Money and Wealth
Page 3
Both men benefit from Jay’s job.
Tor gets six fish each day
from his neighbor’s labors.
Jay acquires a skill for life.
Jay gets four fish in the time
he used to get one fish.
Notice that trade does not necessarily involve money. An exchange takes place that both people value.
And there is one more critical thing to understand about this kind of working trade.
Working trade is a choice
that benefits all involved.
Tor and Jay both prosper. Soon Tor invites others to fish for him, creating more jobs and allowing more and more people to save time.
Meanwhile, Tor’s wife, Sophia, teaches others to use the slingshot in exchange for some of the coconuts they knock down.
Tor and Sophia begin building more wealth as they become employers.
Community and Jobs
Free choice and jobs create more of a community, as well as create the possibility of culture.
The community is going strong.
It turns out that a small number of people in the village are naturally good at fishing, so they fish for the community by trading those fish for other products, or goods, and services. (I will give you two fish if you wash these clothes for me.)
Other people are good at using the slingshot to get coconuts and trade them for other goods and services. It’s the same with blankets and clothing and hats and baskets and shoes and jewelry and spears.
Soon more people are creating an increasing variety of goods and services. They are building specialized skills.
If someone does not want to join in with the community, that’s OK.
They can continue their own fishing without a fishing pole and knocking down their own coconuts without a slingshot.
Since water comes to the community, the community may decide to let that person have the water. But that person still has a choice to participate in the community.
All kinds of things now begin to happen, simply because of:
— The ingenuity of individuals
— The willingness of others to learn a skill
— The labor of all parties involved
— Their freedom to choose
Trades and Crafts
Originally, people who labored with their hands—such as carpenters, bricklayers, plumbers, and others engaged in manual labor—were said to have a trade.
Why?
Because they would steadily acquire skills that allowed them to trade skilled labor for products or money. Being a skilled tradesman meant having some value to offer others.
Other people focused on developing skills in crafting products, such as furniture, jewelry, tools, sculpture, music, and other things that people wanted. They became craftsmen.
Their skills allow them to specialize in crafting products that few can do for themselves.
These people made themselves valuable by pioneering and increasing their value, their ability to provide something others would trade for.
Having skills is having wealth.
Having skills that others value,
that others will trade goods or money for,
is having wealth.
Skilled people are wealthy people. And if they are free to choose their skills, their trades, their crafts, and they are free to apply their imagination to go beyond the boundaries—they are free to invent themselves and create their own new, specialized jobs.
They create new wealth.
Jobs offer people who are not personally creative or entrepreneurial a way to participate in a free trade economy.
The trade-off may be that they have to labor in new ways, either physically or mentally. But they can acquire new skills and increase their sense of personal value.
Of course, now you are thinking, “Yes, that’s all well and good. But in the real world not everyone is good and honest like those on Gold Island.”
What happens when you have to deal with human nature? With people who are not so good and honest? With people who choose to exploit and abuse workers?
Good question.
Deep Dive: Good Intentions
Economics is not about how to make money, personal finance, or playing the stock market. Economics is about how decisions are made and the consequences of those decisions.
What resources are available?
How do decisions affect how those resources are allocated?
Do the decisions raise or lower the standard of living of people as a whole?
At its core, economics is about understanding the law of cause and effect. Understanding how decisions lead to certain results and ensuring that one must look at the facts to determine that the results are connected to the right causes.
If you are getting results you do not desire, to correct the course, you must clearly grasp what the true causes are. Not causes dictated by a certain political, economic, or philosophical vision. Causes dictated by facts.
It’s important to distinguish between incentives created by economic decision and the goals of economic decisions. This distinction allows for seeing how consequences matter more than intentions.
Some will claim that a decision based on a moral economic goal is somehow more important than a decision based on creating incentives. But history is factually full of good economic intentions leading to disastrous consequences due to a lack of understanding what incentives are being created.
Read articles on Venezuela’s economic disaster, in a country with incredible natural resources, incredible opportunities for wealth. Venezuela’s economy, based on a moral vision of what’s good for the people, has allowed the leader’s family to become billionaires while the people starve.
Economic principles are not a matter of opinion any more than the basic principles of biology, chemistry, or physics.
A non-ideological, that is, non-visionary, understanding of economics is important because economic decisions have real-world consequences.
When first responders arrive at a natural disaster, they know that resources are scarce. They know that there are only so many medical personnel, only so many specialists, and so many antibiotics and medical devices.
Experienced responders do not make decisions based on an ideology of “this person’s social standing puts them ahead of others.” They must quickly determine who needs the most urgent care, who will probably die despite extraordinary efforts because of the heavy nature of their wounds.
They apply The Law of Economy. Since time and resources are scarce, each medical professional must determine how that time and those resources must be allocated for the best overall result.
And so they must deal in trade-offs. Yes, this decision will mean that one person dies. But time is better spent so several others may live.
Economics is about right decisions, recognizing trade-offs, and making the most of the options available.
Chapter 4
Government
If men were angels,
no government would be necessary.
James Madison,
from Federalist No. 51
True business is based on choice. When the threat of force exists, you have something else.
What happens when people and communities exist that do not have honesty and integrity?
Who cannot be trusted?
Let’s talk about Iron Island and how the people on that Island are different from those on Gold Island.
Gold Island vs. Iron Island
The people on Gold Island each have a moral conscience. They behave in such a way that they do not seek to gain something at the expense of others. They do what they do for themselves and their loved ones without causing conscious harm.
A good, healthy culture instills a moral conscience.
However, the people on Iron Island do not each have a moral conscience. They take what they want from others without regard for the harm they cause. In fact, many enjoy the harm they cause others. They delight in exer
cising power.
Zahn is a pirate. He is greedy and strong, and he enjoys taking what he wants from others on Iron Island. He forces others to fish for him and get him water.
Zahn has some fellow bandits who also enjoy taking and hurting. Since they are not as strong as Zahn, he rules. He rewards those who follow his rules and punishes those who don’t.
Zahn and his fellows rule by force and whim. The rules can change every day, if he chooses. Anyone that questions his rules can try to kill him. But they know if they fail, he will kill them.
One day, Zahn’s son Zeb tells him about another island he and his buddies found while out on a raft. The island had many people with plenty of fish, coconuts, and exotic clothes—Gold Island.
With a gleam in his eye, he persuades his father to let him take a pirate crew there at night, sneak in, and take all they can without waking anyone.
Zahn laughs and agrees.
The next day, the people on Gold Island wake up to discover that the pirates from Iron Island had paddled over the waters in the dark of night.
They had sneaked into the village and stole stores of fish and coconuts, boxes of clothes and blankets, and even some fishing poles and slingshots.
The people of Gold Island decide to take some kind of action to protect themselves and their wealth.
People with a healthy moral conscience govern their own behavior. The people of Gold Island each have a healthy moral conscience.
They are intrinsically governed—
governed from the inside.
People without a healthy moral conscience do not govern their own behavior. The people of Iron Island do not have a healthy moral conscience.
They need to be extrinsically governed—
governed from the outside.
As a community forms, members of that community soon discover they need to govern the behavior of outsiders who are a threat to their community.
When the people of Gold Island awaken to what the pirates of Iron Island have done, they awaken to a new danger. All their labor has gone to people who do not earn their keep, people who are simply willing to take what they want.
What to do?
Several leading thinkers in the community, like Sophia and Alex, come up with a plan.
The village is now becoming more complex and specialized. Different people have different specialized work they do to contribute to themselves and to their community.
For example, those good at fishing, fish. Those good with a slingshot collect coconuts. Those good at making blankets, make blankets. They keep what they make, and when someone wants what they have, they trade.
The people love how their lives work. But they need protection from those who would take what they produce.
So they come up with a plan for each person to contribute something to a small group of people who will lead the community’s defense and protect the community against theft.
They form a new kind of institution, a new kind of job. They choose people to specialize in governing the bad behavior of the outsiders, who become guardians.
The people in the community grant these people the right to exercise force on outsiders who engage in bad behavior.
However, some people worry about giving guardians such power. They want everyone to agree and be clear on what “bad behavior” means.
So... what is that bad behavior?
They come up with the two laws:
1) Do all you have agreed to do, and
2) Do not encroach on other persons or their property.
In other words, they agree on laws that require people to avoid fraud and lying, and also stealing and physically hurting others.
People who do not follow these laws are acting outside the law.
They are outlaws.
So certain members are now paid, not to produce any wealth directly, but to stand guard, to protect the wealth created by members of the community, and to apply force when needed.
Soon a small number of people form a local council to coordinate these activities. They propose plans. Everyone in the community discusses these plans and decides on the best courses of action.
They have formed a small government, supported voluntarily by the community.
The main purpose of a government for a community based on choice and free trade is simple: to govern externally some people’s bad behavior in order to protect members of the community and their property.
What is the difference between a business and a government?
A business is based on choice.
People choose to trade or not to trade.
Properly understood, a business is distinguished by choice, the freedom to choose. No one is required to buy.
A government passes laws and exercises force to make sure people comply with the laws.
A government is based on force.
When the laws created are good and applied equally to everyone, including those who make the laws, then the government is good.
On Gold Island, the rule is Equal justice before the law.
Everyone is equally held accountable for obeying the laws. The laws are written, and everyone agrees on the meaning of the written laws. Nobody can make up laws on a whim, out of thin air.
On Iron Island, the opposite is true: Might makes right.
On Iron Island, it’s survival of the fittest and most ruthless. Any wealth produced comes from slave labor.
The most ruthless and powerful bandits, like Zahn, power their way to the top. They make the rules (laws), and if they choose to change the rules, they do.
Some leaders can change the laws every day, or apply different laws to different people. They create laws on a whim, out of their own heads.
The people on Gold Island want to preserve their free society. So they have to do something to protect it from people who do not care for the rules of a free society.
They create a limited government.
There is a significant trade-off that comes with forming a government. Government has the power to exercise force.
On Gold Island, there is no concern about people abusing their power.
The people of Iron Island, of course, are expected to abuse power.
However, on Silver Island there would be concern about the potential abuse of power. That is the trade-off. If you have government, you are giving people the power to coerce.
And people being people, they will be tempted to abuse their power.
One thing is clear.
A small and limited government
helps keep a community healthy, wealthy, and free.
Deep Dive: A Note About Rights
People like to talk today about the right to food, the right to a home, the right to healthcare, and so on. They say government must provide these.
To most people, these are obvious rights. How can you object to them? Anyone with compassion should support these fundamental human rights.
In the short view, these seem to be praiseworthy goals.
But looking beyond the short view,
you discover these so-called rights
can cause great harm.
Not all rights are the same.
The Declaration of Independence announced for the first time that certain natural rights supersede man-made law. The right to life, liberty, and the pursuit of happiness. (Magna Carta started the process but did not fully articulate this distinction.)
People had the natural right
to be free from constraints.
The main idea here is that governments should exist to provide freedom from constraints. Therefore, a government should be limited (since the inherent nature of government is to constrain through force of law).
What then is the role of government designed for a free people? To protect people equally so they can be free to choose how to live their lives.
Limited governments protect people from criminal violence, and from criminal fraud. They do not apply force except in these limited categories.
Because these are not natural rights.
They are rights to commodities.
In other words, from a Gold Island perspective...
By asserting a right to food,
someone else is constrained
to provide that food.
By asserting a right to a home,
someone else is constrained
to provide that home.
By asserting a right to healthcare,
someone else is constrained
to provide that healthcare.
Therefore, commodity rights are directly opposed to the basic natural rights of life, liberty, and the pursuit of happiness—the right to be free from constraints.
And, therefore, are directly opposed to free trade.
Other people have to work (be enslaved) to provide these commodities.
You cannot have it both ways. However, anyone emotionally attached to commodity rights will provide all kinds of rationalizations to justify them.
History shows time and again that
rights to commodities lead to human slavery
and the collapse of a civil society.
People who do not understand basic economics only look at the immediate results of an action, law, or policy. They do not look at long-term consequences, or to the impact those actions, laws, or policies may have on other groups.
Furthermore, from a Silver Island perspective government may have a role protecting a community’s ability to access clean water, healthy food, and proper shelter. These can be protected under the Two Laws.
Even a safety net for emergency healthcare can be provided by government.
However, that’s quite different from saying that people have a right to them without work or some way to earn what they receive.
One final thought: Government is not the only way to get things done.
But that is a discussion for another book. See Law and Liberty (A Lifetime of Learning, Book 9).
For now, it’s enough to understand that “rights to commodities” is how the pirates on Iron Island view the world.
One group of people labors to create wealth, and another simply takes the fruit of that labor—through force.