The Rag Reel


Sunday, October 24, 2010

The Business of Being in Business!

Business is Burning Around You!

Value Creation - Create real, long-term value by the economic means. Eliminate Waste.

   We live in an era when many people - including policymakers and media celebrities - view businesses and corporations with disdain or intense suspicion. Their way of thinking begs a simple question: What is the primary role of business? Is it to create jobs and provide benefits? Help advance a social agenda? Or just to make as much money as possible, by exploiting customers and employees? As a matter of principle, there is only one reason for any business to exist: creating value. We all tend to pursue our own interests, but in a true market economy we can only prosper long-term by providing others with what they value!

   Biting the Hand

   In a system of economic freedom, a company will generate long-term profits only if it uses resources in a way that consumers value more than alternative uses. Large or small, a company will not stay in business for long if it is not truly creating value. Unfortunately, the same cannot be said for governments. Most governments consume massive amounts of resources - primarily labor and capital - much of which doesn't create value.

   Was it worth more than $200 million of U.S. taxpayers' money to build an airport in Johnstown, Pa., that services just three commercial flights per day? Although it was never built, would the federal government have created real, long-term value by spending nearly twice that much for the infamous "bridge to nowhere" in Alaska? It is essential that use of resources is directed by consumers, rather than politically. When resources are directed for political ends, the result is misallocation.

   What About Jobs?

   Job creation is one of today's hottest topics. Governments of many nations - liberal, conservative and even Communist - are under enormous pressure to "do something" about high unemployment and lagging job growth. In reality, it is business of all sizes in the private sector, not the government, that tend to produce the sorts of jobs that create real, long-term value.

   Government interventions - particularly controls, subsidies, barriers to entry, tariffs and bailouts - misapply resources, thwarting the efficient production of what people value. An economist would say such actions replace activities that convert resources to higher-value products with activities that convert them to lower-value products. Think about that for a moment.

   If a business activity is really creating value, should it need to be subsidized? Similarly, if a business is destroying rather than creating value, shouldn't it be allowed to go out of business, rather than be subsidized or protected; i.e. Citi.


   Productivity is more than a business buzzword. It is a key driver of success for all of society. The more productive we are in enhancing the value of resources, the better off virtually everyone is going to be. By contrast, anything that interferes with productivity is going to make people less well off, especially the poor, who are least capable of weathering economic shocks.

   It is important to realize what makes us better off. It's not just how much money we have, but the availability of the goods and services we value. In the old Soviet Union, lots of people had rubles to spend, but there was very little of value to buy. Government policies resulted in chronic shortages of food, clothing and shelter. Similarly, in any nation where government policies systematically destroy value, shortages of valued goods and services should be expected.

   Good Idea?

   Government-mandated transfers from one group to another don't solve the problems of lower productivity and higher unemployment. In fact, they make those problems worse. If the government insists that someone should be paid $50 per hour in wages and benefits, but that person only creates $30 worth of value, no one will prosper for long.

   In a scenario such as this, as businesses lose money because of the government's policy, employees will end up losing their jobs and fewer (if any) new employees will be hired. Consequently, the result of what sounded good - making a guaranteed $50 per hour-will not be prosperity, it will be higher unemployment. Anything that undermines the mobility of labor, such as policies that make it more expensive and difficult to change where people are employed, also increases unemployment.

   In Europe, where stringent labor laws make it difficult and expensive to terminate someone - even for cancer - this has become especially troublesome. Similar policies that distort the labor market - such as minimum wage laws and mandated benefits - contribute to unemployment. Policies that make it difficult to get permits to build plants and equipment that are more efficient lower productivity and reduce wages. All these obstacles interfere with the ability to create valued products and services, adversely affecting consumers, employees and employers.


   Societies that value freedom and prosperity protect their citizens' rights to free speech, which greatly facilitates the discovery and the dissemination of knowledge. What we see is many nations today is just the opposite. Citizens who are openly critical of the European Union bureaucracy in Brussels or the out-of-control government of the United States are being shouted down by politicians, government officials and their media and other allies. Too many government elites think they know what's best for citizens and ignore the wishes of the citizens themselves.

   Those in power tend to want to control more and more, all in the name of making things "fair." To do so, they pile on more rules, more regulations, more restrictions, more programs and more costs. This kind of thinking is a recipe for disaster - both for a company and for a government. Over-specifying and enforcing particulars undermines prosperity, it also facilitates corruption and abuse of power, subservience and stagnation.

   After many years of disastrous policy decisions in the United States, it will be interesting to see who voters support at the ballot box this November.Will it be those candidates who believe that more government is the answer, and that government - rather than consumers - should decide which businesses succeed or fail? Or will it be those candidates who believe the true role of business is to create value for society by serving customers, not politicians?


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