Ten simple truths about the economy

By Kevin Price

Politics is more divisive than ever. Partisans hear "buzz words" and they no longer can have a meaningful discussion on the issues of the day. Instead people are "liberal," "conservative," and as a result, "don't get it."

I love the work of the Ten Pillars of Economic Freedom by the American Economic Foundation (AEF). That organization, formed during the Great Depression, was designed to fight a battle that is very similar to the one we suffer from today. The nation is largely ignorant when it comes to the political and economic battles of the day; furthermore all discussions are about political approaches rather than economic realities.

I have had the opportunity to speak about the Pillars in countries around the world, as well as in colleges and universities in the US. They are noted for their simplicity, clarity, and are as useful today as they were in the 1930s when they were written. Here they are:

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.

Simply put, there is no such thing as a free lunch. Everything has a cost regardless of promises from politicians.

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.

Recently, 25 percent of Americans who were asked in a 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.

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 Obama (and Bush) is being financed by fiat money (essentially counterfeit) and will result in rampant inflation. Other parts of the spending will be paid for by future generations. Finally, some will be paid by foreign governments who invest in such debt (making us dependent on regimes, like China).

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 accommodate customers. There is no other way to assure long term job 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.

Unions often want an adversarial relationship with business, but job security can only come if the two are partners pursuing customers together.

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 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.

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, 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 at NR + HE x T = Man's Material Welfare.

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 and the abundance of food could not be greater. Tools are what have changed everything.

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.

These Pillars are factual, logical, and without a political agenda. Share them with your students who are neglected a proper economic education at school. The Pillars work and use them today.

© Kevin Price