How to talk about the economy

By Kevin Price

Virtually every economic debate falls into a discussion about parties and politics. This is why most economic discussions do not amount to much. You start discussing parties and politicians and the debate simply goes down hill from there. That is why I love the Ten Pillars of Economic Wisdom. They speak of pure economic truths — no agendas, just common sense.

In the 1990s, I was a Senior Fellow at the American Economic Foundation, which was the group that developed the Ten Pillars during the Great Depression. The organization wanted to remind Americans that freedom works. It was my job with the Foundation to teach the same lesson in seminars in the former Soviet Union and how these principles could be a light to a region that suffered from decades of totalitarianism. Today, the US is slipping into a command economy of its own where the government will seek to be in charge of all things. Today, with the Obama Administration, this country needs to be reminded of these principles now more than ever.

1. "Nothing in our material world can come from nowhere or go nowhere, nor can it be free: everything in our economic life has a source, a destination, and a cost that must be paid."

As Milton Friedman use to say, "there is no such thing as a free lunch." Everything has a cost, regardless of promises from politicians. The next time a person says "the government should to that," simply ask them how? At what cost? Why?

2. "Government is never a source of goods. Everything produced is produced by the people, and everything that government gives to the people, it must first take from the people."

Following the two massive bailouts over the last 16 months, 25 percent of Americans who were asked in a Fox survey how the government pays for its programs said it was because the US "has its own money." Those people need to be familiar with this Pillar. The bailouts we have seen cost plenty and will have a profound impact on our economy. They are being paid for through a massive printing of fiat money (essentially counterfeit dollars) and new taxes that will effect every economic group.

3. "The only valuable money that government has to spend is that money taxed or borrowed out of the people's earnings. When government decides to spend more than it has thus received, that extra unearned money is created out of thin air, through the banks, and, when spent, takes on value only by reducing the value of all money, savings, and insurance."

Much of the new spending we have seen by politicians is being financed by fiat money and will result in rampant inflation. Inflation means "too much money chasing too few goods." Government is paying for its programs with "funny money," but the consequences are anything but humorous.

4. "In our modern exchange economy, all payroll and employment come from customers, and the only worthwhile job security is customer security; if there are no customers, there can be no payroll and no jobs."

Labor unions have long tried to create an economic world that is detached from reality. If labor wants job security, they must do what successful employers must do — make the customer the priority. There is no other way to assure stability.

5. "Customer security can be achieved by the worker only when he cooperates with management in doing the things that win and hold customers. Job security, therefore, is a partnership problem that can be solved only in a spirit of understanding and cooperation."

This simply means that labor often seeks an adversarial relationship with business, but job security can only come if the two are partners. For years Japan's company unions served as a model of labor and employer cooperation. With this model employees and management would work together on strategies to increase customers, foster efficiency, and to build a better business.

6. "Because wages are the principal cost of everything, widespread wage increases, without corresponding increase in production, simply increase the cost of everybody's living."

An example of this is the minimum wage. When it goes up, so do prices, and if the job isn't worth the wage, it will be lost. This solves the mystery as to why minimum wage increases are both rare and devastating. Unemployment had remained extremely low for several years until the summer of 2008 when there was a huge jump, followed by unemployment surpassing the 7 percent level. Another increase in the summer of 2009 has led to double digit unemployment. This is due to cause and effect, not coincidence.

7. "The greatest good for the greatest number means, in its material sense, the greatest goods for the greatest number which, in turn, means the greatest productivity per worker."

Production is the best way to keep an economy strong, and those who participate in it growing financially. The best way to encourage productivity is for a government to keep the costs of production as low as possible. This is done through a stable money supply, low taxes (especially on wealth creation), and few regulations.

8. "All productivity is based on three factors: 1) natural resources (NR), whose form, place and condition are changed by the expenditure of 2) human energy (HE) (both muscular and mental), with the aid of 3) tools (T)."This is straight forward enough. These three factors make up the totality of the economy. As a formula, this is seen as NR + HE x T = Man's Material Welfare."

Economies grew when the labor (human energy) is available in the most efficient way possible, when national resources (oil, wood, etc.) are as accessible and affordable as possible, and through the development of tools (which is technology)

9. "Tools are the only one of these three factors that man can increase without limit, and tools come into being in a free society only when there is a reward for the temporary self-denial that people must practice in order to channel part of their earnings away from purchases that produce immediate comfort and pleasure, and into new tools of production. Proper payment for the use of tools is essential to their creation."

Tools are the only one of these that can increase without limit. An example of this is agriculture, which was the dominant industry in the late 1700s and early 1800s, with the majority of our population working in that area. Today, the number who work in it are in the single digits, yet the abundance of food could not be greater. Technology made this completely possible.

10. "The productivity of the tools — that is, the efficiency of the human energy applied in connection with their use — has always been highest in a competitive society in which the economic decisions are made by millions of progress-seeking individuals, rather than in a state-planned society in which those decisions are made by a handful of all-powerful people, regardless of how well-meaning, unselfish, sincere and intelligent those people may be."

The genius of the many individuals operating on their own when it comes to economic prosperity is always greater than the few or even the majority that would impose its view of "fairness" on them. This is the "invisible hand" that Adam Smith spoke of so eloquently in his, The Wealth of Nations. Government cannot effectively manage economic growth and its efforts to do so only leads to government waste, economic recession (or depression), and devalued currency.

I love the Ten Pillars because they are simple, factual, logical, and without a agendas. They provide excellent benchmarks on what works in the economic system. Pass this tool on to others who are trying to figure out the headlines and share with them the message of economic liberty.

© Kevin Price