Economics 101: Part 1

I have never pretended to be an expert ... or even especially knowledgable ... on the subject of higher economics. As long as each month runs out before my money does* and my retirement fund looks as if it will support me in my dotage**, I'm generally happy. But although I'm not any sort of economist, there are things that either seem clear to me, or seem stupid to me as I watch our two political parties and all their splinter groups howl uselessly at each other across the struggling wreckage of our once-vibrant economy.

Over the last year or so, I've been dabbling off and on with a file I call "Economics 101," which contains my stream-of-consciousness thoughts on things like the economy in general, jobs, health care, taxes, and so on. What follows in this post is the first part of my Economics 101 document, as I wrote it. What do you think? ...

Part 1:

Business, Jobs, and the Economy in General

Businesses exist because their owners have identified an opportunity to make a profit by selling some good or service for which there is a perceived need.  The entire purpose of a business in a capitalist society is to make the maximum profit at the minimum cost. Altruism may play a part, but only a very small one.

Businesses hire people because they assess that they can maximize profit by employing a certain number of workers. They fire workers when it makes economic sense to do so to maintain the desired level of profit. Contrary to what the GOP tends to believe, businesses don’t hire workers because their taxes are low or lay them off because taxes are too high. Taxes are just one part of the cost of doing business, and are factored into business decisions.

Consumers want the lowest possible prices. In order to provide the lowest possible prices to consumers, producers at every level must do whatever they can to hold down their costs so that they can charge the lowest possible price to the consumer*** while still making the best possible profit. They minimize costs in a number of ways, for example:

-  Pressuring suppliers to cut the cost of raw materials;
-  Increasing productivity by getting more work out of a given number of workers;
-  Paying the minimum wage necessary for each job position (this is why there is such tremendous opposition to the idea of a national minimum wage);
-  Minimizing benefits for workers to the lowest competitive level;
-  Demanding wage and benefit concessions from workers, with the implied threat that if concessions are not made, jobs will have to be cut;
-  Outsourcing functions to locations where labor costs are minimized (usually overseas); and,
-  Pressuring elected officials for concessions or loopholes that minimize their tax burden.

How about the political costs of doing business?

-  When businesses pay large sums of money to individual political candidates, parties, or PACs, who absorbs the cost?  Surprise! - it’s you and I, the consumers. You didn't think it was coming out of profits, did you?

The end result is that the consumer pays the lowest possible prices for the goods and services he needs by holding down a job that pays the lowest possible salary, with the minimum possible benefits. The ultimate economic result is the following:

-  Providers of goods and services arbitrarily raise the cost of those goods and services, citing “increased cost of doing business,” while at the same time cutting back on those costs in every possible way;
-  Because the costs of goods and services continue to rise while wages and benefits remain stagnant or decline, both necessities and luxuries continue to spiral out of the reach of the average worker. This means that, in the worst case, workers are forced to chose between paying for health care, mortgage, or food.

So, what happens when costs are minimized by laying off workers?  Companies produce goods and services to sell at the lowest possible prices, but people cannot afford to buy them anyhow, because they have no jobs.

That's enough for now. Think about all that, and let me know what you think. Tomorrow, we'll talk about taxes and spending.

Have a good day. Keep a hand on your wallet.

More thoughts tomorrow.

Bilbo

* A rare event, let me tell you!

** If I live in a box in the park and eat once a week.

*** In some cases, an item may be sold to the customer below the cost of production ... this is called a 'loss leader,' and is intended to attract a customer who will probably buy other things as well, which will offset the loss incurred in the sale of the 'loss leader.'