I Pencil by Leonard Read “I am a lead pencil – the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.... Simple?

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I Pencil by Leonard Read

“I am a lead pencil – the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.... Simple? Yet, not a single person on the face of this earth knows how to make me.”

I Pencil• “The lesson I have to teach is this: Leave all creative

energies uninhibited. Merely organize society to act in harmony with this lesson. Let society's legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed.”

Some basics of econ

WHAT IS CAPITALISM?

first, what is capital?

capital

• Cash or goods used to generate income either by investing in a business or income property

capital

•Cash or goods used to generate income either by investing in a business or income property

•The net worth of a business; that is, the amount by which its assets exceed its liabilities

capital

•Cash or goods used to generate income either by investing in a business or income property

•The net worth of a business; that is, the amount by which its assets exceed its liabilities

•The money, property, and other valuables which collectively represent the wealth of an individual or business

capital

• Cash or goods used to generate income either by investing in a business or income property

• The net worth of a business; that is, the amount by which its assets exceed its liabilities

• The money, property, and other valuables which collectively represent the wealth of an individual or business

• Human resources considered in terms of their contributions to an economy

capitalism

capitalism

• A broad economic system where competition in a free market determines the price, production and consumption of goods and services through the “invisible hand” of supply and demand

Invisible hand• The idea that people acting in their own self interest in a

free-market, price-controlled economy, can benefit society even without intending to. Describes the self-regulating nature of the free market.

• “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

capitalism


• Capital, property and enterprises are privately owned and managed for a profit

capitalism


• Capital, property and enterprises are privately owned and managed for a profit

• New enterprises may freely gain market entry without state restriction

capitalism

• Employment and wages are determined by the market and there will be some unemployment

capitalism


• Some government intervention is necessary to guard against price fixing and collusion by producers

capitalism


• Some government intervention is necessary to guard against price fixing and collusion by producers

• The capitalist economy will likely follow a cycle of growth and recession

capitalism

• Several basic forms:

capitalism


-- Mixed (state intervenes in market activity and provides some services)

capitalism



-- Laissez-faire (state plays minimal role)

capitalism



-- Laissez-faire (state plays minimal role)

-- Anarcho (markets completely free from state)

What are the world’s freest economies?


• Hong Kong, 20th consecutive year


• Hong Kong, 20th consecutive year• Singapore, Australia, Switzerland, New Zealand


• Hong Kong, 20th consecutive year• Singapore, Australia, Switzerland, New Zealand• Canada, Chile, Mauritius, Ireland, Denmark

What about the U.S.?

What about the U.S.?• U.S. is 12th, down from 10th in 2013• “The U.S. is the only country to have recorded a loss of

economic freedom each of the past seven years… Substantial expansion in the size and scope of government, including through new and costly regulations in areas like finance and health care, has contributed significantly to the erosion of U.S. economic freedom. The growth of government has been accompanied by increasing cronyism that has undermined the rule of law and perceptions of fairness.”

what are world’s most restricted economies?


North Korea, Cuba, Zimbabwe


North Korea, Cuba, Zimbabwe

Guess which are three of the poorest nations in the world?

WHAT IS SOCIALISM?

socialism• Broad economic system in which the major enterprises

are either owned or controlled by the state


are either owned or controlled by the state• Some socialist societies direct the economy through a

national plan, but most favor a mixed economy of public and private ownership


are either owned or controlled by the state• Some socialist societies direct the economy through a

national plan, but most favor a mixed economy of public and private ownership

• Others (Social Democrats) advocate social welfare programs in a mainly market-based economy

socialism• Private property and private ownership of capital typically

is restricted


is restricted• The state usually decides what is produced, prices,

incomes and levels of production


is restricted• The state usually decides what is produced, prices,

incomes and levels of production• Often, unemployment is abolished and employment is

guaranteed for life

socialist countries?• Would include Venezuela, Bolivia, Laos, Syria, Belarus,

Turkmenistan, Zambia


Turkmenistan, Zambia• Lots of social democratic nations including Sweden,

Netherlands, Norway, Finland, U.K.


Turkmenistan, Zambia• Lots of social democratic nations including Sweden,

Netherlands, Norway, Finland, U.K. • Do we now include U.S. among social democracies?

U.S. owned/controlled companies• Fannie Mae, Freddie Mac, Amtrak, General Motors,

Corporation for Public Broadcasting• Current administration financing hundreds of “green

energy” companies… many of which are operated by cronies. Solyndra, A123, Amonix, Bright Source, Solar Trust of America, LSP Energy… all at room temperature

WHAT IS COMMUNISM?

communism• The evolution of socialism

communism• The evolution of socialism• The role of the state has withered away and is no longer

necessary for the functioning of the planned economy


necessary for the functioning of the planned economy• All property and capital are collectively owned and

managed in a communal, classless and egalitarian society


necessary for the functioning of the planned economy• All property and capital are collectively owned and

managed in a communal, classless and egalitarian society• “…from each according to his ability, to each according to

his need…”

communism• What are some communist countries?

communism• What are some communist countries?• Cuba, North Korea, China, Vietnam

communism• What are some communist countries?• Cuba, North Korea, China, Vietnam• China and Vietnam are run by the communist party but

have mixed economies; even Cuba has reduced its state employment by 500,000 people and its permitting green shoots of capitalism

The rise and fall of businesses

“...it is not what money the business owner hopes to make or whether he succeeds, but how all this affects the use of scarce resources which have alternate uses – and therefore how it affects the economic well-being of millions of other people in society at large.”

“More important than the fate of (any business) was the fact that millions of people were able to afford a higher standard of living than if they had to be supplied with goods through costlier channels…”

Profits and Losses

Profits and Losses• Why are losses as important as profits?

Profits and Losses• Why are losses as important as profits?• Each is equally important to force companies and

industries to use SRTHAU efficiently

Profits and Losses• Why are losses as important as profits?• Each is equally important to force companies and

industries to use SRTHAU efficiently• P&Ls tell companies when they have to make changes

Profits and Losses• Companies set up to make money in a particular set of

circumstances can get left behind: A&P, Blockbuster, FAO Schwarz, U.S. Steel, Old Navy, Barnes & Noble, Sarasota Herald-Tribune

The three major changes companies

need to make

Social changes

Social changes• Refers to changes in society that demand a response

from businesses


from businesses• A&P missed social changes: urban to suburban trend,

proliferation of autos, needs for parking, larger ‘rings,’ didn’t follow customers when they left inner cities


from businesses• A&P missed social changes: urban to suburban trend,

proliferation of autos, needs for parking, larger ‘rings,’ didn’t follow customers when they left inner cities

• What social changes did Blockbuster miss?

Social changes• Not important whether A&P made changes, what’s

important is that consumers got cheaper groceries

Social changes• Not important whether A&P made changes, what’s

important is that consumers got cheaper groceries• Consumers are principal beneficiaries of lower prices

made possible by the more efficient allocation of SRTHAU

General principle• Knowledge is one of the scarcest of all resources in any

economy… insights based on that knowledge are scarcer still



• Market research departments



• Market research departments• Politicians and central planners cannot have the

knowledge and insights of millions of people acting in their own self-interest

Sowellian insight

“One of the big advantages of a free market is you don’t have to convince anybody of anything. You simply compete with them in the marketplace and let that be the test of what works best…”

The three major changes companies need to make

Economic changes

Economic Changes• Not only changes in the economy, but also changes within

the firm’s management, especially in their response to economic changes



• Lotza stuff we take for granted was fought: credit cards, computerization, answering machines, ATMs, on-line shopping, etc.



• Lotza stuff we take for granted was fought: credit cards, computerization, answering machines, ATMs, on-line shopping, etc.

• Some people are successful in certain economic conditions, not in others

Econ Changes, round 2• No economic system can depend on the continuing

wisdom of current leaders


wisdom of current leaders• Price-coordinated economy with competition does not

have to because leaders will be forced to change or be replaced


wisdom of current leaders• Price-coordinated economy with competition does not

have to because leaders will be forced to change or be replaced

• Society that can tap all kinds of talents throughout population has obvious advantages over controlled economies

The three major changes companies need to make

Technological Changes

Techno changes• Manual typewriters, film cameras, faxes, newspapers,

land lines, VHS, cassettes, cash, checks, etc.

Techno changes• Manual typewriters, film cameras, faxes, newspapers,

land lines, VHS, cassettes, cash, checks, etc.• Up to business leaders to make the changes… or hire

people who will• Business leadership not only impacts individual

companies, also economy as a whole

Coordination of Knowledge

Coordination of Knowledge• No matter whether socialist or laissez-faire, knowledge is

scarce, the totality of which is not known to any one person



• Free-market biz exec: receives instructions from marketplace about prices, what’s popular, trends



• Free-market biz exec: receives instructions from marketplace about prices, what’s popular, trends

• Gov official: gives instructions about same

Assignment 2/11• Chapter 6 “The Role of Profits – and Losses”

Assignment 2/11• Pick out a successful publicly listed company you admire

such as Facebook, Wal*Mart, Apple. Research the company via its website, investor commentaries, annual reports, etc. Write a 400-word essay entitled “Why _____ is well positioned for future growth.” Cite how it is adapting to changes, use of economies of scale, profit margins, marketing, its leadership, etc. The idea is to demonstrate your Sowellian knowledge. Dazzle me…

Brand vs company• Sprite is a brand of the Coca-Cola Co.• Apple Inc. is a company, which markets the iPhone, iPad,

Mac and other brands• Tropicana is a brand of PepsiCo• Amazon is a company• Companies that are public have their stock listed and you

can track them by symbols: AAPL, KO, AMZN, PEP• Ergo, your company will have a stock symbol!

Documents

I Pencil by Leonard Read “I am a lead pencil – the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.... Simple?