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The best thing about free economics is people figure out what they are good at.

December 12, 2012

Economics 101

OK, back to basics. Joe has chickens. Bob has Cows. Joe needs milk. Bob needs eggs. They negotiate. So many eggs for a pale of milk. They trade. (No, government didn’t give them the chickens or cows, or regulate the price. This is long before government!)

Bob gets tired of walking to Joe’s house to trade (despite the obvious physical and social benefits of doing so), and decides he’d do better raising his own chickens. Besides, Joe only has brown eggs, and Bob wants to try his hand at breeding diversity. He’ll have his own white and brown eggs, and even have a little fried chicken now and then, along with his steak and cheese. They negotiate – so many chickens for a cow – they trade.

Bob is now in the chicken and egg business as well as cows and milk. Joe is now in the cow and milk business as well as chickens and eggs. And we have an added benefit for anyone else who may trade with Joe and Bob – competition. Before, if I wanted eggs or chickens, I had to go to Joe. Now we have multiple sources of chickens, eggs, cows, and milk. And maybe Bob’s venture into eggs will improve the product. Or maybe not. But, so far, it’s working for everybody.

Introduce Tom. Tom needs eggs and milk. If Tom has something of value to Joe or Bob, we have more trade. If Tom has something of value to Joe and Bob, we have competition, and Tom can get a better value for his exchange. But if Tom has nothing to trade? He does have a body and a mind. After all, he walked to their house to get the eggs and/or milk. He can trade labor for the eggs and milk. If either Joe or Bob need long-term help with their business, Tom has a job. If both Joe and Bob need help, we have labor competition, and Tom can negotiate for a better wage (and all without the help of a union). Tom goes to work for the person that offers him the highest wage and/or best benefits. We now have economic expansion.

All sounds pretty fair so far. Of course if government was involved, government would just take eggs and milk from Joe and Bob, and give it to Tom. But, so far we don’t have a government. We haven’t “progressed” enough to need one, so let’s just not have one yet.

A few years go by, this trade network expands, and low and behold, people from another trade network (yes, trade is developing without a government stimulus) come in and raid Joe’s and Bob’s farms and take all the chicken and cows. (Remember, we don’t have a government yet, so it wasn’t the government that stole it.) This group that came in could have negotiated or worked for what they needed, but instead, they took the quick path – thievery.

Joe and Bob have lost everything, and Tom has lost his job. Joe, Bob, and Tom decide to raid the group that stole from them, and take back what was theirs. However, in this kind of ordeal, there is the campaign expense, lives are lost, chickens are lost, cows are lost, and the loss cannot be fully recouped. And there are losses on the other side, too. Bad for everyone.

Are we finally ready for government? The situation is not good for anyone anymore, so we set up a simple government, i.e. an agreement (contract) between people, saying we won’t steal from each other, and that for the common good and common defense, we will enforce this contract. Hence, the purpose of government and laws – to protect the lawful from the lawless. Lawful people will do what is right anyway, because they recognize it is to everyone’s advantage. The lawless will have to be forced to obey the laws because they, unfortunately, learn slowly (if at all) that stealing is bad for everyone, including themselves.

The original situation, with no government, was best. But necessity (lawless people) made government necessary. There is an administrative cost to government, but we conclude that this cost is necessary when it offsets the losses of lawlessness. So we establish a military to protect us against foreign invaders, a police force to protect us against domestic invasions, and government officials to judge/administrate it all. Wow, we’ve established a new business – government. Not one that can profit, but one that can minimize its citizen’s losses by protecting their individual rights. REMEMBER THAT!

All is normal in our land again. Raising chickens and cows. Working hard. There is no trickle down here, except from the cows. But that’s OK. Tom gets paid to clean up the trickle down. Job security. And something else really awesome is happening: Tom has been a diligent observer at his work, and has all kinds of ideas on better ways to do things. He could share these good ideas with his employer. But instead he’s been saving his money, and has decided he will bear the risk, and hopefully reward, of going into business for himself. If he succeeds, he can achieve his dreams, and maybe even dream bigger, hire people to work for him, and expand. If he fails, he can start again, or work for someone else again. (No, the government in our story will not bail him out, or provide happiness for him. It will protect his right to life, liberty, and the pursuit of happiness. His “rights” to a nanny are excluded, unless he wants to pay for her.)

The best thing about free economics is: People figure out what they are good at. They even figure out what they are not good at. (Bail-outs and hand-outs prevent people from learning either.) This is how, not only wealth is created, but personal satisfaction and success are achieved. Government is good at 2 things: protecting this process when it needs protecting, and staying out of its way when it doesn’t. Once government extends beyond this, it can become the ultimate obstruction and monopoly.

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