Tuesday, May 31, 2011

The Free Market and the Blacksmith

I’ve been wondering, as our economy continues its downward slide, why we aren’t hearing the solution to the problem, particularly from the GOP candidates for president.

In my years in the manufacturing sector, problems naturally arose, as they do in any business. Those who excelled usually had the ability to find the source of a problem and fix it. Most of the time, those folk were among the *ahem* older employees who had experience, had seen a problem before (or a variation of it), and knew how to fix it.

Those problems tended to be fundamental in nature. I’ve mentioned something called “root cause analysis” before. Many of you may already know instinctively what this concept means: problems can usually be traced to a single source. Once this source is found, it can be corrected.

This may sound like a simple concept, and it is, for the most part. But sometimes, finding the root of a problem may not be simple. Occasionally, the problem will be of such a nature that’s its cause is disguised by another problem. One example is the tragedy of the Space Shuttle Challenger. The orbiter was destroyed by an explosion of the main fuel tank. The cause of the explosion was a faulty design of the O-rings at the joints that connected the solid rocket booster sections that allowed hot gasses to escape and ignite the tank. So, the explosion destroyed the orbiter, but the explosion itself had a cause.

You can chase your own tail for a while, if you know what I mean, before a solution is found and remedied. Successful problem-solving is sometimes more art than science.

However, in certain industries such as engineering, there are concrete rules that cannot be violated, namely the laws of physics. There are certain things that just can’t be done, at least not without causing damage. There’s a joke among engineers: something is “designed to fail.” That means that whoever came up with a particular concept hasn’t thought it through far enough to see where a failure could occur. Murphy’s Law lives in the details – if something can fail, it will.

Economics isn’t much different from engineering. While not quite as rigid as the laws of physics, there are nonetheless economic laws that cannot be violated without causing damage.

If I may, I’d like to make an absurd analogy in order to make a point. Let’s say you wanted to make an automobile out of paper. In theory, there would be advantages to doing so: it would be light, it would get great gas mileage and could be easily repaired.

Sounds great, doesn’t it?

But if you were to crash in one of these cars, the disadvantages would be tragic. The fault lies in the details. Paper isn’t very strong and affords little to no protection for the passengers. Even if you built a wooden frame to support the paper, that wouldn’t work either. If the underlying foundation of the idea isn’t sound, it’s designed to fail.

Thankfully, we have something called experience to guide us in the engineering world. There is a body of knowledge that’s been accumulated over the years that’s taught in engineering schools. Such is this body of knowledge that there’s very little grey area in that discipline: either something will work or it won’t work. Bridges are a great example.

Economics is very similar. While I’m not as well versed in economics as Milton Friedman, I’ve managed to pick up enough nuggets of knowledge in my travels to know that our economy, as it’s currently being directed from Washington is, shall we say politely, not following the laws of free market economics. Therein lies the problem.

Now, there are many among us who seem to think that there are economic forces beyond our control. This was true in the past when our economy was centered more around agrarian commodities and the farm. Weather played a large part in crop harvests, and one bad planting season could have a profoundly negative effect on prices. Several years of bad weather could devastate a crop, and farmers along with it.

But as our economy has grown and industry has become a larger part of our economic structure, changing weather has played less of a role. These days, there is less economic disruption caused by nature.

Now our biggest enemy is us.

I spoke earlier of a body of knowledge that we can use to draw upon in the engineering world. We also have that body of knowledge in economics. However, you’d never know that by listening to those in charge of the economy today. It seems as though economic history is being ignored, and those who think they know this body of knowledge really don’t. Their ignorance is showing up everywhere in high unemployment numbers and a low GDP. Remember how we were told that President Obama’s Stimulus plan would keep the unemployment rate below 8%?

It’s as though they were bound and determined to construct their car out of paper, disregarding any evidence of the bad results.

Our economic body of knowledge is contained in recent history. The economic law is clear: more government interference in the private sector results in less economic activity. If that law has a name, I don’t know what it is, but it certainly deserves one.

The problem is that we have someone (or a group of someones) in Washington who is laboring under the false illusion that they can “guide” our economy. The truth is, any action that the government takes only restricts the free flow of the economy.

Let’s try another analogy, this one historical and less absurd. Let’s say you’re the village blacksmith and your main product is horseshoes. Let’s also say you’ve been in business for a few years in a growing community. Because of that growth, you’re making more horseshoes than ever. Your raw materials are abundant in the area and you have all the tools you need to produce horseshoes as quickly as you can.

Along comes the village magistrate with the news that he’s going to levy a tax on all sales in the community. Part of that tax will help the community keep the roads in good shape. That sounds like a worthwhile use of the taxes, since it will encourage an activity in which you’re already engaged. The tax is to be 10%. You add this cost onto the price you charge for your horseshoes, and once the community is aware of the tax and the increased cost they now must pay for the horseshoes, everyone understands.

Now let’s say this magistrate comes by and announces not a tax, but something called a regulation. This new regulation requires that you must use a certain type of wood for the fire that is essential to your business. You can no longer use the wood readily available from the nearby forest; you must now travel to the next community some miles away to purchase wood from a different forest. The wood from the local forest is to be used only by the townsfolk for their cooking, not for making horseshoes. Incidentally, no one is planting seedlings in the local forest to insure the future supply of wood for the village.

Since you don’t have a cart to transport the wood, you must take several days to construct one yourself, days that prevent you from making horseshoes. In addition, your trip to purchase the newly required wood takes one complete day of your time, further reducing the number of days you have to make horseshoes. This must be done every week.

As a result, you must charge more money for your horseshoes: the magistrate has imposed a tax and a new regulation too, forcing you to increase the price. If you don’t, you won’t be able to purchase the grain your wife needs to make bread, which is also more expensive due to the 10% tax levied on it.

Next, the magistrate notices the increased cost of his food and decides that the tax he’s levied on the community is going up to 13%, again forcing a price increase for the entire community, only now that tax money is feeding the magistrate whose costs are higher as a direct result of the taxes he’s levied on the town.

You see where this is going.

Once government gets its tentacles around an economy, it can only cause economic damage. Granted, there are many things that government can and should do. But once the legal framework is in places to protect the lives and property of the citizens, there is little left to do except meddle. Any meddling beyond the essential duties of a government (as defined by the people, in our case) only serves as a drag on the economy and results in a slowdown of activity as the cost of doing business goes up.

This is the law of economics that’s being violated with wild abandon inside the Beltway today. The solution is to get government out of the marketplace so as to increase economic activity. This a simple remedy that will prove difficult to execute. We’ve become numb to the effects of government intrusion to such a great degree that many people recoil at the idea that certain government programs and agencies should be reviewed, or reduced or eliminated.

In their panic, they mistakenly think that there’s no way we could dismantle these large regulatory agencies. But, if they were aware of the true nature of these bureaucracies and how they function today, they’d be more than happy to do away with them. Part of the deception that career politicians use to protect their jobs is to make you think that you absolutely cannot live without this or that agency. Even PBS is essential to our lives according to those pols who seek to justify their increasingly meaningless positions and the money they take from taxpayers.

We can’t live without a government-sponsored radio station? Think about that for a minute and ask yourself if maybe, just maybe, our government has gotten too big.

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