Division of Labor

Posted by PITHOCRATES - November 4th, 2013

Economics 101

(Originally published October 24th, 2011)

The Division of Labor gives us our Houses, Food, Cars, Televisions, Smartphones, Laptops and the Internet

We can’t do everything ourselves.  It’s not efficient.  And most times not even possible.  We don’t build our own houses.  Grow our own food.  Build our own cars.  Manufacture our own high-definition televisions.  Smartphones.  Laptops.  And we don’t build our own Internet.  No.  Instead, people everywhere across the economy specialize in one thing (i.e., work for a living).  And together these specialists fit into the big economic picture.  Which gives us our houses, food, cars, televisions, smartphones, laptops and the Internet.

It started with the most basic division of labor.  Prehistoric women raised their young.  While prehistoric man hunted.  Which was necessary for the propagation of the species.  And us.  For if they all hunted and no one nursed the young the young would have died.  And with them the species of man.  For there was no formula back then.

The next great leap forward on the civilization timeline was the indispensible plough.  The prime mover of civilization.  With the food problem managed, famines were more the exception than the rule.  And with fewer people needed to produce a food surplus, people could do other things.  And they did.

The Division of Labor let us Create Surpluses in Food, Ploughs, Shoes, Tools, Harnesses, Etc.

The division of labor gave rise to artisans.  The first skilled trades.  Made possible by a food surplus.  As other people grew the food the artisans made the tools and crafts the farmers used.  They specialized in plough making and designed and built better and better ploughs.  Lots of them.  Shoemakers made shoes.  Lots of them.  Metal workers made tools.  Lots of them.  Leatherworkers made harnesses.  Lots of them.  See the pattern?

The food surplus gave us surpluses in ploughs, shoes, tools, harnesses, etc.  The division of labor let us create these surpluses.  Specialists made continual improvements in their areas of specialization.  Producing better things.  And more of them.  Which led to another key to the advanced civilization.  Trade.

The shoemaker didn’t have to grow food.  He could trade shoes for food.  Ditto for the plough maker.  The metal worker.  The leatherworker.  And the farmers didn’t have to make any of these things because they could trade food for them.  So we became traders.  We created the market.  And traders took their goods and/or services to these markets to trade for other goods and/or services.  First by foot.  Then by animal.  Then by boat.  Then by train.  Then by truck.  Then by airplane.  Artisans (i.e., workers) traded their specialization for the product and/or services of another’s specialization.  Then.  And now.

The Division of Labor made the Complex Simple and our Lives Rather Comfortable and Fun

The division of labor gave rise to the artisan.  The skilled trade worker.  The middle class.  People who can specialize in one thing.  And trade that one thing for the other things he or she wants.  Whether it be a skilled blacksmith hammering out farming tools.  A tool and die maker working in a factory.  An accountant.  Or a software engineer.  We have a skill.  Our human capital.  And we trade that skill to get the other things we’re not skilled in.  The end result is a modern, bustling, free market economy.  An advanced civilization.  And a high standard of living.

All thanks to the division of labor.  Which made the complex simple.  And our lives rather comfortable.  And fun.  Unlike prehistoric man.  Who knew of no such things as iPhones.  Indoor flush toilets.  Movie theaters.  Or restaurants.  No, he didn’t do much other than survive.  Which was no easy thing.  But he did.  And for that we are grateful.

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2012 Endorsements: Benjamin Franklin

Posted by PITHOCRATES - October 15th, 2012

2012 Election

Franklin understood Wealth was not Money but the Talent and Ability of the Entrepreneurs and Artisans

Benjamin Franklin was born into the middle class.  A proud member of what he called the middling people.  Entrepreneurs.  And the very definition of what it meant to be American.  Hard-working people.  Who built success based on diligence, frugality and honesty.  People who strived to live a virtuous life.  Even if they sometimes faltered.  Franklin believed doing good works led to salvation.  He believed in God and was tolerant of all religions.  Especially if they were charitable and helped others, making the world a better place.  So when he could he gave back to his community.  And to his country.  He would die a famous rich man.  But he always thought of himself as that middle class printer.  Who worked hard.  And tried to be virtuous.  Sometimes he failed.  But he did a lot of good along the way.

When he arrived in Philadelphia he had only one Dutch dollar.  He secured employment with a printer where he worked with industry and frugality.  From his first days as an apprentice.  To when he was a small business owner.  Later, on a return trip from London, he came up with four resolutions to live a better life.  1.) It is necessary for me to be extremely frugal for some time, till I have paid what I owe.  2.) To endeavor to speak the truth in every instance; to give nobody expectations that are not likely to be answered, but aim at sincerity in every word and action—the most amiable excellence in a rational being.  3.) To apply myself industriously to whatever business I take in hand, and not divert my mind from my business by any foolish project of suddenly growing rich; for industry and patience are the surest means of plenty.  4.) I resolve to speak ill of no man whatever.

When Franklin opened his own business with a partner he put in long hours.  He worked late into the evening (even working overnight when the work required it).  And started work before most others started their workday.  Being a businessman he understood money.  And the cost of borrowing.  He favored the expansion of the money supply to lower interest rates to lower the cost of borrowing for business.  However, he also understood wealth was not money.  But the talent and ability of the entrepreneurs and artisans.  Those middling people who worked with industry and frugality who offered goods and services for sale.  Purchased largely by other middling people.  The basic barter system improved by money.

Franklin believed in Limited Government and worried about too much Social Engineering

When Franklin became a newspaper publisher (i.e., writer/printer/marketer of a newspaper) he refused to become partisan.  In part because he didn’t want to limit his income.  But also for another reason.  He believed in free expression.  And said, “Printers are educated in the belief that when men differ in opinion, both sides ought equally to have the advantage of being heard by the public; and that when Truth and Error have fair play, the former is always an overmatch for the latter.”  Words framed and hung in many a newsroom since.  But he wouldn’t print everything.  He refrained from printing things that were scurrilous.  Immoral.  Or might hurt someone personally.

Franklin believed in rugged individualism.  He worked hard to acquire wealth.  And after he did he helped his community.  He helped organize volunteer fire companies.  Suggested a progressive tax on property to pay for a full-time police force.  Improved the post office.  Organized the Pennsylvania Militia during King George’s War against the French and their Indian allies in America.  (The local militia company elected Franklin to command it but he declined, saying he was unqualified and, instead, served as a common soldier.)  He retired from his printing and media empire at 42.  Set for life financially.  Then he became a scientist.  An inventor.  Then statesman.  With always an eye to detail.  And favored being practical over being rigidly dogmatic.

Franklin believed in limited government.  And had a problem with authority.  But he also believed in order.  And a place for government.  He believed in public-private partnerships and created the matching grant (matching a sum raised privately with an equal sum from the government).  He believed in charity.  Offering a helping hand.  And he was a civil activist.  Always tried to improve his community.  However, he worried about too much social engineering.  And unintended consequences.  Even worried that by helping the poor too much government could make them dependent.  And lazy.  For he built his wealth after arriving in Philadelphia with one Dutch dollar in his pocket.  It was hard work that made his success.  Not charity or dependence.

If Benjamin Franklin were here Today he would likely Endorse the Republicans in the 2012 Election

Franklin would go on to be one of the strongest supporters of Independence from Britain.  He helped edit the Declaration of Independence.  Sat in the Constitutional Convention.  And signed both documents.  As well as the Franco-American treaties bringing the French into the American Revolution.  And the Treaty of Paris officially ending the American Revolution.  He was a Founding Father.  Perhaps as indispensable as George Washington.   So if Franklin were here today what would he think about the country he helped create?  And who would he endorse in the 2012 election?

First of all he would be appalled at the size of the federal government.  Which would be unrecognizable to him from the limited government he helped create.  He would find the taxes and regulations on business suffocating to the entrepreneurial spirit.  Dissuading who knows how many from working those long hours.  Like he did.  He spent his time doing what he loved.  Printing, publishing, writing, etc.  Not hiring lawyers and accountants to help him pay his taxes and comply with regulations.  He would like the cheap credit available to business but he would have been shocked by the level of government spending and the level of the federal debt.  For the federal government is anything but frugal.  And the size of the welfare state, the amount of people receiving federal benefits, would have confirmed his fears about too much social engineering.  The blatant bias in the media would have disturbed his nonpartisan senses greatly.  Finally, being someone who rose from the middle class and built his own wealth he would have been greatly offended by the class warfare in politics today.

So who would Franklin endorse in the 2012 election?  Well, the Democrats want to make government bigger.  They want to increase taxes and regulations.  With Obamacare being a big one that will discourage many small businesses from growing.  The current Democrat administration has been the least frugal of all administrations.  Their spending having even caused a credit downgrade.  Their stimulus bill did not benefit the middling people.  Instead, most of that money went to rich Democrat donors.  They want to increase an already immense welfare state.  Which under the current administration has set a record for the number of people on food stamps.  Other than one cable channel (FOX News) and talk radio most media has a liberal bias.  Where truth and error do NOT have fair play.  And it’s the Democrats that push class warfare.  Who want to transfer even more of the tax burden to the wealthy.  Even though the top 10% of earners are already paying about 70% of the taxes.  While the Republicans want to cut taxes and regulations.  Cut spending.  Shrink the size of government.  And provide a business-friendly environment.  So others may start a business and rise up from the middle class.  Who can then give back to their community.  Like Franklin did.  So it is likely that if Franklin were here today he would endorse the party that was closer to his political and business philosophies.  The Republicans.  And the Romney-Ryan ticket.

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Farming, Food Surplus, Artisans, Trade, Barter, Search Costs, Money, Precious Metals, Pound, Dollar and Gold Standard

Posted by PITHOCRATES - October 9th, 2012

History 101

Food Surpluses allowed Everything that followed in the Modern Age

Humans were hunters and gatherers first.  When the environment ruled supreme.  Then something happened.  Humans began to think more.  And started to push back against their environment.  First with tools.  Then with fire.  Bringing people closer together.  Eventually settling down in civilizations.  When the human race embarked on a new path.  A path that would eventually usher in the modern age we enjoy today.  We stopped hunting and gathering.  And began farming.

Throughout history life has been precarious.  Due to the uncertainty of the food supply.  Especially when the environment ruled our lives.  That changed with farming.  When we started taking control of our environment.  We domesticated animals.  And learned how to grow food.  Which lead to perhaps the most important human advancement.  The one thing that allowed everything that followed in the modern age.   Food surpluses.  Which made life less precarious.  And a whole lot more enjoyable.

Producing more food than we needed allowed us to store food to get us through long winters and seasons with poor harvests.  But more importantly it freed people.  Not everyone had to farm.  Some could do other things.  Think about other things.  And build other things.  Artisans arose.  They built things to make our lives easier.  More enjoyable.  And when these talented artisans and farmers met other talented artisans and farmers they traded the products of all their labors.  In markets.  That became cities.  Enriching each other’s lives.  By allowing them to trade for food.  For things that made life easier.  And for things that made life more enjoyable.

We settled on using Precious Metals (Gold and Silver) for Money for they were Everything Money Should Be

As civilizations advanced artisans made a wider variety of things.  Putting a lot of goods into the market place.  Unfortunately, it made trading more difficult.  Because while you saw what you wanted the person who had it may not want what you had to offer in trade.  So what do you do?  You look for someone else that has that same thing.  And will trade for what you have.  And when the second person doesn’t want to trade for what you have you look for a third person.  Then a fourth.  Then a fifth.  Until you find someone who wants to trade for what you have.

This is the barter system.  Trading goods for goods.  And as you can see it has high search costs to find someone to trade with.  Time that people could better spend making more things to trade.  What they needed was a temporary storage of value.  Something people could trade their things for.  And those people could then use that temporary storage they received in trade to later trade for something they wanted.   We call this ‘something’ money.

We have used many things for money.  Some things better than others.  In time we learned that the best things to use for money had to have a few characteristics.  It had to be scarce.  A rock didn’t make good money because why would anyone trade for it when you could just pick one up from the ground?  It had to be indestructible and hold its value.  A slab of bacon had value because bacon is delicious.  But if you held on to it too long it could grow rancid, losing all the value it once held.  Or you could eat it.  Which would also remove its value.  It had to be divisible.  A live pig removed the problem of bacon growing rancid.  However, it was hard making change with live pigs.  Which is why we settled on using precious metals (gold and silver) for money.  For they were everything money should be.

The Key to Economic Activity is People with Creative Talent to make Things to Trade

Money came first.  Then government monetary systems.  Traders were using gold and silver long before nations established their own money.  And when they did they based them on weights of these precious metals.  The British pound sterling represented one Saxon pound of silver.  The U.S. dollar came from the Spanish dollar.  Which traces back to 16th century Bohemia.  To the St. Joachim Valley.  Where they minted private silver coins.  The Joachimsthaler.  Where the ‘thaler’ (which translated to valley) in Joachimsthaler became dollar.  The German mark and the French franc came into being as weights of precious metals.  People either traded silver or gold coins.  Or paper notes that represented silver or gold.

We used silver first as the basis for national currencies.  Then with new gold discoveries in the United States, Australia and South Africa gold became the precious metal of choice.  Using precious metals simplified trade by providing sound money.  And it also made foreign exchange easy.  For when the British made their pound represent 1/4 of an ounce of gold and the Americans made their dollar represent 1/20 of an ounce of gold the exchange rate was easy to calculate.  The British pound had 5 times as much gold in it than the U.S. dollar.  So the exchange rate was simply 5 U.S. dollars for every British pound.  Which made international trade easy.  And fair.  Because everything was priced in weights of gold.

The pure gold standard, then, was part of the natural evolution of money.  The state did not create it.  It does not require an act of legislation.  Or political decree.  The pure gold standard existed before the state.  And states based their currencies on the monetary system that already existed.  Using weights of precious metals as money.  That is, a pure gold standard.  Central banks and fiat money are only recent inventions of the state.  And bad ones at that.  For the thousands of years that preceded the last hundred years or so there were only traders mutually agreeing to trade their goods for precious metals.  Using these precious metals as a temporary storage of wealth.  To temporarily hold the value of the things they made.  So the key to economic activity is people with creative talent to make things to trade.  And a sound money like gold and silver to facilitate that trade.  Not a central bank.  Or monetary policy.

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Rent-Seeking

Posted by PITHOCRATES - June 11th, 2012

Economics 101

Wealth Creators Freely met and Made Trades they felt were Mutually Beneficial

The human race started as subsistence hunters and gatherers.  Our ancestors spent all of their time hunting.  And gathering.  If they were successful they propagated our species.  Making it possible for us to be here.  If they weren’t their family tree was a barren one. 

So that was life.  A rather short and brutish life.  Except that part about propagating the species.  And we lived that way for some 2 million years.  Eating.  Fleeing.  Fighting.  And, of course, propagating.  As we grew more intelligent we did a lot of things that ushered in the modern world.  But perhaps the single greatest advancement that brought on the modern age was our evolution from hunters and gatherers to farmers.  Everything followed from this.  We learned to live together in cities.  And we increased crop yields so much we created food surpluses.  Which gave us time to do other things.  It allowed the rise of artisans.  A middle class.  That built things and traded them for their food.  These new goods helped produce more food.  And the greater food production allowed more people to do other things.  Creating a complex economy.  Where people traveled to market with the things they created.  And traded them for the things other people brought to market.  We traded things of value for other things of value.  Because these traders, these wealth creators, each created something of value.

These wealth creators freely met and made trades they felt were mutually beneficial.  Each felt they came out a winner after their trade.  For they each received something they valued more than what they traded away to get it.  Which means going to the market was where to go to get valuable things.  Which provided an incentive to make more things so you could take them to market.  And trade for things you valued more.  As everyone did this the overall wealth in the economy increased.  People specialized.  Focused on what they were good at.  To produce as much as possible so they could trade for more.  And because they specialized they improved quality.  And used the available resources as efficiently as possible.

Rent-Seeking People took more Wealth from the Market than they Brought to It

There are many competing schools of economics.  But if you go back to where it all began what you find is laissez faire free market capitalism.  Where the profit incentive drove people to create wealth.  Which they then traded for the things they didn’t make.  Then things started to change.  Some people didn’t want to work hard and innovate.  And bring new things to market.  What they wanted was influence.  Privilege.  And a rigged market.  So they could get more in trade than the value of the things they produced for trade.  One of the first vehicles used for this was the artisan guild.

In medieval Europe if you wanted to be a blacksmith you had to join a guild.  If the guild accepted you a long apprenticeship awaited you.  But the guilds denied more people entry than they allowed.  Why?  To limit competition.  So blacksmiths could keep their prices high.  At any given time a city, town or village had a very limited number of blacksmiths.  The guild worked to keep it that way.  For the last thing these blacksmiths wanted was other blacksmiths opening up shop.  Putting more goods onto the market.  And lowering prices.  No, the guild wanted to fix prices above their market value by keeping would-be blacksmiths out of the trade.

The economic term for this is rent-seeking.  Which is sort of the opposite of profit seeking.  In profit-seeking people create wealth to trade (or to pay) for other wealth.  They work hard to earn more so they can buy more.  Both buyer and seller add wealth to the economy.  Not so in rent-seeking.  In rent-seeking you try to garner more wealth not by working harder but by using the power of government.  By getting tariffs placed on foreign competition.  By getting prices fixed above market prices.  By getting onerous regulations enacted to hurt your competition.  By restricting entrance into the industry thus limiting domestic competition.  Such as the guilds did for those medieval blacksmiths.  This interference into laissez faire free market capitalism reduced economic activity.  Because rent-seeking people took more wealth from the market than they brought to it.

The Government caused the Great Depression by Favoring Rent-Seeking over Free Market Capitalism

Some say a better name for rent-seeking is privilege seeking.  For that is what they are seeking.  Special privilege so they don’t have to compete in the free market.  For the cost of a little lobbying can remove the need for innovation.  Maintaining the level of quality.  Or satisfying customers.  For if you have a government-imposed monopoly you don’t have to do any of those things because the people don’t have anywhere else to go.

Rent-seeking is rife in crony capitalism and state capitalism.  Neither of which is true capitalism.  These companies are granted monopolies (or near monopolies) by the government in exchange for political support.  Which they can afford when they can sell their goods above market prices.  They get rich.  Their cronies in government get rich.  But the consumers suffer.  As they have to pay higher prices. Suffer poorer quality.  And less innovation.  Rent-seeking is common in the older industries.  Particularly ones with strong unions.  Who have negotiated costly wage and benefit packages.  Which they can afford to pay until new innovation and new competition enters the market.  Putting out a higher quality product at a lower price.  Prices so low that an old firm saddled with a costly union wage and benefit package simply can’t sell at and pay their bills.  So they go to government.  And lobby for privilege.

What typically happens is that they delay the inevitable.  All the protected industries in the U.S. have failed.  Textile.  Steel.  Even the automobile (well, two of the Big Three have failed.  Ford hasn’t).  For when you take more wealth from the market than you bring to it you’re just transferring wealth.  You’re not creating it.  Which is a problem.  Because you have to create wealth to increase economic activity.  So when you protect an industry you’re just pulling wealth out of the private economy and transferring it to the rent-seekers.  Who give so little in return.   Which results in a decline of economic activity.  And if it spreads enough it can and has caused recessions.  Even a Great Depression.  Such as when domestic industries lobbied government to enact the Smoot-Hawley Tariff.  Which launched an all-out trade war.  All because the government favored rent-seeking over free market capitalism.

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Comparative Advantage and Free Trade

Posted by PITHOCRATES - May 21st, 2012

Economics 101

Mercantilism benefited only Protected Industries which Profited Handsomely from Higher Consumer Prices  

The Age of Discovery ushered in the era of mercantilism.  An era of trade.  But protected trade.  Tariffs, quotas, protectionism, restrictions, subsidies, etc.  You name it they used it.  To favor their trade position and their domestic industries.  And to restrict that of everyone else.  For mercantilism was a zero-sum game.  You only did well if others did not.  A thought that still has traction today.  Especially in older, inefficient industries.  That cannot compete with international competition that provides better quality at lower prices.  Such as textiles.  Steel.  Automobiles.  The Americans protected these industries in the face of better foreign competition.  Which only hastened their decline.

A protected industry has no incentive to improve.  When protective tariffs raise prices of lower-priced and higher-quality imports consumers buy the inferior domestic goods.  Because the tariffs make the better goods more costly.  So when a business has a captive audience their only focus is in maintaining that protectionism giving them that advantage.  Not improving their quality.  Or improving their productivity to lower their prices.  Why?  Because they don’t have to.  So prices continue to rise to pay for inefficient labor and management.  And quality continues to decline due to the lack of real competition forcing them to continually provide a better product.  By improving designs.  Production methods.  And making capital investments in new machinery and equipment.

This is the cost of protectionism.  Poorer quality and higher prices.  Because of the misguided belief in the zero-sum game of mercantilism.  There was a reason why mercantilism was abandoned for free trade.  Because free trade was better.  For consumers.  Giving them lower prices and higher quality.  Whereas mercantilism benefited only those protected industries which profited handsomely from those higher consumer prices.  And the government officials who granted those favorable protectionist policies.

The Consumer gets Lower Prices AND Higher Quality thanks to the Division of Labor, Specialization and Comparative Advantage

As civilization advanced so did the division of labor.  People began to specialize.  Instead of growing our own food, making our own tools, spinning our own pottery, etc., we did only one thing.  And did it well.  Then we traded the things we made for the things we didn’t make.  This division of labor created a middle class.  And this middle class would take their goods to market to trade with other middle class artisans.  At first bartering with each other.  Trading good for good.  Then they introduced a temporary storage of value into the economy.  Money.  Making those trades easier by reducing search times.  Trading your goods for money.  And your money for goods.  Making life a lot simpler at the market.

Let’s take a closer look at the division of labor.  Let’s consider two artisans.  A toolmaker.   And a potter.  Both are skilled craftspeople.  And can make an assortment of goods.  But each excels at one particular skill.  The toolmaker can make 10 plows a day.  But if he makes 2 pottery bowls he can only make 4 plows in that same day.  The potter can make 12 pottery bowls in a day.  But if he makes 3 plows he can only make 5 pottery bowls in that same day.  Each can make more of their specialty.  But when they try to make other things in addition to their specialty they can’t make as much of their specialty as before.  So there is a cost to the toolmaker to make pottery.  To make 2 bowls cost the toolmaker 6 plows.  And there is a cost to the potter to make tools.  To make 3 plows cost the potter 7 bowls.  So the economy as a whole is better off when the toolmaker and the potter focus all of their energies in their own specialty.  When they do we get 10 plows and 12 bowls in one day.  When they don’t we only get 7 plows and 7 bowls.

We call this economic principle comparative advantage.  Where we look at economic output.  Which is what matters.  The more we bring to market the better it is for consumers.  Because greater quantities mean lower prices.  And when these skilled craftspeople focus on their specialty they improve the overall quality of the goods they bring to market.  So the consumer gets lower prices AND higher quality.  Thanks to the division of labor.  Specialization.  And comparative advantage.

We will always Have Jobs regardless the Size of our Imports for Having a Job is the Only Way to Buy those Imported Goods

If you multiply this over and over again to represent all the individual economic exchanges throughout the world you see why free trade is better than the protectionist policies of mercantilism.  Because it provides consumers with greater economic output at lower prices and higher quality.  This is why nations practicing free trade have the highest standards of living.  Because their people can walk into large department stores and fill their carts with inexpensive, high quality goods on a moderate paycheck.  Which could never happen if the mercantilists had their way.

The old inefficient industries want tariffs to increase the costs of those goods we fill our shopping carts with.  Including the food we eat.  And the cars we drive.  They use lofty arguments about protecting American jobs.  But those protectionist policies destroy jobs by increasing costs for businesses throughout the supply chain.  Raising consumer prices everywhere.  Reducing the amount of things we can buy.  Meaning businesses can’t grow and create new jobs.  Or they have to cut back production and eliminate existing jobs.

There’s also a lot of talk about the balance of payments.  Which actually meant something during the days of the gold standard.  For any trade deficits had to be paid for with gold.  But we don’t have the gold standard anymore.  Governments everywhere abandoned it in favor of irresponsible government spending.  So we don’t have to pay for trade deficits with gold.  Most money today is just electronic entries in a computer.  International capital flows have never been greater.  There are currency markets where people actively trade the world’s currencies.  So trade deficits don’t mean the same thing they once did in the mercantile world.  Then there’s the argument that if all our manufacturing jobs go overseas there will be no jobs for Americans.  If we import everything and export nothing there will be jobs everywhere but here.  Sounds like a problem.  But can that happen?  Not unless we get those imports for free.  So we will always have jobs regardless the size of our imports.  For having a job is the only way to buy the imported goods in those department stores.

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The Invisible Hand

Posted by PITHOCRATES - April 16th, 2012

Economics 101

A Command Economy Reduces the Overall Economic Output because those Managing the Economy don’t Understand It

Command economy?  Or free market capitalism?  Which works better?  Well, let’s find out with a little experiment.  Let’s go back in time.  Say ancient Mesopotamia.  Just after they developed mass farming.  And produced some of the first food surpluses.  Allowing the rise of a middle class of artisans.  Now let’s look at what could have been the first two of these artisans.  A potter.  And a winemaker.  Who probably weren’t the first two artisans.  But will suffice for our little experiment.

The winemaker needs some pottery vessels to store and sell his wine in.  And the potter enjoys drinking wine.  They each have something the other wants.  And because we’re so far back in time there is no money yet.  We’re still only bartering at this time.  Trading the goods we make with each other.  But in our experiment the high priest of the civilization is also the economic planner.  This priest communicates to the civilization’s gods.  And guides the civilization in pleasing their gods.  Which he is very good at.  For he knows all of the old teachings and rituals.  But he doesn’t know a thing about pottery or winemaking.  But he looks at an empty pottery vessel and a pottery vessel full of wine and sees that the vessel volume equals the volume of wine.  And deems the price of one pottery vessel is the amount of wine one pottery vessel holds.

Well, the potter is quite happy with this price.  Because he is skilled.  And can dig up some clay.  Throw it on the potter’s wheel and knock out vessel after vessel.  Glaze them and fire them in the kiln.  Even working by himself he can achieve some economies of scale.  By repeating this process every day.  Something the winemaker isn’t quite able to.  For he makes wine by the batch.  Because each step in the process takes a lot of time.  Maintaining his grape vines.  Then picking the grapes.  Carrying them back to his winery.  Putting them into his winepress.  Squeezing the juice out of the grapes.  Putting the grape juice in large vats to ferment.  Monitoring the process.  When he determines the process is complete he fills the small pottery vessels with wine.  When it was finally ready for ‘sale’ and consumption.  Considering all the work it took him to make one vessel of wine the winemaker was not at all happy with the price the high priest set.  And instead builds his own potter’s wheel and kiln to make his own vessels.  Greatly increasing his workload.  And reducing his winemaking output.  While the potter loses a potentially large customer.  Thus reducing the amount pottery he makes.  Reducing overall economic output in the command economy.

The Invisible Hand makes sure we use our Limited Resources Efficiently to Make the Things People want Most

In this command economy the civilization suffered a deadweight loss.  Economic resources went unused.  They could have created more economic benefits with the available resources.  They could have made more pottery.  And made more wine.  Perhaps even creating some jobs to help with the economic output of efficiently using the available resources.  But they didn’t.  Because of the fixed prices economic resources went unused.  Thus creating a market equilibrium lower than where it could be.  Hence the deadweight loss.  Now let’s look at the same example with only one difference.  The high priest does NOT set prices.

In a barter economy people agree to trade the goods they make.  And now the potter and the winemaker are free to determine what they think is a fair trade.  That is, they set the price of pottery in wine.  And the price they agree on is one they find mutually acceptable.  Where the potter agrees to trade an amount of his pottery for an amount of wine.  And the winemaker agrees to trade an amount of his wine for an amount of pottery.  Everyone wins.  For the potter gets an amount of wine he values more than the pottery he traded for the wine.  The winemaker gets an amount of pottery he values more than the wine he traded for the pottery.  And the civilization wins because at this mutually agreed upon price both the potter and the winemaker increase their production.  Providing the civilization with more of their goods.  The potter and the winemaker may even hire people to help them produce more goods to meet this higher demand.  Thus increasing the level of happiness in the civilization.  By increasing the amount of economic activity.  Moving the market equilibrium to a higher level of economic output.  And thus reducing the deadweight loss.  By using the available resources in the most efficient manner.  As determined by these mutually agreed upon prices.

This is the Invisible Hand in action.  An economic concept put forth by Scottish economist Adam Smith (1723-1790) in his The Wealth of Nations (1776).  In a competitive market place where traders set the price for their economic trade (not a command economy) two things happen.  First, resources flow to where we demand them most.  That is, to the buyers willing to pay the highest price.  Second, because of the competitive market place only those companies that sell at the low prices the market demands stay in business.  Which means that they have to use those resources as efficiently as possible.  Especially when they’re paying the highest prices for them.  And all of this happens because of the Invisible Hand. 

History has Proven that no Government Bureaucrat can do a Better Job than the Invisible Hand

Those who favor a command economy (or more government intervention into market forces) say the economy is too complex for us to leave it to its own devices.  That without a smart government bureaucrat managing this complex thing we cannot reach a market equilibrium that maximizes economic output.  Whereas Adam Smith says it is because the economy is so complex that no one is smart enough to manage it.  Just as a high priest doesn’t understand pottery or winemaking a smart government bureaucrat cannot hope to understand all the intricacies of a complex economy.  Nor can they ever hope to understand what millions upon millions of consumers want to buy most.  But the beautiful thing is we don’t have to.

The multitudes make individual decisions just like our potter and winemaker.  Where everyone is looking to maximize their own value.  And when they agree on a mutual acceptable price all parties in the trade win.  While making sure our resources flow to where they are demanded most.  And that we use these valuable and limited resources most efficiently.  Thus maximizing overall happiness in our country.  Reducing deadweight losses to a minimum.  And obtaining a market equilibrium that maximizes economic activity.  All of which happens with no one in charge.  As if an Invisible Hand guides us in the market place to make all the right decisions to maximize this economic output.  And our happiness.

So which is better?  Command economy or free market capitalism.  Well, if you’re being honest you have to choose Adam Smith’s Invisible Hand and free market capitalism.  For history has proven that no government bureaucrat can do a better job than the Invisible Hand.  Not the Soviets.  Not the Chinese Communist (under Chairman Mao).  Not the Cubans.  Not the North Koreans.  Even the Americans failed when their government actively intervened in the private economy.  Something that President Jimmy ‘one-term’ Carter knows only too well.  So based on our hypothetical Mesopotamian example, and history in general, free market capitalism is, and always has been, and always will be, better than a command economy.

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Labor Costs, Standard of Living, Artisans, Gunsmiths, Specifications, Interchangeability of Parts, Machine Tools and the Assembly Line

Posted by PITHOCRATES - February 15th, 2012

Technology 101

Since the Dawn of Civilization we’ve Waged a War against High Labor Costs

Technology determines our standard of living.  The greater we develop technology the higher our standard of living.  Because the things that make our lives easier and more enjoyable come down in price as technology advances.  So that the great conveniences and comforts of life are available to all.  And not just for the amusements of a wealthy upper class.  For example, who owned and enjoyed the first automobiles?  It was the wealthy upper class.  Exclusively.  Until Henry Ford used all the technology of the day to reduce the price of a car so that a working man could afford and enjoy one.  Changing America forever.

Labor.  The cost of people making things.  This is the cost that holds back the standard of living.  The thing that made the comforts of life affordable only to the rich.  Since the dawn of civilization we’ve waged a war against high labor costs.  To find ways to allow people to create more for less.  The division of labor allowed specialization and a middle class.  Where artisans made things they could trade for other things.  But artisans were artists.  Each thing they made was one of a kind.  And it took time.  A single artisan could not operate at an economies of scale to bring unit prices down.  Which tended to keep their more labor-intensive works more costly and available only to the wealthy class.  And rulers of their civilization.

Great talent was going to waste.  And a great number of people were not living anywhere near as well as the few well-to-do.  To unleash this human capital, to make a better life available to anyone, they had to reduce these labor costs.  Figure out a way to make more for less.  And we took a giant step forward in this direction thanks to war.  One of the great drivers of technology.

Precision Machine Tools allowed the Interchangeability of Parts

Some of our first firearms were works of art.  Built by highly skilled artisans.  Gunsmiths.  Who carefully and painstakingly shaped, fitted and gently filed parts he created and assembled together into a working firearm.  Changed the way we fought wars forever.  They were expensive.  And not all that plentiful at first.  Because it took such a long time for a gunsmith to build one from scratch.  Who was always busy building new guns.  Or carefully and painstakingly repairing old ones damaged in battle.  Shaping, fitting and filing a replacement part into the old firearm and restoring it to working order.

Then someone got a bright idea.  Actually, a few had the same bright idea at various points in time.  If we could standardize these parts by building them to a set of specifications we could mass-produce these parts.  Building the same part over and over again, one after another, following a set of specifications as closely as possible.  And then take these uniform parts and assemble firearms out of them.  Because the parts were uniform they were interchangeable.  Any part could go into any gun.  A worker could just grab these interchangeable parts from piles of identical parts and slap them together into a finished firearm.  Furthermore, we could keep spare parts in our armories.  So we can easily repair parts damaged or broken in combat by simply replacing the broken part with a new part.  Without sending the firearm back to the manufacturer.

Of course, the interchangeability of parts was not possible without the precision machine tools provided.  At first artisans guided their hand tools with a trained eye.  Often securing the piece he was working in a vise and working the tool around the piece.  Machine tools allowed us to spin our work and used a constrained tool to shape it.  Or to constrain our work and apply a spinning tool to drill, cut or shape it.  Using machines to constrain our work allowed us to apply greater forces on our work.  Which advanced metal working.  And allowed us to manufacture things with complex shapes and demanding specifications.  Creating the many thousands of pieces that we ultimately assemble into a finished good.  Allowing us to build more for less.

Computer Controlled Machine Tools and Robots increased the Speed and Precision of Assembling Automobiles

The interchangeability of parts and machine tools led to the assembly line.  Where we assembled things in mass quantities.  From piles of interchangeable parts.  Then Henry Ford made the assembly line move.  Taking mass production to a new level.  Reducing the costs for one of the wealthy class’ most expensive toys.  The automobile.  Bringing labor costs down so far that the final selling price was inexpensive enough for the working man to afford.

Computer controlled machine tools increased the speed and precision at which we made these interchangeable parts.  And robots on the assembly line increased the speed and precision of assembling automobiles.  Which should have reduced the price of cars even further.  But they seem to be more expensive than they need be.  Making many cars today too expensive for the working man.  Making them toys for the rich and well-to-do again.  For technology has reduced costs everywhere in the assembly pipeline but one.  The final assembly labor costs.  Which should have plummeted in the advance of all this technology.  But they haven’t.  Because unions have removed these costs from market forces.  Keeping labor costs higher than market costs.  And in turn pushing the selling price of their cars higher than market prices.  Opening the door to Japanese competition in the Seventies.  And the Japanese stepped in.  Sold a lot of cars.  So many that they would one day even sell more than GM.  Where we come full circle.  One of the countries (the other being Nazi Germany) that changed American manufacturing by pulling it out of the Great Depression changed it once again.

During the war years of the Great Depression FDR set a wage ceiling.  He didn’t want employers paying workers too much.  A bit of a problem when you’re trying to hire the best workers.  So employers got creative.  And, instead, started offering benefits to get around that wage ceiling to attract the best workers.  Following World War II the wage ceiling was gone.  But the benefits lived on.  And are some of the most contentious issues discussed at contract negotiations with the United Automobile Workers (UAW).  Ultimately leading to the great legacy costs that led the Big Three (GM, Chrysler and Ford) to bankruptcy and government bailouts. 

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Advanced Civilization takes a Huge Step Forward with the Bronze Age

Posted by PITHOCRATES - November 2nd, 2011

Technology 101

Bronze gave the Artisans the Tools to Unleash their Human Capital and Increase the Quality of Life

Two things put man at the top of the food chain.  The ability to think.  And hands that could build the things we thought of.  In particular, tools.  First it was sharpened sticks and antlers.  Stone and flint.  These were steps forward.  But the quality of these tools was poor.  They weren’t ideal.  They were the best we could chip out from what we could find.  And they didn’t hold a sharp edge very long.  But that all changed with metallurgy.

Enter the Bronze Age.  Where man could cast pretty much any tool he thought of.  By pouring molten metal into a mold.  This was a huge step forward.  Because we could make tools to fit the job.  Any job.  They were strong, too.  And could hold a sharp edge for a longer time.  This exploded the growth of cities.  Farms.  And urban life.  Artisans now had the tools to unleash their human capital.  Cities became rich in finished goods.  Things that increased the quality of life.  And attracted the attention of envious neighbors.  And the uncivilized barbarians beyond the civilized frontier.

With bronze they could make better weapons to defend themselves.  And they did.  The Sumerians used bronze to create one of the most formidable defensive units of the time.  The phalanx.  A formation of soldiers armed with bronze-tipped spears.  This spear could reach further than a sword.  So swordsmen attacking a phalanx were at a disadvantage.  The phalanx could stab with the spear before the swordsman could stab with his sword.  The same principle of the defensive mechanism of the porcupine.  The phalanx was such a formidable defensive unit that it saw service for many centuries.  Letting civilizations grow because they could defend themselves from their envious neighbors.

It took Regional and Long Distant Trade to get the Copper and Tin to Smelt into Bronze

The Stone Age lasted a long time.  And the change to the Bronze Age didn’t happen overnight.  Because you don’t mine bronze.  You make it.  When you melt two or more metals together.  And the two most popular metals of the time were copper.  And tin.

The Sumerians used bronze tools and weapons.  But the Fertile Crescent didn’t have any ore deposits.  So the metals necessary to make bronze were not indigenous to the Fertile Crescent.  That land between the Euphrates and the Tigris.  So how did a people with no ore deposits smelt copper and tin into bronze?  Trade.

You have to dig copper out of the ground.  You have to dig tin out of the ground.  And you typically don’t dig copper and tin out of the same mine.  Worse, tin wasn’t as close to the Sumerians as copper was.  So it took regional trade.  And long distant trade.  To get the ore to smelt into bronze.

Trade gave us the Bronze Age and Advanced Civilizations

The Bronze Age created advanced civilizations.  But it took an advanced civilization to make bronze.  So what came first?  The Bronze Age?  Or advanced civilization?  That’s an easy answer.  Trade.

An advanced civilization could create great things.  As long as they had the ingredients to make those things.  Some of these things were indigenous to their civilization.  A lot of them were not.  So you traded.  To get the things you needed but didn’t have.  With the things you had.  And the things you built.  From both.

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Pottery Stored Food Surpluses and Created Advanced Civilizations

Posted by PITHOCRATES - October 26th, 2011

Technology 101

An Advanced Civilization requires a Food Surplus and Something to Store it In

Take a look around your kitchen.  Your pantry.  What do you see?  Storage jars.  Canisters.  And, of course, cups and plates.  They’re so prevalent in your life you don’t even notice them.  You just use them.  You drink from them.  Eat off of them.  Shake salt and pepper from them.  Store flour in them.  Sugar.  Coffee.  And tea.

It would be hard to live your life without the things in these containers.  It would be harder still if you had no containers to store these things in.

And it’s been this way since the dawn of civilization.  In fact, there would be no advanced civilization without one invention.  Pottery.  Because to form an advanced civilization requires a food surplus.  An excess of grain.  That they had to store.  Where animals and bugs could not get at it.  Or moisture.  Today we use storage jars and canisters in our pantry.  Back then they used pottery.  In their homes.  Even in their granaries.

Pottery allowed the Farmer and Artisan to Eat at the Harvest and Long After the Harvest

Pottery and agriculture were attached at the hip.  They both needed each other.  The mass farming of these early civilizations, before the plough simplified farming, required a lot of labor.  Which produced highly populated cities.  With a lot of mouths to fed.  And they did produce a lot of food.  So much that they had a food surplus.  To feed the farmers.  And the non-farmers.  The artisans.  At the harvest.  And long after the harvest.

They could grow a food surplus.  And did.  But a surplus without the ability to store it was useless.  So following the great agricultural developments came the all important granary.  And pottery storage vessels.

The development of pottery required a dedicated work force.  A division of labor.  The potters couldn’t farm.  They needed to spend all their time mass-producing pottery to meet the demands of their civilization.  Plates.  Bowls.  Cups.  And storage vessels.  To store that food surplus.  So both the farmer and artisan could eat.  At the harvest.  And long after the harvest.

The Division of Labor gave us Agriculture, Pottery and an Advanced Civilization

The hunter and gatherer life was simple.  You followed the food.  And hunted.  Which pretty much consumed all of your time.  And kept you on the move.  That changed after some key advances.  Agriculture.  And pottery.  To name only two.  The rise of these specialties allowed people to settle down.  To stop following food.  And, instead, to grow it.  And store it.

None of this would have been possible without the division of labor.  Which allowed the rise of artisans.  Specialists.  A middle class.  To make the things that made a civilization advanced.  And a food surplus.  Which allowed an advanced civilization to survive.

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Division of Labor

Posted by PITHOCRATES - October 24th, 2011

Economics 101

The Division of Labor gives us our Houses, Food, Cars, Televisions, Smartphones, Laptops and the Internet

We can’t do everything ourselves.  It’s not efficient.  And most times not even possible.  We don’t build our own houses.  Grow our own food.  Build our own cars.  Manufacture our own high-definition televisions.  Smartphones.  Laptops.  And we don’t build our own Internet.  No.  Instead, people everywhere across the economy specialize in one thing (i.e., work for a living).  And together these specialists fit into the big economic picture.  Which gives us our houses, food, cars, televisions, smartphones, laptops and the Internet.

It started with the most basic division of labor.  Prehistoric women raised their young.  While prehistoric man hunted.  Which was necessary for the propagation of the species.  And us.  For if they all hunted and no one nursed the young the young would have died.  And with them the species of man.  For there was no formula back then.

The next great leap forward on the civilization timeline was the indispensible plough.  The prime mover of civilization.  With the food problem managed, famines were more the exception than the rule.  And with fewer people needed to produce a food surplus, people could do other things.  And they did.

The Division of Labor let us Create Surpluses in Food, Ploughs, Shoes, Tools, Harnesses, Etc.

The division of labor gave rise to artisans.  The first skilled trades.  Made possible by a food surplus.  As other people grew the food the artisans made the tools and crafts the farmers used.  They specialized in plough making and designed and built better and better ploughs.  Lots of them.  Shoemakers made shoes.  Lots of them.  Metal workers made tools.  Lots of them.  Leatherworkers made harnesses.  Lots of them.  See the pattern?

The food surplus gave us surpluses in ploughs, shoes, tools, harnesses, etc.  The division of labor let us create these surpluses.  Specialists made continual improvements in their areas of specialization.  Producing better things.  And more of them.  Which led to another key to the advanced civilization.  Trade.

The shoemaker didn’t have to grow food.  He could trade shoes for food.  Ditto for the plough maker.  The metal worker.  The leatherworker.  And the farmers didn’t have to make any of these things because they could trade food for them.  So we became traders.  We created the market.  And traders took their goods and/or services to these markets to trade for other goods and/or services.  First by foot.  Then by animal.  Then by boat.  Then by train.  Then by truck.  Then by airplane.  Artisans (i.e., workers) traded their specialization for the product and/or services of another’s specialization.  Then.  And now.

The Division of Labor made the Complex Simple and our Lives Rather Comfortable and Fun

The division of labor gave rise to the artisan.  The skilled trade worker.  The middle class.  People who can specialize in one thing.  And trade that one thing for the other things he or she wants.  Whether it be a skilled blacksmith hammering out farming tools.  A tool and die maker working in a factory.  An accountant.  Or a software engineer.  We have a skill.  Our human capital.  And we trade that skill to get the other things we’re not skilled in.  The end result is a modern, bustling, free market economy.  An advanced civilization.  And a high standard of living.

All thanks to the division of labor.  Which made the complex simple.  And our lives rather comfortable.  And fun.  Unlike prehistoric man.  Who knew of no such things as iPhones.  Indoor flush toilets.  Movie theaters.  Or restaurants.  No, he didn’t do much other than survive.  Which was no easy thing.  But he did.  And for that we are grateful.

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