(This is the 4th installment in a series of articles about the problems associated with government's attempts to ignore free market principles in a free market world ecomony.)
Misunderstanding the Concept of Value.
What is the real force behind the problem we associate with the inequality of riches? It is, simply, the lack of universal understanding of value. We don't understand what it is, and we don't understand how to create it.
Value is simply, and only, the realization of a greater benefit than the resource expended to secure it. It is the enhanced well being of one realized from the contribution of another.
Value, in economic terms, has the mystical ability to be realized on both sides of a transaction. In fact, in an appropriately negotiated transaction, both parties will gain value, both will be benefitted. A transaction with only one beneficiary is simply theft. To be willing to buy the services of another for a price, I will realize that the benefit I gain is worth more to me than the money I give to secure the service. The service provider will realize that the money he receives is worth more than the time, effort, or material he expends to deliver. Such transactions are accomplished in the free market every day. Give and take. Value given, value realized, value returned.
The Higher the Value Realized, the Higher the Value Given - The More it's Worth, the More you Pay.
Why does Lebron James receive $19MM in endorsements before his 20th birthday? Because the companies making the offer will receive more than $19MM in benefit for what Lebron provides. Does he deserve it? Yes, once you understand the principle of value. If a major league baseball team can earn $50MM in enhanced profitability by obtaining the services of a gifted athlete, why wouldn't it be willing to invest $20MM to get him? Without making that investment, they miss the $30MM differential. To make the decision to not buy the players services would cost the franchise, and be a poor decision. Is the athlete overpaid? Not unless you don't understand value.
The same holds true, even for a commodity. Oil is a commodity. OPEC may control the price of oil, but their controls are only as strong as the value that oil has in the market to which they sell it. Their prices will only stand if someone else is willing to pay what they ask. And, in the case of oil, until the price of the resource exceeds the value produced by using it, the price can rise. It's as simple as that.
Value Has Nothing to do With the Product, the Service, or the Time Itself.
Some would argue that professional athletes are "overpaid." Here's the reason that the issue is an issue at all. We have erroneously determined to quantify the appropriate wage based on the actual task being done, not on the value of the impact of that task upon a particular company in a particular market. We have assessed a wage based on some assigned value of time, not on real value delivered.
After learning that Roger Clemens would be paid $18MM for pitching 1/2 a season, we make activity based value assessments. He might pitch in 20 games. He might throw 100 pitches per outing. That's only 2000 pitches. In activity terms, we might say Roger Clemens would be paid more than $9,000 per pitch.
If this bothers you, you must realize that you don't understand value at all.
Roger Clemens may have pitched, but he isn't paid just to pitch. He is paid to improve the conditions for the franchise willing to pay him. He is paid to be Roger, and to give the team whatever things come from his participation. Roger Clemens fills seats. People come to see Roger pitch. That accounts for something. Roger Clemens helps the team win. He helps less experienced pitchers. He brings a championship mentality to the team culture. These help the team win games. This fills seats, sells beer and hotdogs, advertizing, and on and on. Roger's employment is a value creator for a sports franchise.
It's the same for all professional athletes, for actors, for musicians, for lawyers, for producers, for business builders. Each of these gains substantial financial rewards which are always less than the value they contribute to their employer or the direct customers they serve.
This bears repeating: The financial reward realized, a workers compensation must always be less than the value they contribute to their employer or the direct customers they serve. Always.
Why is Your Compensation so Small? Why is Anyone's?
So what about all the other, little people? What about the "increasing" gap between the "haves" and the "have-nots"? Shouldn't this be adjusted? I won't argue the point. It would be a tremendous benefit to all of us to bring up the individual standard of living for all of us. And, I believe, it can be done. . . but not as long as we continue to misunderstand and misrepresent the concept of value.
We are our own enemy in this effort. We continue to create and maintain the very vehicle which proliferates the problem.
CJ Coolidge is a regular contributor to HRTools.com.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.
Showing posts with label capitalism. Show all posts
Showing posts with label capitalism. Show all posts
Monday, October 6, 2008
Sunday, October 5, 2008
Capitalism's Potential for Income Inequality: Scourge or Benefit
(This is the 3nd installment in a series of articles about the problems associated with government's attempts to ignore free market principles in a free market world ecomony.)
There is Nothing Wrong with Capitalism.
The American Heritage dictionary defines capitalism as an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.
This is not a hard concept to understand. In a capitalist system, private citizens are permitted to own the means of production, the capital, and can freely invest in that capital out of the increased production, or the profits returned. The more they invest, the more the capital can produce, the higher the profit, the higher the standard of living. Good picture.
Income Inequality: Scourge or Benefit?
I do not defend the companies whose poor compensation strategies allow their executives to be paid untold millions even as their enterprises fail. There is no excuse for this. It is an abomination and an aberration to appropriate capitalism.
The knock, particularly on American capitalism is the apparent inequality it seems to produce. There are a relatively small, but ever growing number of executives and entrepreneurs earning millions while millions of others are earning a relatively small amount.
Remember basic economics. For economic stability, all participants in the economy must provide some contribution to the economy in proportion to the resources they consume.
However, because of age, or infirmity, or whatever, some percentage of every population will not be able to contribute in proportion to their consumption. By the same token, some percentage will be capable of producing more than they need. The balance is struck when the production of the more capable can be allocated to serve the needs of the incapable. This is what happens when a father produces enough to feed his children, as of yet too young to produce for themselves.
This is exactly the condition that has occurred in our well developed capitalist system.
There are the relative few who, through investing in the capital they have purchased and improved, produce substantially more than they need. It is because of this group that our standard of living is ever increasing. There are more who, not wishing to shoulder the risk and responsibility of capital acquisition and improvement, make other, smaller contributions, roughly equivalent to the resources they use, and consume. And there is a yet smaller group who cannot, or will not produce as much as they use or consume. All benefit from the high standard of living available in this country, perhaps the highest in the world.
The Real Conditions Behind Income Imbalance
As I have said, there is an income imbalance. It may even be growing, and may even be a problem, worthy of correction. But the current approaches deny the realities at work, some going so far as to destroy the conditions which encourage the improvements of the quality of life which we all enjoy.
Capitalist Income Imbalance is Essential, Even Good.
The cause of any economic imbalance and its potential remedies are being erroneously identified. Greed and injustice are blamed. Those few who "overproduce" are being accused of performing some injustice. Their "over-production" is viewed, not as the positive contribution that it is, but as some ill-mannered, inappropriately realized gain.
This thinking ignores this important reality: Their production is voluntary. These "over producers" could, just as easily, choose to produce only what resources they use, or consume. They could choose not to invest, and, therefore, not contribute to increase the standard of living for us all.
Legislation and Regulation: A Dangerous Way to Correct the Situation.
With this perspective, increasing law and regulation become the tools used in effort to correct the situation. Investment is penalized. Earning is discouraged. Progress is thwarted.
This approach can only destroy an economy. Eliminating high producers will reduce the resources available, and the improvement of the capital, the means of production, which will lead to a decrease in the standard of living for a growing population. Law and regulation can be used to minimize the imbalance, however. The playing field could certainly be leveled. But, doing so will reduce the productive capacity as the population grows. It will put the economy in decline.
I don't care how socialist or utopian you may be, you don't want the USA to become a 3rd world, simply balanced, economy.
The next installment will offer real practical considerations to the perceived problem of Income Inequality. It has to do with connecting compensation to productivity.
CJ Coolidge is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.
There is Nothing Wrong with Capitalism.
The American Heritage dictionary defines capitalism as an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.
This is not a hard concept to understand. In a capitalist system, private citizens are permitted to own the means of production, the capital, and can freely invest in that capital out of the increased production, or the profits returned. The more they invest, the more the capital can produce, the higher the profit, the higher the standard of living. Good picture.
Income Inequality: Scourge or Benefit?
I do not defend the companies whose poor compensation strategies allow their executives to be paid untold millions even as their enterprises fail. There is no excuse for this. It is an abomination and an aberration to appropriate capitalism.
The knock, particularly on American capitalism is the apparent inequality it seems to produce. There are a relatively small, but ever growing number of executives and entrepreneurs earning millions while millions of others are earning a relatively small amount.
Remember basic economics. For economic stability, all participants in the economy must provide some contribution to the economy in proportion to the resources they consume.
However, because of age, or infirmity, or whatever, some percentage of every population will not be able to contribute in proportion to their consumption. By the same token, some percentage will be capable of producing more than they need. The balance is struck when the production of the more capable can be allocated to serve the needs of the incapable. This is what happens when a father produces enough to feed his children, as of yet too young to produce for themselves.
This is exactly the condition that has occurred in our well developed capitalist system.
There are the relative few who, through investing in the capital they have purchased and improved, produce substantially more than they need. It is because of this group that our standard of living is ever increasing. There are more who, not wishing to shoulder the risk and responsibility of capital acquisition and improvement, make other, smaller contributions, roughly equivalent to the resources they use, and consume. And there is a yet smaller group who cannot, or will not produce as much as they use or consume. All benefit from the high standard of living available in this country, perhaps the highest in the world.
The Real Conditions Behind Income Imbalance
As I have said, there is an income imbalance. It may even be growing, and may even be a problem, worthy of correction. But the current approaches deny the realities at work, some going so far as to destroy the conditions which encourage the improvements of the quality of life which we all enjoy.
Capitalist Income Imbalance is Essential, Even Good.
The cause of any economic imbalance and its potential remedies are being erroneously identified. Greed and injustice are blamed. Those few who "overproduce" are being accused of performing some injustice. Their "over-production" is viewed, not as the positive contribution that it is, but as some ill-mannered, inappropriately realized gain.
This thinking ignores this important reality: Their production is voluntary. These "over producers" could, just as easily, choose to produce only what resources they use, or consume. They could choose not to invest, and, therefore, not contribute to increase the standard of living for us all.
Legislation and Regulation: A Dangerous Way to Correct the Situation.
With this perspective, increasing law and regulation become the tools used in effort to correct the situation. Investment is penalized. Earning is discouraged. Progress is thwarted.
This approach can only destroy an economy. Eliminating high producers will reduce the resources available, and the improvement of the capital, the means of production, which will lead to a decrease in the standard of living for a growing population. Law and regulation can be used to minimize the imbalance, however. The playing field could certainly be leveled. But, doing so will reduce the productive capacity as the population grows. It will put the economy in decline.
I don't care how socialist or utopian you may be, you don't want the USA to become a 3rd world, simply balanced, economy.
The next installment will offer real practical considerations to the perceived problem of Income Inequality. It has to do with connecting compensation to productivity.
CJ Coolidge is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.
Friday, October 3, 2008
Capital: The Key to Economic Survival, and Improved Standards of Living
(This is the 2nd installment in a series of articles about the problems associated with government's attempts to ignore free market principles in a free market world ecomony.)
No matter what we may think, the world economy is a free market, even capital based, economy.
Basic Economics 101
For any government/state system to exist, and maintain, it must have an associated economy which can make available, at minimum, the basic necessities and consumables for its citizenry. For economic stability, the participants in the economy must provide some contribution to the economy in proportion to the resources they need.
As a population grows, so must the availability of these necessities and consumables. More people require more food, more housing, more clothing, et al. And, to the degree that the consumer/participants maintain a suitable level of contribution, the economy maintains a balance, and is sustainable. If this condition is met, the standard of living can be maintained.
However, in this modern age, simply maintaining the standard of living is unnacceptable in most economies. But an improved standard of living, by definition, requires an even greater availability of resources for each member of the population, and, therefore, an associated increase in production offered by the participants.
Capital is the Centerpiece of all Economies: Improved Capital Means Improved Productivity. Improved Productivity Means Improved Standard of Living
Increased production comes from the development of improved means of production. And, means of production is, by definition, capital. To cause the means of production to increase in its ability to produce, hence an increase in the standard of living, there must be an investment of some sort, capital investment.
Restated, since all economies require some means of production, they must be said to be capital based. Since all economies desire an increase in their standard of living, there must be capital investment.
Even Non-Capitalist Economies Require Developing Capital
Yes, Virginia, it doesn't matter what China, India or Middle eastern countries call themselves, communist, socialist, facist, capitalist, or whatever. It doesn't matter that their own domestic economies aren't considered free market, capitalist economies. The world economy, at its core, is a free market, capital based economy, no matter who controls the means of production.
A socialist country may own the means of production. But, the means of production is still capital, A government may "control" the earnings of its citizens, but those citizens must still have access to sufficient resources to secure the things they need for the economy to exist. If a particular economy's consumption needs exceed the availability of available resources, that economy, hence the system it supports, cannot survive.
And in order for even the socialist economy to exist, to improve the standard of living demanded by its citizenry, there must be capital investment. It logically follows that the governmental system that does the most to encourage investment in capital will obtain the greatest increase in production, and improvement in its standard of living. Such has been the experience of the nations who espouse the economic system called Capitalism.
Recognize these Principles at work:
But there are knocks on capitalism, one I will discuss in the next installment.
CJ Coolidge is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.
No matter what we may think, the world economy is a free market, even capital based, economy.
Basic Economics 101
For any government/state system to exist, and maintain, it must have an associated economy which can make available, at minimum, the basic necessities and consumables for its citizenry. For economic stability, the participants in the economy must provide some contribution to the economy in proportion to the resources they need.
As a population grows, so must the availability of these necessities and consumables. More people require more food, more housing, more clothing, et al. And, to the degree that the consumer/participants maintain a suitable level of contribution, the economy maintains a balance, and is sustainable. If this condition is met, the standard of living can be maintained.
However, in this modern age, simply maintaining the standard of living is unnacceptable in most economies. But an improved standard of living, by definition, requires an even greater availability of resources for each member of the population, and, therefore, an associated increase in production offered by the participants.
Capital is the Centerpiece of all Economies: Improved Capital Means Improved Productivity. Improved Productivity Means Improved Standard of Living
Increased production comes from the development of improved means of production. And, means of production is, by definition, capital. To cause the means of production to increase in its ability to produce, hence an increase in the standard of living, there must be an investment of some sort, capital investment.
Restated, since all economies require some means of production, they must be said to be capital based. Since all economies desire an increase in their standard of living, there must be capital investment.
Even Non-Capitalist Economies Require Developing Capital
Yes, Virginia, it doesn't matter what China, India or Middle eastern countries call themselves, communist, socialist, facist, capitalist, or whatever. It doesn't matter that their own domestic economies aren't considered free market, capitalist economies. The world economy, at its core, is a free market, capital based economy, no matter who controls the means of production.
A socialist country may own the means of production. But, the means of production is still capital, A government may "control" the earnings of its citizens, but those citizens must still have access to sufficient resources to secure the things they need for the economy to exist. If a particular economy's consumption needs exceed the availability of available resources, that economy, hence the system it supports, cannot survive.
And in order for even the socialist economy to exist, to improve the standard of living demanded by its citizenry, there must be capital investment. It logically follows that the governmental system that does the most to encourage investment in capital will obtain the greatest increase in production, and improvement in its standard of living. Such has been the experience of the nations who espouse the economic system called Capitalism.
Recognize these Principles at work:
- An economy can be stable only when it is able to produce and deliver the goods and services necessary to support its population.
- Economic balance occurs when the participants produce at least what they consume. A simply balanced economy maintains a stable standard of living.
- The standard of living increases when production exceeds what participants use or consume.
- Productivity is effected by the means of production, by definition, capital. When capital is improved, the standard of living is improved. When capital is diminished, the standard of living is diminished.
- The basic element by which capital can be improved is investment. Every economy, no matter its form, is subject to this principle.
- Economies that discourage investment in its capital inherently diminish their ability to improve the quality of life for its participants.
But there are knocks on capitalism, one I will discuss in the next installment.
CJ Coolidge is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.
Tuesday, September 30, 2008
The Value of Work is Inextricably Linked to its Impact
(This is the first installment in a series of articles about the problems associated with government's attempts to ignore free market principles in a free market world ecomony.)
There is no free lunch.
It seems an obvious foundational principle to all things business - at least all things business in our capitalist system. Somehow, somewhere along the line, we seem to have forgotten.
We have started to believe, even in business, that we are entitled to something, simply because we are. We live and act and conduct our enterprises as though we are entitled to remain profitable on the basis of our existence, our history, the size of our assets, or the supposed quality of our product. Employees think that they should continue to be paid just because they show up, and do some work. It doesn't work that way, and it never should have.
Can you say that any job/activity has quantifiable, intrinsic value?
I once heard Hillary promise to use government programs to guarantee jobs to the manufacturing workers in the northeast. I once heard Obama say that he will do the same to restore the jobs of auto workers. They speak as though they believe that any and all workers should be entitled to be paid whatever they need, doing whatever they can, without considering the real value of their work for the company or the customers they work to serve. These people act like one can dictate prices and wages, without regard for the associated value of the products or the service provided. They are deceived.
Anyone believing that there is intrinsic, quantifiable, fixed or naturally escalating value in performing the tasks themselves is equally deceived.
What Determines the Value of Work?
What dictates the value of the work done by an auto worker, or anyone, for that matter? What guarantees him or her a position by which wages can be justly deserved?
Only the value of the contribution the position makes to the product or service produced, and the customer who buys it.
When that contribution does not exceed the value available, recognized, delivered, received, and desired by customers, that work is no longer worth doing. The worker can no longer expect to continue to be paid for his services. The work is no longer valuable, or necessary.
At one time, thousands of people were gainfully employed as elevator operators. The landscape changed, and elevators became automated. Attempting to maintain that the elevator operators of the world should continue to be paid for operating elevators would be pure foolishness.
Why are there no more people employed as elevator operators? That service is unnecessary.
Attempting to maintain that any job should be preserved, "just because so many people do it" is equally foolish. It is nothing short of a "free lunch."
The same principle is at work in every industry, in every healthy economy.
This same mentality will produce disastrous, protectionist policies to be imposed on a world economy. They won't work. They can't work. They never have worked in a free market economy. And, no matter what we may try to tell ourselves, the world economy is a free market, even capital based, economy.
Somebody will pay, even for a "free lunch." And whatever the cost, it exceeds the value received. It is a bad deal.
There is no free lunch.
It seems an obvious foundational principle to all things business - at least all things business in our capitalist system. Somehow, somewhere along the line, we seem to have forgotten.
We have started to believe, even in business, that we are entitled to something, simply because we are. We live and act and conduct our enterprises as though we are entitled to remain profitable on the basis of our existence, our history, the size of our assets, or the supposed quality of our product. Employees think that they should continue to be paid just because they show up, and do some work. It doesn't work that way, and it never should have.
Can you say that any job/activity has quantifiable, intrinsic value?
I once heard Hillary promise to use government programs to guarantee jobs to the manufacturing workers in the northeast. I once heard Obama say that he will do the same to restore the jobs of auto workers. They speak as though they believe that any and all workers should be entitled to be paid whatever they need, doing whatever they can, without considering the real value of their work for the company or the customers they work to serve. These people act like one can dictate prices and wages, without regard for the associated value of the products or the service provided. They are deceived.
Anyone believing that there is intrinsic, quantifiable, fixed or naturally escalating value in performing the tasks themselves is equally deceived.
What Determines the Value of Work?
What dictates the value of the work done by an auto worker, or anyone, for that matter? What guarantees him or her a position by which wages can be justly deserved?
Only the value of the contribution the position makes to the product or service produced, and the customer who buys it.
When that contribution does not exceed the value available, recognized, delivered, received, and desired by customers, that work is no longer worth doing. The worker can no longer expect to continue to be paid for his services. The work is no longer valuable, or necessary.
At one time, thousands of people were gainfully employed as elevator operators. The landscape changed, and elevators became automated. Attempting to maintain that the elevator operators of the world should continue to be paid for operating elevators would be pure foolishness.
Why are there no more people employed as elevator operators? That service is unnecessary.
Attempting to maintain that any job should be preserved, "just because so many people do it" is equally foolish. It is nothing short of a "free lunch."
The same principle is at work in every industry, in every healthy economy.
This same mentality will produce disastrous, protectionist policies to be imposed on a world economy. They won't work. They can't work. They never have worked in a free market economy. And, no matter what we may try to tell ourselves, the world economy is a free market, even capital based, economy.
Somebody will pay, even for a "free lunch." And whatever the cost, it exceeds the value received. It is a bad deal.
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