Economics Archives - Page 2 of 2 - More Letters to the Corinthians

Immigrants

Danny Thomas used to tell a joke about a newcomer to New York. He couldn’t speak English but liked to eat out. One time a friend helped him order dessert. It was apple pie and coffee. For months he had the same thing because that’s all he could say. Then he ran into his friend again and said, “You know, sometimes I’d like to have steak.” Friend gave him the words and off he dashed to a restaurant. The waitress approached and asked for his order. He said, steak. “And how would you like that cooked?” “Apple pie and coffee.”

Other than adding bodies to help pay for this country of ours, immigration is good for business. Years ago, the Department of Immigration discovered native born Canadians only come in three family types—some givers, some not.

Educated, hardworking, and emotionally stable

Net contributors to the system. These people do hard jobs, volunteer for charities, and pay loads of taxes. Raised to give more than they take, they act as the strong within our communities and are essential for any society to thrive. Mixing talents with effort they bring yeast to the bread and though this tiering isn’t about money, they typically have it.

Middle people

Middle people also do hard jobs but not the hardest, they’re also educated but not in the most difficult disciplines, and they too are well-raised. Their ethic of hard work, pay your bills, and save for retirement makes them the backbone of society. Plus, they stay out of jail and off social assistance. Not causing problems for anyone.

The quality of middle people is crucial to any country because they form the largest part. So if they shift up or down, it matters to the whole. Fortunately for Canada, we have a good one.

Dumb, lazy, and unloved

This last group includes the poorly educated, slow movers, usually from dysfunctional families. Whether it’s subsidized housing, welfare, or the judicial system, these folks cost money. And having too many of us on social programs can bring down the whole system. That’s why we need immigrants.

Immigrants

Canadian immigrants come in various forms and loads of them have dough. But we’re not talking about doctors from South Africa, it’s the ones who work for low wages that we like. Sure, many lack the schooling we have but they score big on hard work and love. And they’re perfect in terms of economic units.

They may bring funny customs but these people generally do a good job, show up on time, never complain, and take whatever shift. Why? Because they’re happy to have a job. And no matter what you pay, it’s always put to good use. This group lives on the lean and it’s remarkable. They don’t drink booze, do cigarettes, or smoke crack. Don’t pay finance charges or need to go to Vegas. And always eat at home, don’t buy lottery tickets, and aren’t slaves to fashion. So not only do they work on the cheap, they can live on it—which is excellent for biz.

And not only are these people economic gold, they raise nice kids. Kids who will become tomorrow’s leaders. Why? Because they’ve been raised with love—real love (and good food, though some of it’s spicy), which makes them emotionally stable—a key to becoming first tier. This along with humility and a strong work ethic builds net contributors, which means this group will soon be coaching our sports teams, sitting on boards, and generally helping others. In the meantime, their families provide great examples for those of us born here.

Summary

Almost one-third of people we grow in Canada have problems, 80% of those we import are good. You do the math. These people are amazing and you couldn’t ask for more. Newcomers embody the essence of human potential and are good for three reasons:

they’re good workers (show up on time, don’t complain)
are excellent economic units (live within their means, save money, don’t waste)
raise wonderful families (emotionally stable, focused on hard work and education)

Not only are immigrants clean living contributors, they’re raising tomorrow’s leaders. So from a government perspective, it’s just good business. Canada is committed to immigration — it’s a national strategy. And that’s why we’re raising the minimum wage. Any investment in these people is money put to good use.

Note: this is the fourth in a series of articles on minimum wage. The first talks about how we got one, the second talks about our huge middle class, and the third says minimum wage is a trade-off between inflation and ethics.

Minimum Wage II

(The first article on minimum wage explains how we got one, Unions describes Canada’s healthy middle class, and this article says minimum wage is basically a trade-off between inflation and ethics.)

The standard argument against minimum wage is that it causes unemployment but that’s not the point. Higher minimum wage is a question of ethics that always results in inflation, which may cause unemployment—that’s the point.

For example, take food. If restaurants suddenly increase their prices by 20%, people will initially eat it and thereby have less money for everything else. This “less money for everything else” indirectly affects employment in other industries. But in time, people will stop eating out so often, which affects restaurant employment directly.

Elasticity

The difference between direct or indirect unemployment is elasticity. If the price of water goes up, you’ll continue to buy the same because you can’t avoid the usage. So direct employment within the water company remains the same. Unemployment only shows up in other industries. But based on elasticity, the example could look different. For example, if the price of balloons skyrockets, you’ll probably avoid the extra cost by going after some party favour that’s less expensive—putting balloon makers out of work.

In theory, this “less money for everything else” gets offset by those receiving higher minimum wage. Extra money earned gets spent creating new jobs in other areas. And in theory this makes sense, but it depends on the industry and the economy in general. Raising wages into a strong market usually results in only inflation. Doing it during a downturn typically causes job loss. Governments must be strategic over when they pull the trigger. (And cost changes can’t be done too fast. Consumers need time to adjust.)

Ethics

Minimum wage was initially legislated in the early 1900s because of worker uprisings and the global threat of communism. Back then, it was designed for the middle class. Today, minimum wage applies more to young people entering the workforce and low-skilled workers happy to get by. Currently, it’s being reinterpreted to reflect society’s values. Sure cheaper burgers are great but not if those cooking them have to suffer.

There’s always been a balancing act between wages for the few and prices for the many. If we lower the cost of teachers, doctors, nurses, and the military, the entire population would pay less in taxes. If we increase those salaries, everyone has to pay more. This balancing was initially left to the market but that’s now been abandoned in some cases for two reasons:

Ethically, society doesn’t want anyone to earn below subsistence wages.
Salaries for occupations like teachers, doctors, nurses, and the military are provided by government so, in these cases, there really isn’t a market.

Who and how much?

Now that we’re dealing with ethics, who is minimum wage for and exactly how much are they allowed to spend? Is it teenagers living at home? If so, make it low to get the buggers out of the house. Single people living on their own? Is it to support a family? And if it’s to support a family, is the mom allowed to colour her hair? at a salon? Can dad join a gym? Are the kids expected to attend the high school trip? Can they own a pet and go on fancy vacations? Hard questions needing real answers.

The government doesn’t provide expected household budgets but the figure can be ascertained using a reasonable number of working hours per week. If minimum wage is $12 per hour and you work 35 hours per week, you’ll be grossing around $22K per year. Great if living at home; insufficient for a family of four (let alone a dog).

Cultural inflation

Everyone’s heard of the consumer price index. The basket of goods that tells officials whether prices are going up or down. Does it take into account cultural change? Like when cellphones were invented, did the government add in the extra cost? How about internet charges and cable TV, or pets and vacations? If the price of essentials remains constant, do we factor in the societal pressure to not buy everything on sale?

And there’s a difference between essentials and luxuries. What’s best for lower income people is to keep the price of essentials down. If you chose some $800 designer purse, great, but increases in the price of food and shelter are killers for those trying to get by. In theoretical countries, workers in essential industries act like volunteers to achieve this goal. It’s like joining the military or signing up for missionary service. Youth donate time to work at the gas plant so everyone can live on the cheap. Then if you want more, work more.

Summary

No matter how you cut it, raising the minimum wage isn’t a slam dunk. Higher labour costs lead to inflation and economists have always known this. This means customers get less for their money. And when business makes less it affects employment—either directly (if goods are elastic) or indirectly.

Raising wages into a strong economy has no ill effect since prices are going up anyway. Plus people already have a job. It just keeps low-paid workers on pace. Not an increase in standard of living. But if the collective wish to better one group’s quality of life for the sake of ethics, they’ll have to eat the inflation this causes by continuing with their purchases. That’s the deal.

And there will be winners and losers. Winners include kids making french fries and immigrants who save money. Losers are the classes affected by consequential inflation, those in need of any ol’ job, and businesses dependent on price. Staying the same are folks who waste their paycheque anyway. Their excess will only go to inflated items like fast food and things they still can’t afford—not RSPs.

The left resolves the argument at the sight of ethics. They never consider the harm, only the good. But low wages allow the marginally skilled to hold jobs and not every company can raise its prices. Plus, minimum wage can be destructive when the economy tanks. But no matter how you vote, society has to answer the big question: who is minimum wage for? If looking at numbers, it’s not for raising a pet loving, trip minded family. It’s for immigrants, young people entering the workforce, and low-skilled workers happy to get by. And just so you know, government already subsidizes those who can’t earn more. (I know a guy who gets $2-700 per month based on what he makes. He’s been to Vegas five times.)

In the end, it’s a complicated issue that shouldn’t be ignored. Lefties have decided to go with benefits over costs and they may be right. We just shouldn’t be naïve about it.

Note: Here’s a discussion on C-SPAN. The bearded left-winger is useless but the French lady is good once she gets going. I also liked the first caller.

Efficiency

In part, understanding economics comes down to imagining 100 people living on an island. If 50 were involved in farming, you’d have 50 left for everything else. Then if conditions improve (say, through technology) to where only 40 were required to work in farming, 10 more would be available for everything else. That’s the core theory of efficiency. As fewer people are required to produce the desired outputs in one area, the price and cost of those outputs are lowered. That saved money and those workers are then free to pursue something else. And that something else becomes a rise in the standard of living.

Let’s use an example, if those freed people start a hair salon, then everyone gets food and beauty for the same price as food. (Remember, the cost of food decreases since it requires fewer people to produce. That saved money and those workers are then directed to salons.) You can extend this principle to the modern world. If we taught everyone to cook—and changed common culture to favour home cooking—all the additional money spent on restaurants would then be saved and those workers would be free to do something else (say, work in health care).

Needs vs. wants

Any increased production in industries that provide for basics leads to money and workers becoming available for luxuries, which is great. If we only need 40 people to produce the goods and services that relate to basic needs, everyone else works for products and services that pamper us (like, massages). But obviously basics come first.

Basics include food, shelter, clothing, utilities, and safety. And it’s important to keep the price of these items down so everyone can easily get by. But two things can prevent this from happening: cultural attitudes and market intervention.

Cultural attitudes

If culture says restaurant food is better or that weddings cost $40,000, people misinterpret the meaning of basics. That’s how you get 60 year-olds on skid row because they overspent on their kid’s nuptials. Unfortunately, no one has control over what society feels and even the best of intents can become ruined by belief. So even a super-efficient system would result in society having the poor because of what some people think. And remember, cultural attitude doesn’t mean one size fits all. Many ethnic groups live their own way financially, and so do many families and friends.

Market intervention

If everyone needs water and it’s only provided by the government, the cost of wages and the water company’s efficiency greatly affect price. Same goes for any monopoly. Take this deeper and you’ll see that outside of food and clothing, most basic needs are affected by public intervention. Shelter is built according to regulations and subject to property tax. Utilities are all regulated. And minimum wage affects the cost of my burger.

In Canada, education is only provided by the government. If they say it takes four years and $50,000 to learn about business, that’s what it takes. And if they overpay for fear of strikes or to appeal to voter loyalty, that too is just the way it is.

Summary

In general, there are two economies: one for basic needs and another for luxuries. Government is heavily involved in basics and luxuries are greatly affected by culture. In a perfect world, governments would operate efficiently by not overpaying for labour or adding unnecessary regulations, and people would divorce themselves from certain aspects of culture to purchase only what they can afford. Then again, the world was never intended to be perfect and sometimes we drive each other crazy.

Note: See the article Emotional Quality.

Unions

Stats Canada says 4.7 of our 18 million workers are covered by a collective agreement. Since 20% of our workforce is employed by the government — and gov workers are 80% unionized — this leaves just over 1.8 million within the private sector, or 12.5%.

Opponents feel unionization has outgrown its purpose and question current validity. They say unions interfere with free-market economics and only serve to give lazy people a job. Regardless, there are two instances where unions are essential:

sole employer
blue-collar trades

Since government services are almost always provided by a monopoly, there is no opportunity for the free market to operate. For example, teachers can only work for the province. That’s why we have the Alberta Teachers Union. There is no marketplace for individual talents to be tendered among numerous employers.

And hey, unions do more than just collective bargaining. They provide apprenticeship training and sometimes manage employee benefits. These two additions are popular in the construction industry. White-collar trades like law and accountancy, have societies that collect dues and perform similar duties for their profession, but their educational component is delivered by public institutions (say, a university). Tradespeople aren’t taught solely in a classroom so the public system doesn’t work for them. Most of their training comes “on the job,” administered by a union.

Plus, certain occupations aren’t conducive to long-term employment within a single firm. Many tradespeople (e.g., welders, pipefitters, steamfitters) work for a number of companies throughout the year. In their world, general contractors win the work and then hire from the local union hall. When the job is done, the employees are done. And because of this hopping around, instead of using the system where employers manage benefit plans, the union does it—because it makes sense.

Middle class

Government and the construction industry are unique in their requirements for unionization but there is another type of company where unions are popular: large blue-collar corporations that provide essential goods, especially in regulated industries.

The theory goes like this: since everyone must buy water, why shouldn’t the guy pumping it be well paid? That’s why unions are prevalent throughout airlines, auto manufacturers, breweries, energy companies, power companies, telephone companies, and the like. None of which need the administration of benefits (since they provide long-term employment) or the training to certification process (because they are non-trade occupations). So these unions exist primarily for the purpose of collective bargaining. Bargaining which ensures society maintains a middle class.

Unionized workers plus non-union government employees (e.g., management) represent 30% of our workforce. Add in regulated white-collar industries (like, banks and insurance companies) and you see why most Canadians live well. Plus, these groups affect non-union wages. For example, computer programmers in industry are compensated along the same line as those working for government. It’s like gov unofficially regulates white-collar wages, while unions do it for blue.

Summary

Most of today’s unions act as minimum wage for the middle class. Decent wages, good benefits, and pension plans. Tenets that illustrate some of our advancements over raw capitalism. And though some argue that unionization of the manufacturing industry has led to jobs being shipped overseas, that isn’t true. The general reasoning behind globalization has a lot more to do with it.

In the end, we’ve arrived at a point where we have rich people, who do great; a large middle class, who live well; and minimum wage for those who make us hamburgers. Hey, it works.

Cultural Economics

Whether it’s gay rights, rap, or the breakdown of marriage, culture plays a significant role in our lives. And many times it influences us economically, which is the focus of this article.

Dual income

Back in the 70s, one parent worked to support four to eight people. Now we have two working to support three or four. That’s a big change. Birth control coupled with the women’s movement and desire for smaller family sizes has lessened the importance of measuring individual income. Today, we focus more on what a family brings in.

Capital assets

Economies produce two kinds of outputs: capital assets and consumables. Goods and services that get used up within the year they’re made are consumables. They include food, cleaning services, and live entertainment. Capital assets last much longer—things like, roads, schools, hospitals, and power plants. Sure, capital assets still require annual maintenance, which is a consumable, but the initial output lasts a long time.

When a country experiences war, many of their capital assets get destroyed and must be rebuilt. But if a country doesn’t see war, their economic resources get spent on building new roads, new schools, new hospitals, and new power plants. This is a major reason why North America has experienced such prosperity.

Necessities

You can only do three things with money:

spend on necessities
spend on luxuries
save to spend another day

Public opinion as to what constitutes a necessity has changed. Pets and fancy vacations, once considered luxuries, have now moved into basics—regardless of personal income. This new definition doesn’t just influence wage demands, it alters personal savings since the attraction behind keeping up with culture often wins out over the fear of going broke.

Inheritances

Family inheritances also affect the amount of money people save. Sure, we now live longer but most of us can expect to receive something substantial from mom and dad. And today’s larger nest eggs are divided among fewer kids.

Price watching

True capitalism expects consumers to play their part. People are supposed to watch over prices by supporting suppliers who deliver superior value. This way companies are forced into keeping prices down. But if you’re too busy to shop (say, for something like snow tires), the system breaks down and we all end up paying more.

Over-specialization of labour

Back in the 70s, whenever a homeowner requested a tradesperson provide a quote, they’d compare that price to doing the job themselves. And if they felt the premium was too high, they would do the job themselves. But when the average homeowner is void of such talents, this evaluation process becomes redundant and people wind up paying more. In the past, we were at the mercy of the accountant and the lawyer. Today, we’re at the mercy of trades.

Happiness

Economists define standard of living based on outputs. The more you consume, the better off you are. But shouldn’t happiness be part of the equation? In the 1970s, people lived in 1200 square foot bungalows, opened garage doors manually, called neighbours over to play cards, and ate mostly at home. They were moderately happy. Today we live in larger homes, have automatic switches for everything, enjoy copious forms of entertainment, and eat out with regularity—but we’re still only moderately happy. Why?

Because economies don’t generate happiness, they only create goods and services. Yes, extra goods and services make people happy in poorer countries but not in ones like ours. When we went from watching black and white to amazing HDTV, people didn’t get a happiness hit. That’s because somewhere along the line there was a social cost (not necessarily from the technology) that nullified the gain. Or, we simply got used to the new quality advancement and adjusted—just like people don’t jump up and down every time they see water coming out of a tap.

Summary

Economics is a social science—not a real one. So numbers don’t tell the whole story. In fact, numbers usually leave out the most important part. And because economies involve emotion-based participants (people), everything can’t be measured by levers and dials. That’s why on top of facts you also look at faces.

Keynes

Economies are like waves with both crests and troughs. When economies overheat, they naturally crash in order to correct themselves. Then when we experience dips, prices naturally adjust until people start to buy again.

John Maynard Keynes (1883-1946) was a British economist who spearheaded a revolution in economic thinking. He proposed that government intervention was necessary to moderate these booms and busts. Before Keynes, thinking held that supply was the economy’s prime motivator. They believed producers would simply adjust prices until the desired number of units sold. But in the 1930s, faced with a lingering recession, Keynes argued we should look at aggregate demand.

Classical economic thinking held that, in a downturn, full employment was achieved by “supply side” price adjustments. Employees would lower their wage demands and producers would reduce profit expectations, yielding lower selling prices, to the point where consumers could no longer resist. Keynes argued that full employment could be better achieved by increasing aggregate demand through the use of policy. (Monetary policy refers to the government’s control of the money supply — like when the Fed adjusts interest rates, and fiscal policy is control over government expenditures and taxation). He proposed government could do three things:

Increase expenditures on things like highways.
Reduce taxes on consumers and business, thus increasing disposable income and after-tax profits.
Increase the money supply by lowering interest rates.

The first two typically result in budget deficits but, under his philosophy, these deficits are to be paid back when the economy looks good.

Keynesian thinking became popular in the 1940s and 1950s, to the point where almost every capitalist country adopted his recommendations. In the 1970s, these principles were challenged by other schools of thought, which argued against the effectiveness of government’s ability to regulate the economy and the natural business cycle. But in the economic crisis of 2008, this thinking resurfaced and was greatly employed throughout the world.

Minimum Wage

Most modern countries have laws governing employee minimum wage. And though the majority of people support such legislation there are always those who oppose. Dissidents lean toward the ideals of total free market economics, where wages are left only to the market. Advocates, like labour leaders, say minimum wage is essential for protecting the working poor. Who’s right?

Let’s start by looking at early economic thinking and why this legislation was introduced in the first place. Then we’ll decide.

Adam Smith

In his book, The Wealth of Nations, published in 1776, Adam Smith presents his theory of natural versus market price. He says the natural price of labour is the cost for a family to provide for itself. And the price of labour can never go below this level because if a family cannot adequately support itself by working, capitalism doesn’t function. There’d be no end of revolutions. Then he crudely defined what adequate subsistence was. At the time, only half of all children survived into adulthood so a family required food and shelter for six (plus maybe a grandparent or two since, back then, children were your retirement plan).

Market price is what employers are willing to pay for labour, today. It’s the result of supply and demand. His theory says that, over time, market price will gravitate towards natural price. So even if the market is currently paying higher, the pull is always back to subsistence wages.

Objective

Early economists were pessimistic about the fate of labour. They couldn’t see how wages would ever get beyond mere subsistence levels. Couple this with the theory that business naturally wishes to maximize profits and you see why the push for minimum wage. It was designed to combat the natural lows of the market by ensuring the price of labour never went below its natural price. And that’s what it still is today.

So is it a sin to regulate such a thing when Adam Smith says the market will, over time, naturally correct itself? And what else are these free marketers trying to say?

Milton Friedman

Milton Friedman, famed economist from the University of Chicago, argues that minimum wage causes unemployment. He says that if minimum wage is set at $8.00 per hour, and a worker is only worth $5.00, you’re denying employment because no one will hire that person for $8.00. And if the market was left to its own devices, he or she would have a job being paid exactly what they’re worth.

Now we have someone saying minimum wage isn’t helping—it’s hurting. But Milton has obviously never run a business. In the real world, if someone isn’t worth barely a living wage, they should be fired. You can’t have that type of person influencing the rest of your staff, not to mention causing quality issues. Every person doesn’t belong in every occupation so part of the market system is for workers to find where they do best.

History

New Zealand was the first to enact a minimum wage in 1894, followed soon after by Australia. Britain brought in similar legislation in 1909 when Winston Churchill said, “It is a serious evil that any class of His Majesty’s subjects should receive less than a living wage in return for their utmost exertions. It was formerly supposed that the working of the laws of supply and demand would naturally regulate or eliminate that evil.”

Minimum wage was introduced in the US, in 1938, by Franklin Roosevelt. He introduced the .25 cents an hour legislation by saying, “No business which depends for its existence on paying less than a living wage to its workers has any right to continue in this country.” In Canada, the Canadian Constitution assigns the responsibility for labour laws, including minimum wage, to the provinces and territories.

Summary

Because of its duty to maximize profits, business is often handcuffed from doing what it ethically desires. That’s why, in many industries, one company can’t pay much better than another. But when government forces all to honour a minimum wage, it levels the playing field.

Friedman’s theory only holds water if minimum wage is set too high. And the practice of telling someone to move on “if he or she isn’t doing well in this industry” is part of the market system. If you can’t find a better fit, you may belong on social assistance. (Note: government programs already exist to address such situations.)

The general sentiment is that people deserve to make at least a living wage, so these laws are here to stay. But there will always be debate over who minimum wage is for, how much we pay young people, and what we deem to be a living wage.

Free Market Economics

A number of issues come with a system based solely on free market economics—that’s why we don’t have one. Ours is a mixed economy where government through regulation, production, and social welfare co-exists with the private sector. Yes, the majority of outputs still come from business but we have public involvement to address issues like security and stability (the tricky stuff).

Regulations

The theory of capitalism rests heavily on the notion of competition. That if company A makes a better widget than company B, they’ll attract more customers and then company B must either adapt to this new condition or perish. The net result is better value for the consumer and better efficiency for our system. The competition model works well because business, in its quest for survival and profits, will always try to outmaneuver the other guy. Without competition where is the motive to get better or cheaper? That’s why governments don’t allow monopolies. And if circumstances dictate one is required, they run it themselves.

In theory land, free market thinking supposes that once prices soar under a monopoly, companies in other industries will be attracted to enter the market, thereby reinstating competition. Sure, this might work in the long run but how long can we wait? And depending on the complexity of the industry, competition may never come. Businesses too, wish for competition because companies are also consumers, so monopolies hurt them equally as well. As you’ll soon see, total price is a determining factor in overall sales. So even if it is a level playing field with all companies paying monopolistic input prices (say, for plastic), my business still gets hurt because the whole market diminishes. For example, if every company’s I-pod is priced at $1,000 instead of $100, people buy less I-pods.

Same goes for regulating safety standards and minimum wage. Today’s common wisdom dictates that an external body is required to insist upon rules being followed because business, through a total free market system, cannot always regulate itself. Total free market theory says if company A provides window washers with safety equipment, they’ll attract the best workers. But rather than wait for a bunch of guys to fall off a platform, we chose instead to force companies into buying workers a harness. And if this increases the cost of having windows washed—so be it. We don’t need efficiency to be perfect. Likewise with employee wages, ethical companies are handcuffed by their directive to maximize profits. So if they can get away with paying less—they must.

Production

It’s always an argument whether government should be involved in producing goods or services. Proponents think it’s a great idea because, in theory, this keeps taxes down. Opponents (i.e., free marketers) say the business world is not the government’s space. But there is one instance in which everyone agrees where governments must get involved and that’s when circumstances carry with them extremely high investment and risk. Take for example, the Canadian National Railway. How could any company get financing for such a massive project that carried such huge risk? Did anyone really know how much it would cost and whether people would use it? So projects of this nature are always started by the government—essentially as monopolies. Examples include not only CNR, but Air Canada, utility companies, and many instances involving natural resources.

Now once an industry can stand on its own—with viable competition—free marketers say it should. And we’ve seen this through the privatization of most telephone companies and utilities (e.g., AGT and BC Tel becoming Telus). Many have gone well but some have become disasters (those privatized before their time or not conducive to competition). CNR is now successfully private since the huge risk is gone and competition is provided by trucking companies and airlines. So we can argue over whether provinces should own their own liquor stores and operate insurance companies, but everyone agrees that it’s the government’s role to get certain industries off the ground.

Social welfare

Every economist knows that capitalism brings with it inherent brutalities. That as competition rewards Company A with greater market share, Company B falls. You might think employees of Company B just go work for Company A, but what if they’re in different cities?

Economies have natural ebbs and flows. Sometimes we’re at full bore and sometimes you really can’t find a job. That’s why we invented employment insurance. It’s not welfare for people who don’t want to work, it’s a social program to bridge the gap between previous and future employment. And it’s essential when the market naturally crashes. Do people sometimes take advantage? Sure, but people also cheat the private insurance industry. So what’s the difference? EI was introduced to curb part of capitalism’s inherent brutality and the overwhelming majority of free marketers support it.

Likewise with social security (public pensions). Early capitalists insisted that people take financial responsibility for themselves and provide for their own future. But it quickly became apparent that most people don’t have the necessary skills. Too many of us were entering our senior years without anything for savings, and how was anyone to correct poor past behavior when they were at their financial weakest? Society, through government, chose to force people into retirement savings. And the forcing part, along with pre-determined outcomes, meant they had to be administered by the feds. Free marketer rumblings soon silenced once everyone realized there had to be forced “pay ins” and dependable “pay outs.” (Most countries, like Canada, have a hybrid model where public pensions provide you with something and you’re on your own for the rest.)

Summary

We don’t have a totally free market system. No country does. We have a mixed economy, where government plays a significant role. Total free-market economics is a theory, and just a theory. It doesn’t work in common practice. Practical free marketers believe in some government regulation, some government production, and some social services (like, employment insurance and public pensions). The difference is they don’t believe in excessive regulation, unnecessary government production, or questionable social services. And this position is perfectly justifiable.

Note: CNR wasn’t actually started by the government but I’m sure you get the point. CNR was the result of government buying up private railways that went bankrupt, and was later privatized.

Supply and Demand – Part II

Everyone’s heard that, due to the law of supply and demand, prices increase whenever there’s a shortage of something. That as consumers chase a limited number of goods, the price of those goods will rise. For example, if a bunch of people move to a new city, the price of houses goes up. And everyone says that it’s because of supply and demand. But did you know there’s a second component to this law? One that says as demand stays high, home builders will increase their production until prices eventually come back down?

People don’t know (or forget) about this second part but it belongs to the same economic law. Supply and demand says prices go up when there is a shortage in supply, and then come back down when supply is eventually adjusted.

Let’s continue with the example of home prices. Let’s say Edmonton builds and sells 1,000 homes per year. And let’s say a bunch of Newfies keep moving to Edmonton to alter this demand to 1,200 homes. What happens? Well, the price of an Edmonton home goes up (and a bunch of Newfies end up sleeping on the couch). But something else happens. Home builders expand their output to build more homes and additional companies go into the business. These two actions then increase supply to the point where the city builds and sells around 1,200 homes per year. And, in theory, the price goes back down to where it was at 1,000 homes per year.

So it’s wonderful that everyone understands the first piece of this law, but you should also know about the second.

Elasticity

Total revenue is the result of multiplying quantity times price. Elasticity measures what happens to revenue when price changes. For example, on any given night the Toronto Maple Leafs sell 18,000 tickets, at an average price of $100, to yield total revenue of $1.8 million per game. But what if the Leafs increased their average price, would they sell as many tickets? And would they sell at least enough to make total revenue per game greater than it was?

If after the price increase total revenue per game is higher than $1.8 million, the price of a Leaf ticket is said to be inelastic (insensitive to price). If they sell fewer tickets, to the point where total revenue is less than $1.8 million per game, the price is called elastic (sensitive to price).

This is why essential industries like water and power are always regulated. Their volumes are too insensitive to price.