April 16, 2024 

AmosWEB means Economics with a Touch of Whimsy!

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MARKET-BASED ECONOMY: A mixed economy that relies heavily on markets to answer the three basic questions of allocation, but with a modest amount of government involvement. While it is commonly termed capitalism, market-oriented economy is much more descriptive of how the economy is structure.

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Fact 3: Our Unfair Lives

Across the interstate from the Mega-Mart Discount Warehouse Super Center resides the Shady Valley Central Town Sprawling Hills Shopping Mall -- a prime example of our economy's climate-controlled, suburban shopping phenomenon. Our pedestrian's ramble through the economy would be totally inadequate if we did not spend at least one day strolling past the endless rows of stores with their displays of clothes, shoes, electronics, clothes, luggage, clothes, cheese pretzels, and of course clothes. Our pedestrian trip, however, is not concerned with the products exhibited beyond the stylish glass windows. No, our jumping off point is the gadzillions of people who pass us by, bump into us, get in our way, and generally make our shopping experience comparable to a commuter train during the rush hour.

Those who comprise the shopping crowd are short, tall, young, old, fat, thin, black, white, happy, and sad. More importantly for our present discussion, however, is that some are rich and some are not-so-rich. A few of the wealthier shoppers actually buy the products framed by the picturesque windows that line the air-conditioned quaint mid-way of Shady Valley Central Town Sprawling Hills Shopping Mall. Others must be content to ogle the prominently displayed products or perhaps buy an occasional cheese pretzel.

Is it fair that some people can afford to buy stuff, while others can't? The gadzillion people, some rich and some poor, who meander the mid-way of the Shady Valley Central Town Sprawling Hills Shopping Mall suggests our third basic fact of economic life:

FACT 3 LIFE IS NOT FAIR -- Resources, production, income, and wealth are not equally distributed in our economy.

We've already seen with Fact 1, Our Limited Pie, how limited resources, production, income, and wealth translates into a limited economic pie. It's now time to see how our limited economic pie is divided, which is often bandied about in the media as the income distribution, or occasionally wealth distribution. The bottom line, the conclusion that we will reach, the whole point of this walk through Shady Valley Central Town Sprawling Hills Shopping Mall, is that none of the items -- not even one -- comprising our economic pie is equally distributed. Some people have more resources, production, income, and wealth, while others have less. This is a fact of economic life. Is it fair? That's a matter of opinion. But fair or not, there is some good and bad with an unequal division of our pie. Before the mall crowd gets too rowdy, let's see why.

Everything Begins with Resources

Resources beget production, which begets income, which begets wealth. Everything in the economy begins with resources -- natural resources, labor, and capital. To see why some patrons of the Shady Valley Central Town Sprawling Hills Shopping Mall have more income and wealth than others, we also need to begin with resources.

It's a fact of life that some of us have larger (or smaller) slices of the economy's resource pie than others -- resources are not equally distributed. Here are my two favorite reasons for this:

  • Quantity of resources. Some of us just have more resources -- a larger quantity. For example, you might have nothing but your labor resources. Your neighbor, on the other hand, might have labor plus ownership of a factory and an apartment building. There's a real good chance that this greater quantity of resources also gives your neighbor more income.

  • Quality of resources. Some of us have better or more productive resources -- a higher quality. By more productive I mean that the resources either (1) produce a larger quantity of output or (2) produce output that's more highly valued by society. Therefore, if your measly little labor resources produce stuff that lot of people want, then you're likely to have more income, even though your neighbor has capital and natural resources plus to labor. If you doubt this, compare the adjusted gross income of almost any professional athlete, who sells only labor, with any hardworking farmer, who also owns a bunch of land, farm equipment, and other productive resources.

Perhaps it goes without saying that income comes from ownership AND control of resources. Maybe it's obvious, but it needs saying. Your income is directly tied to Q and Q -- the quantity and quality of resources over which you have ownership and/or control. The more productive resources in your control, then the more income you'll have.

Ownership AND Control

What does it mean to have ownership and control? The ownership part is pretty straightforward. You buy something, you have it, it's yours, you own it. Most of our nation's resources are under our individual ownership and control, and we're generally free to do with them as we see fit. Our legal system and the courts spend a lot of time making sure that this continues. For example, if someone stole the eight-track cassette tape deck out of your 1968 Pontiac Bonneville (why they would want to, is another question), you could have that person prosecuted. Moreover, you're also free to sell this eight-track cassette tape deck and keep the money. In general, you're free to keep the income from the sale of any of your productive resources. Ownership -- holding the legal title to a resource -- also implies control -- the ability to use it as you see fit.

Ownership OR Control

In some cases, however, ownership and control don't go together. You might own a resource, but not control it. Or, you might control a resource without legal ownership.

  • Ownership, but NO control. Government both enforces private ownership and control and can take it away. (More on this thought with Fact 5, Our Necessary Evil.) An example of ownership without control is given by income taxes. For most of us two to four months of our labor efforts each year are used to pay taxes -- the use over which we have no direct control.

  • Control, but NO ownership. Government can also give people control over resources, and the income generated, without giving them legal ownership. Some examples include social security, welfare, and unemployment compensation. These entitlement programs give the legal right to the income without legal ownership of resources. In other words, your social security check ultimately comes from the efforts of someone else's labor.
We Are What We Are Except When We Change

We know that income is not equally distributed because some of us own and/or control different quantities and qualities of resources. The next question to ask, therefore, is why do we have different quantities and qualities of resources?

Two thoughts come to my mind. These thoughts have been the source of debates since our ancestors first stepped from the trees and were puzzled by their lack of tails. These two thoughts have sparked controversies in almost every human endeavor, from politics to science to religion.

  • Nature. One side of this raging debate is that the quantity and quality of our resources are guided by a natural predisposition -- it's in our genes. In some cases, this is obvious, in other cases, however, the argument becomes questionable. There is little doubt that actors, athletes, and scientists are genetically blessed with natural talents and abilities that form the basis for their productive resources. However, it's questionable whether someone like Winston Smythe Kennsington III, a well-known Ivy Leaguer with a social pedigree dating back to the Mayflower, has more income because he's genetically superior to anyone who ever attended a state-supported university (ugh!). On closer inspection, we see that Winnie's income is attributed to the fact that Winston Smythe Kennsington II and Winston Smythe Kennsington I owned several Fortune 500 companies and most of Rhode Island.

  • Nurture. The other side of the debate is that we're "all created equal" and thus the quantity and quality of our resources depend on the actions we take. You acquire more productive resources than me because you work harder, take acting lessons, study for college degree, scour the financial pages, or painstakingly search out unseen employment opportunities. The drawback with this interesting little argument is that everyone doesn't have the same opportunity to take dancing lessons, attend college, or "do lunch" with the personnel officers of Fortune 500 companies.

When you get down to the bottom line, it's evident that both of these thoughts are important. Sure many great athletes have been blessed with natural talents, but the best ones have also spent gadzillions upon gadzillions of hours practicing, studying, and improving their abilities. A word of warning is in order at this point. Be careful about taking either reason to the extreme. This suggests two timely tips:

A Few Tips on Possibilities and Reality

  • Don't attribute the success of others exclusively to their natural talents. Some people may have a head start because of their genetic makeup, but effort can often compensate for the lack of natural ability. A number of athletes who have been honored by a sports Hall of Fame because slow, uncoordinated bodies were overcome by years of hard work.

  • Likewise, be very cautious of those who promise unqualified success in areas where you might be, uhm, genetically deficient. Hard work can't always compensate for the lack of natural abilities. Some people are born with the looks of a fashion model and others aren't.

Nature and nurture have a great deal to do with the productivity of labor resources. What about the other two resources -- natural resources and capital? Like our genetically configured bodies, there are some things we can change about the ownership and control of productive natural resources and capital, and some that we can't.

This Land Is Your Land, This Land Is My Land

On the nature side, our planet has been "genetically predisposed" to a certain configuration of natural resources. In particular, natural resources are unevenly distributed across the planet. Some areas have abundant water, mineral deposits, fertile soil, and/or a pleasant climate, and others don't. For example, water drops from the sky as rain, runs down the slopes of hills and mountains, and accumulates at the low point of the land. Geological forces of the past have tended to create huge pockets of fossil fuels from prehistoric dinosaurs and vegetation. Because of the rotation of the planet, the configuration of the continental land masses, and the tilt of the planet's axis, some areas have abundant warm sunshine, others get a lot of rain, still others see more than their share of cold temperatures and snow. There's not a whole lot anyone can do about this.

To illustrate the importance of this predisposed geographic configuration, suppose that we have two sod-busting wheat farmers, around the beginning of the 20th century, toiling away their hours tilling the soil in western Kansas. Both are barely eeking out minimal, but roughly equal livings from their ownership and control of 160 acres of rolling prairie land. Then, one morning, one of the farmers -- let's call him J. D. Goodluck -- discovers that his 160 acres sits atop a pool of crude oil. This is the same crude oil which Henry Ford and his associates have found increasingly useful for those new-fangled horseless carriages.

You probably know how this story ends. J. D. and his descendants buy up most of Houston, Texas and each morning drive to the toilet in brand new Cadillacs. The other farmer -- let's call him Hapless Herb -- and his descendants continue eeking out their lives in the quiet solitude of the Western Kansas skies.

Because of the geographic concentration of the natural resources that came with the planet, there's obviously a bit of luck involved in ownership and control. Being in the right place, at the right time, can give you control over productive natural resources -- kind of like being blessed with great facial features or quick reflexes. This also means that millions of people around the globe can only dream of walking past the glass-fronted stores of the Shady Valley Central Town Sprawling Hills Shopping Mall because they lacked the foresight to be born in a country with abundant natural resources.

This Land is Now My Land, Too

The creation of the universe billions of years ago might explain some of our control over productive natural resources. But, it doesn't explain it all. We can also improve upon nature's gifts.

Let's consider Hapless Herb and J. D. Goodluck again. Sure J. D. had the fortune of homesteading 160 acres of land that would eventually produce wealth-creating oil. But was Hapless Herb destined to remain hapless? Perhaps he could have, with a little effort and foresight, kept up with the latest technological developments, performed a few geological tests on his land and that of surrounding farms, then buy J. D.'s farm before oil became a highly-valued resource. In that case, who do you think would be driving to the toilet in a new Cadillac?

Nurturing Our Capital

Thus far very little -- in fact nothing -- has been said about capital and its role in the income distribution. Capital is a resource produced from other resources -- meaning there is absolutely nothing natural about it. Factories were not, I repeat NOT, formed with the universe billions of years ago. Every factory, building, oil well derrick, mine shaft, and interstate highway in our economy is as artificial as many of the body parts seen on the movie screens.

Speaking of artificial body parts, it's useful to ponder the difference between physical capital, the sort of capital that's exemplified by factories and buildings, and human capital. Human capital is the learned, or produced, side of productive labor resources. The term human capital is appropriate because it is the non-natural or artificial component of labor produced by other resources. Much like we can build a new, automated factory, we can build a new, more attractive face. We can also build physical skills, knowledge, and a warm compassionate demeanor. Training, education, and experience are the primary methods used to produce human capital.

Because of its artificial nature, capital (human and physical) can be either a great equalizer or a great unequalizer.

  • The great equalizer. A small, unattractive, uncoordinated person with a large factory can be just as wealthy as a hulking quarterback, handsome actor, or really tall basketball player. Of course the same can be said for a small, unattractive, uncoordinated farmer who owns 160 acres of land with a pool of crude petroleum underneath. Capital, unlike land, can be produced, increased, and expanded. If I build a factory with nothing but my bare hands and the sweat from my brow (not that this is on my list of top ten things to do before the universe collapses), I would have control over, not only my labor resources, but also some capital resources. This would help equalize the income between me and someone who may be blessed with greater natural abilities.

  • The great unequalizer. Because capital is produced using other resources, the more control you have over other resources, the more capital you can produce. Recall that our farmer from a few pages back, J. D. Goodluck, was able to use his oil-rich farmland to buy most of Houston, Texas. In essence, J. D. used his resources (oil) to buy more resources (buildings, factories, etc. in Houston). Hapless Herb had hardly a hope of having even half of Hayes, Kansas because his 160 acres were less productive. The more you have, the more you can get.
Nurturing Capital with Investment

Because capital (physical and human) is not part of the natural configuration of us or our planet, it must be produced. Producing capital, however, incurs an opportunity cost from lost consumption. The more limited resources we use for investment in physical or human capital, the less we have available for consumption stuff.

Once again, Hapless Herb could have been less hapless by buying another 160 acres, improving the 160 acres he had, building a "Hapless Herb" Museum and Tourist Attraction ("See how Herb harvests wheat with nothing but a combine! Witness, first hand, the daring exploits of planting season! Marvel at the use of irrigation equipment! All yours, for one low price of $5!"), selling the farm outright and buying into a proposed shopping mall in the Sprawling Hills section of Shady Valley, or spending eight years in medical school to become a plastic surgeon.

This brings to mind a few tips worth considering for anyone who would like to increase their annual incomes and accumulate more wealth:

Income and Wealth Creating Tips

  • Society pays the highest incomes for resources that it values most. If you want more income, determine what society wants, then get the resources to produce it -- if you can.

  • Everyone has different degrees of natural abilities. Often we're unaware of how much value society places on the natural abilities we have. A (potentially) wealthy artist may languish behind an accountant's desk. Or, a (potentially) successful accountant may starve to death as an artist.

  • Productive resources can be acquired, especially capital (physical and human), but not without sacrifice. By sacrificing current consumption you can invest in the stock market, go to college, start your own business, or buy rental property; and thus receive more income tomorrow from an increase in your productive resources.

Shall We Specialize?

The unequal distribution of resources, both natural and acquired, can be good and bad. Is it fair that some people enjoy higher living standards because of the happenstance of their birth? History is filled with examples where the less fortunate -- who thought that such a situation wasn't all that fair -- beheaded the more fortunate. An extremely unequal distribution of resources, production, income, or wealth has never been a very stable political situation.

But (and here is one of those important "buts"), an equal distribution of resources, production, income, or wealth, is not good either. One important benefit of inequality is specialization. Let's see why.

Suppose that two ordinary, everyday people (call then Becky and Phil) are both capable of growing vegetables and making furniture. If Becky decides to devote her entire energies to furniture crafting, rather than dividing her time between china closets and tomatoes, she will become quite proficient at furniture making. Phil can attain a similar proficiency in vegetable production, if his time is not torn between two different activities. Specialization by Becky and Phil will let them produce and consume more furniture and more vegetables. By exchanging the good that each produces for the good that each does not, Becky and Phil can have more of both goods.

This little fact of economic life explains why few people in our current complex economy are self-sufficient. If I pick one thing to do, and do it really well, then I can earn enough income (hopefully) from my efforts to buy things that other people specialize in doing.

Comparative Advantage -- The Savior of All

Specialization and exchange is an obvious course of action when people begin with a natural talent for one activity or another. Becky is likely to choose carpentry over gardening, if she is blessed with a natural woodworking affinity. Phil will probably choose gardening if he has the proverbial green thumb. But what if Becky is not only a great carpenter, but is also an excellent gardener? In fact, Becky may be extraordinary at everything she does. You know the type of person -- class president, lead in the school play, valedictorian, athlete/cheerleader, good looks, rich family. Phil, on the other hand, not only has absolutely no gardening abilities, but is also a complete dreg when it comes to carpentry. Is there any hope for Phil?

Actually there is, thanks to the notion of comparative advantage. Even though Becky is great at everything she tries, she's better off specializing in the production of one thing and buying other stuff. Becky needs to figure out what she's relatively best at doing, then specialize in it. The same is true for our apparently worthless Phil. Although he may be extremely not good at a lot of different things, he needs to find that one thing he is least not good at. Here's some simple numbers to illustrate. Let's say that Becky -- our class president extraordinaire -- can make five chairs or grow ten tomatoes a week. Phil -- our dreg of society -- can make one chair or grow four tomatoes a week. Even though Becky the great is better at both, she should specialize in one.

If Becky spends a week making five chairs she doesn't grow ten tomatoes. The opportunity cost of each chair is therefore two tomatoes. Phil the dreg, on the other hand, can spend a week making one chair, but in so doing gives up four tomatoes, an obvious cost of four tomatoes per chair. Becky is a relatively better carpenter -- her cost per chair is two tomatoes while Phil's cost per chair is four. Phil, however, is a relatively better gardener -- his cost per tomato is one-fourth of a chair, while Becky's cost is one-half chair. Let's pause to reflect on this: Phil the dreg can produce tomatoes more cheaply that Becky the great. He's found something he can do relatively better than Becky.

As such, Becky is better off making chairs and trading them to Phil for tomatoes. She can make five chairs and trade one of them to Phil for tomatoes. Phil can grow four tomatoes and trade three of them to Becky for a chair. By specializing, both Becky and Phil can get more chairs and tomatoes than if each produced both. Here are a couple of career tips -- one that's pretty obvious and another that may not be:

Specialization Career Tips

  • Differences in natural and acquired abilities mean you're better off by specializing in one career, then buying goods from others. The trick, of course, is finding that one specializing career. This can be discovered through trial and error, but can be found more easily by (1) carefully cataloging your natural and acquired skills and (2) determining the value society places on the stuff produced with those skills.

  • Comparative advantage tells us that everyone can specialize in something. Even if you have no apparent skill or talent, and seem to be mediocre at everything, there's always something that you can do relatively cheaper than others.

A Word or Two on the Three Estates

You may have already reached the conclusion that resource ownership, control, and the slice of the pie that follows is somehow related to the three estates. If not, you will now. The degree to which you can be classified into one of the modern three states -- government, business, and consumers -- depends on your degree or resource ownership and control.

Most of us fall into the third estate because our income is derived primarily from labor resources. Sure you may own a few stocks, have a share in some rental property across town, or even run your own small business, but your slice of the pie probably depends mostly on labor.

The other two estates have significantly more ownership and/or control over resources -- labor plus. Proud members of the first estate -- government -- have lots of control over resources, although they may have little or no ownership. (Yet, the way our system works, resource control obtained as a member of the first estate often enhances resource ownership. In other words, a lot of politicians get rich by feeding at the public trough.) The even prouder members of the second estate -- business -- have extensive ownership of resources and usually the control that goes with it.

A word of caution is in order. Because the government is ultimately responsible for determining resource ownership and control, a close association between the first and second estates usually spells trouble for the third. In fact, if the first estate takes over the second estate or the second estate takes over the first, the economic pie is usually sliced in such a way that leaves nothing for the third estate.

What Does It All Mean?

An unequal distribution of the nation's economy pie is clearly a bad thing. It's unjust! It's unfair! It's the result of luck, chance, and happenstance. We as society (through our elected officials) should do everything we can to promote a more equal distribution of the pie. If the elected officials won't do it then we may have to rise up and do it ourselves, by force if necessary.

No, wait a second! An unequal distribution of the nation's economic pie is a good thing. It means that hard work pays off. If you work harder or sacrifice consumption to produce capital you're rewarded for your efforts. These activities, because they promote progress for our entire economy, are worth rewarding. If you could get no more than an average income, as many in the former Soviet Union can attest, you would have no incentive to do a little extra. Without that little extra, our economy would stagnate. And because extra reward for extra effort creates an unequal distribution of the economic pie, that's one price we pay for progress.

Whichever side of this argument you're on, you may be spurred on to action. If so, keep in mind that there is no ideal distribution of the economy's pie. Any distribution will be good for some and bad for others. Moreover, changing the pie's distribution in any way has its pluses and minuses. The question that must be asked, therefore, are what goals do we seek?

  • Economic growth. If the goal is progress, or economic growth, then an unequal distribution of the economic pie is not only unavoidable, but also desirable. An unequal distribution is essential to growth.

  • Equal opportunity. A problem, however, of an unequal distribution is that the rich get richer and the poor get a lengthy rhetorical discourse from politicians. Our economy also suffers when a well-qualified person is prevented from pursuing an opportunity because of the lack of income or resource ownership. How many of the nation's Fortune 500 companies are being staffed by those whose primary qualifications are a sizable family bank account while better workers languish in the mail rooms? How many potentially great Governors, Senators, or Presidents never made it past the city council elections because they lacked the personal wealth needed?

I don't know about you, but the gadzillions of people wandering around the Shady Valley Central Town Sprawling Hills Shopping Mall are beginning to get on my nerves. They seem to be meandering aimlessly about, never really buying anything, but always managing to stop just in front of me. I've got to get out of here!

This might be a good opportunity to pay a visit to the cable television office. I have a small, trivial, insignificant question about last month's bill. I hope they don't get mad and disconnect my service. Maybe I shouldn't go. After all, it's only a minor, minimal $3,569 charge. Perhaps I should just pay the bill. I don't want to cause any trouble.

Well, okay we can walk buy the office. But, I'll have the checkbook handy, just in case they ask me to pay the $3,569. It's best not to get them upset.

Fact 2: Our Subjective Valuesxxx Fact 4: Our Monopolized Markets


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