Incentive and Competition

Posted by PITHOCRATES - December 19th, 2011

Economics 101

Prices set by the Free Market make Competitors Think and Innovate

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  Free labor sustained economic growth by increasing the number of people making economic exchanges.  Prices automated the process of assigning value and allocating scarce resources (that have alternative uses).  But that’s not all.  Prices also provide incentive and competition.

High prices signal high profits.  Or the potential for high profits.  Which encourages other people to enter the market to get their piece of these high profits.  People who think they can do a better job.  Make something better.  And sell it for less.  That’s right, to get rich they will sell it for less.  That’s key.  That’s how you gain market share.  The ultimate goal of all businesses.  Because with market share comes profit.  And often times this happens even with a price below that of the competition.

Prices set by the market allow this amazing phenomenon to happen.  It stimulates the creative juices.  It makes competitors think.  And innovate.  Providing incentive.  To improve on an existing idea.  Or replace an existing idea with a better idea.  All the while being guided by market prices.  Which tell them the current value a buyer places on a product or service.  And the final cost they have to remain below to bring their innovation to market.  If they do both they will gain market share.  By giving customers better value at a lower price.  And they will make themselves rich in the process.  The proverbial win-win of the free market.  The hallmark of capitalism.  Incentive and competition.

With Crony Capitalism Government Increases the Cost of Competition, Squelching any Incentive to Innovate

Free market prices are essential for free market capitalism.  If the market is not free to determine prices this amazing phenomenon will not occur.  Consumers will not get more value for less.  And business people and entrepreneurs will not take chances and create more value for less.  Because if there are outside forces influencing prices these forces also create uncertainty.  They throw unknowns into business calculations.  Things businesses have no power over.  Which makes them cautious.  And less prone to risk-taking.

We can see examples of this every time there is unrest in the Middle East.  Which tends to threaten the oil supply.  Everything in a modern economy uses energy.  Nothing comes to market without energy.  So anything that affects energy prices affects all prices.  Another example is government’s regulatory cost.  Such as Obamacare.  Which has caused great uncertainty.  And a lot of unknowns.  For entrepreneurs.  And business owners.  Who don’t know the ultimate regulatory compliance cost.  Freezing hiring.  And business expansion.  Extending the Great Recession.  Causing the economy to spit and sputter along.  Like an engine that just won’t restart.

Typically when government over regulates it’s to reward their friends and cronies.  Hence the term crony capitalism.  Which isn’t even capitalism.  Crony capitalism is about getting rich by who you know in government.  Not by creating more value for less.  The government fixes the game by keeping prices high for their cronies.  By enacting regulations that increase the cost of competition.  Squelching any incentive to innovate.  Leaving consumers stuck paying more for less value.

When Government Interfered with Market Prices they gave us the Great Depression and the Great Recession

Free market prices assign value.  Allocate scarce resources that have alternative uses.  Provide incentive to innovate.  Encourage competition.  Incentive and competition.  The hallmark of capitalism.  Which ultimately provides consumers with more value at lower prices.  And it does all of this automatically.  As long as government doesn’t interfere with this automatic pricing mechanism.

But government often does.  They interfere with this automatic pricing mechanism to reward friends and cronies far too often.  When they do the economy suffers.  And often goes into recession.  And when they really interfere, they cause Great Depressions.  And Great Recessions.

Government regulatory policy turned an ordinary recession into the Great Depression.  One of their greatest anti-business regulations being the Smoot–Hawley Tariff Act.  Which launched an all out trade war.  Killing the economy.  And government regulatory policy in the mortgage industry caused the Great Recession.    First by creating a housing bubble by forcing lenders to qualify the unqualified.  And then enabling this bad policy on a grand scale by having Fannie Mae and Freddie Mac buy the resulting bad subprime mortgages.  Which removed all risk from the lenders so they kept on approving bad subprime mortgages.

Say what you will about the Great Depression and the Great Recession.  But what you can’t say is that they were market failures.  Because they weren’t.  Both were government-made.  Because it was government that interfered with market prices.  Not the free market.  And the consumers paid the price for their crony capitalism.

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Free Labor

Posted by PITHOCRATES - December 5th, 2011

Economics 101

Unlike Slaves Paid-Laborers Worked, Went Home and Fed & Housed their Own Families

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  And to sustain this economic growth we needed something else.  Free labor.

Slavery as an economic model has serious defects.  For one the labor is not free.  People are restrained against their will.  And only work to minimize their pain and suffering.  They do not think or innovate.  Their human capital is wasted.  Because no one voluntarily thinks and innovates to make a better life for others.  Especially if it  won’t improve their own life.  A slave, then, has little incentive to think or innovate.  Their incentive is to follow orders.  Because that was the proven way to minimize their pain and suffering.

Buying human beings is also less efficient than renting them.  Not everyone in a slave family was in their working prime.  The elderly couldn’t work the fields anymore.  Neither could the infant children.  But they all needed room and board.  Unlike a paid laborer.  Who you paid only for the hours they worked.  You didn’t feed or house them.  They worked and went home.  And fed and housed their own families. This is why George Washington wanted to sell his slaves and replace them with paid laborers.  To increase his profits.  But he found people were only interested in buying slaves in their working prime.  He could sell some.  But not all of them.  Which meant breaking up slave families.  Something he couldn’t do.  So he kept his slaves.  Settled for lower profits.  And kept the slave families together.

The Slave-Economy in the New World was a Step Backward toward Old World Aristocracy

Not everyone was as kind as Washington.  Some people had no problem breaking up families.  Or abusing their slaves.  But they all had to exercise restraint.  Because a maimed or a dead slave couldn’t work.  A problem for slave owners because they bought their slaves.  Often borrowing money for the purchase.  So it was costly to replace them.  As well as to train them.  One skilled in picking cotton may not readily take to harvesting and drying tobacco.  Whereas you could simply advertise for a hired hand who was skilled in harvesting and drying tobacco if you used free labor.

Free labor added to the economy.  Because they had earnings for economic exchange.  Slaves didn’t.  The slave owner provided their room and board.  So they were not only enslaved they were also dependent on others for everything free laborers bought with their earnings.  Economic exchanges in a slave economy, then, were limited to the wealthy landowners.  Making it a system much like European feudalism or Russian serfdom.  Only instead of peasants or serfs there were slaves.  Who were less free.  And even poorer.

Thus the slave-economy in the New World was a step backward toward Old World aristocracy.  (And a little beyond it.)  Where there were a few rich and a lot of poor.  Agricultural reform came with the help of the Black Death.  When the balance of power tipped from the landed aristocracy to the much thinned out labor force.  Who could then demand wages and better conditions.  And then came capitalism.  For those new wage-earners had money for economic exchanges.  Which they made.  Thus producing a prosperous middle class.  Which took root in the New World.  At least, in the parts of the New World that used free labor.

Our Capacity to Think is the Key to Unlocking our Human Capital, Economic Growth and the Quality of Life

The great problem of slavery (other than the moral one) is that it excluded a great part of the population from the economy.  Slavery excluded millions of people from making economic exchanges.  And millions who might have thought and created didn’t.  Their human capital was wasted.  Setting economic development back.  As well as the quality of life.

In a modern capitalistic economy there must be no slavery.  Or dependency.  Because those enslaved or dependent do not create.  Or innovate.  They just exist.  And do not maximize the gift of being human.  Our capacity to think.  Which is the key to unlocking our human capital.  Economic growth.  And the quality of life.

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Trade

Posted by PITHOCRATES - October 31st, 2011

Economics 101

People Traded the Things they Made to have Things they couldn’t Make

Agricultural advances gave us food surpluses.  Food surpluses gave us the division of labor.  And spare time.  For the first time everyone didn’t have to hunt or gather food.  They could do other things.  Think.  Experiment.  Innovate.  Create.  And they did.  Becoming specialists.  A middle class.  Artisans.  People who became very good at doing one thing.  So they kept doing that one thing.  Finding ways to improve that one thing.  And created surpluses of their own.  Potters made excess pottery.  Shoemakers made excess shoes.  Tanners made excess leather goods.  Metalworkers made excess metal goods.

Cities grew in the center of the sprawling farmland.  And it was in the cities where these artisans lived.  Where they honed their specialties.  And met.  With other specialists.  And with farmers.  To trade.  The potter would trade pottery for shoes.  The farmer would trade food for shoes and metal goods.  The tanner would trade leather goods for pottery, shoes and food.  And so on.  People traded the things they made.  To have things they couldn’t make.  Everyone was able to have more things.  Thanks to this trade.

This unleashed the vast human capital of the people.  Their cities.  And their civilization.  Cities on the coast fished.  Cities closer to the forest harvested wood.  Cities closer to the hills mined silver, gold and copper.  And coal.  And the cities traded their surpluses with other cities.  Metal workers and potters traded their goods for fuel for their forges and kilns.  Miners traded their ore and coal for grain and fish.  Either directly.  Or indirectly.  When other people traded their large surpluses with other people in other cities.  With the miners getting a portion of these large-scale trades for all their efforts to make those trades possible.

As Civilizations became more Complex they became more Dependent on Trade

All of this trading made cities grow.  And as a result the civilization they belonged to grew.  And became more advanced.  People ventured further.  Looking for other resources.  And met people from other civilizations.  Who had raw materials that were different and interesting.  As well as finished goods that were different and interesting.  And these civilizations traded with each other.

Civilizations established trade routes with each other.  Which connected civilizations with others in the unknown world.  Beyond the civilizations they knew.  Markets appeared on these trade routes.  Bringing the exotic from the furthest corners of the world to everyone.  As well as new ideas.  And innovation.  The civilized world grew more advanced.  More interdependent.  More peaceful.  And better.  There was more food.  More technology.  More goods and services.  And more leisure.  Giving rise to the arts.  And entertainment.

But it was not all good.  As cities grew they grew attractive to the uncivilized barbarians beyond the frontier.  Roving bands of hunters and gatherers.  Who were more partial to plunder than trade.  So a portion of their surpluses had to be set aside for city defenses.  The building of city walls.  Implements of wars.  And standing armies.  To defend their cities.  Their civilizations.  And their trade routes.  For as civilizations became more complex they became more dependent on trade.

Trade Improved the Quality of Life which is the Hallmark of an Advanced Civilization

Trade unleashed our human capital.  Because it drove innovation.  There was a big world out there.  Creating a lot of fascinating stuff.  And the only way to get it was to trade your fascinating stuff for it.  And when we did everyone won.  Life got better.  We learned new and interesting things.  That we used as building blocks for further innovation.  And further advancement.  Which led to a better quality of life.  The hallmark of an advanced civilization.

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The Government Model of Doing Business is a Failure because it’s more Politics than Business

Posted by PITHOCRATES - September 7th, 2011

Finding other People to pay for Generous Benefits is the Government Way

The United States Postal Service (USPS) is not a part of government.  It doesn’t receive any tax dollars.  It’s supposed to survive alone on the revenue of their services.  In particular, the postage stamp.  But the USPS is dying.  Thanks to new technology.  People are using email.  And paying bills on line.  And FedEx and UPS deliver packages better than they do.  So they’ve lost a lot of business.  This enterprise that is not part of the government.  Which is now seeking help from the government.  To survive.

Even though it’s not a part of government it is protected by government.  The USPS has a monopoly on 1st class mail.  And like all businesses with a government enforced monopoly they didn’t innovate.  They didn’t exceed the expectations of their customers.  They just trusted in government.  That government would maintain their fat revenue stream.  So they could continue to pay fat pay and benefit packages.  But you can never truly keep competition away.  For there is always someone looking to innovate.  And exceed customer expectation.  The USPS has learned this lesson.  The hard way (see Obama crafting fix as Postal Service faces default by Emily Stephenson posted 9/6/2011 on Reuters).

The White House will offer its reform plan in the next few weeks for the agency, which lost $3.1 billion last quarter and is approaching due dates for multiple billion-dollar payments, said John Berry, director of the U.S. Office of Personnel Management.

The Obama administration wants Congress to delay for 90 days a $5.5 billion retiree health benefits payment due this month. The Postal Service has said it expects to default on that payment…

It has proposed cutting 220,000 jobs, or more than a third of its full-time staff, by 2015, and is studying about 3,650 of its 32,000 offices for potential closure.

A $3.1 billion loss in one quarter?  Revenue for that quarter was only $16 billion.  So that’s a loss of 19%.  What’s even more startling is that the retiree health benefits payment due is 34.4% of revenue.   That’s just over a third of all revenue going to people no longer working for the post office.  This is not a business.  This is pure government. 

It’s little more than a Ponzi scheme.  And it worked until technology provided competition in other forms.  Now they have a declining revenue base supporting an expanding group of benefit recipients.  Sound familiar?  Sounds a little like Social Security, doesn’t it?  Another failing Ponzi scheme.

Finding other people to pay for generous benefits will always end this way.  And that’s the government way.  Which explains why the economy produced zero jobs last month.  It doesn’t know how to create a job.  All it knows how to do is to take money from those who work and give it to people who support them.

In Canada the Government is letting the Private Sector find and bring Oil to Market

You know who knows how to create jobs?  Canada (see Canada’s Oil-Sand Fields Need U.S. Workers, Alberta Minister Says by Jeremy van Loon posted 9/7/2011 on Bloomberg).

Unemployed U.S. construction workers should look for jobs in Canada’s oil-sands industry, which faces a shortage of as many as 75,000 positions in the next few years, Alberta Energy Minister Ronald Liepert said.

Alberta’s oil sands, the world’s third-largest recoverable reserve of crude, needs workers including electricians and construction staff, Liepert said in an interview at Bloomberg headquarters in New York late yesterday. Labor restrictions between Canada and the U.S. need to be eliminated first, he said…

U.S. President Barack Obama will address Congress tomorrow with a plan to boost job growth by injecting more than $300 billion into the economy next year. Unemployment in the world’s largest economy remains at 9.1 percent more than two years after the recession’s official end. That compares with 7.2 percent in Canada.

In Canada the government is letting the private sector find and bring oil to market.  Which is good for Canada.  Because oil is high in demand.  Very, very high in demand.  The Keynesian economists all say our current economic woes are due to a lack of demand.  And the Obama administration is a Keynesian administration.  So you’d think they would let Americans find and bring American oil to market, too.  But no.

Instead, they put a moratorium on Gulf oil exploration.  Forbid oil exploration on most American land.  And put all their eggs in the green energy basket.  Especially the electric car.

The Success of Electric Cars depends on the Cost of Gas 

Electric cars don’t pollute.  But the power plants that produce the electricity that charge their batteries do.  The majority of which are fossil-fueled.  Why?  Because wind-generated and solar-generated electricity just can’t produce electricity as plentifully and as cheaply as fossil-fueled plants can.  Which will become a bigger and bigger problem as more electric cars plug into the electric grid (see Bidding for volts posted 9/6/2011 on the Economist).

ELECTRIC cars and hybrids could represent as much as 15% of the new car market by 2020, depending on the price of oil. This means that in some places a lot of vehicles will be plugged simultaneously into the mains after the evening commute home, in order to recharge their batteries for the following day. The sudden demand for power this will entail, on top of the existing evening peak, could put the small electrical transformers that serve local grids under considerable strain—possibly to the extent of causing brownouts.

First of all, note that the success of electric cars depends on the cost of oil.  Why?  Because gasoline-powered cars are better.  And people will always choose them over electric cars.  Unless the cost of gasoline makes them more expensive.

So the switch to electric cars will only happen at great cost to the consumer.  Who will pay more.  In more ways than one.

Electric cars are not like washing machines, which vary little from brand to brand in their electrical demands. Car batteries come in different capacities, have different recharging speeds and use different chemistries which have their own recharging criteria. The picture is complicated still further by the development of fast-charging systems that suck capacity out of the local grid with much greater relish than a traditional charger. And hybrids add yet another dimension since these, if electricity is too expensive, can run on petrol instead.

Luckily, a driver would not have to worry about making any of these tedious calculations if one of Dr Rogers’s software agents were working for him. All he need do when connecting his car to the recharging point of an evening is inform the system, perhaps using a key pad, when he wanted to drive the vehicle again and the likely distance of his journey. The negotiations would then take place on a computer system that linked all the local vehicle-recharging points.

Gee, I hope the electric car owner doesn’t have to rush their child to the hospital during the night.  Say some 6 hours before going to work.  About an hour before that electric car’s charging was scheduled to start.  If so, hopefully the child’s parents have a reliable gasoline-powered car in the garage as well.

Keynesians want to Grow Government and Spend Money 

The USPS is a microcosm of the United States.  At least on the path we’re currently on.  And you can see how well things are working for the USPS.

Keynesians worship the god of demand.  All problems go back to a lack of demand.  They want to tax and spend.  To give money to people to spend.  To stimulate.  As only Keynesians know best.  Despite their near century of failure.  But in the face of record demand for a commodity (oil) that America could look for and bring to market to meet that demand, they shun that demand.  Why?

Instead they’d rather see oil prices rise so high that people will reluctantly buy electric cars.  That will strain our electric grid.  Causing brownouts.  Or more consumer costs to upgrade the grid.  Either way, the consumer will pay more and be inconvenienced more if the government gets its way.

The examples of failure (the USPS and green energy) are all around us.  As are the success stories (Canadian oil).  Yet government keeps choosing failure over success.  Why?

Because something is more important than economic well being.  Political power.  And a bad recession is an opportunity.  To grow government.  And spend more money.  Which is what Keynesians want to do.  And will do.  Every time.  Despite their near century of failure.

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