Ten Basic Rules

How The Economy Works

Posted: June 23, 2014

All too often, when it comes to economics, conservatives and liberals have this “Mars-Venus” thing going. Whereas the former are governed, more often than not, by reason and the ironclad rules of the marketplace, the latter are moved by emotion and the errant compassion of government intervention.

To better explain this dichotomy, we call upon economics professor Jeffrey Dorfman, who, in the June 5 edition of Forbes, expounded on 10 basic truths that policymakers need to recognize — but liberals often don’t. To wit:
In and of itself, government does not create wealth; it only “reshuffles” it by taking money from some to lavish it upon others.

While differing levels of income — “income inequality” in the current parlance and pejorative sense — may seem, to some, grossly unfair, it does no harm to the economy. In fact, money saved by high-income earners spurs capital investment, which fosters job and wealth creation — i.e. growth.

Low wages do not necessarily suggest exploitation. It’s supply and demand at work, or, as Mr. Dorfman says, “Just as businesses must set prices according to consumer demands, they establish wages based on the supply and demand for labor.”

Environmental over-regulation drives up prices, particularly for poorer Americans who spend a greater percentage of their income on necessities such as energy.

Education, largely viewed as a “public good,” produces human capital “privately owned by each person.” What’s more, “the ensuing benefits of education are not given away for free.”

Corporate salaries may be high, but then, so are those paid to entertainers — and we seldom hear liberals complaining about them. In terms of money paid to lower-level employees, this is not a zero-sum game: The marketplace determines an employer’s payroll and an employees wage. If anything, high CEO salaries result in shrinkage of a company’s profit margin, which should prompt investors to complain, not workers.

Consumer spending does not drive the economy; greater wealth ensues when folks save more and spend less.

When government provides what are perceived as “freebies,” one can almost be certain they’ll be of low quality and, at the same time, needlessly expensive.

Government action is no antidote for “injustice.” Whenever a government conccocts a quick “fix,” other folks are adversely affected.

Here’s an old chestnut: “There’s no such thing as a free lunch.” Government intervention inevitably costs money. Take the minimum wage: Raising it may help those toiling at that wage, but in the end reduces job opportunities for the unemployed. How does that help?

Granted, one may view Mr. Dorfman’s list as green-eyeshade stuff that encourages business owners to behave like the pre-Christmas Scrooge. Even we have our quibbles. For example, we’ve never understood employers who fail to equate the success of their companies with the well-being of their employees. Thus, we cheered mightily in 1995 when textile magnate Aaron Feuerstein, in the wake of a devastating fire, chose to rebuild his Malden Mills right there in Lawrence, Mass., and pay his workers for six months while the new plant was under construction.

Of course, twice since then, the company has filed for bankruptcy protection — which shows the necessity of balancing moral precepts and economic principles. Nonetheless — and unlike government intervention, which defies all indices of compassion as much as it does economic reasoning — we fail to see where morality and economy are mutually exclusive in the marketplace.

An old aphorism sums up Mr. Dorfman’s 10 rules, which essentially say that when the market is permitted to work, the economy thrives, and nearly everyone prospers:

A rising tide lifts all boats.



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