Basic Economics

The various forms of government are fundamentally philosophies of economics. Some forms are more successful than others are. If success is defined as the highest standard of living for the most people, then Democracy/capitalism/free market/free enterprise is the most successful by far. The reason is simple: capitalism conforms to human nature. It takes advantage of our greed and our altruism. It harnesses our greed by driving us to work hard, use our ingenuity, invent, create, save, conserve, accumulate, and cooperate with each other in order to satisfy our material desires and our craving for entertainment and leisure as well as for security. It harnesses our altruism by revealing to us that prosperity is not a zero sum game. The better off our friends and neighbors are, the better off we are. The better we understand our friends and neighbors, the better we understand the world we live in and we use that understanding to prosper ourselves, and so the better we work together, the more we prosper. In addition to harnessing our greed and altruism, Capitalism takes full advantage of our natural, inborn competitiveness. While we want others to be well off, more than anything else, we want ourselves to be even better off. As they say on Wall Street, greed is good.

Successful as it is, capitalism does have some down sides. Those who are incapable of competing, who are handicapped mentally, emotionally, or physically, fall behind. Most prosper according to their abilities. Because abilities vary greatly, some become excessively wealthy and some unacceptably poor. Luck and happenstance play a part in relative wealth. Inequalities occur. Capitalism also has a strong tendency to promote materialism to the detriment of aesthetics. The beauty of our world and life itself can sometimes be overshadowed by the compelling drive of capitalism to sell each other things that will enhance our own affluence. It is the great challenge of modern society to control capitalism/free markets/free enterprise so that inequalities remain tolerable and so that we maintain as much of our humanity as possible.

This control of capitalism, while necessary and desirable, must be applied carefully because, in spite of its seeming power and robustness, capitalism is also fragile and corruptible. Many of the economic problems we face from day to day are the result of unwise attempts to control capitalism’s flaws. Most of the problems caused by attempted controls result from misunderstanding the fundamental rules of capitalism. These rules are not especially complicated or hard to understand, but some of them are counter intuitive and they are all immutable. Controls based on wishful or intuitive thinking, which attempt to change or challenge these rules will always result in corrupting the system, sometimes beyond repair. The basic rules are as follows:

1) The going price of any product or service is primarily the result of demand and modified by supply, not by the cost of producing the product or providing the service as would be expected.

2) The cost of producing the product or providing the service eventually rises or falls to approximate the price.

3) In the absence of price competition and buyer resistance, both price and cost will rise to consume all funds available to pay for the product or service.

4) When a product or service is paid for, not by the consumer, but by a third party, buyer resistance is rendered ineffective and price competition is severely compromised.

5) When a product or service is perceived as essential to a minimum quality of life, or as an entitlement, and is paid for by third parties, both price competition and buyer resistance are nullified. As a result, both price and cost will rise to unsustainable levels.

6) In economics, perception is reality and cannot be overcome.
The above rules lead to the following conclusions:

a) Cost can be controlled only by controlling price.

b) Price can be effectively controlled only by price competition and/or buyer resistance.

As a result: Regulations must always be conducive to maintaining pricing competition.

1) The quantity or availability of a product or service must not be restricted by regulation. Regulation can control quality, safety, environmental impact, mode of distribution and unfair business practices. These types of regulations, uniformly applied to all competing providers, may impact price, but not pricing competition.

2) Excessive consolidation of suppliers of products or of services must be regulated. The number of independent providers must be such that pricing competition is maintained.

3) No provider of products or services can be allowed to gain control of raw materials or sub-suppliers.

4) Providers must not be allowed to conspire to control prices or create false shortages.

Regulations must avoid subversion of buyer resistance and price competition through insurance.

1) Primary or full payment by a third party must be discouraged.

2) Buyer must pay an initial percentage of the cost of any product or service.

3) All insurance must have a substantial percentage deductible. Full coverage should not be allowed. Supplemental insurance undermines buyer resistance.

4) The incentive for insurance companies to drive prices to unaffordable levels should be recognized and controlled.

5) Collusion among insurers must be controlled.