What Makes a Business Tick?

The first step toward understanding businesses is knowing what businesses do. All businesses have one thing in common. Businesses seek to create wealth. To create wealth a business buys resources, makes products, and sells the products. If the proceeds from the sale of products exceed the cost of the resources the business has created wealth.

A business starts with an idea about a way to produce wealth. The idea leads to a plan for setting up and operating the business.

The next need is investment capital to pay for starting the business and operating it until it sells enough products to pay its own way. The investors may be owners or lenders. The business also needs equipment, supplies, etc. If the business makes physical products, it will need materials. Add workers to manage and operate the business and it is ready to try to produce wealth.

All of the above will be pointless unless the business finds customers to buy its products. Management runs the business, but customers hold the business’s fate in their hands.

The investors who made the business possible are most committed to it. The other participants can walk away and pursue their interests elsewhere. The investors loose their investment unless the business is successful in creating wealth.

It is understandable that investors wouldn’t invest if they couldn't control the business. Any of the other participants could bankrupt the business providing benefits for themselves, and then walk away leaving the investors holding an empty bag.

The investors can’t afford to ride rough shod over any of the other interests. Unhappy suppliers, workers, and customers can simply move on leaving the business to flounder. For the investors to succeed they must balance all the interests in a way that everyone finds it beneficial to continue doing their part.

Interfering with the investor-owners’ balancing acts is all but certain to disrupt the business and decrease its productivity. Decreased productivity is detrimental to all the participants. With freedom in the marketplace there is no need to worry about the owners gaining excessive profits. Competition limits profits, constantly pulling them toward zero.

The only way a free market business can sustain its profits is to innovate. It must find better production methods, better products, or something else that the competition doesn’t have. Everyone benefits from successful innovations.

The profits earned by the business while the competition is catching up are the business’s reward for taking the risk of doing something new and different. This is true even if the profits are 1,000 percent. Profits will be proportional to the benefits that flow from the innovation.

I’m sure many businesses would like to exploit their customers, employees, and anyone else in reach. They can get away with it only when helped by government. Freedom in the marketplace protects everyone. Government and businesses endlessly seek to limit that freedom for their mutual benefit, and to the detriment of everyone else.

When government aids businesses in blocking competition it decreases productivity. If the blocked competition wasn’t more productive than the protected business, the blocking wouldn’t be needed. Government is the last refuge for businesses that can’t win in the marketplace.

In “An Inquiry Into the Nature and Causes of the Wealth of Nations,” Adam Smith concluded that the nations whose governments interfered least with the economy became the wealthiest. This is still true. Find a poor nation and you will find bad government.

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Copyright 2018

Albert D. McCallum

Fair Warning

Column 2018-5 (11/12/18)

It recently came to my attention that the nation’s obsession with political warfare has distracted our guardians in government from one of their most important missions, the proliferation of warning labels.

The item that first caught my attention originated in Russia, or perhaps in the Onion. It reported that a man was found in a field with a knife in his head. Fortunately he was alive. Otherwise we would probably never have known what happened.

The man was having difficulty breathing. He decided to open a new hole for breathing. No explanation was provided as to why he chose to start digging in the top of his head.

I haven’t seen the knife. Still, I am willing to bet it didn’t have a proper warning label. “WARNING: opening a breathing bypass with this tool may cause serious injury or death.”

The next day I found (actual stumbled onto) an article that hit closer to home. Researchers claimed that sitting kills three times more people than smoking. My exhaustive research (more than one minute) discovered a claim that cigarette smoking kills more than 480,000 people in the USA each year.

This suggests that sitting kills nearly a million and a half people each year. How many killer chairs are you harboring in your home? Sofas and park benches are probably serial killers.

Firearms death are reported to be 40,000 or less per year. That is in the same neighborhood as deaths from motor vehicle crashes. So, grab a cigarette and a gun. Then go for a drive. Your biggest risk will be that you are sitting. Of course, keep in mind that statistics will confess to anything, if they are tortured long enough.

Still, there are no background checks or waiting periods for purchasing chairs. Even worse, a mere child can walk into a store with a few dollars, and walk out armed with a killer chair. Most likely that chair won’t even have a proper warning label, such as: “It is known to the state of California that chairs cause death.”

If you are a regular reader of warning labels, you may have noticed how smart California is. It knows about all sorts of hazards that the benighted residents of the hinterlands can’t even imagine. Should California have a warning label? How about “Living in California may cause serious brain damage?”

One vital question remains unanswered. Are California warnings valid outside of California? The Californians who compose those dire warnings probably are unaware that there is anything outside of California.

Should I even ask, How great is the risk from smoking while sitting? Give government credit for leading the way on this one. It drove smokers outside to indulge in their pastime standing on the sidewalk. How many lives have been saved by getting smokers to stand up? Should the cigarette warnings be revised to: “It is hazardous to sit while smoking?”

After I wrote the above I learned of anther hazard branded “as bad as smoking.” Staying out of the sun can shorten lives as much as smoking does. What will happen to anyone who smokes while siting in the shade? I see another warning label in our future: “WARNING: Sunscreen can cause death.”

I believe that passing on these warnings is important. I took the risk of doing it. Some may ask, What is the risk? I am bravely sitting in a chair, out of the sun, while typing this vital warning. Will I make it to the next paragraph?

aldmccallum@gmail.com

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Copyright 2018

Albert D. McCallum

Where Is All the Plastic From?

Column 2018-4

For some time various people have expressed concern about the plastic accumulating in the oceans. One of the more noticeable accumulations is a blob floating in the Pacific Ocean.

Recently individuals and groups have launched a campaign to do something. They are seeking bans on plastic drinking straws. Some city governments appear ready to act.

Certainly plastic straws are plastic. Also, most likely some of those straws reach the oceans.

This isn’t enough to answer the question, Does the straw ban make sense? Advocates for the ban don’t appear interested in research. Their minds are made up. What might a little research reveal?

One point perhaps worth considering is that only a small fraction of one percent of plastic made in the US is used to make straws. If all of it went into the oceans, Would it make a detectable difference?

A study found that most plastic that goes to the oceans by river flows out of ten rivers. Two of these rivers are African. The other eight are in Asia. The Yangtze is by far the biggest contributer. Three more of the rivers are completely Chinese. An additional three are partly Chinese.

Perhaps the straw banners should take there campaign to China. Of course, it is highly unlikely that straws are a significant part of Chinese plastic.

The main point is that under developed countries with poor or nonexistent trash disposal facilities are the main sources of plastic flowing into the oceans.

Meanwhile back home in the USA Starbucks® has jumped on the end the straw bandwagon. It announced its plan to replace straws with a cup cover that eliminates the need for straws. One reporter did some research. He found that the new cover contains more plastic than the old cover plus a straw. Perhaps this is a small price to pay for getting rid of those cursed straws.

If plastic straws are eliminated, we could go back to paper straws. There might be a flaw in this plan too. Paper straws cost 10 times as much as plastic ones. Paper straws cost more because more resources are used to make them. Consuming more resources will have an impact on the environment. Perhaps someone should investigate that impact before beating the drum for paper straws. The results might be surprising.

I read of a study comparing the environmental impact of driving an auto to the impact of riding a bicycle. The researcher concluded that the bicycle rider generated the most pollution. The calculation included pollution from producing the food the biker ate to produce the energy for peddling. I have no idea if this conclusion will stand up under scrutiny. It does, at least, bring to mind the importance research being thoroughly done.

Back to that blob of plastic in the Pacific Ocean. Apparently most of the plastic is from discarded fishing equipment, such as nets. How many plastic straws go fishing in the Pacific?

It seems that once again the defenders of the environment have hatched a half thought out plan that will do little or nothing to improve the environment. If the ban is enacted, it will, of course, be a minor nuisance to millions of people.

I will boldly predict that the world can survive without plastic straws. Perhaps the campaign for the ban is a good thing. The effort and wealth devoted to the ban campaign won’t be used to pursue causes much more threatening to the comfort and survival of humanity.

aldmccallum@gmail.com

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Copyright 2018

Albert D. McCallum

The Accumulation of Wealth

Column 2018-3 (10/29/18)

The goods and services available to consumers today exceed anything ever seen in the past. Obviously some consumers have far more access to this wealth than do others. Still, even the poorest have more than they did a generation ago. The percent of the world’s population living in absolute poverty has decreased dramatically. In general those who produce more have more.

There are several things that affect an individual’s ability to be productive. These things include ability, environment and availability of resources. The willingness of others to cooperate is also very important.

Technology and tools are indispensable to productivity. Take away our vast array of technology and production facilities from farms, factories, mines, transportation, etc. and no one will be very productive. Maximizing all the other factors that are essential to productivity would do little to lift us above stone age levels of productivity and a stone age standard of living.

We owe almost everything we have to past generations that built up the accumulated knowledge and production facilities. We do our part. Without what our ancestors willed to us we couldn’t come close to producing what we do today. If we add to the accumulated wealth, the next generation will be able to produce even more.

Any generation could go on a spending binge and consume, rather than maintain and increase, the accumulated wealth. If that happens, every future generation will suffer from decreased productivity.

Even if future generations fully replace the depleted wealth, their productivity will lag behind what it would have been if the wealth hadn’t been depleted. Our productivity today suffers from the destruction of wealth in the major wars and other destructive actions of past generations. Recovery from the destruction took time. We will never get that time back.

The past is chiseled in stone. We can’t change it. The most we can hope for is to learn from it. Whether we learn or not, we can’t escape paying the tuition.

We can party, party, party. We can pay for the party by diverting wealth from investment in future productivity. We can keep the party going longer by failing to replace the production facilities passed to us by past generations.

At first the decrease in present productivity will be barely noticed by most. Decreases in future production don’t show up until the future arrives. Funny how it works that way. Don’t expect the generations that live in that future to be laughing.

It won’t matter that the spending binge was well intentioned. Taking investment capital from the wealthy and spending in on consumption by the poor hurts future productivity just as much as it would if the wealthy spent it on their own party.

It seems that there might be some moral questions involves in deciding whether to squander our inheritance, or enhance it and pass it on. Moral or not, we have the power to squander our inheritance if we so choose.

If the neosocailists have their way most people will not even see the questions. We need to ask more than, Shall we tax the wealthy and spend it on the poor? We need to ask, Shall we consume the accumulated investment in productivity to the detriment of the future poor, wealthy, and everyone in between?

It would be most unfortunate if the present generation choose to squander the investment in production facilities without even recognizing the choice they made. The so called socialists want to fool everyone into letting the socialists squander the investment in future production. Imagine what life will be like when all of our production facilities deteriorate to the equivalent of a road full of potholes.

aldmccallum@gmail.com

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Copyright 2018

Albert D. McCallum