GuidoWorld

Economic Myths

June 29, 2007 on 5:35 pm | In General |

Our free market economy is based on competition. In any competition there is at least one loser for every winner. In the long run in any area there is only one winner. It is not unusual for a society’s recreational activities to exhibit and mirror its basic values. There has been much written on how the games at the Roman Coliseum reflected the social structure and filled a need of Roman society.

One look at our sports structure shows how important competition is in our society. In every sport the victor is hailed and the loser is quickly forgotten. The victors themselves are quickly forgotten if they do not repeat the next year. In most professional sports we have twenty to thirty teams all vying for the title. In the Olympics one thousandth of a second can separate fame from anonymity.

Yet, when it comes to our economic realities we often act as if the majority of people win. We act as if the loser in one field can quickly change into another economic activity or career and experience success. We talk as if monopolies are uncommon and unnatural and the exception rather than the rule. We have a myth that hard work and talent make one successful and only the lazy and weak lose in our society.

In each and every economic transaction there is a winner and a loser. If both parties were equal there would be no profit, it would be an exchange. If I gave you two quarters and in return you gave me five dimes it would be an equal exchange and neither of us would make a profit. In order for me to make a profit I must make more than the total cost or overhead of making the product, and the consumer must pay more than the products actual worth.

We often talk about the measures taken in order to keep costs down as a miracle of capitalism. We talk of the inventions and improvements in technology as if they create profit and wealth. We often go a step further and assert that economic realities spawn invention and raise the standard of living for all partakers of our wondrous economy.

We will fully address how our economic system fosters and restricts both invention and the standard of life in our next few posts, but for now let’s focus on the dynamics of profit and loss.

Economies are generally closed systems in which wealth is created thru increased capital generated by increased profit. If I mass produce an item there are many factors which go into the final cost of production. The factors change for different industries but in this essay lets say I’m building large appliances such as washing machines.

One factor is the cost of materials involved in making the object. In producing washing machines I would need various metals and plastics for the many parts that go into producing the final product. Another factor is the cost of the assembly line machines and energy needed to run those machines. In less I have a totally automated plant I will also need to pay the workers for their time and labor.

Transportation is another prominent factor which involves both how I get the materials to my factory and how I get my end product to the customer or distributor. I also have to consider the cost of packaging my product along with the expense of advertising my product to the general public.

In most cases, other than electronics, changes in technology do not happen often. For the most part I will not be able to cut cost thru technological advancement. Increases in profit margins could be made by being more efficient in how we make our product or by cutting down the profit margin of my suppliers. Additional ways of making a profit would be to reduce overhead by having my workers salaries take a smaller percentage of costs (overhead), or by increasing the productivity of the workers without compensating them for their efforts.

In many cases one’s major form of making a profit is thru increasing both the volume of things produced and their sales. In such situations I may be making less profit per washing machine sold but make a hefty sum thru the sheer number of washing machines sold. When the major portion of profit is generated by sheer volume the movement towards one business having a monopoly is but inevitable. If you look at any US sector you will find it dominated by one, two or three entities.

The winners from one geographical district will then meet up with the winners from another district, and thru take-overs, mergers, etc. they will determine the two or three winners of the next larger area. After national winners are determined this same competition will be played out on the international scale with regional and continental winners vying for the championship until one champion, one monopoly wins. This process happens in department stores, oil companies, computers, car companies, etc.

In this expansion phase where resources are being utilized at a rate far faster than ever before in human history, the standard of life of many people on the planet is improved. Yet, the very structure of the free market competitive economy demands that the gaps between the winners and losers becomes larger and larger. The general improvement of the standard of living of most of the populace allows them to not only tolerate, but even support the widening gap between the have’s and the have not’s.

Yet, the reason for the rise in the standard of living is not inherent in the system of competition. The rise is a by product of the system. What is inherent in the competitive form of free enterprise is an ever widening gap between those who profit and those who are profited from.

The odds of someone making exactly what their labors and talents are worth is infinitesimal. In almost every case either you are being overly or underly compensated. In a system of competition the majority are under compensated and the minority are making huge sums of money.

In my next post I will talk more on how our capitalistic economic system generates profit and wealth. I will attempt to show how colonialism and rapid exploitation of natural resources have given us a false sense of progress and wealth.

Guido