Wednesday, February 24, 2010

Wealth Theory

One characteristic which separates Republicans and Democrats in most people’s minds, is their attitude towards wealth. Democrats often believe that Republicans are biased in favor of the wealthy and against ‘the poor’, who are commonly imagined as minorities, women, and the elderly, and that Democrats stand for fair outcomes, so made by actions taken to punish greed. Republicans often believe that Democrats are biased in favor of special interest groups and against ‘working Americans’, who are commonly imagined as America in total, and that Republicans stand for equal opportunity, so made by elimination of subjective barriers and penalties used to punish business success. Democrats and Republicans both claim to speak for Main Street, although Democrats claim Republicans are buddies of Wall Street, Republicans claim Democrats are buddies of Broadway, and far too many members of both parties act like they live on Bourbon Street. This article is written to set out my understanding of how wealth is created and developed, and to begin a discussion on perspectives of the same concern.

There is a sense in the modern culture that money is a bad thing, and that rich people are bad people. Democrats promote this sense in politics by accusing business leaders and major companies of “greed” whenever the business community is opposed to a policy or bill supported by Democrats. Opposition by Democrats to financial success, however, does not appear to extend to criticism of celebrities and actors, to lawyers or doctors, or to special-interest groups which support liberal causes. This hypocrisy is salient to the matter, since it demonstrates that Democrats are inconsistent in their application of their theory, designating non-productive wealth as acceptable while maligning wealth from production of useful goods and services demanded by the public. America will not be in crisis if Michael Moore’s film fails, but as we have seen, it does fall into crisis when major auto manufacturers cannot produce profits. It should also be noted that it is inherently illogical for politicians, who receive money while producing no useful product, to sit in judgment of people and companies which do produce useful goods. That way lies madness and the myth of Man-created Global Warming.

The liberal lie about wealth depends on the zero-sum fiction of wealth. The idea is that there is only so much of any good thing, and it’s human nature to want as much of it as you can get. That’s greed, as they think of it. Everyone is entitled to their “fair share”, which is almost never how it works out in practice, making the real world “unfair” by their rules. The idea that everyone should have a share of something, even if they did nothing to create or build it, sounds a lot closer to greed than those people who work hard to make a thing themselves. And anyone who’s ever done farming understands that production is not a zero-sum equation. Come to that, farming is counter-intuitive in some ways. The idea that you take edible seed and bury it makes no sense until you understand how germination works. That’s why Agriculture is the ‘First Wave’ of technology mentioned by the Tofflers.

And Industry, by the way, is the Second Wave, and it’s no zero-sum matter either. Not everyone can make all the goods he or she wants and needs, nor equally well. Industry provides a means for a community, country or planet to raise its living standards and quality of life without increasing its cost of resources to the same degree. Capitalism works for many reasons, not least of which include the fact that major capitalist nations have healthier, happier citizens. One of the most basic laws of business is that to succeed, a business must have relatively low prices, superior features and convenience, or superior quality and customer satisfaction, or some two of the three if it wants to lead in its industry. Only a monopoly, like the Post Office or Congress, is immune to these economic laws, and even there, over a period of time degradation is inevitable. Anyone who tells you different is running for office with a jackass for a logo.

There are a few basic rules of how one creates wealth. One may receive it, as in inheritance; one seizes it, as in conquest or eminent domain or nationalization; or one may actually build wealth. Wealth is not simply manipulating numbers a la Bernie Madoff to create the illusion of wealth creation, nor is it the parasitical behavior of people living off other people’s work, like people who make money off things like ‘residuals’ and other gambling-based activities. Wealth creation only occurs when the net wealth of all stakeholders in an enterprise grows. This is why farms, savings and loans, factories, and corporate labs are good investments, while law firms, casinos, and eco-thug restrictions are generally liabilities for a culture. The farmer’s tools, land, and work combine to create food which is worth more than he puts into it. A savings and loan – properly run – protects savings and provides capital for worthwhile ventures, which grow to far beyond their initial investment and outlay. Factories produce products which improve the quality of life for their customers, employees, and communities, especially if they are run by people who live in those same communities, which creates a desire for good corporate citizenship. Corporate laboratories seek answers to pressing medical needs and provide improved options for people living with disease, impaired ability, pain, or other maladies. On the other hand, law firms not only consume assets while producing no goods or valuable services, they also leave impacts which damage communities as a whole. This is not to say that the law is not necessary, but it is abused by lawyers far more than communities are abused by businesses. Casinos also consume resources without creating any physical goods or valuable services; the net effect on a community with a casino is inevitably negative. And politics-based restrictions on corporate operations damages the effectiveness of those businesses, costs jobs, and consumes assets and resources with no production of goods or useful services. The point is that government, even when absolutely necessary, is by definition destructive, wasteful, and a liability to be minimized whenever possible.

All wealth creation involves risk. There is always the risk of failure, such as the farmer whose crops suffer from bad weather or insect blight, or the factory which must stay abreast of consumer demand and the cost-effectiveness of its methods. All successful corporations begin as small businesses, so protection of small business interests is not only quaint, it’s Economics’ version of Pediatric Medicine. As for public corporations, they exist under specific laws and requirements. A lot of people don’t seem to understand that what Enron did, for example, was already against the law, even before the passage of Sarbanes-Oxley. While there are crooks in business, there are crooks everywhere, as Congress and most city councils have proved well beyond dispute. There are far more good businessmen than bad, something Congress can hardly claim for itself. That’s not to say that business should operate without reasonable rules and laws, but there’s something very wrong with a Congress that knows so little about Economics and Business, with its own pallid record in Ethics, setting business leaders in general out as the enemy of the nation. And the results of the Auto Bailout in the year just past stand as a painful reminder of just how poorly Congress understands the effects of its actions. The Bank, Auto, and who-knows-what-else-is-to-be-bailed-out industries have not improved in financial stability or health, despite all the money poured into them. Because risk is not mitigated by government meddling, anymore than blaming Wall Street for blundering disasters in the White House is an effective means of improving job creation.

Risk is disliked, of course. But because you cannot escape it completely, risk tolerance is a factor in all economic activity. And as a natural function, the only way to persuade someone to accept higher risk, is to offer commensurate rewards for success under those conditions. Also, refusing to reward risk tolerance will inevitably damage performance, as the consistent results of Socialism demonstrate. As an example, consider at-will employment. A man has some money, and an idea. An idea he thinks will produce profits. So he hires employees to help him make the product or provide the service that is his idea. That’s how most people these days make a living – working for a company that hired them to do a job. They could have started their own company, worked by and for themselves, but they did not like the risk, so they agreed to an arrangement where they could be assured of a certain income by doing a certain thing under certain conditions. If things didn’t work out, the boss could fire you or you could quit. Simple, direct, and functional. Companies with good bosses, a good plan, and good employees grew strong. Companies without those things died out. Here in the bailout age, a lot of people would not believe that most of the original automobile companies eventually went under – Stanley, Packard, Deusenberg, Haynes, Studebaker, and Duryea were all major automakers at one time or another but which died out, even though some were successful for some years. The Studebaker was a popular company well into the 1950s, for example. And in addition to government intervention to protect selected industries and companies, there was also the drive to create protected classes of employees. Unions, for example, originally created to protect employee rights to safe working conditions and equal opportunity to advancement and compensation, were soon corrupted to become means to manipulate workstaff and extort money from businesses; the Mafia’s gruesome history alone confirms that unfortunate development. Governments, from local councils to the Congress, have also interfered with business through initiatives meant to accomplish job growth or to advance selected outcomes, but inevitably such programs have cost well in excess of their benefits. The most obvious example would be Medicare, which controlled medical costs for a selected demographic of Americans but only to a degree and only for a finite time span, while the attendant costs have rocketed far beyond all projections. Darwin’s theory of Natural Selection may not prove true with regard to biological cross-species evolution, but it is a truth of economics that cost and benefit can not be artificially manipulated to serve a political aim. While it is true that behavior can be influenced by rewarding desired behavior and punishing undesired behavior, this practice breaks down as the scale of subjects, cost, and time increase. The best examples are black market economies and attempts to legislate moral preferences.

For this reason among others, every nation depends essentially on small business first and foremost. This is because small businesses are most sensitive to new opportunities and dangers, and because small businesses exist for pure business reasons, paying in taxes and compliance for government and special interest interference but operating for valid business purpose. The effect of new policies upon small business is therefore a significant barometer for the economic wisdom of those actions, and should be carefully considered in historical context. An action which was ill-considered in 1934 is not a wise choice in 2010 simply because time has passed.

This brings us to present politics. The plain lesson of History is that policies based on the subjective values of the minority of the population, such as Carbon taxes, ex post facto taxes on executive bonuses, and arbitrary manipulation of mortgage and credit rates, may work for a limited time but in the long term prove ineffective, inefficient, and do more damage to the economy than any good. Any action taken will inevitably affect and influence the behavior of the whole economy, and focusing only on one part is going to lead to unpleasant surprises. Government actions will inexorably damage economic performance, with the exception of actions which reduce government restrictions. This is not to say that government regulation is not needed, but to observe that even the most necessary statutes mean accepting poorer performance for greater stability or control. Consequently, it never even possible for Obama’s “Stimulus” to work as intended, anymore than a perpetual motion engine can function in real life, and for the same reason; economic performance comes from the actions of wealth-producing entities, which are individuals and businesses, never the government. The government is parasitic in economic nature, and therefore any government action which controls and redirects wealth will reduce the total amount in that process; it was therefore impossible ab initio for a plan to spend huge amounts of public money to result in anything but diminished economic performance. Cross-reference East Germany, 1945-1995 and compare to West Germany for the same time period.

This essay says nothing that was not already generally known. The emotional reactions from some folks may, however, serve as a sort of economic literacy test.

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