Thanks for the well-thought-out article — I certainly found nothing to argue with in it...
But (and there’s always a ‘but’, isn’t there??) I suggest that there is a more basic lack of understanding that, unfortunately, isn’t entirely limited to the Liberal sphere..
“Wealth” is not the same thing as “Money”....
It’s something that I (not a trained economist) have managed to figure out from applying a bit of common sense to observation, and maybe you can provide a *Conservative* Economist’s view....
President Bass Ackwards actually thinks the public sector supports the private sector and not the other way around.
I support making 'money' not jobs. If jobs are created from making money, it is proper.
Alot of companies are doing extremely well in the recession, and they have cut lots of 'jobs', but are making money. They have streamlined and developed their production and service.
Secondly. It is not only Solyndra and other top down creations that are the problem.
Our central planners have been picking and choosing winners for way too long. They target home buyers with tax incentives and other 'winners' instead of simply cutting taxes for all. This targeted approach leads to bubbles and other distortions in the market.
When the guy goes up to look at the rooms the manager takes off with the money and pays the hotel bill to the baker who supplies the hotel with donuts and baked goods.
The baker then takes the money and goes and pays his grain supplier for goods owed.
The grain supplier then takes the money and goes and pays his bar bill at the local tavern.
The tavern owner then pays the local lady of the evening money he owed for services rendered.
Then lady then takes the money and goes back to the hotel to pay for rooms she owed on.
The guy comes down to the desk clerk and says the rooms are unacceptable and is then given his hundred dollars back.
That's how the private sector is understood by Libs and Dems.
I agree with the article, but it stopped short. This would be a good place to have included an explanation of the difference between gross revenues and profit.
TV shows and news media do a major disservice to the public by misusing the term “profit”. Examples are the “Auction Hunters” and similar type shows. The text and discussion at the end of the show presents the amount the successful purchasers paid for the items auctioned and the amount they received when disposing of them, with the difference in the two amounts being called “profit”. Since the participants in these shows have other expenses, at best the correct term would be “gross profit”. In the show referenced, Ton and Alan have some other expenses that eat into their gross profit: the cost of their transportation in the van they use to travel across country, the cost of the van, the cost of the lodging and meals, etc. We’ll call these indirect costs “overhead”. Once the overhead costs are subtracted from the gross profit, net profit results - and it’s usually nowhere near the extreme amounts presented as “profit” on these shows, adding fuel to the liberal misrepresentation of just what is meant by profit.
I work for a government consultant. A rule of thumb overhead cost for companies in my business sector is around 150% of direct labor costs, give or take. This means that these companies - to even break even - must take in actual labor costs plus the 150% of direct labor costs just to break even. Our profit margins are not very high, by contract they range from about 10% to 15% of total labor and overhead. But in actuality, it is very rare that the lump sum labor contract costs are not exceeded, due to inefficiencies, unforseen conditions, or mostly from the unwillingness of government client managers or their support staff to promptly provide the direction they’re contracted to provide. This means that in many instances firms actually lose money.
And those are the pure, cold, hard facts.
The Wealth Creation Process
This formula is an attempt to quantify the wealth creation process and identify the factors that are a part of creating wealth.
Where R = Resources; s = scarcity of those resources; K = Knowledge; a = applicability of that knowledge; P = Physical Effort; e = the expertise with which that effort is applied; I = Ideas; c = the inherent creativity of that idea; D = Demand; and W = Wealth
An understanding of the factors that make up the formula can explain the variance in the amount of wealth earned by individuals in any given creation scenario. A great deal of physical effort at a low skill level, for example, does not have the same effect as a good idea that is creative and unique. Likewise, a great deal of knowledge that is not applicable does not have the same effect as a smaller amount of knowledge that is directly applicable to a given endeavor.
Applying this formula to a CEO and a worker within the same company shows that even if the worker exerts a great deal of physical effort at a low skill level, he simply does not have the effect that a CEO with specifically applicable knowledge and creative ideas has on the overall amount of wealth created by that company. And neither worker nor CEO can match the effect that demand for their final output has in the overall equation.
Of the factors in the formula for wealth creation, only Demand can be zero. Many of the factors can be extremely small numbers, but each factor is required in some measure to create a product. The governing factor in the creation of wealth is the demand for that product or service. Satisfying a large demand creates a large amount of wealth. Producing a fantastically innovative product for which there is no demand creates no wealth.
Looking at the individual factors, the formula starts with Resources. These can be natural resources such as iron ore, they can be the product of a previous wealth creation formula such as component parts, and they can be capital or any of a number of different raw resources. While some wealth is created by stronger influence of ideas and creativity, the transfer of that wealth must always take some physical form and thus requires some resource. Even wealth that is purely idea based must be communicated through film or the printed page or on silicon. Conversely, a raw material may require little imagination or skill to bring to market but creates a great deal of wealth because it is in high demand.
The knowledge component of the formula refers to accumulated knowledge of processes and ideas. There may be little historical knowledge behind truly inventive ideas, but even the mundane knowledge of the marketplace within which the idea will be traded is required. The knowledge must also be specifically applicable to the process. A great deal of knowledge of French Literature is not as valuable in the construction of a building as the specific and mundane knowledge of waterproofing details.
Physical effort may not be a significant factor in the overall equation, but the skill with which that physical effort is expended most certainly is. I am reminded of an old joke:
A guy takes his car into the shop complaining that the engine is running roughly. The mechanic opens the hood and listens intently to the engine. After several minutes, the mechanic walks to his tool box and retrieves a ball-peen hammer. He leans over the engine and gives the motor a quick strike. The engine immediately begins to run as smoothly as the day it was made. The customer is amazed and asks What do I owe you?. The mechanic replies $500.00. The customer objects All you did was hit the engine with a hammer! That is true replies the mechanic, Im charging you $5.00 labor for hitting the engine and $495.00 for knowing where to hit it.
Next to demand, the factor that has the potential to change the outcome of the equation most is the creative idea that is at the root of any wealth creation. That creative idea may be as simple as a slightly better production method or as complex as imagining a brand new technology, but that idea is the foundation upon which all the other factors are built.
The wealth creation equation explains why the CEO earns a larger share of the wealth created than does the worker, but it also serves as a guide to which aspects of personal development will position a person best for being a more valuable contributor in the wealth creation process. Possessing knowledge is good. Possessing specific knowledge is better. Having physical ability is good. Developing that ability into a skill is better. Seeking fields that encourage creative problem solving and learning to apply your knowledge, skill and the resources available in a creative way can lead to vast amounts of wealth.
This equation does not measure such things as luck in the success of an endeavor, but merely measures the components of creating wealth. Obviously, if someone is at the right place at the right time to
write a brand new operating system for the first personal computers that IBM would produce, they have a very good chance of becoming the wealthiest person in the world. This equation does not measure such things but instead examines how, with relatively few resources, a great deal of specific knowledge of computers and the marketplace, a relatively small physical exertion but at a very high skill level and building on a truly revolutionary idea of creating a brand new language for computers at a time when the demand for those computers was about to skyrocket, an immense amount of wealth is created.