Sunday, November 21, 2010

Milton Friedman - The Man Who Knew Economics

Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist, statistician, a professor at the University of Chicago, and the recipient of the Nobel Prize in Economics. He was an economic advisor to U.S. President Ronald Reagan. Over time, many governments practiced his restatement of a political philosophy that extolled the virtues of a free market economic system with little intervention by government. As a professor of the Chicago School of Economics, based at the University of Chicago, he had great influence in determining the research agenda of the entire profession. "The Economist" described him as "the most influential economist of the second half of the 20th century…possibly of all of it".

Now as to why I invoke the name of this great economist.

I watched a video of this man, holding a pencil. He plainly stated that in this whole world there is not one man who could make that pencil. It took thousands of people - different nationalities, religions and goals. The rubber for the eraser comes from Indonesia; the wood shaft from Oregon; the graphite from South America. And yet they all came together, seamlessly, to create that pencil, and in so doing they were able to sell it for a nickel.

When asked how it was possible to do that, and still keep the price to 5 cents, Friedman simply said, "The government was not involved in it."

Friedman is noted as an economic genius - which probably explains how he won the Nobel Prize in economics. Yet many people still do not understand, nor accept his "trickle down" economics. But it is also noteworthy that none of his detractors ever won the Nobel Prize. Most have never even studied economics.

If you already understand the trickle down theory, you are likely a left-brain thinker (so it is also likely you are a conservative or Libertarian). For the rest of you, I hope I can put it in simple terms, because if we are ever to get out of the mess we are in, and stay out, people need to understand the concept.

No, the trickle-down theory did not get us into this mess. Neither did the free market or capitalism. Every time - EVERY time - the economy shifts even a little, the government, in its infinite arrogance and stupidity, steps in. The FED meddles with interest rates, or prints more Benjamins. Congress passes more regulations. And more regulatory agencies are created. Frankly, the only time in the last 50 years that we relied heavily on free markets, capitalism and trickle-down economics was during Reagan's presidency, where he used it to reduce 20% interest rates, 10.3% unemployment rates and runaway inflation. And it worked. Those who say it did not are either being dishonest or ignorant.

Some say trickle-down did not work because the economy did not STAY healthy. But again, that is because after Reagan, government again began meddling in the economy.

Trickle-down economics is like anything else - left alone, it will move onward and seek its own level. But when the government puts up dams to regulate it, then it is no longer Trickle-Down. And that is what we have had for most of the last 50 years - government building dams. And now we have a government that is actually trying to PUMP the economy with trickle-up economics. That's no different from trying to make water flow uphill - while you can force it to do so, it only comes at great expense and wasted energy - only to have it flow back down again.

So, here it is in a nutshell. Left unhampered, no economy can even begin except at the top. Poor people do not have the money, assets or education to fire up an economy. If, for example you experiment with a new economy in a vacuum, where you have people but no business, no products, you have stagnation. If you give money to the people, they cannot spend it on products - there are none.

It is only when some enterprising individual creates a product or service that the people can finally become consumers. But the PRODUCTS must come first - else, there is nothing to consume. If the products and services must come first, then that is where the flow of money must begin.

Someone starts a business and produces a product by investing money into it. Investing in a facility, inventory, marketing, shipping, and, of course, employees. And the money begins trickling down - from the owner, to the vendors and employees, to the allowances of the employees children. Money flows. And it flows back up as consumers buy more products, which creates bigger demand, so the business owner must buy more inventory and hire more people. And more money trickles down.

That is the ONLY way an economy can grow. If you doubt that even for a moment, try starting a small "family economy" from scratch without providing any products or services first. Or try starting up a store with nothing on the shelves, hoping that consumers will bring you their money, and you can then use their money to buy products for your shelves. Good luck with that!

If you don't have products or services already available, no one can or will buy them.

Now understand the second most important fact of Trickle-Down. Every business has one goal - to make a bigger profit each year. If you are not growing, you are dying. Period. Growth requires the investing of more money. In order to invest more money, you need to EARN more money - and be able to keep it.

But when government decides that class warfare makes good politics, they play the masses against the "rich". This results in punishing the rich with ever-increasing taxes while reducing taxes for everyone else. They think this is good for the country. But it will destroy the nation. Every government regulation, every manipulationof interest rates, every printing of more money as debt is another log in the dam, slowing the economy.

And every dollar of tax imposed against a business is another dollar the business cannot invest. Don't think for a moment that those extra tax dollars you take from the rich are coming out of their "lifestyle" expenses. No, they come out of investment capital. If given a choice between giving up the yacht and giving up an employee, human nature says the employee will be the loser. So, taxing the rich only makes things worse, not better. Besides, every tax is always passed on to the people below, in higher prices. Even you pass on your taxes by demanding raises to adjust for the increases in your taxes. So then your employer, to pay for your raise to pay your taxes must now jack up the cost of his products, and consumers pay your taxes - and the business owners taxes. Taxes, like money (or water, or seweage or anything else) flows downhill. That is why the poor are poor, and why they stay poor. If you raise taxes on the rich, the poor will be the only ones to suffer.

When you take from the rich, they cannot invest in growth. Jobs are not created. Products are not made available. Demand begins to outstrip supply, and prices rise. And a recession (or depression) is the result.

But many on the left say, "We'll give that money to the poor. They will spend it and that will fuel growth." But what will they spend it ON, if products are not being made? If jobs are not available for continued prosperity? And if they do spend it on products that are going up in price, why would the business owner reinvest it for growth if he knows the government is just going to take it away?

Look, folks - Friedman knew there was more to an economy than the flow of money. There is human nature, human needs, greed and more. They all work together, like all those people that make a five-cent pencil. And the minute government gets involved in any way, it throws everything out of balance.

What we need is a government that, as Reagan so aptly put it, just gets the heck out of our way.

Yes, there will be winners and losers - and liberals don't like anything that includes losing. They think everyone should win. But that is not reality. It is not natural. And it simply cannot work. It cannot work because of human nature, needs, greed etc.

Face it - if you were assured of having everything everyone else had, regardless of whether or not you earn it, why would you work harder or smarter than the next guy? Why would you risk everything to start a business if you could not get anything out of it because it all gets shared with "the community of Man?" You would not. And that is why communal living (communism, socialism etc.) does not work. And that is precisely why "social justice" is a travesty against nature and God. We are obligated to help ease the suffering of our neighbor, but we are not obligated to raise him up to our own level. That is for him to do, if it will be done at all. Charity is good. Social justice is bad.


No comments: