an economic fallacy and an error - the so-called "fallacy of composition."

That fallacy proposes that if one individual thinks so, all in that individual's group must think so.  It is not only incorrect as a philosophy, but as a way of posturing any argument it is absurd.

Adam Smith, in Part 6 of his book "The Theory of Moral Sentiments," states:  "[The statist] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse [sic] to impress upon it."

Good economics requires an analysis of the system, the entire system.  Economics is indeed a study of systems!  And the components of that system as well.  And free enterprise helps the system to work more efficiently. 

The fallacy of composition is a fallacy because the truth is that individuals will act as individuals!  They will act in their own self interest.  They don't necessarily act because their "group" does so.  And their actions are ENTIRELY UNPREDICTABLE economically because economics has to look at the whole picture.  An economist has to see the forest and the trees, so to speak, and never one in favor of the other.

Free enterprise does NOT favor one or the other.  It can't.

And when the invisible hand is managing the many, many multiples of human behavior in a free market it does so indiscriminately.  The most efficient means and the most efficient end is the goal.

Free enterprise sees the forest and the trees.


Tuesday, March 3, 2015

Free Enterprise Creates Market Value From Market Supply

"A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value."

Jean-Baptiste Say (1767 - 1832)

Can it be possible that a market exists before something is created?

This basic principle has been called "Say's Law of Markets."  And it is essentially that.  Markets are created when a product - a good or a service - hits the scene that everyone wants.

Ten years ago there may have been a demand for the small, pad computers.  But none had been invented.  None had been produced.  The demand may have been hiding out there in some latent fashion, but until such a product was introduced there was no supply to service that latent demand.

People did not know they wanted a pad computer!  But they did.  And with nothing to satisfy that demand there was no market.  The supply of pad computers, first brought to market in 2010, created an immediate demand and an immediate market.  And it created all the substitutes, with more companies coming to market with their own versions of the pad computer.  And then the subsequent generations of pad computers came forth with more of this and better of that.

As with all products this one will be superseded.  Remember the big TV-like computers, called "mini-computers," which sat heavily on the desk?  And how they got smaller in time?  And were replaced by a "tower" which sat under the desk, connected to a smaller and thinner screen?  Are they still around?  Yes.  Are they as popular as they were say twenty years ago?  No. But they are cheaper and still available.  And as far as computers go they do it all.

Think of all the computer products that had no market 20 years ago that have happened since!  For instance, I can carry of library of tens of thousands of books in my pocket, and everywhere I go.  I can break it out any time and access any one of those books and begin reading.  It even remembers the last page read for me when I "open" the book.  Some books are "free!"  I can tell you, while I very much enjoy that today, I had no idea 20 years ago that I would like such a thing in my pocket.  Or at my reading chair.  Or in my glove compartment.  I even have a cool leather cover to keep it safe while I carry it around!  Like Say says above, the pocket library created a market for other complementary products - cases and such.

This is the very essence of free market economics.  Boiling off all the water in an economic pot, what is left is the fact that until a good or service that everyone wants is brought to everyone's attention and a demand for it is created, no market exists.  If a given good or service comes to market and becomes popular its supply, and continued supply, spurs market demand enough to encourage more and more popularity via more and more production.

Can there be a glut?  For a short while.  Over time nothing goes to waste as the price will lower and lower until eventually it is all gone.  My little pocket library may one day be given out as a "free gift" by a certain store when people shop on a certain day.  It will be a marketing gimmick, and then forgotten, and finally become the equivalent of a spinning wheel displayed in a museum.  Say's Law says there is no glut forever.  All production will eventually be acquired.

And the best way to acquire that good or service to market is with guidance by an invisible hand that directs the most efficient use of resources toward that end.  Free enterprise makes those resources more used and more valuable.

Free enterprise creates market value from market supply.


Tuesday, February 24, 2015

Free Enterprise Always Goes To Market

Rope For Sale
Otavalo, Ecuador, 1975

This photo looks cheap and unprofessional because I took it with my little Instamatic camera when I was a missionary in South America in the 1970s.

The photo is what you think it is.

The couple of people sitting in the center of the photo is selling wares at market.

They are selling rope.  Of course, they made the rope.  They have been making and selling rope for years.  Rope is their business.

Instead of paying for a booth in the town marketplace, at the weekly market, they have set up shop in a gutter on a busy, popular road leading into town.

They have different styles of rope, with different thicknesses and strengths, made from an abundant, and free, local product - hemp.  The ropes are strong and long lasting.  I noticed this couple every week.  They are at market.  This is their marketplace, and their office.  They are practitioners of free enterprise.  Their lunch is in the small basket and they will be open for business all day.  What they don't sell will be packed up at the end of the day and returned to inventory.

If any company wants to go to market with any product - good or service - and someone looked up in any basic marketing book how to do it, they would see something like the following:
  • What product - good or service - will I sell?
  • What is my target market?
  • What price should I charge?
  • What should I do to advertise my product - good or service?
  • Where should I sell my product - good or service?
Every book's information would be basically the same in asking and answering those questions above.   If any company wants to market a good or service it HAS to ask and answer those questions!

The couple sitting in the gutter above has ASKED AND ANSWERED those questions.  They can make rope.  They are set up where they will get good foot traffic.  They are advertising their product two ways - it is laid out in the street and they have a reputation (they have been doing this for years).  What is their price?  You can see they are discussing that with their prospects.  The price will vary depending on many things.

What price will be settled on?  The LOWEST price the buyer can obtain and the HIGHEST price the seller can get.  That is the essence of free market economics. That is the essence of business.

Free enterprise antagonists would call it greed.
Free enterprise protagonists would call it self interest.

That is the way it is.  Whatever you call it, that is how economics works. 

Do you see any implied force in this photo?  Any gubment intervention?  Anyone breaking the law?

The sellers are trying to provide themselves a living and the buyers are trying to satisfy a need with discretionary money.  Each is left to decide if they want to proceed with the transaction.  Whatever you call it, greed or self interest, this is what makes economics go round.

This very process works in a micro-economic fashion for small and large businesses and it works in a macro-economic fashion for countries.  Each of the questions ASKED and ANSWERED above must be considered.  If not, economics does not go round!

How well a company or country does in the marketplace depends on how well they answer the questions!

Free Enterprise Always Goes To Market


Tuesday, February 17, 2015

Free Enterprise Makes Natural Resources More Abundantly Available

"Because we can expect future generations to be richer than we are, no matter what we do about resources, asking us to refrain from using resources now so that future generations can have them later is like asking the poor to make gifts to the rich."

Julian Simon (1932 - 1998)

All this talk about using up our natural resources.

We hear it and hear it and hear it.

Who says we will run out of natural resources?  People who don't understand economics. Economics says that no natural resource will ever go to zero.  We will NEVER use up any natural resource to the point that there is no more of it.

What, then, is economics?  Economics is a social science that tries to understand all of the various processes that govern the production, govern the distribution, and govern the consumption of all the goods and services in a given economy.

Key word:  govern.  The key word everyone forgets is govern!  There are true laws in the social science of economics!  For example:

  • There is the law of supply and demand.  If supply does this, demand will do that.  They reach an equilibrium point.  If someone tries to force a change in the supply or demand of a given good or service, they will each respond, and perhaps in ways not anticipated.  It's a law.  You can count on it.
  • There is the law of diminishing marginal utility.  Sounds like a fancy, schmancy term, but it isn't.  Marginal utility is the gain from an increase or the loss of a decrease of something.  The marginal utility of something, its usefulness, can diminish if there is too much of that something.  If I have a small garden that needs water, there is great usefulness to a first bucket of water.  Maybe a second or a third bucket is just as useful, but the one millionth bucket certainly has no use whatever, and is detrimental.  It's a law.  You can count on it.
  • There is the law of rent.  The economist David Ricardo demonstrated that rent is among the most firmly established laws of economics.  Rent, essentially, is the economic advantage, or disadvantage, of using a given thing productively.  That thing might be land, labor, or even capital.  Using a given factor of production, let's say a farmer's capital, like a wagon, to haul his hay from the field to the barn may not produce much capital gain for the farmer.  But on days not needed for hauling hay, if the wagon was dressed up and put at the side of a busy road, and used to sell produce to passersby, the wagon's value increases, and returns that value to the farmer.  Ricardo said that is rent.  It's a law.  You can count on it.
See the very first post on this blog, written in August of 2011 entitled:  Free Enterprise At Work.
So what is this idea that a given natural resource would never be used up?  Is Julian Simon crazy?

No, far from it.  Nature utilizes this principle itself!  What if a natural disaster like a forest fire caused by lightning or a volcano like Mount St. Helen blows up and destroys the natural forest nearby.  What happens?  Nature rebuilds itself.  It takes time.  But it rebuilds.  (The same thing would happen to a jungle where all the trees are cut down by a lumber company.  It will rebuilt itself.  It takes time.  But it rebuilds.)

What happens if an oil company uses up all the oil it can get to in a given drilled hole?  The hole might be abandoned.  But what happens over time?  Over time many things can happen.  Free enterprise  will create new technologies to come forth that help the oil company get more oil out of the same hole.  (Happening now.)  Or free enterprise  will find new ways to go get any oil that may be in a given area.  (Happening now.)  Or free enterprise  will design new techniques to get oil from the area that could not previously been derived, like from inside the surrounding rock.  (Happening now.)  Or free enterprise  finds cheaper and cheaper ways to create oil synthetically from other materials.  (Happening now.)

Or, theoretically, all of the oil in the world becomes so scarce and becomes so expensive that substitutes are developed that are cheaper and the expensive oil that remains is never used up.  Free enterprise  will always find those substitutes!  That is, if people and markets are free.

The Dr. Simon comment above is simple.  It is a free enterprise  comment!  Where free enterprise  exists markets have grown, those societies have gotten richer, and the people living there have enjoyed higher and higher standards of living.  Where free enterprise  does not exist none of that is encouraged.

Look around.

Free enterprise makes natural resources
 more abundantly available 
and future generations richer.



Tuesday, February 3, 2015

Free Enterprise Doesn't Kill The Goose

The Goose That Laid The Golden Egg

"A man and his wife owned a very special goose.  Every day the goose would lay a golden egg, which made the couple very rich.

'Just think,' said the man's wife, 'If we could have all the golden eggs that are inside the goose, we could be richer much faster.'

'You're right,'said her husband, 'We wouldn't have to wait for the good to lay her egg every day.'

So, the couple killed the goose and cut her open, only to find that she was just like every other goose.  She had no golden eggs inside of her at all, and they had no more golden eggs."

An Aesop fable (620BC - 564BC)

Telling such simple stories as these Aesop was able to lend his wisdom to the ages.  Why do these stories last?  Because they are so full of wisdom that can be applied in every age, and understood by people in many different cultures, that they are passed along and passed along.

Certainly this wisdom can be applied in a free enterprise way!  Free enterprise could certainly be said to be the goose that supplies the golden eggs.  Can a society becoming less and less free-enterprise oriented kill the goose?  Can this magical goose we all benefit from be killed?

Our current entitlement society, and gubments, local, state and federal, want more eggs than are being laid by economic activity.  They spend more and more eggs before they are laid.  As eggs are removed from the system and used for things that do not produce more eggs, freedom is restricted, standards of living are reduced, and less and less is available for personal wants and desires.  The spiral is down.

Two recent events combined to lead me to fear we are killing the goose more quickly than we might think, and leaving devastation in our wake for those who follow us.

The first event:  our mail often goes to other households and the mail for other households often comes to us.  This is nothing new, and probably the same for everyone.  In our neighbor's mail coming to our house one day was a DVD entitled something like, "How To Get Free Money."  Of course, the basic economic fallacy there is that something is free.  There is no free lunch.  Money has, that is HAS, to come from someone else if we are to get it.  If someone thinks there are ways to get "free" money, they must realize that first it was taken from someone else.  This sort of behavior, and agency after agency after agency that exist to "teach" people how to acquire other people's money, are killing the goose.

The second event:  the other day I was driving to a home inspection.  All during the days before we were warned about the substantial snowfall that would bury our area.  We were doomed.  As a result of this forecast (key word:  forecast) all of the local gubment agencies and schools closed.  State and federal agencies sent out similar warnings, giving people the option of whether they could go to work or not.  All of this was in advance.  We ended up getting 1" of snow.  The county I live in has dozens of gubment agencies, and dozens of schools.  How many thousands of people are employed by these entities?  Driving by the empty parking lots of two county gubment offices and many schools I realized that these people all were enjoying a paid day off.  My neighbors who work for state and federal agencies also stayed home, enjoying a paid day off.  Those paid days off are laid and harvested golden eggs, all gone to waste.

IN ADDITION, TWICE A SNOW TRUCK WENT UP MY STREET "PLOWING" THE SNOW THAT HAD ALREADY DISAPPEARED FROM THE STREET, AND SPREADING SALT.  NOW REALLY, THAT WAS ENTIRELY UNNECESSARY.  BUT STILL, I PAID FOR IT.  I CONTRIBUTED TO THAT WASTE OF A GOLDEN EGG.

Where did those eggs come from?  On the highway I noticed plumbing trucks, electrician trucks, HVAC technician trucks, etc., you name it, private trucks.  All from private enterprises.  They were all engaging in free enterprise.  They don't have paid days off!  But they provide paid days off for others.

Each day that this happens we are doing more and more to kill the goose.  A larger and larger percentage of our society is not contributing to activity that creates the golden eggs.  A larger and larger percentage of our society thinks it can get "free" money and is taking and consuming those golden eggs.

Are we killing the goose?  None of that is free enterprise activity.  It is the opposite.  The opposite will kill the goose, albeit little by little, but it will eventually kill the goose.  Statism will kill the goose.  And the statist takers, and their taker constituencies, will run out of other people's money.  And then the takers will blame the givers.

Free Enterprise Doesn't Kill The Goose