Last session in my seminar we examined cheap labor and found there is nothing to support that as a factor in international trade. The idea is unremarkable to people who are actually involved in international trade, but often a surprise to those outside the field. Welcome aboard!
There is another fundamental that must be understood, a fundamental which helps people analyze their experience as they proceed.
Everyone in this class desires, at least, to learn something about acquiring wealth through trade (even if one aspires to mere nonprofit status). What if the common idea of wealth is misguided? A proper understanding of wealth will help you order your priorities to gaining it.
As a preface, let me point out that the market is a subset of the economy. The market is limited to the distribution of goods and services. The economy is all transactions, the majority of which are non-market events. When a neighbor gives you a pie, it is a non-market event, but it is part of the economy. When a house is built and sold, it is a market event and an economic event. When a house burns down, it is a economic event, but not a market event. When volunteer firemen, which are the vast majority of firefighters in USA, put out a fire, it is non-market event, but it is an economic event.
Then such things as love, violence, charity and so much more are neither market nor economic events. A walk through the park, playing a song on a guitar, falling in love are neither market nor economic events. The markets are not the answer to everything, not everything is about economics.
Having said that, let’s look at how wealth is created, to see how we fit in.
The entrepreneur advances the market function of innovation in goods and services. Innovation is a process that results in the unique, rough, pricey and plodding. We saw this in the example of the first Apple computer products. A product is introduced, when it is only good enough to get enough orders to cover a supplier’s minimum production run. The next order constitutes a product iteration which includes improvements suggested by initial market reaction. Over and over, new versions keep coming out based on customer feedback. You keep making money since each order is profitable. This process continues, at least for several years, until the the item is so good and so widespread in its market acceptance that conservators "steal the idea," and apply their economies of scale to the innovation. The result is the product becomes commodified, and the conservators apply their economies of scale to the product and we get more, better, cheaper, faster versions of the innovative good or service. Ultimately, through the market and the concomitant division of labor, access to the the goods and services is made universal because the conservators “steal” the ideas of the innovators.
Of course, properly understood, the conservators steal nothing, because they redesign the idea at least one more time before they release their version, and they use their factories, distribution and finance to produce their version, and sell it to customers the innovator could never serve. So except out of some delusional conceit grounded in insupportable theory of “intellectual property rights” conservators steal nothing from innovators. And keep in mind the years the innovator was ever improving the item, the innovator was enjoying a nice profit on the sales thereof.
At the same time, the point in this process where the conservator is inclined to “steal the idea” the innovator has the opportunity to become a conservator himself. With such a history and such a proven item, the innovator may decide to offer an Initial Public Offering, the IPO, and change from innovator to conservator himself. Microsoft, Boeing, Apple were all at one point startups and innovators, and all at some point decided to offer the IPO, and become conservators. In any event to become a big business at some point the business must first start.
Happily almost all business remains small. The owner gets to some point, say $5 million in annual sales, with $500,000 net, after supporting himself through the business, and decides he has it just right. At that point to maintain that level of business, he is obliged, as we see from history, to dump about 20% of his line each year and introduce 20% new. This keeps the business steady. Which 20% to dump is indicated by which items are being “stolen” by the conservators. Those are the items to let go. What new items to develop is indicated by customer feedback.
We saw the market, when relatively free, lowers the price of computing and widen the access to the point where today people have more power in an iPad than was available to NASA to put a man on the moon. Nasa spent billions on such computer power, you get it for $500. If we had as free a market in medicine, then the cancer cure would be at $87.50, over the counter.
By “free market” we do not mean capitalism or its rival communism, but markets free of force and fraud, statutory vs common law regulation, and subsidies, which both -isms accept as necessary.
Think of deregulation of phones in 1980 and the internet thereafter. No one anticipated the world wide web, but it could not have happened without telephone deregulation. (As a side note, this, Carter’s wholesale dismantling of the CIA plus deregulation of air travel, beer and trucking led to the economic boom that occurred under Ronald Reagan. Change takes time, and Carter’s brilliant work took effect during the terms of Ronald Reagan.) Cell phones, introduced about 1980, were terribly expensive, huge, with poor service and design, and hard to come by. Today most cell phones, even an Apple iPhone, are free if you sign up for telephone service.
Affordable access to a wide variety of goods and services is the definition of wealth. A free market creates an ever expanding menu of more specific goods and services, at every lower prices. The people are served with ever more selection at ever lower price.
This is the original sense of "wealth," ie, weal, commonweal, commonwealth, before the bad guys hijacked the term. Wealth is not how much gold you have stacked up, wealth is access to goods and services. Progress is when prices fall, to the point where everyone has access to the good or service, like the cell phone and service plan that goes with it.
Wealth is an every widening selection of goods and services and an individual’s access to the same. King Henry the VIII was one of the richest people on planet earth in 1540 when he had a beautiful home, great personal security, meals ready at a snap of the finger, chamber music with each meal, wore silks from China, could travel anywhere he wanted, outstanding carriages, excellent medical care (not that it did him any good), had a fabulous education and could start his own religion if he wanted. Today even the poorest American citizen has all that and far more. Did the US citizen get fabulously rich, or did the price of all those benefits fall to where virtually everyone has access to them?
That is the function of the free market in the classic sense, not what politicians call the free market. When politicians say “free market” they mean help their friends, and hurt their enemies. The use subsidies, regulations and taxes to pick winners and losers. In any case, the consumer loses, no matter which gang wins. Poverty is the result of failed government policies, not the free market. It is not possible to get government policies right since they necessarily pick winners and losers. Someone’s ox gets gored. The market is the only means for getting selection and distribution right, and get the price down to where it is affordable.
Wealth is the result of freedom to act and contract, in which one can pursue solutions to problems and share them with others. This sharing is in response to the needs of others. Merchants are in essence at the service of others, in the strictest sense.
Each enterprise is unique to the entrepreneur and the situation in which he finds himself. He may open merely yet another coffee shop, but his kind of coffee and what baked goods he offers will meet the needs of his customer base, making his shop unique. He may have come to love coffee cut with chicory and its health benefits, and found that sweetening such coffee with molasses and calling it Cafe Creole satisfies the aspirations of a Francophone section of his customer base.
This is not a world in which we "live simply, in order that others may simply live" but a world in which we live fully, because everyone is free to contribute.
Wealth is not how much money one has, but what goods and services one can access with the money one earns. A free market allows the range of goods and services multiply indefinitely since markets are constantly being divided up by entrepreneurs introducing new and better goods and services.
The ability to create and satisfy customers earns one just compensation for his efforts, and he that refuses to work will find it difficult to earn. But as we see in better ordered economies such as Hong Kong, anyone can earn and the range of goods and services make life comfortable for all who participate.
But we may be inspired to do something more than a coffee shop. As we get closer to what we truly love, we may find something larger to work on. Let’s experience free thinking in a couple of examples.
Radio waves occur naturally, and so when you are between stations or out of range you get static, natural radio waves. Marconi and others discovered sound could be recorded, transmitted and sent to receivers (radios). That is an invention.
Around the 1900s a theory emerged that said there was such things as natural monopoly, for such things as roads, telephones and radio. Therefore, the state should step in and control these things. But they would say that, wouldn't they?
About 1980, the scales fell from the eyes, and we had the unimagined wonders of the internet when telephones were deregulated, just lightly. Imagine what we would get with full deregulation!
The internet is an example of unseen goods and services that emerge in freedom, and deregulation is a return to freedom.
As to radio, it is an invention. 100 years ago the invention was in a stone age form. The government locked down the invention. So entire swathes of band are allocated to one owner. This is madness.
Think of a sine wave of a radio frequency, with its up and down pattern. There is no reason why radio transmitters cannot be designed to separate out the wave upswing with the wave downswing for reception of signal, and then build the reception with that half of the wave. It would be a mere improvement on what we have now. It is in fact exactly how your computer works. An email is broken into many packets as it goes out, and on the other end a computer reassembles the parts into a coherent message.
Now, if you can wrap your brain around cutting a band wave in two, then you can see how where we allocate certain bandwidth to one radio station now, we can split it in two so we can serve two radio stations. Call it AM 1000 a and AM 1000 b. Same bandwidth, just double the capacity. Old radios might no longer work (or someone would come up with an adapter) but we have plenty of old computers that do not work either, because they cannot handle the internet, a new invention.
Once you understand we can cut bandwidth in two, then you see we can cut that in two also. So, one channel, two channels, four channels, eight channels, 16 channels, 32 channels... on to infinity, for that one dedicated channel of bandwidth. That is to say, radio is an infinite resource, limited only by mans desire to exploit. The price of something with infinite supply is very cheap.
“Health Insurance” is a hot political topic, for which there are plenty of ways to provide a solution. Never mind that health insurance is diet and exercise, and what we want is cures for a medical disaster, not insurance for health care. Insurance, in essence, is where a group gathers for mutual aid. So how about members agree to make a monthly insurance payment, in this case full medical care for a single at $135, two parent family at $320. The members submit any medical bills above the first $300 per year to the group headquarters. HQ verifies the bills, and then directs the members that month to mail their payment to the person in the group who has medical bills to cover. So if Joe Smith has $13,500 in medical bills this month, 100 members mail their payment to him, as an act of charity, and he pays his $13,500 in medical bill directly to the hospital or doctors or whoever. Anyone else who has bills gets covered as well. Each month they clear out all bills, one way or another. Wow.
Members pay $175 a year to join, and for that administrators check and verify the bills, and negotiated down bills for members (cash talks) and also maintains lists and a clearing house of doctors who esteem cash paying patients. This efficiency lowers the cost of health care. This isn’t fantasy, it has been in place for the last 15 years. It works, but few can imagine it, so it only has about 18,000 members.
Pollution: Cars are inventions. The invention could include a system to catch all emissions. When USA changed from common law to statutory law on pollution, then the manufacturers were given a pass, so now we have pollution where once none was permitted. Go back to the common law on pollution, redesign cars to package up exhaust for resale to industrial users, and end auto pollution.
In business, in a free market properly understood, your passion, your joy is mixed with customer feedback to ever refine the collection of goods and services available at ever falling prices. There is no better means for distributing society’s goods and services, not to mention there are no other means for initiating the improvement in the selection of goods and services needed by society at any given time.
This is entrepreneurship in a free market, properly defined and understood.
Feel free to forward this by email to three of your friends.
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