Economics is a social science, who's primarily concern is how scarce resources are allocated among individuals in society. Over the course of history there have been many theories as to how allocation decisions are made on a daily basis. The most prominent and widely accepted of these theories is the free market system. Originally proposed by Adam Smith (1723-1790) in The Wealth of Nations, the free market system was not created by any single document or government decree, but rather emerged as if by an invisible hand. The self-interest of the individual to satisfy their own needs economically are the reason for the emergence of the free market system.
We see that today, the free market system still operates through the invisible hand, however, economists have a far greater understanding of individual self-interest, and how it influences allocation decisions. A modern contemporary to Adam Smith would be the Nobel Prize Economist, Milton Friedman (1912-2006). Friedman was a staunch libertarian and believed in the power of the free market system. In the following video clip, Friedman uses a simple pencil to explain the power of the free market, or price system.
Now that I have established for you (with the help of Dr. Friedman), the basics of the free market system, I want to focus the rest of this page on specific societal issues. The free market system provides intuitive explanations of many social questions, and, where applicable, has the potential to answer these questions. However, the conclusions we're able to reach from the free market system are highly dependent on one's own personal opinions on the efficiency of free market outcomes.
The Myths about the "Free Lunch"
If you have ever taken a class in economics, you have probably heard the expression 'there's no such thing as a free lunch'. What do I mean by this? Certainly you can remember sitting in your high school cafeteria watching one student get bullied out of his lunch by another student. No money has changed hands, and clearly the bully is now better off in the sense that they have a lunch and the other student now has nothing. However, the truth is that nothing is free, and there is always some cost associated with a transaction. In the case of the bully, he did obtain a lunch at no monetary (sometimes referred to as accounting) cost. Furthermore, I contest there was another type of cost involved, that being an opportunity cost, in which this 'transaction' did not account for. The bully made a conscious choice to essentially steal another students lunch. That choice has consequences, such as detention. Yet, individuals make decisions about opportunity cost all the time and usually do so subconsciously. It's rather obvious by the bullies actions that they have placed a value on a 'free lunch' against the value of time in detention and has determined them to be approximately equal. Remember, we do not have infinite time to spend on this Earth, therefore, we make decisions on how we wish to spend it, and those decisions have value.
This same, rather simple example of the bully can be abstracted to much larger issues such as the interactions between individuals and the government (federal, state, or local). Specifically, the issues of entitlement programs often have the stigma that those who benefit are getting something for nothing. However, this is just not true. Governments (thinking of federal right now) have basically 3 ways to raise capital to pay for entitlement programs. They can tax, borrow, or print money. Taxation essentially takes money from your pocket, and puts it in the governments'. Borrowing usually takes place between governments, adding to the deficit for the year and eventually the accumulated debt of the nation. Printing money is the last possibility. Governments can authorize the treasury department to print new money, such that they can pay for programs. Regardless of how they choose to raise money, in the end, neither of these options are free for anyone. Funding a program either effects you directly (taxation) or indirectly (borrowing, printing). Milton Friedman explains this further in the following video clip.
Income Inequality
One of the greatest fallacies within our market economy is that of income inequality. For anyone who has had interest an interest in economics and public policy or government, you have likely heard the term "income inequality". But what does that really mean? And what evidence do they use to substantiate it? Let's first discuss what exactly politicians mean when they say income inequality. There are routine statistics collected by both the Bureau of Labor and Statistics (BLS) as well as other private business on income in the United States. They consistently find a "shrinking middle class" exists in our society, whereby large numbers of individuals are shifting their 'income brackets' in one of two directions, upward to the 'wealthy' or 'rich' class, or, downward to the 'poor class'.
While this may seem like a terrible issue, the facts are that these finding are not entirely true or representative of the U.S. population. Survey design plays a key part in this explanation. Here, most of the surveys are static, meaning they collect data at one given point in time for one cohort of people. Subsequent surveys may or may not include that same cohort. As a result, it becomes difficult to measure ones movement throughout different social classifications over time. The truth is - as more reputable studies have shown - income classes, be it poor, middle or wealthy have some given turnover rate. So while proponents of socialism and income redistribution in this country argue that we need to 'spread the wealth around' (see President Obama clip below), they are ignoring the fact that the free market essentially accomplishes this feat without any help from the federal government. Individuals are free to choose how, when and why they spend their incomes.
Like it or not, then Senator Barack Obama was very clear with 'Joe the Plumber' about his ideas on spreading around the wealth being good for everybody...but he's not a socialist? With all do respect to our current President, spreading the wealth around a la socialism, is not good for everybody, in fact, it's historically only been good for one group of people, government officials. I challenge you to find me one instance in history where socialism and/or Marxism has been a successful form of government, where individual rights (especially individual property rights) were not oppressed, and the citizens living under that government were generally satisfied. While you rack your brain on that, (and I promise no matter how hard you try, you won't find one), feel free to listen to this clip from Economist Thomas Sowell, as he discusses the realities (and fallacies) behind income redistribution. The video is not yet available on YouTube so here is a link below.
http://goo.gl/6Adpk (Please note the reaction of Dr. Sowell to President Obama's remarks at 9:02...for more on The Constitution and our Founders head on over to our page on The Constitution and the Founding)
Economics of Welfare
Nowhere is the failed interventions of government more apparent than the welfare system. Thinking about welfare from my perspective, I believe the shortcomings are not only apparent, but also make a clear case as to why we need to dismantle the system and start over. But before I get to that, let me ask you this; what is welfare? Seems like a question with an obvious response, but I argue the answer is not as simple as you might think. To me, welfare is not just a system of government programs that subsidize the poor. No, it's much more than that. Welfare represents a means by which individual liberty is infringed upon. With welfare comes egalitarianism, and with egalitarianism comes socialism. Think I'm wrong?
Well, let's discuss egalitarianism for a moment. What is it? Under an egalitarian society, individual motivations and freedoms are less important than the motivations of the collective. Egalitarians believe in equality, not of opportunity, but rather, equality in outcomes. Economically speaking, the egalitarian system supports the socialistic and progressive agendas of 'spreading the wealth around'. Furthermore, a complete disregard of the free market system is part of the egalitarian view. The laws of supply and demand are replaced with artificially fixed prices, set by some controlling interest, usually the state. Dr. Thomas Sowell explains here:
Additionally, this clip is a bit longer, and the argument presented by Dr. Friedman is slightly more complex:
Now, I want to jump back to my original point of the economics surrounding welfare. Currently, our system of government employs a system that essentially subsidizes individuals to stay poor, or to stay unemployed. We are more or less rewarding failure. This is what I believe needs to change. I'm reminded of the adage, "give a man a fish, feed him for a day; teach a man to fish, feed him for a lifetime". It is this sort of sentiment, where we give individuals handouts, that is continually crippling welfare and country. This is not to say that I do not support some form of social assistance, however, that social assistance must be established in such a way that gives individuals the incentive to not remain poor or to not remain unemployed. Rather, they should want seek out upward mobility in society such that they can achieve a higher 'status' as Dr. Friedman refers to in the previous video. It is important to note these changes to do not start and stop with the government. While it is the duty of the government to reform these current practices, the push for reform must come from the individual.
Society as a whole is broken right now. I believe much of the American family has become irrelevant. We are more willing to accept mediocrity instead of promoting excellence. For those of you with younger children, how many of you have some sort of 'participation award' that was given to your child for either sports or other sort of 'competition'? While this may come off a shrewd, my suggestion would be to burn them, throw them out, show your children that mediocrity is not the same as success. Now, I'm not saying to go call your kids losers. What I am saying is that maybe there is something else out there that they can finish first in. Maybe they have another calling that you as a parent haven't yet to discover. We need to go back to teaching our kids how to succeed. They need to learn how to be personally driven, self-motivated individuals. It was that spirit that founded this country. It was the same spirit that caused the great industrial revolution in the 1920's and it is that same spirit we need to dig ourselves out of this miserable hole we are in today. Final thoughts on this issue from Dr. Thomas Sowell:
Economics of Health and Health Care
Coming Soon!!
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