Personalized Economics

Production and Distribution

They say that ‘money is power’. Actually though, this is only half the story. Money allows you to access a share of the goods and services produced in the market society in which you are situated. All the money in the world will do you no good if your market society doesn’t produce much at all, or doesn’t produce the things that you want to buy.

So actually, the saying should be ‘purchasing power is power’. The amount of monetary units that we have determines our share in the distribution of what is produced, but the amount that is produced contributes to determining the purchasing power of each monetary unit that we possess. In other words, distribution determines what percentage of the pie our respective slice with make-up, but production determines how large the pie will be in the first place.

Most people want as much purchasing power as possible. It is a fine thing being able to get people to willingly give you the useful or delightful things that they produce, or to get them to willingly do personal services for you. I certainly want as much purchasing power as possible for myself; it just opens up so many opportunities in life.

So we want purchasing power, and to have a lot of it we must see to it that: 1. Production in our society is high and, 2. Our share in the distribution of the total production is high. Let us discuss these two aspects in turn.

Production:

Efficient production relies on three main factors: 1. Producers being sufficiently incentivized to produce well. 2. The right people being selected for the right production tasks. 3. The proper allocation of productive efforts towards goals desired by the consumers of the products.

#1: The logic of economic incentives is simple: if producers are rewarded depending on how well they succeed at production, then the average level of production should be significantly higher than it would be if producers received the same reward no matter what. In the market society, having more money gives one access to a greater portion of the distribution of the total produce. Thus, it makes sense to incentivize producers by rewarding them monetarily, depending on how well they succeed at production.

#2: What’s the best way of determining who is better at the game of chess than others? By having them compete in chess matches with one another of course! Similarly, in the market society, economic competition is what enables us, the consumers, to determine who is best suited, at a given moment, to perform given production tasks for us. Who is the best person or group of people to oversee the design, production, and distribution of smart phones? Well, let’s let whoever has the resources and aptitude give it a go, and the consumers will select who they prefer by buying the products that they like, and not buying those that they don’t. Perhaps different consumers will have different opinions, in which case multiple ‘top’ smart phone organizations will emerge, as has happened with Apple, Samsung, HTC, etc…

#3: All these disparate people competing for the consumers’ money, does it not sound too chaotic? Don’t we need some mastermind directing the production efforts of the whole society, so that our efforts aren’t wasted on tasks that no one really wants done? In fact we don’t, and this is because a combination of monetary incentives and free competition will do the job for us. For example, what if lots of producers decided that they wanted to make refrigerators, but very few decided that they wanted to make dishwashers? Well, then each refrigerator, if it could be sold at all, would have to be sold for a lower price in order to induce consumers to buy it (perhaps as a second refrigerator in their house). On the other hand, consumers would be trying to monetarily outbid one another for the limited supply of dishwashers, which would cause their price to go up. Seeing this, a number of refrigerator producers would very probably decide to get out of this less-than-lucrative industry and move to dishwasher production instead, where the rewards promised to be much higher. The result would be less refrigerators produced and more dishwashers produced, a result that is better for the consumers in this case.

Such adjustments of production to the demands of the consumers (though much less dramatic) happen every day, spurred on by the profit motive, the desire of producers to earn monetary rewards for their efforts that exceed their cost of production.

Combination: These three factors are all present in good doses in the societal system of production knows as the free-market, or free capitalism. This is a system that revolves around the purchasing decisions of the consumers (ie. everyone with money to spend). For the producer, the ‘customer is always right’ and ‘the customer is king’. Producers compete with one another to best serve the consumers in a particular area and adjust their productive efforts if they believe doing so would better serve the consumers, all in pursuit of the monetary rewards that pleasing the consumers will bring.

Alternative: The only real alternative to this free-market system of production is a system of production based on the dictates of governmental economic planners. The planners assign an occupation and position in society to every individual (perhaps based on personality tests or aptitude tests), determine what is to be produced in what ways, and determine what material rewards every individual is to receive. The problem is that, whereas in the free-market the system is, in a sense, automatically coordinated by a combination of the purchasing decisions of consumers and the desire of producers for the consumers’ money, in the governmental system this coordination must be achieved manually via economic planning. To even approach the coordination that the free-market achieves automatically, the planners would have to be imbued with a superhuman amount of knowledge and foresight, given how devilishly complex modern economic systems of production are.

In addition, the planners don’t really have much of an incentive to cater to the desires of the consumers, because they do not rely on them for their monetary rewards as free-market producers do. Rather, the planners will try to structure production in a way that suits them, rather than in a way that suits the diffused consuming public. Moreover, whereas in the free-market, the individual consumers have a recourse if they grow annoyed or dissatisfied with one of their formerly favored producers (buy from someone else who is competing in the free competition), in the governmental system, switching ‘providers’ is not that easy, requiring either a majority of voters to change their minds (in a democracy), or a violent revolution (in a dictatorship). This lack of competition will result in even less of an incentive for the government to do a good job in the eyes of the consuming public.

Distribution:

So in general, allowing the free-market to run most aspects of the production show will result in a higher total societal production than allowing the government to meddle more than a small amount with production would.  Well and good, but our objective is to maximize our purchasing power, not to maximize the purchasing power of everyone in society, taken as an aggregate. So in addition to ensuring that production is high in general, we also need to ensure that our share in the production in high.

One way to get a good share in the production of the free-market is to be a successful producer yourself: to be a successful businessman or to possess labor skills that are rare and in demand. If you are such a person, or if you believe that there is a good chance of you becoming such a person in the future, than the free-market system of distribution should suit you just fine, without any modifications.

However, not everyone has the aptitude or the inclination to be such a successful producer. They might consider the alternative to being a producer: being a plunderer. There are two primary sorts of plunderers: first-hand plunderers and second-hand plunderers. First-hand plunderers actually grab other people’s material possessions or money themselves, using either stealth, physical violence, or the threat thereof.  Second-hand plunderers, on the other hand, throw their support behind an organization that plunders others for them, and receive a share of the plunder collected by this organization.

Nowadays, in most of the developed western world, the majority of first-hand plundering is done by governments, who don’t like it when others try it for themselves. Thus, for most people, first-hand plunder is now too risky of a strategy. Second-hand plundering remains a live strategy for many people though. Governments, especially democratic governments, rely on popular support for their power and legitimacy. Many people only support governments that promise to plunder others and give their supporters a share. These people can engage in plundering in a ‘legal’ and ‘respectable’ fashion, much less risky than gearing up and robbing a bank!

One must always be careful about plunder though: too much of it will kill the goose that lays the golden eggs, crippling the free-market system of production that works so well. For this system relies on the monetary rewards that consumers can offer producers. If producers are just plundered as soon as they receive these rewards, than they will soon lose their incentive to produce well and to use their property in a way that the consumers desire. The whole system will be compromised if this happens.

Thus, to get the benefits of second-hand plunder without sabotaging the future purchasing power of the money that we receive, we must leave the free-market system of distribution largely in place, just modifying it somewhat to make some room for second-hand plunder.

I submit that the best way to do so would be to have the government levy a 20% flat proportional income tax on everyone, and then to divide the resulting amount collected up equally among the whole population. This system would be relatively easy to administer, and should not harm production incentives too much, either at the top or the bottom of the income ladder. And everyone, no matter what, would receive a nice cheque entitling them to a share in their society’s large, free-market produced store of products.

Capital Accumulation and Allocation

Capital is formed when someone decides to use a portion of the fruits of a previous production process in order to advance another production process that will produce results in the future, rather than for the purposes of present consumption. In a monetary economy, this is accomplished by saving some of the monetary income that one receives, and then investing these savings, either directly in another production process, or indirectly by investing it in a productive organization (a firm/company), who will use it to fund their operations.

The more capital is accumulated and invested, the more complex or time-consuming production processes can be engaged in. For example, rather than employing a lot of laborers, armed with hand tools to create golf balls by hand, resources can be invested in the creation of productivity-enhancing capital goods, such as factory buildings and advanced machines, which can then be used to create golf balls more efficiently. Labor is still necessary, but now it is the labor of the machine operator and engineer that is required to engage in this more sophisticated production process, rather than the less-productive labor of manual golf ball makers.

Here, capital investment serves to make the labor of people involved in the golf ball industry more productive, which makes this labor more valuable to employers, which forces the employers to pay higher wages to secure this labor. It also forces employers in industries in the same geographic area, even if they have not used more capital goods in their production processes themselves, to pay higher real wages to their employees, in order to prevent them from jumping ship to the more advanced, and more lucrative, industries. This is how capital investment in a region serves to raise, on average, the wage rates of workers in the region.

Here, similar to general production and distribution, what an individual worker in a region needs to enjoy higher wage rates for their work is: 1. For a lot of capital to be accumulated in general, and 2. For a good share of the capital accumulated to be allocated to this region. We will discuss these in turn.

General Capital Accumulation

The most important factor that encourages capital accumulation is security of property rights. Someone will not save their resources for future production if they are uncertain whether those resources will be theirs in the future. Thus, whether it was medieval peasants faced with expropriation by marauding Viking bands, or modern businessmen faced with expropriation by socialistic nation-states, the threat of expropriation always induces less capital accumulation, while its opposite, the security of property rights, induces more.

As such, if you want to encourage capital accumulation, you should not support policies such as industry nationalization (the seizure of businessmen’s capital assets by the government), or inheritance taxes. Why not inheritance taxes? Because these taxes reduce post-death security of property. If the inheritance tax were 100%, then older people would be encouraged to consume all of their savings when they were approaching death, rather than maintaining part of their fortune in order to pass it down to their heirs. This would not only discourage capital accumulation, but would result in capital consumption, it’s opposite. Any inheritance tax rate below 100% would have a similar, though less intense, effect.

In addition, if you want more capital accumulation, you should refrain from supporting policies that make saving and investment less lucrative when compared to consumption. People save and invest in order to make a monetary return on their investment, otherwise they would just consume their resources or hoard money in stashes. Any policy that artificially reduces this rate of return will result in less capital accumulation. Capital gains taxes, taxes on dividends, and corporate taxes all have this effect, the more severe the higher the rate.

Capital accumulation is also tied to the distribution of income throughout society. The more income ends up in the hands of people who are more likely to save it and invest it successfully, the more capital accumulation there will be. In the conditions of the current world, these people tend to be relatively wealthy people who have had a history of successful investment. This is why any redistributive policy that especially targets people with high free-market incomes, especially the progressive income tax, tends to have a negative effect on general capital accumulation.

Finally, economic volatility tends to deter capital investment, as investors will be more afraid of losing lots of their invested money, and thus might prefer to consume it in the present instead. A certain degree of volatility is inherent in the free-market process itself, due to constant changes in consumer tastes, industry conditions, and technological innovations. But government policies, most notably the monetary inflation and credit expansion enabled by central bank monetary policy, but also granting subsidies/privileges to certain industry players and then withdrawing the subsidies/privileges, can add additional sources of volatility, and thus should be avoided.

Capital Allocation

So lots of capital has been accumulated by people within our country, but in order to benefit from it, we must try to ensure that a good share of this capital is allocated to the region in which we are working.

Luckily, a lot of the policies that encourage capital accumulation also, if adopted in the region, encourage capital allocation to that region. Respect for investors’ property rights, relatively low corporate tax rates, and a relative lack of economic and political volatility, are all factors that encourage investors to allocate capital to a region. In addition, other things equal, many investors prefer investing in their home markets with which they are more familiar, rather than foreign markets. Thus, a good portion of the capital accumulated by residents of a country will probably be invested in that country, making the encouragement of capital accumulation also, to some extent, the encouragement of capital allocation within the country.

Other factors encouraging capital allocation to a region include the relative lack of burdensome restrictive regulations, a skilled and conscientious workforce, relatively low wage rates, and a good supply of valuable land and natural resources. #1 is all based on policy, #2 an effective educational system could help with, #3 workers in a region obviously don’t want, even if it does encourage capital allocation, and #4 policy can do little about.

Some governments have tried to use the granting of special subsidies and privileges to select companies or industries as a way of attracting investment in their territories. The problem is that governments neither have the knowledge nor the incentives to choose the ‘correct’ people to privilege. Instead, government officials will likely use this discretionary power to advance their political careers by buying the support of the favoured industries/companies. Better then, if you are a worker in the region, to just forget about supporting subsidies and to support keeping tax rates low instead.

Income Inequality

Let’s say that you have managed to accumulate a decent amount of purchasing power, but you notice that there are other people who have more than you! What gives? Why should they have more?

Feelings of jealousy and envy naturally arise when we see that there are people who have more purchasing power than us whom we don’t think ‘deserve’ more than us. The question is: what should we do about these feelings?

One possible reaction is the egalitarian, levelling impulse; the urge to make everyone’s purchasing power more equal to one another’s. This is not a very beneficial impulse though, for the simple reason that the purchasing power that we have depends on the inequality of wealth and incomes in the market society. The possibility of having more purchasing power than others acts as a powerful incentive, an incentive on which the market economy, the most productive kind of economic organization, is largely based upon, as was discussed in Chapter 1. A bit of plundering and redistributing, if done in a limited and intelligent manner, will not harm the market economy too much, precisely because there will still be room for a lot of inequality of wealth and income.

Nevertheless, for all that, the unpleasant feelings of envy still remain. What is to be done about them? Some people try to consciously suppress such ‘unworthy’ feelings, but this kind of suppression rarely succeeds in any non-superficial way. A better strategy is to try to avoid stimulating these feelings in the first place.

In this case, there are two possible methods of doing so. The first is to try not to think about people who are richer than you. Direct your thoughts away from such people and towards those who have a bit less than you. By doing so, the unpleasant feeling of envy can be replaced by a pleasant feeling of moderate superiority.

The second method is, when you find yourself thinking about someone richer than you, to postulate all kinds of possible non-monetary shortcomings of the richer person, so that they don’t seem so well-off after all. That rich man over there, perhaps his marriage is loveless, his children dislike him, he has ulcers, his work is overly stressful, he does not truly appreciate the finer things in life, etc… Do this long enough, and soon you may find yourself pitying, rather than envying, this rich man. Whether his postulated shortcomings are accurate or not does not really matter, just believe that they are so and you will be rid of your unpleasant feelings of envy, without having to undermine your own purchasing power by supporting egalitarian political measures.