Friday, February 19, 2010

Of Course Say's Law still applies

In it's simplest form, Say's Law says that "production creates its own demand." Of course, it is a simple statement of the law and this simple statement of it is easy to demolish. If I go and produce some vacuum tubes, what demand have I created? No one will want my products and so I will not get an income. In fact, I have not created demand, I have destroyed it. I have taken goods which could have made good products that people were willing to pay me for but instead I pretty much destroyed those goods. Say's Law no longer applies! Production does not create its own demand and in fact may even destroy wealth!

Well, not quite. See, this simple statement of Say's Law ignores one of the most important ideas about production: it is not all equal. It's the famous diamond-water paradox. Diamond is very plentiful and easy to extract, much like water. However, diamonds are multiple times more valuable than water. The reason is that people value diamonds more than water. Don't believe me? Then pay $1000 for a karat of water. Yeah, just what I thought. So what really matters is production of things that people value. When someone creates something that people want, people will pay for it and the person who created it will trade it for something he sees as more valuable. He profits, and some of the money he will save and some of it he will spend. Because of that profit, he will spend more than he otherwise would. So, a more accurate (but still simple!) way to state Say's Law is that "production that creates a profit creates its own demand." It is still far too simple, but this statement would do well to help explain why the only way to sustainably grow an economy is through production (and that not all production is equal).

Friday, February 12, 2010

The Life of a Peasant

We have to oppose sweatshops! Look at the working conditions of these people. They work basically every hour that they're awake! They make meager wages! Stop buying from companies that use sweatshop labor!

Or not. This reactionary argument it nonsense. Conveniently the people who make this argument ignore the fact that people voluntarily take these jobs. That's right, people choose to work there. If you pose this response to a person who holds the anti-sweatshop position, you'll most likely get a response that they were forced to work in the sweatshop because they were forced out of their farmland. This view, though, is based on a romanticism of peasant life. Were things really much better for people who were subsistence farmers? Grow what your family needs. If it doesn't grow then you die. Is this the way that people really want to work?

If you oppose sweatshop labor, maybe you need to look at this statue of what peasants really look like. See if this is the glorious labor that you make it out to be.

Wednesday, February 10, 2010

We need to stop focusing on jobs

It seems lately that the only thing our politicians have been focusing on is jobs. I hate to say it, but this is a waste of time. We only need to go back to the old motto: government cannot create wealth, it can only destroy it.

Our focus on jobs is a waste of time because we need to realize that the value of a job is the wealth that it creates. If you have an economy where everyone works for the government digging holes and you have 1 farmer, you're going to have mass starvation. Yes, everyone will be working, but the government jobs are a drain on the economy. If these people were not working for the government, they could be making tools to help the farmer or become a farmer in order to compete. We have to realize that the only reason that a job naturally comes about is because there is a demand for the wealth created by the job.

And this is why all make-work programs naturally fail. The way out of a recession is to ramp up production. Government cannot do this because it does not operate from the profit motive and as such it does not know what people want. Only the private sector which can know what the demand is. Those companies that stick around and profit will successfully be satisfying the demand of the people Those that go bankrupt are not. This is why those companies that are not making profit should fail. When a company is failing, it means that the resources that they are using are not being put to a good enough use. With the liquidation of that company, those resources will be free to meet the demands of the people.

We have forgotten this old lesson, something that we should have learned from our high school economics classes. If you do not have an economy producing the things that people want, then you do not have a good economy. It is time that we stop these make-work programs and instead let the market correct and get back to making those things that we want.