Economics 101

Many people have incorrect assumptions about money. First among these is that money is anything other than a method of scorekeeping for wealth. This in turn leads to the misconception that one person's gain is another's loss.

An example of this world economy shakes out like this:

assume that there are four people on the planet, each with $5.00

Name: Lumberjack
Bank: $5.00
Needs: Food, Shelter, Bling-bling, Fertilizer
Produces: Firewood, Lumber

Name: Builder
Bank: $5.00
Needs: Food, Shelter, Bling-bling, Lumber
Produces: Houses, Picture Frames

Name: Herder
Bank: $5.00
Needs: Food, Shelter, Bling-bling
Produces: Food, Fertilizer

Name: Painter
Bank: $5.00
Needs: Food, Shelter, Bling-bling, Picture Frames
Produces: Bling-bling

Prices for Goods (cost to make)

Fertilizer: $0.25 (free)
Food: $5.00 (free + labor)
Lumber: $5.00 (0.25 Fertilizer + labor)
Firewood: $2.50 (0.25 Fertilizer + labor)
House: $10.00 ($5.00 Lumber + labor)
Picture Frame: $2.50 ($1.25 Lumber + labor)
Bling-bling: $5.00 ($2.50 Picture Frame + labor)

Minimum requirements for life are $5.00 Food and $2.50 Firewood per year. Everything else is just quality of life improvements.

Obviously, if this is our economic universe, then all of the goods and services have to be provided between the parties keeping in mind that only $20 exist on the whole planet. If one of the parties has something that everyone wants or needs, he could jack up the price and stick it to everyone else on the planet. Conceivably, he could wind up with 75% or more of the entire wealth on the planet, and that wouldn't be fair would it? In fact, if one were to get outrageous with a price there could be civil unrest or simply a lack of customers ("I'm not paying that much for that!")

But here is the missing piece: Money is just a way of counting wealth, it's not actually the wealth itself. If money was the wealth, then even after each of our four residents marry and have children (perhaps after we import some women from Venus) there would still only be $20, but they would have to split that between 16 people (each has a family of four).

The way it really works is this:

Lumberjack has 20 trees in inventory. Over the life of each tree, he spends $.25 to maintain it. He chops down one of the trees, cuts it up into lumber, and sells the lumber to Builder for $5. Builder then builds a house worth $10. Lumberjack would like to buy the house, but he doesn't have the money. So he cuts down another tree and cuts it up for firewood. This he sells to a painter for $2.50. It's not as much as the lumber, but then it didn't require as much skill to make either. Lumberjack buys his house, and keeps providing lumber and firewood for the others. The builder builds stuff for whoever needs it. The Herder provides food for everyone and fertilizer for the lumberjack. And the artist, warm and well-fed paints a series of masterpieces that everyone wants to buy.

So far, it's your zero sum game. There can't be more than $20 in the whole world right? Except for one thing: the paintings are worth something.

And rather than their worth going down, since everybody wants one, the value of the paintings goes up, especially for the oldest ones. If one of the population gets a little cash strapped, let's say the herder wants to buy a house but doesn't have $10, he could offer two paintings (he's been feeding everyone for a while and loves the paintings so much that when he has the extra cash he buys one).

You see, it's not the money that has value, it's the stuff. And if you make stuff that people want, and you sell it for more than it cost you, you have created wealth. Money is just a convenient way to keep score.

As the population grows, and new products are introduced, and the economy grows, we need to print more money to keep track of stuff. But printing more money isn't what makes things worth more or less... it's the stuff.

Lesson 2

Governments must act responsibly when printing money. There are two worries:

1) The government could print too much money. Let's take our group of four from the previous example. If they decide to print and distribute an additional $100, while the value of the durable goods produced is only $60, they will have created an inflationary situation. The value of the stuff is still the same (think of it as "desirability" or "how much do you want it") but now you have more money so you are willing to pay more for it. The price of everything goes up to keep the relative worth the same.

The bad news here is that whatever effort you put forth to create the cash you have now is devalued.

Here is an example: Each tree as it stands in inventory has a cost associated with it of $.25 and each new tree when planted will have an associated cost of $.50 after the economy stabilizes again. Before the inflationary period, Lumberjack dude chopped up one tree for firewood and he still has it sitting in inventory. This is actually a good deal for him because he put $2.25 worth of "work" into it (for a total value of $2.50) and it is now worth $5. Cool. That's like free money. But here's the problem: just before the inflationary period, he sold two stacks of firewood for a total of $5.00 and he was planning on buying a new painting. But now the painting costs $10. His cash lost value.

2) A government can also print too little money. This creates deflation which might sound alright on the surface, but which is just as destructive as inflation. If some of the currency gets taken out of circulation by the world bank, say it goes from $20 to $10, the transition is extremely painful. What happens is this: the first thing that gets cut is salaries for the people that help you because there's not enough money coming in to pay for people. "Stuff" is still going to be the original price for a while because, as in our Lumberjack example, the effort and material have already been put into the product, and to reduce the price now means that at best you might break even or possibly even lose money. This doesn't help you pay your bills which also have not come down yet. Eventually, the sellers will have to lower prices even on their current stock just because nobody else has the cash to buy anything. If your business is strapped for cash in a deflationary period, you may well go under.

An additional drawback to deflation is that the growth of the economy will be reduced even after it stabilizes again. This is because there is not enough money to spend on durable goods like houses and paintings. It takes longer to save up enough to get them.

The key points to remember about a free economy:

1) Wealth is a measure of the value or worth of goods and services. That value is a "desirability" factor. If nobody wants it, it's not worth much even if it costs a lot to make. If everybody wants it, it's worth more, even if it didn't cost much at all.

2) Money is just scorekeeping. If tagging home plate in baseball is suddenly scored as three points, it doesn't make tagging home plate worth any more, it just inflates the score.

3) We could create a new country called Utopia and put every resident on the payroll giving everybody 1,000,000 Utopian dollars a year and we would all be living in squalor because we don't produce anything. We'd be rich in Utopian dollars, but we wouldn't be able to buy anything from anybody else because nobody else wants Utopian dollars. They have no value because nothing has been produced.

4) A free economy is not a zero sum game. If my Oakland A's score 9 runs in a game, it doesn't mean that there are nine fewer runs available to be scored by the other team. The other team might score fewer, the same, or more runs than my team. But there's no maximum score. You just need more numbers to track it.

5) Wealth is created by work. That's how an artist turns a piece of canvas and a glob of paint into a work of art; and that's how a tree becomes lumber, and lumber becomes a house, and that's also why a house is worth more than the sum of its parts; that's how an author can be paid for words.

6) Wealth can be destroyed by artificial price structures. If the government determines that the maximum price for a particular product is x, and the cost to produce that product is 2x, the only way to make that product available at x is with a subsidy, which may sound good except that the subsidy is paid with taxes and... this gives the government control of the profit margin, and through that employee salaries, capabilities for expansion of the business, research and development, etc. Likewise, if the government establishes the minimum wage at $20/hr, we'll all be paying about $10 for a Big Mac, but worse than that, unskilled workers won't be able to get a job because employers will want skills for that kind of money, employers won't offer insurance or retirement benefits because they can't afford them anymore, and taxes will increase to pay for all the new unemployment and welfare cases.

For some interesting reading with a more professional explanation of these ideas, see this essay on Ludwig von Mises.

Understanding Islam - pt. 1, Origins

Obviously, based upon the title I've chosen to give this post, I'm going to be talking about this for quite some time. This first chapter regards the origins of Islam, and is written from a non-scholarly Christian perspective.

But before beginning, perhaps I should touch on the "origins" of this post. The idea for this post came about with my response to a comment made on another blog. The comment was that "Islam and democracy are mutually exclusive." My response essentially said that they are NOT mutually exclusive.

From that thought is born this series of posts in which I plan to explore the question. I will purposely lay out the case that Islam is, by nature, anti-democratic (the opposite of what I feel to be true, by the way). And having established that it will be an uphill road, I hope to also establish that freedom and democracy are the only hope for the Arab people.

I must reiterate I am not a scholar or even an expert in anything. In fact, even the things I used to be an expert in have left me far behind. These words are my opinion only, and no more learned than your own. They are probably worth far less than you paid for them.

Before I begin exploring, let me say that official Church teaching (of the Roman Catholic persuasion) is very limited in respect to the Muslim faith:

The Church's relationship with the Muslims. "The plan of salvation also includes those who acknowledge the Creator, in the first place amongst whom are the Muslims; these profess to hold the faith of Abraham, and together with us they adore the one, merciful God, mankind's judge on the last day."

Please note that this paragraph comes after a paragraph which describes the special relationship between the Church and the Jews.

In the beginning....

Islam traces it's origin to Abraham, who is believed by biblical historians to have lived sometime between 2100 BC and 1500 BC. In a tale which could have inspired many modern day soap operas, Abraham, the father of monotheism, and his wife Sarah are unable to conceive. Sarah suggests that Abraham have relations with Hagar, her handmaid, and Abraham's illegitimate son, Ishmael, is born. Then, wouldn't you know it, Sarah conceives Isaac.

Even if you have only the most basic understanding of soap operas, you can see a problem developing here. Your first-born son is illegitimate. Your real son is not the eldest. Not a good situation in a time where the entire inheritance goes to the first-born. Abraham decides to banish Hagar and Ishmael to the desert (which in reality should have been a death sentence but for one fact; God had promised to watch over Abraham's children).

So perhaps that story would have remained a footnote in the Judeo-Christian history except that two thousand years later (give or take a couple centuries), in 570AD, Muhammad ibn Abdallah was born in Mecca. A minor merchant who married well, there is little noteworthy until about the year 612AD when Muhammad is said to have had a (possibly epileptic) vision in which an angel had him memorize (he was illiterate) what was to become the Koran.

Ten years later, Muhammad was driven out of Mecca for his blasphemous teachings only to return at the head of an army to conquer the city in 630AD. He died of fever three years later.

These events are essentially uncontested regardless of the faith perspective.

So now for my perspective: I see two things here which could be insights into today's events. First, Muhammad himself set a poor precedent when he allowed his personal feelings of being slighted by his hometown to inspire his return to Mecca with intensions of conquest. Second, the "illegitimate son" syndrome seems to permeate the Arab psyche to this day (while I'm not a huge fan of Kevin Costner films, Christian Slater's portrayal of Will Scarlett in "Robin Hood: Prince of Theives" is a sample of the attitude I am thinking of here).

Again, I must say that I am not an expert in history, religion, or psychology. Make of this what you will.

Next time, we'll lay out the brief version of history through the middle ages.

Science Class

Okay everybody, I've explained this to various people at various times. I'm going to post this in one place and from now on just tell everyone to come here for the explanation.

Do NOT squeeze the soda bottle before you close the cap.

I know that you have in your head that it will last longer that way before going flat, but you're wrong. Let me explain what happens. The bottle wants to return to its natural shape. The only way it can do this is to fill the empty space with gas. The only gas available is in solution (the fizzy part of the soda). If the gas comes out of solution, the soda goes flat.

If you really want to keep your soda "fizzy" longer, right after you buy it put it in the frig. After you open it the first time, pour your drinks then reseal the bottle without squeezing it, and put it on the countertop. When the cool liquid warms up, it will expand, keeping the air pressure within the bottle high and keeping the "fizzy" in solution. Of course this only works the first time. After that, you're on borrowed time like the rest of us.

Just please, please, please... stop squeezing the bottle!!!!!

Celebrating Dan

As CBS ramps up toward the celebration of Dan Rather's final broadcast on The Evening News, we will no doubt be exposed to all of Dan's "glorious" accomplishments and all the history that he has reported to us by being the man on the scene. However, not everyone is quite so impressed with Mr. Rather's career.

Philip Chalk of The Weekly Standard writes:

Eddie Barker, for one, remembers. The news director for CBS's radio and TV affiliates in Dallas at the time of President Kennedy's November 22, 1963, assassination, Barker is widely credited with first reporting on the air that the president was dead, having received word through a doctor acquaintance directly from the hospital ER. Rather, then based in Dallas as a reporter for CBS's national news broadcast and working out of Barker's newsroom, later took credit for the scoop, Barker says. The error is repeated in historical accounts often enough to annoy the now-retired Barker, though he says the falsehood was later acknowledged by Rather.

But that wasn't the lie that got Rather out of local news in Dallas and an eventual promotion to New York. No, Dan Rather is a bolder and more aggressive journalist than that. In a live feed to New York, bypassing his local editor, Rather interviewed a local minister and reported that children at Dallas's University Park Elementary School had cheered when told of the president's death. Nothing of the sort ever happened.

Approached earlier by the same minister with what was a second-hand account, Barker himself had run the story by the school's principal and some teachers, all of whom denied it outright. Because of the shooting, which took place at 12:30 p.m., the principal had decided to close the school early, though without telling the students why. The children at the school--including three of Barker's own--were merely happy to be going home early, he was told. There couldn't have been any spontaneous cheering at the news of Kennedy's murder, because no such news had been announced.

Will they mention in "Ode to Dan" that his attempted hatchet job of former Senator Bob Kerry was fabricated as well? And they say they are going to include Memogate, but how much culpability will actually be laid at the feet of poor St. Dan.

You know what, as much as I believe that the MSM is left leaning I still like Tom Brokaw. And Dan Rather, you're no Tom Brokaw.

UPDATE: Thomas Sowell writes on 3/11/05 of Dan Rather's departure:

Those who believe this might dig into the records of the CBS News broadcast of March 27, 1991, when Dan Rather said: "A startling number of American children are in danger of starving" because "one out of eight American children is going hungry tonight."

This was a crock -- but it was a fashionable crock on the left at that time and Dan Rather not only echoed but amplified a ridiculous "study" done by leftist activists. He probably didn't set out to tell a lie then any more than he did when he relied on forged documents to try to "get" President Bush on the eve of last year's election.