The study of economics, which is not by any standard a science, has many pitfalls and traps. It is full of many false assumptions that once become popular become the dogma of the professors who continue to teach them. One assertion that you will always hear in any introduction to macro or micro economics is that a two percent inflation rate is good for the growth of economy. Yet this statement, this assertion has never been proved. No Noble Laureate has ever written a paper, done any research, or otherwise lifted a finger to prove the truth of that assertion. The best we get is: “It’s true because I have a Nobel Prize and you don’t.” An appeal to authority has never proven two plus two equals five. We are taught about the beauty of the free market system as if it really existed. I have never seen one, have you? We are told that democracy depends of a free market system. I always thought that the basic definition of democracy is one individual one vote. It does not define who may and may not vote. Then there is Free Trade and Fair Trade. We are told that free trade exists when tariff barriers are removed and individuals and businesses may freely compete for trade that crosses borders. But just as markets are never really free, cross boarder trade is never free.
To understand this concept of why Free doesn’t exist one must start accounting for all of the barriers and the interference that exists in any market, local or cross border. Let us take our friendly farmers market. The farmer grows his produce and takes it to a stand by the road. You come along and buy what you want and can afford. There are other farmers who are doing the same thing and perhaps for the sake of convenience they put their tables in a specified area. Already we have a problem. The farmer at the entrance of the area has a distinct advantage. Buyers see him first and impulse buying favors his table. This also works if the farmers are spread out and limited to selling only in front of their farms where they meet the road. The farmer farthest from the center of town suffers a distance penalty. This is why national chain stores put so much research into finding what they believe to be the best location for a new store and why old stores are closed. Good location insures more business opportunities. Transportation costs matter. But continuing on, those farmers may use harmful pesticides and too much fertilizer, both of which are carried by water runoff into local streams, then rivers, and finally into oceans. Worse yet, the farmers may rely far more on supplies of ground water for irrigation instead of rainfall. Now we come to that point when in one form or another government, usually we think of it as an organization that serves the people, issues regulations and fines for violations. Public improvements for sanitation may be necessary and new deep wells drilled for sources of clean water. Further, the transportation costs go up because we want clean vehicles, taxes that reduce consumption of certain resources, and so on. That apple you used to buy for a nickle now costs a dollar and you can only buy it on Wednesdays. Do we really have a free market? We certainly have gap between those who have nothing and those who have something. Having something now costs a lot more, making poverty very expensive.
What have we learned so far? That there are always more costs or impediments to free markets that we first thought. That price tag on the item you want to buy only has one number. But what would it mean to you if it listed all the associated costs of bringing that item to the store for you to buy? I think it might complicate your life if you had to read through every line that defined each cost. In a way, it’s like thinking about productivity. Is that just getting the employee to work a little faster, produce goods at a faster rate? Is the advertising budget too large? Are you carrying a couple of incompetent marketing people? Maybe you have an engineer who tends to pick the second best way of design. Or perhaps a few of your managers are far less than effective. We tend to rely on simplification because the complexity overwhelms us. Thus we are sold on the existence of a free market, and by extension, free trade. Once again, when we think of free trade we think of little or no tariff on goods and services that are sold across national borders. We do not see that in an underdeveloped country where labor is very cheap that very labor is an advantage for the producer of goods and services. After all, it’s not his fault that you pay your people too much for too little work. Our businessmen don’t see the harm in polluting another country, in extracting resources for the least cost possible, and keeping a populace in perpetual poverty. Did you forget where your Apple iPod and iPhone are made? Those workers aren’t even making ten thousand dollars a year and their lives are not materially made any better for the work. So where’s the free trade? It comes at a very high cost. We strip our own country of manufacture and other work and ship it to underdeveloped countries where the population only realizes a marginal improvement. More and more of our people go unemployed or under employed each year. Only the international corporations are benefiting, not the average individual in any of the countries involved. No wonder we have an increased disparity in wealth not only in the developed countries but also in the undeveloped countries.
Fair Trade is just a cross between free trade and morality. We preach responsibility by showing that we are bettering the lives of a chosen few and engaging in sustainable production and growth. So we hike up the prices a bit while promoting moral gloating. Fair Trade is only for those who can afford to buy at higher prices. If one is living close to or under the level of poverty one buys Maxwell House coffee and now whole bean from fair trade importers. Fair trade is a deliberate distortion of trade. It has a cost that is not sustainable on a higher lever of production. Supply and demand determine the point at which individuals will pay a particular price. Paying a living wage, what ever that might be, will disturb that price if the living wage is more than what others would willingly work for. This is a wage/price push. When you raise the cost of wages the price must rise to recover those costs. But in doing so you run the risk that the now higher price will reduce demand, meaning that supply must adjust downwards. This is what unions do, they price themselves out of a job.
Once again, the world economy is a closed system. But within that general closed system we have a number of economies acting as open systems with unlimited growth. This creates severe dislocations over time. For the moment it is very difficult to conceive of a method by which we might better measure and manage the affects these subsystems have on the whole. But the major key to understanding and controlling some of the harmful effects is to understand and limit the creation of credit. Again, so many economists, meaning those with PhDs and who should know better, do not see credit as money. Yet it spends just like money. You have a credit card? What, besides love, can you not buy with a credit card? The issuance of credit is the creation of money. You do not have to spend all the cash in your checking account just as you do not have to use your credit card to purchase everything. The difference is once cash is spent, it is gone. Once credit is spent we are left with debt which is a claim against future earnings. This is the major problem with credit, it tends to interfere with free markets, makes them less free because it artificially inflated demand. Real economic growth comes from the expansion of the population of individuals who can pay for what they consume, not from those who constantly live beyond their means.