Thursday, August 20, 2009

Making People Richer: The Benefits of Globalization

Everywhere you look in this day and age you will see the results of a global economy.  From the car you drive, to the television you watch, from the coffee you drink, to the instrument you play, we are fully engrossed in the fruits of a world economy.  

Over the years in America, however, there has been a public outcry against the looming threat of increased globalization.  Many called for closed economies to protect American jobs from outsourcing or protectionism of certain sectors from foreign investors.  Others have stated that overseas factories exploit lower-income nations by enslaving their populations in sweatshops to churn out goods for American consumption.  These people paint the picture of the American businessman getting rich while dancing on the backs of the poor.  I feel, in the interest of fairness, that it is important to address these concerns through the lens of how global economics works and address the root causes for the problems faced by the upper-income and lower-income nations alike.

Let us address the first concern of globalization eroding away the American workforce.  The notion is based in fear-mongering because free trade with other nations has shown to make the American citizen richer on the whole.  Abraham Lincoln had famously remarked that buying a coat in America keeps the coat and the money here in America but buying one from England brings the coat here but sends the money to England, effectively removing it from our economy.  What this misguided argument failed to address is that when any product is purchased with our currency, that currency eventually makes its way back to our country when foreign consumers purchase American products.  It is simple mathematics.  

So when governments push for tariffs on foreign goods--for example taxing a foreign car as an incentive to buy a domestic car instead--they are essentially taxing American consumers and limiting their choices.  Taxation certainly does not make the American consumer richer.  Even if those consumers decide to buy domestic cars only, the Detroit autoworker is the only one who truly benefits from the transaction.  The rest of the country actually becomes collectively poorer.  

The same applies to the protection of jobs.  Union operatives will wax poetic about the benefit of buying domestic products helps keep Americans employed but fails to address the inefficiency in protecting industries in the first place.  If people stopped wanting to buy American automobiles, it is a horrible waste of resources to continue producing the product.  It would be tantamount to the government protecting the horse-and-buggy industry over the automobile industry just in the interest of keeping cartwrights employed.  In a free market, when one sector of industry produces something undesirable, the resources of labor and capital are shifted to something that is desirable.  And everyone is better off for it.  Additionally, the outsourcing of jobs to foreign countries where labor is cheaper makes the cost of production a fraction of what it was in the United States, thus dropping the prices of the items in question, making those products available to more people, regardless of their individual income.  It also increases the dividends and investment returns to shareholders in those corporations, of which 50% of the American population is involved with on some level or another.

On the other side of the globalization coin, what about the exploitation of poorer nations at the hands of greedy capitalist interests?  Well, let us break down what goes on in an overseas factory.  In lower-income nations, government bodies tend to have less stringent policies regarding entrepreneurship or property rights.  Without an incentive to get people to innovate and produce, that nation's people are sitting on resources they cannot really use.  Instead of letting their resources rot on the vine or languish in the mine, the citizens instead trade these resources to foreign bodies who can make use of it.  Since prices are generally determined by the supply of the resources versus the demand for it, these items are generally acquired cheaply.  Even so, according to the principle of voluntary exchange, both parties in the transaction are better off for it.  

And what of sweatshop labor?  The common outcry against outsourcing is that foreign workers are put to work in unsafe environments for long hours and paltry wages.  What many fail to ponder are the alternatives.  While child labor or uncompensated overtime are fundamentally deplorable, they are still better options than what the citizenry had available in the first place: starvation or selling themselves into sexual slavery in an underground economy.  Because of lower-income nation's despot-driven policies of government-sanctioned larceny and loose property rights, the people have few choices available to them to produce.  In fact, studies have shown that countries with foreign investment have citizens that, on the whole, enjoy a higher standard of living than those without, with some of their children going to college for the first time in their family's history.  Refusing to engage in trade with these poorer countries just contributes to them staying poor.  While the conditions are far from what westernized nations feel are acceptable, one cannot overlook the fact that industrialization in our own country started out much the same way and put us on the path of prosperity.  As people become more empowered, social change inevitably results, and convergence becomes all the more possible.

In summary, a free global economy is far more capable of improving the lives of everyone involved than the oppressive hand of government protectionism and closed economic policies.  So long as the principle of voluntary exchange is practiced between trading parties, everyone in the global economy walks away better off than when they started.  And every little bit brings up the standard of living for everyone involved.

Wednesday, August 12, 2009

Stealing From the Poor to Buy Teenagers iPods: The Law of Unintended Consequences

So it's been over a month, I got all my vacation needs out of me in the past month and, as a diligent reader (or maybe both of them) pointed out, it's time to get this train rolling again.  Toot toot!

So next on my list of topics I will discuss economic policies and their various unintended consequences.  An unintended consequence is something that happens as a result of an otherwise well-meaning policy either in the form of a hidden cost or a change in people's behavior that was unexpected.  Today I'll discuss minimum wage.

Now minimum wage, as a concept, is rooted in altruism: you set a wage floor so that any working individual has to make at least a particular wage which is decided to be a "living wage" according to the benevolent bureaucrat who comes up with that number.  Those politicians (mostly on the left) who support it state that this is to help poor, working families make ends meet.  I think we'd all agree that that seems like a worthy goal.

And it's an easy policy to enact; politicians don't have to spend any taxpayer money and it is highly visible.  In this instance the benefits are very easy to see with a numeric value.  But what about the costs?

And that is the kicker because the costs are much less obvious, especially to those who, ostensibly, are supposed to be being helped in the first place.  One of the biggest costs is to the job sector itself: since the government is raising the wages above their market value (i.e. they are not allowing a free negotiation of wages between a willing worker and willing employer), they are forcing employers to hire fewer people.  If you have been paying attention in my essays about the Great Depression (and of course you have been) you'd see right away that a wage control actually INCREASES unemployment.  

Because firms have the freedom to choose whatever they want to pay willing workers to perform a particular job taken away from them, they exercise their freedom of choice in other ways; namely just cutting jobs and forcing what remains of their workforce to work harder to cover the loss of production.  If they can't realistically do that they then they raise the prices of their products to defray the cost.  Or, perhaps the worst scenario of all (and not at all an uncommon one) they use the minimum wage as an excuse to do both.  

So, to use an example, if you are one of three shelf-stockers at Clem's Ball-Bearing Emporium and you make minimum wage at $5.15 an hour.  The government, feeling that you are unfairly paid for your immeasurable talents of matching numbers on a box with numbers on a shelf, decides to give you a $2.10 raise.  Now Clem, the owner, has to assess his options.  If you and your two coworkers worked there full-time, Clem is now shelling out just over another $1,000 a month for the same amount of work.  That might not seem like much but if Clem is a good manager he is already operating at the margin and squeezing every dollar for what it is worth to undercut his competition.  

Since Clem has to pay you more he has to find some way to make up that $1,000  He will either have to raise the prices on ball-bearings after assessing his monthly revenue (which might not be a good idea if his competition lays off workers to keep their prices down) or he will have to decide which of the three of you he has to put out of a job.  If he lays one of you off, he ends up saving himself over $1,100 a month in addition to the costs of maintaining you on the payroll.  But he will have to push the two remaining guys even more to make up the work, or even spend valuable amounts of his own time doing it as well, instead of devoting more time doing the more important and essential things involved in running a business.  

Now, to be fair, minimum wage isn't all that powerful of tool for helping out poor people (or hurting businesses) in the grand scheme of things (but it sure looks good for politicians seeking reelection) since minimum wage barely keeps pace with inflation, but there are more insidious costs involved.

For one thing, over 90% of the people making minimum wage aren't even the sole sources of income for their households; most of these jobs are held by people with part-time side jobs and teenagers still living with their parents.  That fact kind of takes the whole "we're doing this for poor people" claim right out of the equation.  Secondly, businesses use minimum wage increases as an excuse to raise their prices anyway and, since most of those jobs are in service and retail industries like Wal-Mart or McDonald's), the people on the lowest rungs of the income ladder--who weren't actually propped up by the change of minimum wage in the first place--actually shoulder more of a cost than they received in benefits.  Ouch!

So, as you can see, the Law of Unintended Consequences rears it's ugly head in a fashion that not only doesn't actually benefit the people it was designed to benefit, but actually does them more HARM overall.  I wonder how many votes these politicians would get if they just told the truth and said "I'm proposing that we make goods more expensive for poor people so teenaged kids have more money for iPods"?  I'm guessing not very many.

Tuesday, July 7, 2009

What Makes a Depression Great Pt. II: The Roosevelt Myth

If Herbert Hoover's policies ground the apple cart that was the U.S. economy to a screeching halt, Franklin Delano Roosevelt's policies tipped the cart over.
Instead of adopting the policies of his predecessors--which were largely no policies at all--and letting the economic downturn correct itself, FDR sought the opportunity to make for himself a legacy that would leave ruin in its wake and set a dangerous precedent that we're seeing bloom into full effect today with Barack Obama's economic policies.  

The New Deal had more than seven years to pull our nation's economy out of the rut that it remained stuck in.  Historically economic depressions didn't last that long to begin with; most downturns lasted around two years and none more than five.  It goes to show that historians don't seem terribly well-versed in economic study and those who are, such as Burton Folsom Jr., Gene Smiley, or Jim Powell, seem suspiciously absent from the textbooks in public schools. History is written by the winners indeed!

But enough speculation, let's take a look at some facts:  While unemployment was at its highest when Roosevelt took office, unemployment numbers stayed in the double-digits all the way into the 1940's and even jumped from 14% to 18% in 1938, five years after Roosevelt's New Deal had gone into effect.  The last economic depression prior to that, in 1921, unemployment was again in the double digits at 11.7% but had dropped to a remarkable 2.4% by 1923.  There apparently was no need for a New Deal then, right?  

So what kept unemployment so high during Roosevelt's administration?  Apologists will claim that without the New Deal unemployment would have been much worse but one has to remember the Great Depression was a global catastrophe and yet the United States suffered the longest and hardest out of all other countries.   Looking just at our northerly neighbors in Canada one can see that their unemployment numbers nearly matched the United States between 1930 and 1931 (8.9% for the U.S. vs. 9.1% for Canada) whereafter the United States would outpace Canada for the remainder of the Depression (The U.S. peaked at 24.9% and Canada peaked at 19.3%) and Canada would end up recovering quicker, it's unemployment numbers reaching a normal level by the 1940's at 4.4% while the U.S. still floundered at nearly 10%.  

One of the biggest contributors to unemployment was FDR adopting Herbert Hoover's wage controls.  Even as prices were dropping in the economy, the government was forcing firms to increase wages.  When you have to pay workers a hefty sum and you're not making any money, the demand for labor drops considerably.  If, immediately after taking office, FDR had allowed wages to adjust freely according to market value, unemployment would have tapered off and started dropping as resources and labor moved from failing businesses to sustainable ones. Instead FDR used the might of the Federal government to enact policies (such as the National Industrial Recovery Act and the National Labor Relations Act) that forced firms to raise wages and prices and limit competition--in effect creating monopolies.  Small businesses couldn't survive because they couldn't undercut the prices of bigger corporations who then used their government-sanctioned cartel status to raise their own prices.  

Essentially what happened is that a minimum price had to be charged for any good.  If you were a small business your operations were run into the ground and then large corporations, now lacking any sort of competition, could charge whatever they wanted for goods and they most certainly didn't price them cheaply.  In a free market such things do not happen because while corporations still want to make large sums of money, competition forces them to behave.

Forcing wages to be high has the same effect.  By using the Wagner Act to give crippling power to labor unions, wages were forced up, union membership doubled, strike days doubled, and unemployment spiked.  Firms weren't going to hire more workers when they were forced to pay the workers more than they were worth, especially when no one was buying any of their products because the prices had to be raised to cover the cost of the labor.  

So with all this meddling in the markets another after effect of these policies was "regime uncertainty".  Essentially this meant that private investors were scared away from investing their money because they remained unsure of the security of their property rights or their ability to even keep the returns on their investments.  This form of "capital strike" slows recovery efforts in the economy because businesses won't have any means to invest in their own machinery or maintenance costs.  In fact, investment dollars ran into the red to the tune of 
-18.3 billion dollars (and that's in 1930's dollars).  Yes, that's a minus sign in front of that figure!  It wasn't until Roosevelt forced all the "New-Dealers" out of his administration on the onset of World War II and brought private industry onboard, filling his war administration with capitalists, that private investment started making a comeback.

As we can see from just a few examples in a long laundry list of policies that FDR put into effect, trying to prop up failing businesses, cutting off competition, and forcing high wages did nothing but exacerbate the length and severity of the Great Depression.  It truly made what would have been just another plain ol' depression into a great one.  And as I will explain in the next installments, what is going on in the economy now is not too far removed.  Stay tuned!

Sunday, July 5, 2009

What Makes a Depression Great Pt. I: The Hoover Myth

      I'm going to sideline my postings on economic fundamentals briefly, break up the monotony, and tackle some things that I think are increasingly important in the here and now.  That subject is the Great Depression.

You might ask "Wait a minute, what does the Great Depression have to do with the here and now?" and my emphatic answer is "lots!"  There is a lot going on in the economy today that ominously echoes events that preceded the 1929 stock market crash and the ensuing Great Depression and I feel it is important for us as citizens to understand what is going on and why--and present it in a format that does away with the partisan finger-pointing we are all so used to seeing and hearing day in and day out.  You will soon realize that there is plenty of blame to go around both back then and today.  But first we need to take out the big free market hammer and bust some myths.  

You see the Bush/Obama dynamic we have been experiencing is in part reminiscent of the Herbert Hoover/Franklin Roosevelt one of the past.   Hoover, then a Republican president during the disastrous stock market crash, was given the full brunt of the blame for the Great Depression and, in fact, he deserves some of this criticism but not for the reasons we think.  History has painted a picture of Hoover as a do-nothing pro-capitalist who sat idly by and watched the American economy flounder like a dying fish in the bottom of a fishing boat but actual facts show us otherwise.  Like George W. Bush, Hoover having a big fat "R" next to his name was no indicator of his fiscal principles and he certainly didn't act in the interest of free market economics or fiscal conservatism.  In fact, nothing could be further from the truth.

Herbert Hoover loved big government, tax hikes and heavy-handed policy on the markets. What he started was then magnified by big spender Roosevelt, much like what was started by Bush has been snowballed by President Obama.  The irony, of course, was that Roosevelt used Hoover's policies of deficit spending against him during the 1932 presidential race by pointing out that Hoover had run more peacetime deficits than any president before him.  

Here is a small smattering of Hoover's sins: he steeply raised income taxes during an economic downturn, he propped up wages artificially which led to staggering unemployment, he imposed massive tax hikes on imported goods which hamstrung the availability of raw materials, he spent more than twice what tax revenues were bringing in, and he ushered in policies that would prove to be the seeds of the New Deal that FDR would soon bring in to deepen and lengthen the depression.  In fact, we as a country very likely would have been better off if we had Hoover the vacuum cleaner sitting in the Oval Office.

So sure, you can blame Hoover for helping to cause a run-of-the-mill economic downturn to balloon into the single most devastating depression in American history but it's for none of the reasons the partisan left has fabricated (and made all the easier by simply pointing out his party designation and hoping that's all that needs to be said).  As we can see just by this short summary, Republicans aren't free of blame (as much as they'd like to make that claim) but it is often because the fundamental fiscal ideologies that they claim as their stance are all but abandoned.  As we will discuss over the next few entries, politics and economics are rarely good bedfellows regardless of the letter next to a politician's name.   This punctuates all the more that the economy's best friend is the political party that doesn't interact with it in the first place.  

So perhaps voting for a vacuum cleaner in 1928 would have been the safer bet for the American economy but make no mistake, regardless of his political affiliations, Herbert Hoover still sucked.  

Tuesday, June 16, 2009

Economic Renaissance: The beginnings of Capitalism

Despite our images of cigar-smoking robber barons in dapper suits with monocles and shiny top-hats, capitalism actually started out innocuously enough from the poor classes. Prior to capitalism your social status was largely a product of your birth. If you were born poor you were poor the rest of your life. If you were born rich you inherited everything you had through the aristocracy of your family. You were pretty much stuck where you were. Manufacturing was purely a process held in cities by the wealthy and served only the wealthy.

Eventually, however, people in rural communities started having a surplus of people. More people were being born than there were things for them to do. These people had no work in the agricultural community and were denied access by kings and nobles to manufacturing and thus became outcasts in society. Eventually, however, these poor outcasts started banding together to make small shops that would produce something. They didn't produce expensive items that only the wealthy could enjoy but instead produced things that everyone could enjoy. And thus capitalism as we know it today was born.

As celebrated economist Ludwig Von Mises put it "It was mass production to satisfy the needs of the masses."

So capitalism didn't spring forth as the result of a wealthy aristocracy finding new ways to exploit the lower classes but it was a natural extension of the lower classes finding better ways to do things and make them available to everyone. And it was the first time the lower classes would have the opportunity to dig themselves out of the circle of poverty that had gripped the poor throughout history.

But not everyone is cut out for entrepreneurship. Some people don't want to shoulder the risk or don't feel they have the guile or ability to manage a business, others simply don't want to work that hard or take on that much stress. What did these people do? Well, they still sold someone a product but this time that product was their own skill and labor.

This is an important thing to realize because the collective gasp of outrage against capitalism is almost always centered on the idea that the laborer doesn't own the product of their labor, as if they were shackled to a machine and forced to toil for rich business owners. The laborer isn't trying to own the product of his labor, he is merely exchanging his labor for money.

Remember the Principle of Voluntary Exchange? Two parties freely exchange goods or services in such a way that both parties walk away from the arrangement better off. The same applies to labor. Let's consider that the laborer makes pins in a shop for a living. If the laborer toiled in the shop making pins for himself he is not only a pin-maker but a pin-salesmen too since he has to sell the pins to someone else since he can't eat them or build a house out of them. He now has to divide his time between two tasks, even if he's only really good at one.

So, instead the laborer takes his speciality, which is making pins, and sells that speciality to someone else who will be in charge of selling the pins. In fact, that someone else secures all the materials to make pins, furnishes the tools to make the pins, and sells and distributes the pins. All the pin-maker has to do is show up and make them in exchange for money which he can use to feed and shelter himself. The pin-maker walks away from the exchange better off because he got to get maximum profit from his speciality and the pin-merchant is better off because he found someone better than he at making pins and thus could concentrate his efforts on buying the materials and selling the final product (and doing all the accounting so he can pay his taxes to the government). Both parties are better off than when they started.

Let's break it down mathematically, just to clear it up some and really illuminate this wonderful system of exchange. We'll take our two-man pin-making company and use it further.

To keep it simple, let's assume a pound of pins costs $100 to make and a dedicated laborer can make a pound of pins a day. Since labor accounts for around 70% of the cost of a product that means that $70 was required in just what was paid to the employee to produce the product. The remaining $30 is the cost of the raw materials used to create the product.

Now, socially-minded folks think that charging $100 for the product would be fair because the laborer made $70 that day and then added $30 onto it for the cost of the materials to make the pins. In a Marxist viewpoint the laborer owns the product of his labor and an entrepreneur merely exploits the employee by robbing him of his work and then charging more for the product on the shelf.

By this reckoning it is entirely unfair for the entrepreneur to charge more than $100 for his product, even though the entrepreneur also labored for the creation of that product (the money he borrows to buy the capital in order to have a facility and tools in which his employee uses, the procurement of raw materials to be used in the product since raw materials don't buy themselves, and the sale and distribution of the final product since pins don't sell or deliver themselves), under a Marxist system it is proposed that the capitalist shouldn't make any money from this labor simply because he wasn't the one lifting the hammer to build it and thus he hasn't added any value to it.

Well, maybe that's a fair enough assessment. Maybe instead the pin-maker should secure the materials, secure the capital, build the product, sell the product, and deliver the product himself, instead of just giving it over to the capitalist. Now all this work makes the worker not only the producer of pins but also the purchaser, the accountant, the salesman, and the delivery truck driver.

All of this work would require not only a great deal of skill in multiple areas but it would also require him to split his workday to accommodate all these tasks. And for his workday to be equal to his workday from when he was only a laborer working for the capitalist, he is going to have less time allotted to produce the actual product. In this sense, do you feel he should still only charge $100 for his product? He'll quickly fall behind the normal standard of living he might have enjoyed if he settled for $70 and was just a laborer because he is only getting paid for the time spent producing, not the time spent purchasing the materials, selling the product, distributing the product, and finally accounting for all the sales for taxes.

If all those tasks take an equal amount of time, then he's only making $14 for a day's work of working for himself instead of the $70 a day he made simply working for someone else. So the worker has one of three options. He can work much longer hours to produce more, he can raise his prices substantially to make up for his income gap, or he can simply settle for a paltry wage that he probably wouldn't be able to live on because if the entire economy operates that way then the prices remain high while income remains low. This is tantamount to self-imposed serfdom.

So, this is a pretty simple yet effective example about how capitalism works. The idea is that everyone walks away from the exchange better off. In the next installment I'll discuss our plucky pin-maker further and explain how the division of labor makes everyone in a society richer.

Thursday, June 11, 2009

"So what exactly is this economy business anyhow?" Pt. III (home stretch!)

In my last installment of on the rudiments of economics, I'll discuss the five Key Principles of Economics, those things that are self-evident truths that we understand and accept in the economic world like we do gravity or fire being hot.  I'll touch on them here but will reference them more and more as time goes on because economic analysis keeps coming back to them.  Think of them as the foundation on which economies are built.

-The Principle of Opportunity Cost is based on the principle that economics is all about analyzing trade-offs.  The opportunity cost of something is what you have to sacrifice to get it.  If you pay $100 for tickets to the next sweet U2 show, then that is $100 you aren't spending on something else, like CD's from a bunch of other bands that are infinitely better, or donations to Sally Struthers, or approximately 20 Shamwows.  Additionally, we can apply it to time as well since time is a limited resource too.  For every U2 concert you go to, that's less time you have to look at porn on the internet, or punch yourself fervently and repeatedly in the crotch (though efficient people will realize that the latter activity is very similar to going to the concert in the first place).  

-The Marginal Principle is simply thinking in marginal terms and the results of small incremental changes in activity.  "Marginal Benefit" is the additional result of an increase in an activity and "Marginal Cost" is the additional cost of said increase in activity.  If U2 could raise the price of tickets and sell them all by playing an extra hour, their marginal benefit (more ticket revenue) exceeds their marginal cost (less time lamenting the social injustice in the world) and it would make sense for them to pursue this.  The level of the increase in an activity should always continue until the marginal cost equals the marginal benefit.  Thinking at the margin is basically "fine-tuning" the decision-making process to the point where we maximize the benefit from our choices.  

-The Principle of Diminishing Returns is the principle that states the number of inputs will eventually cause a reduction in outputs that decrease at an increasing rate.  At some point U2 playing long concerts will actually cause the increase of ticket sales to slow down as they extend their sets because at some point, the allure of listening to 12-hours of Bono keening into a microphone stops being worth the additional cost of the ticket.  So for every additional hour they spend playing (the input), actually causes ticket sales to slow down (the output).  They still might sell more tickets for each additional hour they play, but not at the rate they were selling them when they decided to only play for two hours.  And, at some point, it will start costing them more to play than they will generate in revenue.

-The Principle of Voluntary Exchange is the big one that the socialist thinkers overlook a lot.  This is when two individuals make an exchange that makes both individuals better off.  Everything from wages people are paid to the price of goods falls under this and you'll hear me talk about it a lot.  If U2 is charging $100 a ticket for their two-hour show of rockin' tunes, they are better off for having sold you the ticket and the concert-goer is better off for having an enjoyable experience of delay-drenched guitar rock and an increased awareness of social injustices going on throughout our world.  Or, to put it into more tangible terms, when you buy a pound of hamburger at Wal-mart, Wal-mart is better off with the money you give them than they were with the pound of meat slowly decaying in their meatcase and you are better off with a pound of cow meat than you were with the money because you can't actually eat money.  The cow, incidentally, has benefitted nothing from this exchange.  

-The Real-Nominal Principle is the principle that states what matters to people is the real value of money or income and not its "face" value.  The "1" on the dollar bill means nothing to you other than what it will actually buy you.   In 1913 that dollar in your pocket bought you a dollar's worth of goods.  Today it will buy you $0.04 worth of goods.  (or a 100-dollar bill bought you a U2 ticket but back then it would have bought you 25 U2 tickets--fun for the whole family!).  Obviously we are more concerned with what our money will actually buy us as opposed to what the number on the currency says.  This is important to remember too because if the price of your goods goes up by 4% in a year, and you get a 3% raise that year, you're actually worse off this year than last year.  This is part of the "money illusion" and I'll be bringing that concept up later on down the road.

So that concludes the fundamentals.  Now you're ready to strap on your thinking helmets and follow me down through the maelstrom of free market economics and why freer markets mean freer people overall and how these uncontrolled forces actually work better and more naturally on their own than when we try to tinker with them ourselves.  See you soon!  

Monday, June 8, 2009

"So what exactly is this economy business anyhow?" Pt. II

So now that we're up to snuff on the The Holy Trinity of Economics Questions, let's see how we can go about answering them.  

First off, people are largely the ones who take resources and turn them into goods (though bees might produce honey, they still don't package it and deliver it to us.  Yet.)  or produce services. We call these resources the factors of production which I will outline below:

-Natural resources are provided by, you guessed it, nature.  This can be anything from iron ore, to fertile land, oil and gas (the stuff underground, not the stuff that Uncle Herb produces), water, and Bono's fertile imagination.  

-Labor is the physical or mental effort that people exercise to produce a good or service.  At your favorite fast food joint the cook heats a hamburger patty (the raw material) and throws it into a bun and wraps it with paper (the product) and the squeaky-voiced kid with the headset takes your money and hands you your greasy prize (the service).  Note that this doesn't apply to sandwich artists.  Those people create mayonnaise-drenched works of art, apparently.  

-Physical capital is all the equipment machinery, buildings, tools, infrastructure and other physical objects that are used to produce goods and services.  The fast food cook can't cook your freedom fries without a deep-fryer and the cashier can't keep your food warm for hours before you buy it without those orange lamps.  Even sandwich artists need a palette and canvas (i.e. rows of colorful tubs filled with ingredients and some waxy paper).

-Human capital is the knowledge and skills required to do the job which are acquired through experience or education.  This is why fast food places have an orientation so they can train their teenaged worker-bees on the many arcane aspects of grilling "meat" and how to push buttons on a cash register.  Getting them to get your order right, on the other hand, is a much more advanced discipline.  Sandwich artists, conversely, are born with their talent.  That's why they are artistes!  

-Entrepreneurship (stop with the ugly words!) is the effort exerted to coordinate the other aforementioned factors of production to produce and sell products.  The entrepreneur is the one who comes with the idea ("what if we could produce full-cooked 'food' nearly instantaneously for people in a hurry?"), decides how to produce it ("We'll use teenagers who need to learn the value of working and have them operate utterly simple machines!"), and raises the cash to bring the idea to the marketplace ("I get a loan from the bank, I build a building with some machines in it, and I buy cheap killing-room floor scraps from the meat-packing plant to create my product!").  Well, we can only assume that was Ray Kroc's vision, anyway.

In a free market, the entrepreneur is half of the equation on who gets to answer the three economic questions.  The other half of the equation is consumers: the people who ultimately buy (or don't buy) the product.  In a free market the questions are answered through the millions of transactions that take place everyday; when someone has a good idea and can produce it as cheaply as possible, more people will buy this product.  When someone has a bad idea (like Crystal Pepsi), then people don't put forth the cash to buy it, thus telling the entrepreneur in no uncertain terms, that their idea for transparent cola is a stupid one. 

And good ideas become better ideas when someone takes an idea and improves on it to make it easier to produce and more accessible to more people.  Consider that automobiles were originally a luxury only the wealthiest people could afford but as society got richer overall (because we got more productive and innovative) and innovation led to cheaper and easier forms of production, prices of automobiles dropped as real wages and the standard of living went up.  Now people in all social classes have access to automobiles to some degree or another.  Jetson-styled flying cars, on the other hand, we're still waiting for.