Thursday, March 26, 2015

Two Kinds of Profits

Column for week of March 16, 2015

     Many people vilify profits.  I endlessly read of those
who claim nobody should profit from providing education. 
Then many of those same people demand higher pay for
teachers.  Can you spell hypocrite?  What is evil about profits? 
The first step to understanding profits is to recognize there are
two kinds of profits.  One kind is truly evil.

     When the highwayman robs his victim, the victim
receives no benefit.  The highwayman's profit is the unwilling
victim's loss.  All profits extracted from unwilling victims are
illegitimate and evil.  Fortunately there is another way to gain
profits.

     Consider a shirt maker who makes a shirt for $15.  He
sells the shirt to a willing customer for $20.  It would have
cost the customer $30 to make his own shirt.  Is the customer a
victim because the shirt maker's efforts gained him a $5 profit? 
Or, is the shirt maker a victim because the customer gained
twice as much as did the shirt maker?

     For both the sale was voluntary.  Each expected to
benefit.  If either hadn't expected to benefit, he wouldn't have
made the exchange.  Why make or buy a shirt if you gain
nothing by doing it?  In all voluntarily, free market transactions
each party expects to gain.

     The future is never 100 percent predictable.  Thus,
sometimes the traders don't get the expected benefits.  People
learn from their errors and try to do better next time. 

     Suppose the shirt maker sells a million shirts and earns
$5 million of profits.  Are his profits ill gotten simply because
he repeated the same act a million times?   How many shirts
did he have to sell before his profits became ill gotten gain? 
Should he have stopped at 100, 1,000 or perhaps 10,000? 
Would any of the million shirt buyers have benefited more if
the shirt maker had decreased his profits by selling fewer
shirts?

     Profits earned through free market transactions are
rewards for serving others.  The greater the rewards for serving
customers, the harder producers try to serve.

     The only way businesses earn profits in free markets is
by producing value.  Our shirt maker bought supplies and labor
worth $15 and produced a shirt that was worth $30 to the
buyer.  The shirt maker got $5 of that added value as profit. 
This was a good deal for everyone involved, including the
suppliers who sold the means for making the shirt.

     Before judging the merits of profits we must determine
whether the profits were gained by the way of the highwayman
or the way of the shirt maker.   Were the profits earned in a
voluntary transaction, or was someone coerced into paying the
profits?  Profits through coercion are a form of theft.  The
person paying the profits is coerced to pay the profiteer.

     Our economy is so severely regulated by government
coercion that it is all but impossible to separate good profits
from evil ones.  The morass of laws all but eliminates
completely voluntary transactions.  Even if government
coercion doesn't dominate the chain of production, it at least
infects it.  Few business profits are paid on a 100 percent
voluntary basis.

     Confiscating all profits to eliminate illegitimate ones
would be a cure worse than the disease.  It would kill much of
the incentive for businesses in the legal economy to serve
customers.  Black markets would flourish.  I hope no one
believes that is a good solution.

     The only sane solution is to eliminate the laws
restricting freedom in the marketplace.  Producers will then be
unable to extract illegitimate profits from customers.  Then we
will have no reason to worry about illegitimate profits.

     Competition in the marketplace eats profits like foxes
eat rabbits.  The only way for free market businesses to sustain
profits is to innovate.  Without new products and better ways
to produce existing products, competition grinds profits down
to zero.  That is why established businesses endlessly turn to
government for the imposition of restrictions on competition.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum

Thursday, March 19, 2015

Zero Tolerance -- The New Frontier

Column for week of March 9, 2015

     For some time I have worried that the masters of zero
tolerance in schools were approaching the limits of creativity. 
How could they possibly come up with new and more
ridiculous reasons for suspending students?  A recent news
article suggests the answer.

     "A fourth grade boy in Odessa, Texas has been
suspended from school for making a terroristic threat.  He told
another boy that he had a magic ring and could make him
disappear."  That is a bit creative.  It doesn't plow new ground
though.  Another school previously suspended a boy for writing
about shooting an imaginary dinosaur with an imaginary gun.

     The suspended boy's father didn't appear to take the
"terroristic threat" quite as seriously as did the school principal. 
The father told the principal "his son lacked the magical
powers necessary to threaten his friend's existence, but even if
he had those powers, he's sure his son would bring his friend
right back."

     The principal's rational was "threats to another child's
safety would not be tolerated - whether they are magical or
not."  Perhaps the principal should be transferred to a drug free
school zone.  It sounds like she may have already ingested a
few too many magic mushrooms.  I wonder what will happen
if a student threatens to turn the principal into a toad. 

     Naturally there is more to the story.  The boy was a
chronic offender with two previous suspensions in a mere six
months.

     His first offense was calling an African-America
"black."  If the African-America was from Egypt, Algeria or
Morocco, this was probably wrong (wrong like in mistake).  If
mistakes are grounds for suspension, schools will be rather
empty, especially principals' offices.

     I am a bit puzzled by the second suspension.  The boy
brought "his favorite book to school, called 'The Big Book of
Knowledge.'  The popular children's encyclopedia had a section
on pregnancy with a pregnant woman in an illustration."  Why
this offended the principal is truly mystifying.  Considering
schools enthusiasm for sex education, Why didn't the boy get
bonus points instead of a suspension?

     None of these suspensions strain the envelope of what
schools have already done.  Obviously the principal is looking
to the future.  Why not?  The future is the only thing we have
ahead of us.  When all silly suspensions become so common
place that no one, even me, will write about them, Do you
expect school administrators to quietly fade into the
background and out of the spotlight?

     This pioneering principal has pointed the way to a new
frontier.  Principals can now focus on creating the most bizarre
and longest combinations of the old, boring suspensions.  How
about extra points for those who complete the assignment in
the shortest time?

     I have long been puzzled by schools' enthusiasm for
suspensions.  Schools send out truant officers to drag in
"students" who don't show up for school.  Sometimes the
parents of the truants are threatened with arrest.  Why then
does the school suspend the students it already has captured?

     I may have a creative solution.  Redefine truancy as self
suspension.  A student who doesn't believe he belongs in
school could suspend himself, just like an administrator with
the same belief could.  The student is a truant no more.  He is
merely serving a suspension.  Of course, students should be
entitled to as much creativity as principals when imposing
suspensions.

     The hardcore egalitarians should love this.  Students and
principals could be equal.  Notice, I only said "could be."   I
don't want to be sued for defamation by the students.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum

Thursday, March 12, 2015

Enforcing All the Laws

Column for week of March 2, 2015

     A number of Republicans and some Democrats
complained when the Obama administration failed to fully
enforce national marijuana laws in Colorado.  This was nothing
compared to the fire storm when the Obama administration
announced that it wouldn't enforce immigration laws against
some illegal immigrants.  How dare the president refuse to
enforce the law of the land?  How did he dare flout the law
and fail to carry out his constitutional duties?

     One could as fairly ask, How dare congress ask the
president to enforce more laws than anyone, even with all the
resources of the nation at his disposal, could begin to enforce? 
The laws enacted by congress and regulations adopted pursuant
to those laws add up to 200,000 or so pages.  It would be a
safe bet that no one has come close to even reading all of
them.

     If every law were fully enforced, everyone would be in
jail for life.  The last one convicted would have to lock his
own cell.  Someone has to decide which laws to enforce and
who to enforce them against.

     Prosecutors' discretion is nothing new.  It has been
around as long as prosecutors.

     I attended high school about 15 miles from Grand
Rapids.  Everyone in school seemed to know where the
brothels were in Grand Rapids.  They were on C Street.  I'm
not quite sure where that was.  I never doubted that if I had
asked I would have found out.  Some students admitted to
(bragged about?) being there.

     Don't even ask me to believe that the police and
prosecutors didn't know about the illegal prostitution.  I don't
know if they were compensated for their blindness.  For
whatever reason they chose not to enforce the law.  This is but
one small illustration of the ancient tradition of prosecutors'
discretion.

     We wouldn't have 11 million illegal aliens in this
country if many someones hadn't elected not to pursue them. 
When they decide not to pursue some, they also decide which
ones to pursue.

     The congress critters who are complaining about the
president haven't appropriated enough money for the president
to attempt to deport all illegal aliens.  Neither did they pass a
law telling him which ones to deport first.

     All Obama did was change how prosecutors' discretion
will be exercised.  It isn't amnesty.  Congress, or a future
president, can change the priority to whatever they wish.  All
Obama did was say to some illegal aliens, you don't have to
worry about being deported right now.

     Most of them won't ever be deported.  Sending them all
home at once would so disrupt some businesses that it would
cause a recession.  If the unemployed in this country wanted
the jobs the illegals have, they could have had them.

     The US immigration law is an unworkable mess.  Both
congress and the presidents, past and present, bear part of the
blame.  The president and congress critters are all far more
interested  in scoring points pandering to certain votes than in
enacting sensible, workable immigration laws.

     The last time congress faced up to the immigration law
problem it granted amnesty and kicked the can down the road
by continuing unrealistic, unworkable immigration laws.  Well,
we have caught up with the can.  It is time for congress and
the president to give it another kick and see how long it takes
to catch up with it again.

     Having foreign workers here legally and above ground
would, at a minimum, be far less of a problem than building an
underground culture of illegals.  Building a fence to keep them
out won't work.  For one thing, a third or so of illegals enter
legally and merely fail to leave.   The fence also works as a
check valve.  Instead of working and going home, foreigners
are more likely to stay.

     One thing is certain.  As long as voters demand
unworkable immigration laws, politicians will deliver them.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum

Thursday, March 5, 2015

Why Are Wages Stagnant?

Column for week of February 23, 2015

     Several recent articles lamented that wages aren't
increasing.  The authors were sure that wages needed to
increase for prosperity to return.  None of the writers showed
that they had a clue about why wages were stagnant.

     The clearest way to illustrate many economic principles
is by considering a simple barter economy.  There instead of
using money, all producers trade what they produce for what
they want.

     Money is a very useful tool for making trading easier. 
Still, money is only a tool.  The real substance of buying and
selling is that one individual trades what he produces for what
others produce.  A worker at a wheel factory trades the wheels
he makes for money.  When he spends money at the grocery
store he trades wheels for food.

     To discover where wage increases come from, consider
a wheat farmer in a barter economy.  He produces wheat and
trades it for things produced by others.

     The farmer grows 1,000 bushels of wheat.  First he
must pay for the materials, tools, land rent, etc. used to grow
the wheat.   This takes 800 bushels of wheat.  The 200
remaining bushels are the farmer's wages for growing the
wheat.

     The only way the farmer can increase his wages is to
have more wheat left after he pays his cost of production.  The
farmer could rent more land and work more hours to produce
more wheat.  This would increase his income.  It wouldn't
increase his wage rate any more than an employee working
more hours at the same pay per hour increases his wage rate.

     The farmer has two other options.   He might improve
his efficiency so that his cost of production is only 700 bushels
of wheat.  That would increase his wages by 100 bushels.

     The other option is to use the same resources but
change his method of production so that his yield increases to
1,100 bushels.  This also will give the farmer a 100 bushels
wage increase.

     The same principles apply to wage increases in our
money economy.  The only way to increase wage rates is for
workers to be more productive.  Without increased production
the wage pie remains the same size.  If some workers get
bigger pieces, others must settle for smaller ones.

     Believing that we need wage increases to increase
prosperity puts the cart before the horse.  We need increased
prosperity in the form of increased productivity to increase
wages.  The question we should ask is, Why isn't productivity
increasing?

     The avalanche of new government rules and regulations
increases the cost of production.  Far worse the threat of more
new laws and regulations discourages businesses from investing
in new more productive facilities.  Factories, mines,
warehouses, refineries, etc. don't pay for themselves until many
years in the future.  Businesses fearing that government may
pull the rug out from underneath are afraid to invest in new,
more efficient facilities.

     Much of the investment made in recent years has been
in wasteful, inefficient facilities subsidized by government,
such as ethanol, wind power, and electric vehicles.  Such
investments increase the cost of production.  Because of the
increased cost of production some workers are forced to settle
for lower wages.  The convoluted financing of such facilities
with subsidies, mandates, etc. makes it difficult to know which
workers are taking the hit.

     We may see a brief surge in wages due to the drop in
oil prices.  Don't mistake this for a return to prosperity.  It will
be at most a temporary blip.

     It will likely do more harm than good by distracting
attention from the real problem, government meddling with the
economy.  Until businesses are allowed to freely pursue
increased productivity and the profits that reward increased
productivity, wages will continue to stagnate.  And, millions
will scratch their heads and wonder why.  Meanwhile
government that caused the stagnation of wages will hurl
flaming darts at the businesses that government has denied the
means of raising wages.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum