Sunday, May 27, 2012

Why Do Businesses Hire?

     Hiring employees is vital to our prosperity.  If everyone
worked for himself, larger enterprises would be impossible.
Millions of independent workers could never come close to
duplicating the efficiency and productivity our large enterprises
achieve.

     Prosperity requires that many individuals work under the
direction and control of a single commander.  There are two
ways of assembling workers -- voluntary cooperation and
slavery.  The western world long ago rejected slavery for good
reasons.  This leaves only voluntary employment as a foundation
for prosperity.  It is important that we understand how
employment works for the good of all.

     Some things appear complex.  One might marvel at the
complexity of a brick mansion.  The mansion is thousands of
simple bricks placed one at a time.  To understand the building
of the mansion we must understand the simple placement of
thousands of individual bricks.  The same is true of most
complexities.

     Hiring of a large work force may seem complex.  That
work force is brought together by hiring one person at a time.
The reasons for hiring each of those workers are few and simple.

     Free market businesses hire employees for one reason --
to produce something.  The reason for  producing something is
also simple.  The business hopes to increase the value of the
resources it buys by producing something of greater value.

     If the product of the business is more valuable than the
resources consumed, the business can sell the product for more
than it cost.  This is how businesses earn profits.  Customers are
the final judges of the value of the product.

     A business expects that each employee will produce net
value for the employer.  The business that doesn't expect the
employee to produce net value doesn't hire.

     Employees who have no concern about their productivity
or the business's profits are very foolish.  Some employees brag
about how little they have to do to keep their jobs.  Such
employees are doubly foolish.  Their continued employment
depends on the employer not discovering how worthless the
employees are, or the employer being forced to keep the
employees.

     It is only common sense that an employer will be far
more concerned about keeping an employee who produces
$150,000 of net value than one who produces $10 of net value.
The higher an employee's wages rise, the lower his job security.
He becomes less valuable to his employer.  Demanding higher
wages and more job security is trying to run in two directions at
the same time.

     The employee who produces $150,000 of net value for
his employer and is paid only $50,000 may not be pleased.  The
employee can demand more and quit if he doesn't get it.
Chances are the employer will pay more to keep the valuable
employee.  An employee who is worth only $10 to his employer
isn't likely to get anything by demanding it.

     If the employer won't pay the valuable employee more,
that isn't likely to be much of a problem for the employee.  If he
is worth $150,000 to his employer, chances are he will be worth
a lot to another employer.  Productive, valuable workers don't
remain unemployed long in free markets.

     Voluntary employment works to everyone's advantage.
The employer has to raise the pay of his valuable employees to
keep them.  Employers bid wages up to the maximum they can
pay and still earn enough profit to attract investment.

     Employees who want higher pay have only one option.
They must seek ways to produce more value.  They may do this
by finding an employer that will provide the facilities and
environment to enable them to be more productive.  Or, they can
increase their productivity through developing new skills or
improving old ones.

     Voluntary, free market employment pushes everyone to
be more productive.  Increased productivity is the engine that
powers increases in our standard of living.

                                 * * * * *
                                  * * * *
                                   * * *
                                    * *
                                     *
Copyright 2012
Albert D. McCallum
18440 29-1\2 Mile Road
Springport, Michigan 49284

Monday, May 21, 2012

How Can We Save?

     A few weeks ago I considered, What Is Money?  Money
isn't wealth.  It is at best a sort of claim check we can exchange
for real, usable wealth.  If all goes well and someone produces
real wealth we may be able to exchange our money for real
wealth.

     Saving money isn't the same thing as saving real wealth.
How can we save real wealth?

     Consider someone saving for retirement.  He might store
real wealth such as food, clothing, televisions, autos, etc.  This
kind of savings is real but it has its drawbacks.   The saved
goods may deteriorate or become obsolete.  At a minimum the
saver must bear the cost of storage.  The one thing certain is that
the saving will reduce the saver's total consumption while
spreading the consumption over time.

     To consider another way to save we will look back to a
simpler world.  A farmer wants to save.  Instead of devoting all
of his efforts to producing crops and animals to consume in the
near future he spends time clearing new land and building a
barn.

     Such effort does nothing to increase immediate
consumption.  In the future the farmer will be able to produce
and consume more through use of the barn and the cleared land.
The barn and the cleared land are real savings, real wealth.

     Thus, we see the only two ways to save.  We can
produce and store goods, or we can invest our efforts in
beginning the production of future consumer goods.

     Burying tomato cans of paper money in the back yard
isn't real savings.  That money will have value in the future only
if someone who then wants the money produces something the
money can buy.

     So long as the money remains buried it provides nothing
for the saver.  Burying the money will benefit all spenders of
money.  By taking the money out of circulation the saver
increases the purchasing power of all money that remains in
circulation.   The total money supply still in circulation will buy
as much as the previous larger supply of circulating money.
Each unit of money will buy a little more than before.

     The farmer who put his savings into cleared land and a
barn faces a problem if he wants to retire.  The land and barn
will produce something only if someone continues to use them.
This isn't an insurmountable problem   When he retires, the
farmer might sell the land and barn to someone else who will
continue producing with them.  The farmer can use the money
from the sale to buy goods to consume during retirement.

     As a practical matter most of us don't want to put our
savings into something we have to use and maintain ourselves
for productive purposes.  Besides, the savings of one person
often will not be enough to build a very elaborate productive
facility such as a factory or railroad.

     This problem is easily solved too.  We can put our
savings into ownership of small interests in productive facilities.
This is what investors do when they buy stock in a business.

     Another option is to lend our savings to others for the
building of productive facilities.  The loans don't have to be
direct.  We can deposit the money in a bank and let it make the
loans.

     If the bank lends the money to consumers for purchase of
consumer goods, there is no real savings.  The overall effect is
the same as if we spent the money on our own consumption.
Nothing is invested in future production.  All we get is the
borrower's promise that he will produce something in the future
and repay the loan.  If the borrower fails to produce, the loan
will not be repaid.

     The problem we face today is that much of our attempted
savings is being borrowed by government and spent, either
directly or indirectly, on consumption.  Such "savings" produce
nothing for future consumption.  They are only an illusion of
saving.  Thus, government borrowing and spending has the
potential to put us all in the poorhouse for lack of investment in
future production.

                                 * * * * *
                                  * * * *
                                   * * *
                                    * *
                                     *
Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284
Column for May 21, 2012

Sunday, May 13, 2012

The Paradox of Competition

     It may seem that sports should be the domain of pure
competition.  Yet, professional sports leagues and even colleges
stifle competition in pursuit of mediocre teams.  Professional
sports limit competition for players with drafts and salary caps.
Colleges severely limit the rewards paid to athletes.  Also, the
colleges limit the number of players that may be rewarded with
scholarships.

     The goal is to force all teams into the realm of
mediocrity.  The ideal is believed to be to have all teams as
equal as possible.  This goal is often stated as being parity.
When all teams are equal, all are mediocre.  None excel.

     Consider what would happen with full competition.  The
more successful teams could attract the best players, managers
and coaches.   They would become even more successful.  The
weaker teams would grow even weaker.  In professional sports
the weaker teams would fail.  Soon the excellent teams would be
running out of opponents.  It would be a hollow victory to have
the greatest team on Earth if it was also the only team on Earth.

     Reducing all teams to mediocrity allows all teams to
entertain their fans with some victories.  Every team has a
chance to win a championship occasionally.   For professional
sports, full competition can be a disaster.  For practical purposes
major college sports are professional except in name.  The goal
of the schools is to collect the most dollars possible.

     What would happen if we sought the same parity for
businesses?  Imagine that there are 100 widget manufactures.
Some make better widgets than others.  Some make widgets
more efficiently than others.  With free competition the better
widget makers will sell more and more widgets while the weaker
widget makers will sell fewer widgets.

     The weaker widget makers will fall by the wayside
leaving only a few of the best to make all of the widgets.
Suppose that someone decides that this is a bad result.  They
want to achieve parity among all widget makers so that all can
stay in business.

     The parity seekers pass laws limiting the quality of
widgets to a level all can achieve.  They take earnings from the
best widget makers and give them to the worst.  What happens if
the program succeeds?  All the widget makers and their
employees continue doing what they did.  No one loses his job
or business.  The parity seekers were completely successful.  A
byproduct of that success is institutionalized mediocrity and
inefficiency in widget making.

     Part of the price of that mediocrity is widget consumers
must settle for inferior and more costly widgets.  The extra
money they spend on inferior widgets limits their purchase and
use of other things.  Everyone is poorer because of the
mediocrity created to save the weak widget makers.

     The consumers may not complain.  With no one making
better and less costly widgets, the consumers may not realize
that they are being ripped off to benefit inferior widget makers.
It is vital to the sustaining of mediocrity that all excellence be
wiped out.  Good examples are dangerous to the health of
mediocrity.

     Unlike in the sports world, the excellent widget makers
don't need the weak ones.  Neither do the consumers.   The
excellent widget makers can expand production to efficiently
supply all of the needed widgets.

     Laws and subsidies that keep weak producers going
always push us deeper into the world of mediocrity and waste.
Instead of pursuing universal mediocrity, we should encourage
and reward excellence.  This the only way to sustain and
increase our standard of living.

     Nowhere is mediocrity more institutionalized than in
government schools.  The government school system has
perfected the rewarding and sustaining of the weak and
inefficient.  Until we encourage and reward excellence while
letting the inefficient and poor producers fall by the wayside,
schools will continue to wallow in the abyss of mediocrity, or
worse.

                                 * * * * *
                                  * * * *
                                   * * *
                                    * *
                                     *
Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284

Sunday, May 6, 2012

Using Other People

     Many people have a rather quaint view of human
relationships.  In that view kind and considerate individuals
engage in self sacrifice to help others.  The most sacrificial get
the most stars after their names.  How does this measure up to
reality?

     Real people seek to increase their satisfaction.  Facing a
choice they always choose the option they believe will yield the
most satisfaction.  They may willingly choose to sacrifice wealth
and time.  They don't voluntarily sacrifice satisfaction.

     Everyone is greedy about satisfaction.  Thus, it is
pointless to brand some as greedy and others as not.  So, how
will this all work out?  In pursuit of satisfaction everyone needs
many things from others.  We all use others to get those things.

     Employers need workers.  The employer would prefer
that those workers work for nothing.  The workers need some
wealth.  Most employees would prefer to get that wealth without
working.  Neither is likely to achieve the ideal.

     When everyone enjoys the liberty to freely choose or
reject offers by others, the workers and employers compromise.
The worker consents to being used by the employer.  The
employer consents to being used by the workers.

     As long as each believes that the compensation for being
used is worth more than the detriment from being used, the
arrangement works well for both.  Many may miss the point that
the worker and the employer are each using the other in pursuit
of satisfaction.  Both are greedy.

     All voluntary interactions, including social relationships,
work the same way.  Consider a date.  Each party seeks to use
the other to gain some satisfaction.  Each hopes that the benefit
from using the other will be more than the burden of being used
by the other.

     In complete liberty no one can use another without the
consent of the one used.  Everyone can say "No" and make it
stick.  Thus, individuals generally pay rent for the use of other
people.  Every individual is free to refuse to accept rent he
considers inadequate compensation for the use.

     The rent may be money, a back rub, or anything else that
the recipient considers to be of value.  All interactions are
voluntary.  Each person seeks to increase his rental value to
others so that in return he can collect higher rent.

     A big problem rears its ugly head if some individuals can
use others without the consent of the ones being used.  First, the
one used is denied the option of refusing.  Second, the one used
isn't compensated for the use.  Such one-sided use can be
accomplished only through stealth, deceit and threats of force.

     The user either tricks the one used, or threatens "Do it
my way, or I will hurt you."  The results are exploitation, strife
and instability.  Any society where a substantial percent of the
members use others without their consent, and without
compensation, is headed for big trouble.  When everyone tries to
live from the forced, uncompensated use of others, the society
faces collapse.

     In our society only government can legally force the
uncompensated use of others.  Those who want to use others
must hitch a ride on the government bus.  They are doing it big
time.  Welfare payments, business subsidies, government paid
medical expenses, and government funded subsidies of any other
kind all are based on the recipient using others without their
voluntary consent.

     The users and their enablers in government are no less
greedy than anyone else.  It isn't their greed that makes them a
threat to our survival.  Their ability to make use of threats and
force to use others is the foundation of the problem.

     We can't fix the unfixable.  The only hope is to
substantially reduce the power of those in government to forcibly
use others.  No one should be subject to being used by others
without his consent.  Government can't help anyone without
using others.

                                 * * * * *
                                  * * * *
                                   * * *
                                    * *
                                     *
Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284