Thursday, February 26, 2009

Economics versus Politics

10.Economics versus Politics
[The modern flush toilet is an example of a development, not by politics, but by economics.]

(Many things that are possible are not worth attempting. Once something is seen to be worth trying, it quickly will be.)


A few years ago, I was talking idly with a friend about life in Southern California. The conversation veered into some speculation about air quality and how it might be improved. His view was that oil companies and auto manufacturers should build a non polluting automobile. I voiced agreement, but added that what he was asking for was not feasible at that time, or in the foreseeable future. He said that surely, with all the resources at their disposal, such a project would be a “slam-dunk.” I said, in sort of a conciliatory fashion, “Sure, they can build a few on an experimental basis, to test some design concepts, but at this time full-scale production would not be possible. The final product would be rejected by the market as too costly. Such a venture would be an economic failure.”

My mention of economics sent him into a tirade: “Phooey on economics. In a case such as this, you can’t think of economics. It’s the air we’re breathing that matters.” I bit my lip, and moved onto a different subject.

I have reflected on that event many times. I concluded that my friend and I were using different definitions for “economics.” I was using the term in a general fashion meaning: being careful, using caution, employing economy in ones’ efforts. He was using it to mean money or greed.

This event sensitized me to the word, and I started listening carefully to other people whenever the word was used. I concluded that many people use the later definition. They conjure oodles of plunder if they learn that some enterprise is “economic.” A small number of people even think that an economic enterprise is immoral. Most people do not know the meaning of the word.

Thomas Sowell (Basic Economics, Chapter 1) defines economics as: The study of the use of scarce resources that can be used in different ways. For example, pine logs can be sawed into 2x4 house framing, or the same wood might be sawed into ½-inch strips for lattice work. As the result of a hurricane in Florida, attended by major losses in housing, the increased demand for structural 2x4 might cause shortages, or at least price increases, for decorative lattice all over the United States. Such a condition will persist until such time that the structural requirements are satisfied.

A mere definition of economics does little to illuminate its usefulness. Its primary practical use is to determine where to spend money. Before selling your house, you decide to spruce it up to make it as attractive as you can on your limited budget. You decide on a new paint job instead of a new roof. You figure the new paint job will add more dollars to the selling price than would a new roof.

Engineering practice includes economics as an important component. The study of economics within engineering concentrates greatly on evaluating two types of costs: capital costs and operating costs. Capital costs are the costs to build capital: equipment and factories. Operating costs are the costs of running a piece of capital equipment or a factory. Typical costs of running a Coca Cola bottling operation are: water, sugar, syrup, bottles, labels, bottle caps, electricity, labor, etc. For engineering work, many accounting methods (such as discounted cash flow) are employed. Engineering differs sharply from science in that engineering requires economics as a skill necessary to be used and employed in daily practice.

I like to think of free-market economics as the ultimate environmental tool: The cost of whale oil in the 1800s forced people to search for cheaper, more plentiful fuel. This led to the development of oil from the rocks: petroleum. In recent history, logging costs have risen leading to the use of galvanized sheet metal shapes in the place of 2x4 wood for studs. For clothing, synthetic fibers were developed as cheaper alternatives to natural fibers. In addition to being cheaper, synthetic fibers can be manufactured as thin hollow tubes, or star-shaped, or crescent-shaped cross sections. With natural fibers, you take what you get. Custom shapes were unforeseen during the early development of synthetic fibers. The use of many derivatives of petroleum as raw materials were unforeseen too.

Economics is a strong tool for democracy too. Every time we buy a product, we are voting with our money. Products with many supporters succeed. Poor, unsupported products fail.

Please note in Sowell’s definition of economics the requirement for different approaches. A result of this requirement is that the different approaches lend themselves to comparison. Subsequently, a selection can be made to use the most favorable of the alternatives. The mere choice of color scheme for a new home can affect its selling price: deep purple attracting fewer buyers than Navajo white.

The selection process often involves imponderable factors to which a dollar amount cannot be attached. One example would be a book publisher refusing potential business on the basis of the publisher’s religious beliefs. Questions such as: “Where do we want to be ten years from now?” often arise in economic evaluations. I have personally attended many meetings in which the hint of a safety issue has quickly and terminally scotched what initially seemed like a great idea. The hint of a pollution or public nuisance problem has the same effect. Never have I sat in a meeting where safety, the environment, or neighbors have been dealt with by a decision to either: ignore, cause harm, or proceed with a plan to deceive. Part of economics is the use of moral sensibility. If something is morally wrong, it is also uneconomic. The positioning of corporations, and industries as willful polluters and producers of environmental poisons is a lie told by the left to empower themselves by appearing to be morally superior. It has no basis in truth.

Once again, the true correlation is the reverse of what the lefties would have you believe: It is the socialist economies that have the worst track record regarding environmental destruction. Russia, Eastern Europe and China easily take the prize for environmental destruction. Even backward enclaves of socialism such as Mexico and Cuba are easily evaluated in this regard: Just look at them; just think about their water supplies.

In the early 1900s Franz Oppenheimer posited the idea that wealth is acquired only by two means: 1) by political means, 2) by economic means. In Oppenheimer’s view, political activities include force, or the threat of force, but can include inheritance, or gift. In sharp contrast, economic activities exclude force.

Think of Oppenheimer’s observation as follows: A gold nugget is spotted in a stream by a miner. He pockets it. He goes into town and buys two mules with the nugget. The fellow who sold the mules is confronted by a thief with a pistol. The thief steals the nugget. Three transactions have occurred. The first two are economic. The third is political. If the last transaction had been a gift from the mule seller to his wife, it would still be classed as political.

Let’s look at another example. You buy wood at a lumberyard, and build bookcases for sale. You advertise in the local newspaper and sell several bookcases per week. Local regulations require that you collect tax and send the tax to the governing agency. What happens if you do not send in the tax to the governing agency? Quick answer: You are fined. What happens if you don’t pay your fine. Quick answer: You are put in jail. What happens if you resist? Quick answer: You are overwhelmed by armed officers of the court and put in jail. See, how political transfer of wealth can rely on force? It need not, but it may.

The distinction between economic activities and political activities is fairly easy to discern. The following table gives more examples. Note that the bond sale for road improvement (Item 3) is in the realm of both economics and politics.

Economics and Politics Side by Side(See table at the start of this blog.)

Greed is a primary motivation for laws that transfer wealth from those who produce it to those who are plunderers. A strong secondary motivation is envy. The force of envy can be so strong that rather than allow some other person to prosper, and perhaps participate indirectly in that prosperity, some people will prohibit others from prospering. An Argentine friend once told me of a fellow he knew who wanted to develop a talc deposit on his land. One of his neighbors saw him mining the talc and shipping it to a processor in Buenos Aires. The neighbor raised a stink, and the municipality served notice that the operation had to cease. Everyone lost; even the guy that complained. The miners were out of work. The trucker lost a nice piece of business. The processors had to start importing talc from Brazil, as they had prior to the brief operation in Argentina. Every package of talc sold to Argentines had to sell at a higher price. All this occurred because of the ego-driven envy of one individual, and the heavy hands of lawyers and politicians in the municipality.

Personalities, i-type, u-type

By now, the thoughtful reader has probably concluded that i-type personalities are best suited for careers in production and services, performing tasks that are driven by economics, and further, the u-types, lacking patience for details, and given to affable loquacity, and misplaced self confidence, feel an irresistible pull toward the political life. Because you, Joe Sixpack, probably loathe politics, and dedicate your skills in a field of economic endeavor, Joe, your i-type personality, and work in an economic enterprize constitutes a good match.

Our founders knew both politics and economics. They owned businesses and farms. More than a few were inventors, and had patents in their names. Today, very few politicians know anything about economics (in spite of all their posturing to the contrary), or have ever given it a thought. These modern politicians only know law: i.e., the use of force.

Economic activity requires the extraction of something from nature. This includes the chain of transfer from one owner to another. A horse breeder creates new horses. A corn farmer plants and harvests corn. The breeder and the farmer contract others for the sale of products. A merchant buys from one person and sells to another. These are all economic activities.

Prior to the 1966 congressional election, this country (the USA) was governed by economics. Since 1966 fewer and fewer decisions are based on economics. The 1966 elections resulted in a Congress that was overwhelmingly Democrat. Along with President Johnson, Congress passed a series of laws that made economic activities subservient to politics. Before 1966 millions of business people were the ones in charge of almost everything that happened in this country. Since then, large Federal and State bureaucracies have grown steadily. Year after year, these entities have imposed themselves in every facet of life, always under the guise of “helping” somebody (the consumer, the poor, the unemployed, the old, women, blacks, homosexuals, “undocumented” immigrants, etc.). The vision at work in the highest echelons is to create an organized society. This is the vision of our presumed masters – the vision of the anointed ones.

To gain an appreciation of how things have evolved, please examine the small table, below. A single day (22 April) for the years 1960 and 2003 are compared The data show the numbers of articles devoted to Economics and Politics contained within the Business Section of the LA Times, then versus now. Back in 1960 the Business Section devoted itself to reporting what was going on in business. The level of detail is amazing. The reports would include details on square feet when referring to a real estate deal and raw materials (bauxite) when referring to an aluminum company. On the other hand the same LA Times in 2003 reported as much on political matters (lawsuits, etc.) as on economic matters. A single day (22 April) for the years 1960 and 2003 are compared.

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