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June 21, 2002

The Vast Ocean of American Economic Ignorance.

I am constantly amazed at how little most Americans know about the most basic elements of economics. Whether it's anger at Bill Gates for being rich or complaints about how crowded and expensive Disney World is, it all stems from a complete lack of understanding of some pretty basic, logical economic concepts. Let me explain a  few. 

Businesses exist to make money.

If you think this is a given, guess again. Most people don't really believe this. Now there are charitable institutions that provide services and are funded by donations. They don't exist to make money, although many act like they do. Then there are many businesses that whether for PR reasons or for moral reasons, will donate to these institutions and other charities, but always within limits. In the end businesses must make money. If they don't, they cease to exist.

I guess it comes from the subtle socialism that's been added to government education over the past 20 to 30 years, but people seem to get this idea that the reason any business exists is to serve the public. Frankly that's a bunch of crap. I've worked in commercial broadcasting, educational broadcasting and religious broadcasting. The commercial part of that industry is pretty straight forward. The bottom line is money, but you make money by getting people to watch or listen to your program. You get people to watch or listen by providing what they want to watch or listen to. You can provide sensationalistic tabloid type garbage and get a quick audience of morons, or you can provide deeper content oriented programming and get a more steady, dependable, intelligent audience. But in educational broadcasting the bottom line is not as clear. Education is actually a somewhat vague term, so in the end the bottom line became whatever the General Manager said it was, which had a tendency to be based on his ego. The same was generally the rule in religious broadcasting, or least in my experience, except the driving ego was the preacher, pastor, evangelist, etc. that the program revolved around. Some ministers who do broadcasts actually do focus on the needs of the listeners, and put their egos aside, and the result is a quality program, but in all honesty, most don't.

In the end money makes for a more predictable motivation to quality. So money is not an evil motive, and it produces goods and services that are geared toward providing what the public needs. The result is serving the public, but the driving force is money. What makes the difference between a business that serves people and a business that rips people off is the amount of scrutiny the consumer takes in his buying decision. 

The legitimate price of any thing, is the value perceived by the buyer.

Ok, a guy goes into a furniture store and sees a coffee table marked down from $800 to $400. The owner happens to be nearby and he offers her $200 for the table. Now the owner really liked that table, but couldn't ever sell it, and only decided to mark it down after no one seemed to be interested in buying it. The owner gets angry and says, "Two hundred dollars! That is an excellent table and worth a lot more than that! In fact . . ." She grabbed her marker, marked out the $400 and wrote $800, "That is an $800 table, and I'm not selling if for a penny less!"

The guy was shocked but actually did like the table. "Ok, I'll give you the $400." he said to her.

"I'm sorry but that table is $800."

"But you had it priced at $400?"

"If you don't want it for $800, then you don't have to buy it but that is an $800 table and I won't sell it for anything less than that."

The guy tried to talk her into going back down to $400 but the woman was adamant. In the end the man paid $800 and left with the table.

Now, here's your question: did he go home with a $200 table, a $400 table or an $800 table?

The correct answer is, he went home with an $800 table. In the end he made the decision that the table was worth $800, so that became it's value. (This story was originally told in sessions with teen girls to illustrate why pre-marital sex was wrong. Because they devalued themselves by giving themselves away so cheaply.)

If you buy it for a certain price, then that's its value. The buyer determines the value based on how much he or she is willing to pay for it. Another illustration would be a time, in seminary, that a friend asked anyone if they wanted a coke sign. He'd found it somewhere, but it was too big for his apartment (well that's what his wife said) so he had to give it away or throw it away. I told him I'd take it. It was a really big plastic Coca-Cola sign that barely fit in my car. Back at the dorm a guy got on the elevator with me as I was taking it to my room and asked me about it. I sold it to him for $15 on the spot. A few minutes later, back down in the TV room, I saw the guy I sold it to and asked him what he was going to do with the sign, "Oh, I already sold it to someone for $35." That sign went from being useless to being worth $35 in a matter of about a half an hour, all based on its perceived value by the buyer.

Commerce creates wealth, it doesn't redistribute it.

Let's say I build a company to make widgets. First of all I have to get the money to start the business, so let's say I have 10% of it and borrow 90%. Right there the bank is going to make money off the interest I'll have to pay on that 90%. So I hire a contractor to build my widget factory. Now we have the contractor, his employees, his subcontractors and their employees are making money.

My factory is finished and I order my parts. The companies that supply the parts are now making money, as well as their employees. I have to pay utility bills so the utility companies are making more money, as well as their employees.

Next I hire people to run my factory, Lets say 4000 to work on the floor and about 200 management. All these people are now making money.

Well the widgets are good quality and the price is right so they sell like hot cakes and in a couple of years I open a few more factories, with the added earnings to all the people associated with them.

Now I'm a billionaire. Where did my billion dollars come from? It came from profit (the difference between what I paid to have the widget made and what I charged the retailers) Oh, and all these retailers, they're making a lot of money, too, since they get a profit off every widget they sell. Also remember that grocery store owners (and their wholesalers, and their suppliers), clothing retailers (and their wholesalers, and their suppliers) etc. have made due to the money spent by the people who made extra money while I made that billion.

Commerce (buying and selling) means people earn money. I get money for my widget, and the customer gets a widget that is worth more to him than the money he spent. We both profit. In the process thousands upon thousands of people have also profited. Commerce creates wealth.

Bill Gates didn't take his billions from people, he made them while helping who knows how many thousands (actually more like hundreds of thousands) make money.

Those three should help most people get a better grasp of the reality behind economics. Now if you're still wondering about why complaining about how crowded and expensive Disney World is, is a sign of economic ignorance, let me explain. Let's acknowledge that as an entertainment, Disney World is a quality product, OK. So if it's crowded, how can they cut down on the number of people that go there, without losing money? The only answer is to raise the price, but that's the other part of the gripe. What would happen if they lowered the price? It'd get even more crowded. The price, obviously, is based on the maximum they can charge and still get the maximum crowd they can handle. Complaining won't change a thing, unless you complain by not going, and in all honesty there'll probably be any number of people more than willing to take your place.


Posted by Jack Lewis at June 21, 2002 04:25 PM