How to Talk about the Economy

Virtually every economic debate falls into a discussion about parties and politics. This is why most economic discussions do not amount to much. You start discussing parties and politicians and the debate simply goes down hill from there. That is why I love the Ten Pillars of Economic Wisdom. They speak of pure economic truths -- no agendas, just common sense.

In the 1990s, I was a Senior Fellow at the American Economic Foundation, which was the group that developed the Ten Pillars during the Great Depression. The organization wanted to remind Americans that freedom works. It was my job with the Foundation to teach the same lesson in seminars in the former Soviet Union and how these principles could be a light to a region that suffered from decades of totalitarianism. Today, the US is slipping into a command economy of its own where the government will seek to be in charge of all things. Today, with the Obama Administration, this country needs to be reminded of these principles now more than ever.

1. "Nothing in our material world can come from nowhere or go nowhere, nor can it be free: everything in our economic life has a source, a destination, and a cost that must be paid."

As Milton Friedman use to say, "there is no such thing as a free lunch." Everything has a cost, regardless of promises from politicians. The next time a person says "the government should to that," simply ask them how? At what cost? Why?

2. "Government is never a source of goods. Everything produced is produced by the people, and everything that government gives to the people, it must first take from the people."

Following the two massive bailouts over the last 16 months, 25 percent of Americans who were asked in a Fox survey how the government pays for its programs said it was because the US "has its own money." Those people need to be familiar with this Pillar. The bailouts we have seen cost plenty and will have a profound impact on our economy. They are being paid for through a massive printing of fiat money (essentially counterfeit dollars) and new taxes that will effect every economic group.

3. "The only valuable money that government has to spend is that money taxed or borrowed out of the people's earnings. When government decides to spend more than it has thus received, that extra unearned money is created out of thin air, through the banks, and, when spent, takes on value only by reducing the value of all money, savings, and insurance."

Much of the new spending we have seen by politicians is being financed by fiat money and will result in rampant inflation. Inflation means "too much money chasing too few goods." Government is paying for its programs with "funny money," but the consequences are anything but humorous.

4. "In our modern exchange economy, all payroll and employment come from customers, and the only worthwhile job security is customer security; if there are no customers, there can be no payroll and no jobs."

Labor unions have long tried to create an economic world that is detached from reality. If labor wants job security, they must do what successful employers must do -- make the customer the priority. There is no other way to assure stability.

5. "Customer security can be achieved by the worker only when he cooperates with management in doing the things that win and hold customers. Job security, therefore, is a partnership problem that can be solved only in a spirit of understanding and cooperation."

This simply means that labor often seeks an adversarial relationship with business, but job security can only come if the two are partners. For years Japan's company unions served as a model of labor and employer cooperation. With this model employees and management would work together on strategies to increase customers, foster efficiency, and to build a better business.

6. "Because wages are the principal cost of everything, widespread wage increases, without corresponding increase in production, simply increase the cost of everybody's living."

An example of this is the minimum wage. When it goes up, so do prices, and if the job isn't worth the wage, it will be lost. This solves the mystery as to why minimum wage increases are both rare and devastating. Unemployment had remained extremely low for several years until the summer of 2008 when there was a huge jump, followed by unemployment surpassing the 7 percent level. Another increase in the summer of 2009 has led to double digit unemployment. This is due to cause and effect, not coincidence.

7. "The greatest good for the greatest number means, in its material sense, the greatest goods for the greatest number which, in turn, means the greatest productivity per worker."

Production is the best way to keep an economy strong, and those who participate in it growing financially. The best way to encourage productivity is for a government to keep the costs of production as low as possible. This is done through a stable money supply, low taxes (especially on wealth creation), and few regulations.

8. "All productivity is based on three factors: 1) natural resources (NR), whose form, place and condition are changed by the expenditure of 2) human energy (HE) (both muscular and mental), with the aid of 3) tools (T)."This is straight forward enough. These three factors make up the totality of the economy. As a formula, this is seen as NR + HE x T = Man's Material Welfare."

Economies grew when the labor (human energy) is available in the most efficient way possible, when national resources (oil, wood, etc.) are as accessible and affordable as possible, and through the development of tools (which is technology)

9. "Tools are the only one of these three factors that man can increase without limit, and tools come into being in a free society only when there is a reward for the temporary self-denial that people must practice in order to channel part of their earnings away from purchases that produce immediate comfort and pleasure, and into new tools of production. Proper payment for the use of tools is essential to their creation."

Tools are the only one of these that can increase without limit. An example of this is agriculture, which was the dominant industry in the late 1700s and early 1800s, with the majority of our population working in that area. Today, the number who work in it are in the single digits, yet the abundance of food could not be greater. Technology made this completely possible.

10. "The productivity of the tools--that is, the efficiency of the human energy applied in connection with their use--has always been highest in a competitive society in which the economic decisions are made by millions of progress-seeking individuals, rather than in a state-planned society in which those decisions are made by a handful of all-powerful people, regardless of how well-meaning, unselfish, sincere and intelligent those people may be."

The genius of the many individuals operating on their own when it comes to economic prosperity is always greater than the few or even the majority that would impose its view of "fairness" on them. This is the "invisible hand" that Adam Smith spoke of so eloquently in his, The Wealth of Nations. Government cannot effectively manage economic growth and its efforts to do so only leads to government waste, economic recession (or depression), and devalued currency.

I love the Ten Pillars because they are simple, factual, logical, and without a agendas. They provide excellent benchmarks on what works in the economic system. Pass this tool on to others who are trying to figure out the headlines and share with them the message of economic liberty.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Ten Pillars of Economic Wisdom: Now More than Ever

During the Great Depression the size of government grew exponentially and many believed that the United States had lost those essential principles that made this country the most prosperous on the face of the earth. It was during this time that an organization was formed, called the American Economic Foundation (AEF), and they put together the following “Ten Pillars”* to remind Americans what works in an economy. If people wondered if a policy was good and beneficial to everyone concerned, than it would stand the test of these Pillars.

In the 1990s, I was a Senior Fellow at AEF and I conducted seminars in the former Soviet Union about these principles and how they could be a guiding light to that region that suffered from decades of Communist totalitarianism. Today, we are about to slip into a command economy of our own where the government will seek to be in charge of all things. Today, with the Obama Administration, this country needs to be reminded of these principles now more than ever. You are going to see these principles frequently in my blog, in the Price of Business pages, and on the radio. These principles are a guiding light towards a free economy.

1. Nothing in our material world can come from nowhere or go nowhere, nor can it be free: everything in our economic life has a source, a destination, and a cost that must be paid.

Simply put, there is no such thing as a free lunch. Everything has a cost regardless of promises from politicians.

2. Government is never a source of goods. Everything produced is produced by the people, and everything that government gives to the people, it must first take from the people.

Recently, 25 percent of Americans who were asked in a survey how the government pays for its programs said it was because the US "has its own money." Those people need to be familiar with this Pillar. The bailouts we have seen cost plenty and will have a profound impact on our economy.

3. The only valuable money that government has to spend is that money taxed or borrowed out of the people’s earnings. When government decides to spend more than it has thus received, that extra unearned money is created out of thin air, through the banks, and, when spent, takes on value only by reducing the value of all money, savings, and insurance.

Much of the new spending we have seen by Obama (and Bush) is being financed by fiat money (essentially counterfeit) and will result in rampant inflation. Other parts of the spending will be paid for by future generations. Finally, some will be paid by foreign governments who invest in such debt (making us dependent on regimes, like China).

4. In our modern exchange economy, all payroll and employment come from customers, and the only worthwhile job security is customer security; if there are no customers, there can be no payroll and no jobs.

Labor unions have long tried to create an economic world that is detached from reality. If labor wants job security, they must accommodate customers. There is no other way to assure long term job stability.

5. Customer security can be achieved by the worker only when he cooperates with management in doing the things that win and hold customers. Job security, therefore, is a partnership problem that can be solved only in a spirit of understanding and cooperation.

Unions often want an adversarial relationship with business, but job security can only come if the two are partners pursuing customers together.

6. Because wages are the principal cost of everything, widespread wage increases, without corresponding increase in production, simply increase the cost of everybody’s living.

An example of this is minimum wage. When it goes up, so do prices, and if the job isn't worth the wage, it will be lost. This solves the mystery as to why minimum wage increases are both rare and devastating.

7. The greatest good for the greatest number means, in its material sense, the greatest goods for the greatest number which, in turn, means the greatest productivity per worker.

Production is the best way to keep an economy strong, and those who participate in it growing financially. The best way to encourage productivity is for a government to keep the costs of production as low as possible. This is done through a stable money supply, low taxes, and few regulations.

8. All productivity is based on three factors: 1) natural resources (NR), whose form, place and condition are changed by the expenditure of 2) human energy (HE) (both muscular and mental), with the aid of 3) tools (T).

This is straight forward enough. These three factors make up the totality of the economy. As a formula, this is seen at NR + HE x T = Man's Material Welfare.

9. Tools are the only one of these three factors that man can increase without limit, and tools come into being in a free society only when there is a reward for the temporary self-denial that people must practice in order to channel part of their earnings away from purchases that produce immediate comfort and pleasure, and into new tools of production. Proper payment for the use of tools is essential to their creation.

Tools are the only one of these that can increase without limit. An example of this is agriculture, which was the dominant industry in the late 1700s and early 1800s, with the majority of our population working in that area. Today, the number who work in it are in the single digits and the abundance of food could not be greater. Tools are what have changed everything.


10. The productivity of the tools--that is, the efficiency of the human energy applied in connection with their use--has always been highest in a competitive society in which the economic decisions are made by millions of progress-seeking individuals, rather than in a state-planned society in which those decisions are made by a handful of all-powerful people, regardless of how well-meaning, unselfish, sincere and intelligent those people may be.

The genius of the many individuals when it comes to economic prosperity is always greater than the few or even the majority that would impose its view of "fairness" on the economy. This is the "invisible hand" that Adam Smith spoke of so eloquently in his The Wealth of Nations.

These Pillars are factual, logical, and without a political agenda. They provide excellent benchmarks on what works in the economic system. Pass this tool on to others who are trying to figure out the headlines and let freedom ring!

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

*An internationally accepted working paper developed by The American Economic Foundation

Remember when You Use to Shop at...

We have those stores we remember shopping at in times past. When I was a kid I use to visit Santa at the Federal's Store in the Detroit, Michigan area. One year these stores started to spontaneously combust and they had to close them all. Later it was discovered that the owner of the store was behind these fires in an insurance fraud scheme. I also remember Cunninghams Drug Store, Woolworth's, and Kresge's. I loved spending my birthdays at Farrells Ice Cream Parlor with its old fashion charm (there are one or two of these left in California, but it use to be nationwide). Each of these stores were victims of economic hard times, but I still have fond memories of them.

Well, we are about to add to our list of stores and businesses that we will say, "remember when you use to go to...?"

• Mervyns. This poor department store always seems to struggle in differentiating itself from others.


• Steve & Barry's. This store had a fantastic marketing concept of providing college attire at a really low price. It appears the prices may have been too low.


• Linens and Things. This store seemed to reach its pinnacle in the 1980s and has been in decline ever since.


• Sharper Image. A cultural icon of the 1980s, this cutting edge store was found in movies. If you saw a news story about the "next big thing," you would likely find it first at Sharper Image.


• Tweeter, Circuit City and CompUSA. Yes, even electronics and IT stores are vulnerable in this economy.


• Whitehall Jewelers. Not all that glitters is profitable.

I don't believe the list will end here. This economy is extremely soft and it appears that only the major volume businesses might survive (this is a little over dramatic, but I am sure you get my point).

Stories such as these are a little scary. They are very scary if you actually work for one of these businesses. But businesses failing such as this are part of the natural business process and as they fall, they will be replaced with smarter and more efficient companies. Businesses fail because they did not respond to the demands of the market. It is, as Adam Smith described in his Wealth of Nations, the "invisible hand" that fuels economic progress. Some times it is painful, but it is also always effective, as long as government doesn't intervene.

So will a future article I write be "remember when you use to drive a...?" We will have to wait and see.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Ford Employees Learning Economics 101

I know this is going to sound harsh, but the economic realities that Ford employees are discovering are the same lessons everyone must learn in order to thrive in our current economy. During an interview on ABC News Nightline an employee was asked about the cause of the company's decline. She replied it was because Americans selfishly bought foreign cars at the expense of their fellow Americans. The interviewer asked a question that was shockingly perceptive in our current political environment, (paraphrase) "could it be that Americans don't want to pay for the amazing salaries and benefits that you boasted about earlier? Wouldn't they rather pay for the lower cost of buying a car made by Toyota with lower wages and benefits?" (One thing all the Ford employees discussed was how good it was for them financially).

The look on her face was amazing. It was like she had a "V-8" moment, but the negative type, not the one you see in the commercials. She said "the benefits are amazing, but I hate to think that is why they did it." But that is exactly why we -- all of us -- "did it." The economy is a lot of things, but it isn't personal. The invisible hand that Adam Smith discussed in the 18th century is alive and well today. People actively make self interested decisions daily, even as we criticize the ability of other countries in competing against us. The invisible hand, a force we can't see but is all so powerful, creates supply and demand, and controls our economy unless harassed by government.

A great example of this is Wal-Mart. If everyone I talk to about this "job exporting," "people exploiting," "made in the USA destroying" company is telling the truth, this company should be on the brink of bankruptcy and not, arguably, the most economically powerful company in the world. But people, even as they drive to the "hated" store, will decry the injustice of goods made by cheap labor and walk out with not a single item made in the USA (with the possible exception of a tag that was made in a US territory). In essence, they cry all the way to the bank in savings.
Is this a bad thing? Certainly not, in my opinion. Our country has an unemployment of only 4.7 percent, that is virtually zero unemployment when you consider the large number estimated who are voluntarily unemployed (seasonally employed, criminals, etc., equals around 4 percent). Because we are free to get what we want, largely from where we want, we are able to get Ford Escorts for only $14,000 (since they make much of their cars in "cheap labor" countries rather than $60,000 a year (which is what they would likely cost if made bumper to bumper in the US). I'm able to eliminate poverty voluntarily and long term in countries like China and India through my purchases (like we did in Japan 40 years ago) without the United Nations taking my money through redistribution as that organization is attempting to do (leading to corruption and international welfare dependency). We are able to truly take advantage of the law of comparative advantage (things being made were they most make sense economically) and the whole world benefits from it.

I believe people should give up the notion of stopping the imports and embrace them. They are making us richer, not poorer (by the way, our longest period of trade surpluses was during the Great Depression; trade deficits mean we can afford more than other countries; not a bad thing). Instead of grumbling about our imports, we should appreciate the good things we are doing for the world economy and simple common sense with our purchases. We don't make these purchase because they are bad, but because they are good for everyone.

What about the nice Americans who lost their jobs at Ford, GM and other companies? The reality is, most of them will quickly find themselves back on their feet, with either new jobs or created businesses as they pursue becoming their own boss. This loss, though sad, will be temporary, but the American resolve the prosper is permanent.