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Economic Principles

Wealth Creation & Standard of Living

 

Wealth and a higher standard-of-living can only be created when productivity (value produced per person-hour) is increased through innovation or leverage of technology. The latter is only possible through investments. Furthermore, the productivity of labor determines the supply of consumer goods relative to the supply of labor, and thus the prices of consumer goods relative to wage rates. Net, only through productivity are wealth created, wages raised, and standard-of-living improved.

 

Government spending or increase of the money supply through Quantitative Easing (Federal Reserve prints money and loans it to the Treasury in exchange for bonds) cannot achieve productivity improvements and thus cannot improve the standard-of-living. Instead, it results in inflation. Government does not have a profit / productivity improvement motive. It is only concerned with collecting taxes to fund its operations, redistributing money to political allies, national defense, and enforcing rules and regulations.

 

Prices, Profits, and Wages

 

Money facilitates exchange of goods and services and eliminates the need for barter, in which two people with two disparate needs must find each other and agree on exchange quantities. Prices based on money and profits provide feedback signals to companies to assure them that their products or services are correctly priced for their market and that it has employed resources in conformity with consumer desires. Prices are based on market-based supply-and-demand, facilitate proper allocation of scarce resources, and provide incentives during shortages for others to get into the business. Price controls ignore these market-based realities and typically result in shortages, long lines, and generally poor customer service.

 

Wages are based on money and facilitate employment of people with dissimilar skills and interests. The amount of each wage is based on the supply-and-demand of these skills in the market. Any artificial manipulation to increase wages will lead to subsequent losses in jobs, since businesses must maintain competitive operating costs. For example, minimum wage laws or higher wages, obtained through collective union bargaining, lead to job losses. Consequently, “right-to-work” states (which prevent workers from being compelled to join unions as a condition of employment) between 1970 and 2000 created twice as many jobs as states without “right-to-work” laws. Everyone sees the immediate benefits of higher wages for the affected workers, but no one sees the associated job losses.

 

Importantly, none of the above economic dynamics apply to government workers, since the government has monopolistic powers to seize more “revenue” from its citizens through taxation to pay for ever increasing operating costs, or by simply printing money. Without pricing and profit feedback signals from the market, government allocation of resources has no basis other than the beliefs of central planners. Consequently, government will run inefficiently and wastefully. Ask yourself why your shopping experience at UPS, FedEx, OfficeMax, Target, etc. differs so greatly from the government run Post Office, License Bureau, etc.? As stated above, lack of market-based feedback results in shortages, long lines, and generally poor customer service.

  

The Socialist Nanny State

 

Government’s promise to take care of its citizens from “cradle to grave” is predicated on redistributing wealth from its more productive citizens to the less productive constituency, since government does not create wealth. This government intrusion on the free-market ignores the inevitable cause-and-effect of such wealth transfers. It ignores that humans, unlike animals and inanimate objects, can rationally think about the consequences of the wealth transfer and act accordingly. As Ludwig von Mises stated, based on historical observations, human action will attempt to substitute “a more satisfactory situation for a less satisfactory one.” Consequently, society-at-large will experience a trend from more productive citizens to less productive citizens and an associated decline in overall standard-of-living. For example, when the U.S. Census Bureau asked the unemployed poor in 1990 why they were not working, only four percent gave as a reason an inability to find work.

 

Those who advocate the Socialist Nanny State ignore that the United States became the wealthiest and most successful nation in the world based on market-based capitalism. Living standards for all industrialized nations have improved since the Industrial Revolution. The “poor” in the United States have a much higher standard-of-living than in the past and relative to people of other nations – see discussion in next paragraph. Forty-one percent own their own homes, seventy-five percent own cars and VCRs, and two-thirds have air-conditioning and microwave ovens. Standard-of-living is consistently higher for the poor in market-based societies in relation to those economies with heavy government intervention and redistribution of wealth.

 

Many view Sweden as the epitome of a successful socialist state which manages to take care of its citizens from “cradle to grave”. When, in 1912, Sweden prohibited child-labor and introduced old-age welfare, it resulted in the lowest birthrate in Europe by 1935. This was due to the fact that couples were expected to pay for the expenses of raising children, without any material benefit in return, including in old-age. In reaction to this crisis, the Swedish government decided to alleviate this cost burden of children on parents, financially encouraged couples to have children, and in essence provide to all “cradle to grave” welfare. The consequences of this government action, which essentially stripping the family unit of its productive function, were that marriage rates fell to a record low among modern nations, two-thirds of Swedes live in single-person households, and over half of all Swedish births are outside of marriage. Importantly, Swedish median income by the end of the 1990s was $26,800, compared to $39,400 in the United States. The Swedish Research Institute of Trade economists indicated that ”Black people, who have the lowest income in the United States, now have a higher standard of living than an ordinary Swedish household.” It appears that U.S. politicians are on the verge of successfully replicated this travesty in our very own U.S. inner-cities.

 

None of this, of course, is to suggest we don’t need a “safety-net” to take care of those less fortunate in society due to sudden or unforeseen circumstances. It just argues against the going-proposition of a government guaranteed good-life from cradle-to-grave. Utopia has not yet been invented on earth, as evidenced by the many failures over the course of history of those who tried to pursue this dream.

  

Social Justice

 

The Catholic Church’s “Social Justice” initiative in South America has been a travesty. Instead of improved standard-of-living, countries ended up with corrupt dictators. Venezuela’s Chavez is the poster child for this scenario. To get elected, he appealed to the lower classes with demagoguery and populist promises of “Social Justice”. Since his policies were not grounded in economic reality, he was not able to deliver and Venezuela’s standard-of-living declined. The very same people who elected him are now rising up against him, only to be met with force from Chavez. F. A. Hayak in his 1944 book “The Road To Serfdom” eloquently describes this progression from utopian vision, leading to central planning, and why eventually all these initiatives end up in totalitarianism. The Catholic Church has now abandoned this initiative.

 

Similarly, the churches’ advocacy of foreign aid based on “Social Justice” has been an abject failure. After five decades of aid, developing countries have little to nothing to show for it. Instead, it has served to prop up corrupt and brutal regimes and sheltered them from economic realities. Most of Africa, parts of Latin America, the Middle East, and Asia are economically worse off today than they were twenty years ago. Only when aid to South Korea, Taiwan, and Chile were cutoff did they embrace the free market and prosper.

 

The “Social Justice” movement within the Catholic Church ignores church teachings of Subsidiarity. It states that, if at all possible, everything should be accomplished at the lowest possible social unit (e.g. families, churches, etc.). Only functions that cannot be carried out at a lower social unit should be performed at a higher, more remote institution, such as the government. Furthermore, using the government as an agent to take from some, to give to others, is nothing more than legalized-theft. Christian commandments clearly prohibit theft and, in fact, admonish man from even desiring what others have.

 

Thomas Woods, Jr. in his book, THE CHURCH AND THE MARKET, A Catholic Defense of the Free Economy, makes a compelling point that many of the “unintended consequences” of policies advocated by theologians could easily have been prevented with a better understanding of economic principles. Theologians, and many well intentioned people, all too often focus on what is seen in economics, but are clueless about what is not seen, such as how minimum / living wages destroy jobs. Using this line of reasoning, Woods makes the argument that theologians have no business discussing economics, since they have not studied it. He further states, that the central problem with “Social Justice” teachings of the churches is their inability to integrate the logic of the market with the logic of morality.

 

Religious leaders should instead embrace the free-market economies since they have produced one of the greatest creations of wealth, resulting in increased life-expectancies, caloric intake, literacy, education, etc. The poor within these economies have benefited much as well, as evidenced by better housing, better health, sanitation, and declines in famine, disease, and infant mortality. Importantly, the market-based economies don’t rely on government coercion and manipulation, but instead relies on a system of peaceful social cooperation. 

 

 

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