THE FOUNDATION OF THE ECONOMY IN THE UNITED STATES

New Concepts
Economic Evolution Economic Equality Economic Freedom Economic Efficiency

POINT/COUNTERPOINT THE WORLD SERIES CAN'T HAVE TWO WINNERS

POINT: Who ever heard of a race designed so everyone started under different conditions, but finished equal? What would the World Series be like if the losing team was always spotted enough points to insure a tie? It makes no sense. As long as everyone who chooses to participate in the economy has equal access to that economy, it is enough to guarantee the equal opportunity to participate. It is not essential to guarantee that everyone will end up with the same rewards for that participation. If a person selects a certain career or even decides not to work, that person knows the economic consequences of the decision and does not expect the same results as someone who made a different economic choice. The person who decides to become a retail salesperson does not expect to earn what a medical student expects. As each person is making a different contribution to society, the rewards will and should vary. Guarantee an equal start in the system, but then allow abilities, effort and interests to determine the ultimate results.

COUNTERPOINT: It's unrealistic to assume the only equality necessary is equal access to the economic system. Some people are not endowed with opportunities equal to others. The offspring of a wealthy person schooled in the best prep schools and colleges is entering the system at a very different position than is the urban ghetto resident. The chance of birth, not ability, makes economic opportunity inherently unequal. Therefore, despite what might seem ideal, reality dictates that other adjustments to the system must be made for those who are not as "equal." Some social programs to redistribute wealth and opportunity are necessary to help equalize a person's ultimate position in life.

THE FOUNDATION OF THE ECONOMY IN THE UNITED STATES

The system of economics that we have in the United States today is very complex. The interrelationships among the various businesses, political groups and individuals are enough to boggle a person's mind. There are many organizations competing for control, competing for resources, competing for tax dollars, and ultimately competing for the success or failure of economic ideas. How did the system become what it is today? It takes years to understand the system and trace the history of the system. Our look at the economy will touch the surface.

With that in mind, let's ask a few basic questions. Why is the system as it is today? How did it get the way it is? How does it evolve over the years? Will it remain as it is now in the future? All these questions ask essentially the same thing. They ask for an understanding of the evolution of the economic system and the foundation on which that evolution is based. That is the topic of this chapter. There are two key ideas we will explore in this analysis. The first is evolution and the second is foundation.

Economic Evolution in the United States

The economic system in the United States has come to be what it is today through a gradual changing process. It has evolved. It has changed throughout the history of the country. This gradual change has come about through a growth process that has gone through many stages of development. Throughout this development, many economic ideas have been discussed. Some of the ideas have eventually been integrated into the system, some have not. For example, in the thirties, there was a good deal of discussion about the advantages of a communist, planned economy but the ideas were not seen as compatible with the system in the United States and have never been adopted. Some ideas have been integrated into the system, have proven successful, and have remained a part of the system. Some have not been successful and were eventually eliminated. For example, federal troops were once used to break up union activity in the railroads because organized labor was viewed as contrary to the

economic goals of the system. We don't see that sort of government activity today. At one time only men could vote for the people who would eventually determine economic policy. That idea has fallen away as well. Change in the United States economy has been slow and relatively peaceful. It has been the result of discussion and input from many people and groups with differing opinions. Of course, there are times the discussion has not been so peaceful and times when a demonstration or even violence replaced the discussion altogether. Considering the possibility for truly violent change in the world, the growth of the system in the United States has been remarkably peaceful.

Change in the economy of the United States has been evolutionary rather than revolutionary. The changes that have come about have been changes that have grown within the system rather than being changes forced on the system by any single group. So the economy that we know today is the result of thousands of adjustments. It is the result of many experiments. Some of the experiments were successful and some were not. Some of the ideas become part of the system and some are rejected. It has been a relatively stable, peaceful series of changes. As we begin to look at the economy and the future, we should keep the idea of economic evolution in mind.

From what you have read so far, a few key questions should be forming in your mind. We have mentioned ideas are discussed, tried, sometimes rejected, and sometimes accepted. What is it that triggers this discussion? How do we decide to try an idea? If we decide to adopt an idea, how do we determine whether the idea is successful? In other words, what are the criteria that help us see problems, trigger discussions about changes, help us evaluate the changes, and then decide what to do?

Asking about appropriate criteria may seem elementary, but it is not. For example, we may look at the fact that at any time some percent of the people in this country who would like to work can't find a job. We call it unemployment. Is it a problem? Our immediate reaction is to say, "Yes, unemployment is a problem!" But it is not that easy. To the unemployed it is a very serious problem. To the employed it is not so serious a problem. To some of us, it demands lots of attention. To others, it is not so urgent. So, on an individual level, it may or may not be a problem and yet, on a national level, we agree it is one of many problems. How is it that we agree? What tendency toward agreement is there that bonds us together in the definition of certain situations as problems?

The Economic Building Blocks

From the very beginning of our nation we have felt there are certain standards that the system must protect. In the Declaration of Independence they were called "unalienable rights." Groups of people from all over the world came to the United States to form this country. They settled in different places with varying life styles, but all seemed to agree on a few basic economic principles regardless of what they may have disagreed about. There certainly was disagreement about the application of the standards, but not about the standards themselves. For example, early settlers agreed that people had the right to be free. But did that apply to slaves and indentured servants? So they agreed on the freedom concept but not on its application. Today most Americans feel we should attempt to minimize unemployment. But we don't necessarily agree on what minimize means. We have, throughout the years, come to agree on three basic standards: Equality, Freedom, and Efficiency. These shared standards have formed the foundation on which our system has evolved.

Equality: When we think of the word equal, we think of the word same. We look at the economic system and we realize that equality can mean many things: equal jobs, equal pay, equal rights. All these and more can be equal. What our economic standard of equality means is that we ought to have the same opportunities to participate in the system as anyone else. The degree to which we participate is our decision, but there should be no factors in the system other than our abilities and interests that limit our equal participation.

We also realize our equal chance to enter the system depends in large part on our abilities and skills and these tend to depend upon our education. Early settlers often made schools a priority and the results are visible today. Each person, if he or she is to be an active participant in the economy, needs to know how the system works and to acquire skills that are used in that system. If those skills are to be acquired, school must be available to all. We know, however, that schools are not equal today. People do not get the same education and do not have the same opportunities once they complete school.

In addition to unequal schools, people are not treated the same because of race, gender, religious, and age differences. Therefore, we have a problem. But our problems arise because we have not achieved equality, not because we don't believe equality is important. If we didn't believe in equality, these prejudices would not be problems. After all, if we believed men should earn more than women for similar jobs, the fact that they do would not be anything to worry about. The fact that we do worry about inequalities in our economy confirms our belief in equality as an underlying standard.

Equal access to the system is coupled with equal participation in the system. As we begin to look at economics, we should keep in mind that much economic legislation is designed to build more equality in the system. The equality standard is constantly in a state of development through the courts, through new legislation, and through new applications of old legislation. The development of the equality standard is one part of the evolution of the system.

Freedom: The Preamble to The Constitution says one reason for the creation of the United States was to "secure the blessings of liberty". Liberty or freedom is the second major standard. We believe a person ought to be economically free. Each of us has needs and wants that only we can define and, because of the unique nature of our needs, we feel we ought to be free to satisfy them as we choose. Your hunger is your business to satisfy. You may prefer fruits and vegetables while someone else may prefer a cheeseburger. This freedom to satisfy your own wants and needs is critical to the United States economy.

However, freedom to satisfy needs is very broad. We will limit our discussion to economic freedom. Economically, a person should be free to earn an income and to spend that income without any interference. Whenever there are rules about how an income is earned or spent, some freedom is lost. Now, in all likelihood, a person spends income first on basic necessities such as food, shelter, and clothing, later on some extras, and eventually some luxuries. Should a person have money left over, that money can be saved if the person desires. If an economy is entirely free, people decide which goods to buy, which way the needs are to be satisfied, and how much should be saved to be spent later.

In addition to spending freely, we also feel a person should be free to determine what career he or she wants. While it may sound peculiar, this implies a person owns his or her ability to work. It sounds peculiar because we are so accustomed to feeling this freedom that we seldom think it could be any other way. But it is not necessarily that way throughout the world. In some nations, one's ability to work might be considered a national property rather than an individual right. It is the case in some nations that a person is channeled into a profession where that person appears to have a talent, rather than allowing the person to define his or her skills.

In the United States we assume people can decide on a career and then seek out the necessary schooling or training. Or, in some cases, a person may choose not to work at all. However, it is a free choice. Once a person has the job, he or she ought to be free to advance in that job and be paid the same as others doing the same job. Every person is entitled to the freedom to make the decisions that are crucial in his or her economic life.

In economics, income allows a person to satisfy needs and wants which, in turn, provides a particular standard of living. The standard of living of a nation is found by calculating the average income. This assumes each person earns the same amount when, in fact, income is not equally distributed in any country. By determining what share of income goes to different groups within a society, it is possible to get a picture of how that income is shared. Clearly it will not be shared equally.

For example, assume a nation has one person earning $200,000, one person earning $50,000, and three people earning $10,000 each. The average income in this nation is $56,000. However, four of the five people in the nation do not earn as much as the average. Another nation has one person earning $60,000, two people earning $40,000, and two people earning $20,000. The average income in this nation is $36,000. Average standard of living measured by average income, or per capita income, is lower in the second nation but the average individual is better off in the second nation because there is much more equality in the distribution of the income. An ongoing problem in economics is to develop statistics that reflect the nature of a problem, rather than just the numbers of a problem.

It is important to recognize that income only provides the means to choose a standard of life; it does not determine a particular lifestyle. It merely provides the means to a quality of life. Therefore, a person is free to select a job which provides an income which allows the person to select a certain standard of living. That income is, in essence, freely chosen. So a person can freely define what is important in a job and then choose a job which most satisfies what is important. An individual is free to work or not work, free to choose the type of work, and free to choose how to spend income.

Now, in all likelihood, some questions are coming up. First, we have talked about equality but point out that people are not equal. Some people do have more opportunities than others; some do have access to a better education; some have more access to all sorts of chances and much of this may depend upon income. Second, we have talked about freedom and yet we know a person is not free to choose any career or advance in that career because of different skills or bias. More obviously, perhaps, we are not free to spend our income. Taxes are first withdrawn and we are not free to decide how much should be paid in taxes. So, it appears we want to be free and equal but are neither.

What is the problem? The problem is that by being completely equal, we would not be as free and by being completely free, we will not be equal. For example, if we are equal, all incomes ought to be the same, but that would take away a person's freedom because a person would no longer be able to define needs and wants and then secure an income to satisfy those needs. If a person wanted a yacht and was willing to make the sacrifices necessary to secure a job that paid enough to buy that yacht, that person should be free to do so according to a freedom criteria. But if all incomes are the same, then yachts may not be accessible to anyone regardless of job choice. In fact, someone else would have defined the person's ability to satisfy needs.

The other problem, of course, is that if we were completely free, we would not be equal. Some people would acquire great wealth at the expense of others and thereby become "more equal." The result is that we sacrifice some freedom for more equality and we sacrifice some equality for freedom. Hopefully our choices have given us as much as possible of each since it appears all of both is impossible.

Efficiency: We have one final standard in the foundation on which our economy is built. We believe in economic efficiency. What exactly does this mean? It means that everything we do involves two factors. First, there is an economic cost and second, there is an economic benefit. Because we have already said people are free to make decisions, we assume they are intelligent enough to be able to evaluate the alternatives in every decision they make. After all, if they were not intelligent enough to make decisions, then they could hardly be trusted to make choices, and should not be free.

Based on the idea of economic efficiency, a person will balance the costs against the benefits and make the decision that delivers the most benefit for the least cost. Along the same lines, a person would not do something that had a cost which exceeded the benefit. For example, you would not borrow money at 8% and turn around and invest it at 5%.

Costs involve more than just the amount of dollars paid for a product. Dollars, in fact, really represent opportunities and a dollar spent for one thing means that the chance to do something else is lost. For example, consider education after high school. A person pays a certain tuition cost which, whether it's a public or private school, rarely matches the actual cost of the education. But from the point of view of the individual, the amount spent on tuition means that the chance to buy a new car is lost. The cost of school, then, is really a car, or, the cost of a car is a year of school. Another cost is even more subtle. There is the additional cost involving one's time. A person is paying a certain price in time used to go to school which means that time cannot be used on something else like playing tennis or working.

The person is paying what economists call an opportunity cost because the opportunity to do something else is lost by choosing to go to school. The value of that opportunity cost can be calculated only by the individual. So the cost to the person involves the chances given up to buy other things or time to do other things.

Benefits, on the other hand, involve more than just a physical product. They include the services that product will perform and maybe even extra status. Why, for example, would a person buy a pair of jeans for $85 when jeans can be had for $30? Some of the additional benefit is in better materials and the quality of the work, but some of the benefit is just the feeling one gets from wearing a certain label. Some of the benefit may come from the shopping experience which is likely in a fancier store. Some of the benefit may be a trophy effect. I can afford to spend that much.

As with costs, the extra benefits take on many forms. The economically efficient person adds all the costs and matches them against all the benefits before making a purchase. By and large, we do this in hundreds of transactions a day and it is such a mechanical process that it only takes a few seconds for most purchases. Which can of peas do we buy? Which candy bar should we buy from the vending machine? Do we bus or walk today? Should we carry an umbrella or not? In all cases we weigh benefits against costs.

We get in to some more complicated applications of the benefit/cost tradeoff when we begin to look at those things that we collectively pay for and collectively consume. If the city is contemplating paving a walk around a lake at the local park, it will involve extra tax dollars. How much is it worth to the citizens of the town? Some would say that it's worth nothing since they never go to the park. Neighbors of the park may say it's worth quite a bit as it will keep dust down. Regular users may say it's worth a lot since it would make the evening stroll so much more pleasant. Business leaders might say it is a community asset that would help lure customers into town. Balancing these diverse benefits against a cost is nearly impossible. We could ask citizens to contribute what they thought appropriate, but this seems impractical since many citizens may not see the total benefits they will get. Does the resident who never uses the park see that by luring more business into town the paved walk may actually help keep his or her grocery prices down? We could ask each person to pay a fee upon entering the park, but some people will benefit without ever entering the park

What must happen is that some group, such as a city council must make the decision based on input from several sources. If the decision was wrong and a majority of the citizens don't feel the extra benefit justified the tax, the council members can be voted out of office. What we have done is to develop a technique whereby we can collectively make decisions about collective costs and benefits. The technique used is to match public benefits against public costs.

In the United States we have a system based on three principles: equality, freedom, and efficiency. The system has evolved over the past 300 years. Over that time we have come to recognize that all three standards cannot be attained fully, so we try to do the best with what is available to accomplish as much as possible of each with as little loss of any other principle. And we recognize that the system has evolved and is still evolving rather than changed as the result of revolution over the years.

KEY CONCEPTS
ECONOMIC EVOLUTION: A gradual change over time in an economic system so that the system can better meet the changing needs and wants of the population. ECONOMIC EQUALITY: The economic standard whereby it is felt that people in an economic system should have equal access to the economy such that nothing, be it law or bias, prevents a person from achieving his or her full potential. ECONOMIC FREEDOM: The economic standard whereby it is felt that people in an economic system are capable of, and therefore should be free to make the basic economic decisions affecting their lives. ECONOMIC EFFICIENCY: The economic standard which states that a system ought to produce as much as possible with the fewest inputs at the least cost so as to minimize waste in a world of limited resources. OPPORTUNITY COST: The experience given up to accomplish something else. The opportunity cost is always the "next best" alternative use of one's resources.