Friday, October 02, 2009

Understanding Human Nature Matters in an Economy

There has been a war that has raged for centuries in the fields of politics, economics, and the social sciences in general. It is a debate between those who say that all public policy should be developed on how people actually behave versus those who argue that public policy should be developed with the end result or intention in mind. Members of the former group are generally called "positive" theorists when it comes to approaching issues because they make decisions based on the way things are. They strive to take an objective view of public policy. The latter group has a "normative" view of economics. These individuals have a subjective view of human behavior. They want a disconnect between the policy and the intended result, because that goal is the only thing that matters. Unfortunately for them, we silly people tend to undermine that goal.

The examples of this are too numerous to cite in a space this small, but I will give a few examples.

Minimum Wage

The minimum wage is an excellent example of normative economics at work and is proof that the "road to hell is paved with good intentions." "Well meaning" politicians want to raise the standard of living for those who are earning a low salary and they raise the minimum wage. Ironically, this policy is always followed with a spike in unemployment, particularly for low income workers, and leads to higher prices (thus devouring the increase in income). In July of both last year and this there were significant increases in unemployment that accompanied a jump in minimum wage. People are paid based on what value the job has to the employer. If minimum wage raises the cost of the job above its value, the job has to go.

Taxing Business

Another popular area to attack is businesses through increasing taxation. This is the ultimate opportunity, we are told to "soak the rich" and to pound those greedy corporations. Unfortunately, businesses don't pay taxes. Period. Taxes are a fixed cost of doing business, like employees, office supplies, office space, and any of the other over head necessary to stay in business. Just like these other items, higher taxes are simply a fixed cost. Businesses don't pay taxes they collect them. They collect them, that is, until they get too high and they lose their competitive advantage, which is how corporations and the jobs they created are exported. If the cost of business is too high, businesses move to where it is more affordable because when humans (or businesses run by humans) are attacked, they either fight or flight. If we want the US to be the greatest job creator in the world, we would have a truly honest government that doesn't tax business at all. A consumption tax, which every person feels in every transaction, is far more honest that waging a war on wealth creation, be it on businesses and individuals.

Why Bureaucracy is Bureaucratic

I keep hearing stories of how much could be saved if government cut this program or that expenditure and am amazed by people who are shocked that the reductions in spending never happen. The reason is simple, while business operates on a "profit motive," government operates on a "spending motive." While saving money and making the most of every dollar makes sense in business, it does not in government when power is measured by how much is spent, how many employees one has, and the size of budgets. Short of getting bonuses for cutting agency budgets, bureaucracies will only grow. That is human nature.

These are just a few of the areas where government defies the laws of human nature. If you see a public policy that does not "make sense," you are likely right. Government rarely recognizes human nature in decision making, which is among the reasons government is out of control.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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