Thinking About Free Markets

cropped-bob-shapiro.jpg   By Bob Shapiro

I came across an interesting list of statements this morning:

5 Questions

In thinking about these 5 Truths, I realized that our Founding Fathers knew these things when they created The US Constitution, including

all of the Amendments. According to the Fifth Amendment, “No person shall be … deprived of life, liberty, or property, without due process of law…” The Fourteenth Amendment further guarantees Equal Justice Under Law, and this phrase is enshrined on the front of the Supreme Court Building.

EqualJusticeUnderLaw

Taxing Americans at different rates would appear to violate the 5th and 14th Amendments. Taxing homeowners less than renters, people who make charitable contributions less than those who don’t, and families with more children less than childless Americans, etc similarly treat various groups of Americans differently.

While it may be easy to glorify Robin Hood as a great benefactor of the poor, the fact is that he stole from some people, rather than working for the money which he gave away. There are those in our society who believe that anybody who has made money has cheated others to do it. That way of thinking displays a lack of knowledge of our Free Enterprise system. So, here’s a short primer.

Every business has three natural constituencies: Owners, Employees, and Customers. Although each business is different, in the products, prices, services, etc that it offers, the three Natural Constituencies still exist. (Sometimes who is in the three groups overlaps.)

Owners put up the Capital to buy the machines, rent/buy the building, get the raw materials, and all the other things needed to start up operation. They contribute the dough which is at risk, every day, 24/7. If they choose well, they make a return on their money; if not they could lose all their wealth.

A business which is successful MUST give an adequate return on investment to the owner, or he’ll close up shop. And, if he’s fortunate enough to make a large profit, he’ll attract competition which will limit his returns.

Employees are indispensable to get the business established and for it to continue in operation. The pay must be high enough to attract sufficient numbers and skilled employees. Various levels of training, direct pay, and benefits are required to keep these employees. Owners who try to underpay, or who have bad working conditions, will suffer high turnover rates or not be able to attract anyone.

Employees may be well paid compared to other businesses in the industry (Market Basket in MA, NH, & ME comes  to mind), and this may generate superior loyalty and work ethic among employees. But, if employees are paid more than necessary, the return on investment will suffer, and the business may close its doors.

The UAW chief took management at Studebaker to task when it closed up shop many years ago. He said management had a responsibility to not give in to all union demands, year after year, if it meant that the company would go out of business, throwing all the Auto Workers out of work.

Customers also must be satisfied. If prices are too high or quality too low or service is lousy, customers will look elsewhere. And, if prices are kept too low, owners and employees will suffer, threatening the continued operation of the business.

All three Natural Constituencies MUST be satisfied. The better that the owners are at this, the more that is available for all three constituencies.

Now, along comes the government, with it’s taxes and regulations. By force of law, under the urging of various do-gooders and other socialists, Uncle Sam (and state & local governments) have inserted themselves as a fourth constituency. As a result, all three others lose. There is less left for owners and employees, and prices must go higher or quality must be reduced, so customers suffer as well.

To the extent that we can resist the urge to redistribute wealth, fixing what isn’t broken using regulation, and political vote buying, and to the extent that we make the heavy burden of government fall equally on all Americans, we can control the size of government, leaving much more for Owners, Employees, and Customers to benefit from.

2 thoughts on “Thinking About Free Markets

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