Business 100: Why Business Matters

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Coexistence 303: How To Teach

Economies transfer of goods and services throughout society

In effect, economics studies the transfer of things that people consider having value

  • Labor or effort placed into a product don’t define value
  • Value comes from how much a good or service adds value to others

Value is entirely subjective on an individual’s needs and wants

  • e.g., water is almost worthless most of the time but becomes worth everything after a few days of not drinking it

Choosing one thing sacrifices the opportunity to choose a different one (opportunity cost)

  • Even free things cost time or energy

Economic activity is a series of bartered exchanges

  • Someone trades something with someone else
  • Everyone benefits in some way after a trade
  • Everyone considers self-interests, even with selfless actions
  • Self-interested gain can come as economic, political, or social gain
  • Commerce perpetually brings dissimilar people together to coexist for mutual gain

Goods and services we can provide aren’t always apparent

  • Skills in operating, manipulating or creating something
  • Expert knowledge or training in a subject
  • Natural or farmed resources
  • Finished goods
  • Physical strength and energy
  • Free time
  • Networked connection with others

People only trade up, not down

  • People give up money or anything else they own because it has less value to them than what they’re trading for
  • People give things away because that item has less value to them than what they could profit off it or more value to them in building a relationship

One of our most valuable commodities is human capital

Human capital is the added total of your non-material assets

  • Human capital is the culmination of your knowledge, skills, health, and creativity

Education is the most significant investment in human capital and allows people to overcome hardship or loss

Formal education isn’t the only form of gaining knowledge

  • A college degree is more a type of “signaling” to wealthy or educated people that you’re part of their group and therefore worthy of a job
  • Education also includes vocational schools, apprenticeships, and self-teaching through podcasts and libraries (or reading this)

Most of the things we want and need are limited

The scarcity of goods and services we want requires us to trade for it with ours

Since most people aren’t willing to trade for more butter, wheels, or guitars than they’d want, money is a medium of exchange

  • $1 or 1 is a universally agreed-upon amount that could trade anywhere
  • Generally, items become more tradable the less they are useful

Supply and demand capture how much things cost

  • When everyone demands more goods and services than supplied, the price goes up
  • When everyone demands fewer goods and services than supplied, the price goes down

Supply and demand also determine how much of a product to make

  • The markets accommodate demand from a combination of rising prices for high-demand items and competition with other people willing to sell their goods and services
  • The tendency of the market to correct itself is known as the “invisible hand” of the marketplace

Transaction costs add costs to trade including the cost of delivering items, taxes, fines, loss from theft or damage

Business is any trade with a mutual self-interest

Every time someone trades a good or service, both people are doing business

The purpose of business isn’t “making money”

  • The purpose of a business is to maximize profit
  • Maximizing profit requires businesses to inspire others’ trust
  • Income inequality comes from the differing values various jobs provide the rest of society

In capitalism, companies and individuals that add value to others grow progressively wealthier

Entrepreneurship and corporate management aren’t at odds with charitable giving

  • In capitalism, entrepreneurs find ways to fill society’s needs and make money in the process

The more people, the more specialized the skills

People make goods faster and perform services better with specialized work

  • Each person can specialize in trading their goods and services and become highly proficient at their tasks

In groups, work can break into component tasks

  • Everyone dedicates time to one task or section of work and life becomes more convenient for everyone
  • More people create more specializations, which allow for more complex goods and services

Unskilled workers are low-wage and have a difficult time entering the workforce

  • Minimum wage jobs are usually entry-level for most specializations
  • Minimum wage laws cut out unskilled workers from receiving necessary experience
  • Raising minimum wage also creates a more difficult environment for smaller companies to compete

Technology makes our world cleaner, more productive, and wealthier

  • Technological innovation increases the supply of both goods and services
  • Technology and knowledge reduce the resources we need to produce what we want
  • Though technology renders some jobs obsolete, it also creates many others

All derivatives of Marxism (socialism, communism) believe in abolishing private property

Everyone consumes public goods

  • Public goods can be police, parks, lighthouses, public bathrooms, and clean air

People tend to take better care of things they own

  • When nobody owns something, everyone has less incentive to take care of it
  • If everyone shares a resource, nobody gains a personal benefit for its upkeep
  • The decay of public goods is known as the “tragedy of the commons”

Many public goods have private versions of their goods and services

One of the solutions for the tragedy of the commons is to introduce private property rights

  • The ability to profit from private property promotes the public goods’ sustainability

Some economists believe that the market shouldn’t dictate the cost of a legitimately worthwhile good to the public

  • The general idea is that if maintaining something society needs is unprofitable, the government and taxation should provide it
  • e.g., nobody should haggle with a firefighter before putting out a house fire

Governments make free markets more complicated

The public sector (government, non-profits, schools) has an ideological battle with the private sector (companies, businesses)

Governments mix into competing philosophies of centralized planning and emergent order

Centralized planning is when an organization or individual controls an entire social system or society

  • Most central planning in real life falls to politicians and bureaucrats
  • Central planning believes that experts should manage everything

The farthest extreme of centralized planning leads to fascism or communism

  • Both fascism and communism placed experts in charge of managing all aspects of life
  • Centralized planning on a large scale often fails spectacularly
  • e.g., The Soviet Union would set prices so high nobody would buy them or so low everyone bought multiples of them
  • The world is far too complicated and chaotic for professionals to manage from the top down
  • Centralized planners can’t master specialized and specific tasks

Emergent order believes that each person can create individual order and structure adequately enough

  • What appears to be a chaotic swarm of individuals doing unrelated tasks are more like an accidental orchestra assembling itself without a conductor

Most countries mix centralized planning and emergent order

  • A tax system is a type of centralized planning

Government and academic cultures operate differently than private markets

Government and academia are naturally risk-averse, while entrepreneurs and new industries require risk

  • Any new venture is a risk of leaving a safe job, sacrificing assets, investing money, and devoting time

Academics and government workers gain merit from intelligence or compliance instead of providing raw added value

As a result, academic and government mindsets are often at odds with job creation

  • e.g., bureaucrats don’t want to approve things that might kill people, even if they may save lives

Governments, like corporations, aren’t monolithic entities

They are a collection of people with separate ideas and personal motivations

Each person has a stake in helping their constituents gain (more on large-scale leadership later)

Therefore, politicians vying for re-election focus on their constituents’ benefit instead of the general public good

Individual motivations magnified to a massive government body can spend vast sums of money on niche needs (concentrated benefits and dispersed costs)

  • A $10 million subsidy to a small community is a significant amount, but a few cents across 300 million people doesn’t feel like much
  • However, a few cents at a time for many programs can become burdensome for everyone
  • All of this redistribution comes with the self-interested paradox that everyone hates congress but loves their congress member
  • On top of that, some politicians are evil while others are incompetent

Governments try to solve society’s problems

Everyone can consider solutions to today’s problems, but nobody can think of answers to issues that don’t exist yet

History continually refutes stories of civilization rendering society uninhabitable

  • e.g., economists once projected that New York City’s population growth would drown everyone in pony poop in thirty years

Though people are excellent at seeing society’s future problems, they usually fail to imagine future society’s answers to those problems

Governments often adhere to “government paternalism” philosophy

People may vote for leaders, but government paternalism believes they can’t correctly decide their best long-term interests

Unfortunately, government leaders are also human

  • Politicians stay human even after they come into power

Chaos and disorder can erupt from overly rigid and planned government involvement

Governments may set prices on goods and services to discourage or encourage consumption

If the government sets the price too high, suppliers have to waste the product because nobody buys it

If the government sets the price too low, nobody would have a financial incentive to make the product available and would create a shortage

Most economic activities develop costs for unrelated third parties (negative externalities)

Negative externalities could be pollution, damaging public goods, speeding on a highway or publicly consuming a drug

The government often shifts negative externalities from an economic incentive to a criminal matter

Governments tend to micromanage and tell people what to do along with how to do it

  • Describing how people must do something stifles innovation and creates waste
  • e.g., Japan built a more ecologically friendly car in the 1980’s, but it wasn’t sold in the USA because it didn’t have a catalytic converter

Beyond negative externalities, governments can often create unintended consequences

  • Unintended consequences are entirely unforeseen by those who performed the action
  • e.g., African nations receiving consistent food aid stop farming for food

Markets often compensate for government intervention with illegal (black) markets

Since illegalization doesn’t change every individuals’ motivation, a black market for illegal things is inevitable

Since no government or public attention regulates a black market, strength defines trade

Black market risks make items more profitable, enterprises more expansive, and higher chances of fatality or injury

Markets regulate evil in the private sector, but large companies often corrupt governments

Governments can give benefits to large companies while harming smaller ones without connections (crony capitalism)

Large companies can influence legislation to carve out markets for themselves and squash competition (regulatory capture)

Companies can form a scenario to solidify a market

  1. Someone dies consuming a product
  2. The largest company that creates the product sends an army of lobbyists to the government demanding they do something
  3. The government passes laws which mandate safeguards that the large company already has

Learning business is learning how to trade

Knowing how to conduct business enables us to trade our goods and services for more than if we only knew our respective skills

Accounting is effectively the language of business

If you ever intend to work as an employee, you need to know how to search for a job

If you’re willing to take the risk, you can even become an entrepreneur

Next: Accounting Summarized