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Three Economics Lessons I Learned from My Dad

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Tags The EntrepreneurLabor and WagesProtectionism and Free TradeValue and Exchange

07/25/2018

As long as I've known him, my father has always been the entrepreneurial type. Even now, in his seventies, he picks up side jobs both to keep busy and to have a little extra spending money.

Throughout my childhood and youth, he had always been an independent insurance broker and salesman. He often employed one or two people to help with the phones and the paperwork. But also often just worked alone.

Growing up, the idea of going to work for a big company for 30 or 40 years, and then retiring to a golf course or rocking chair somewhere, was something completely alien to me. People my age nowadays mostly expect to work full time until age 75 or more. We can forget about pensions and Social Security. But even when a multi-decade retirement seemed like a viable option in the old days, that wasn't something to aspire to in my house.

In short, Dad has always been part of a small minority group in America: people who make their living from running their own business. It is estimated that only about 10 percent of Americans actually make their living from businesses they own. The numbers are higher if we look at people who have some small-business income on the side. But when we're talking about people whose main source of income is their own business, the numbers are smaller.

Not surprisingly, people who are in this minority group have a different way of looking at the world.

For them, there's no boss or manager to complain about when your income isn't as high as you like. If there's not enough money to make payroll at the end of the month, business owners stare failure in the face, and they know they may even be taking some other families down with them. Ultimately, the most important question is always this: How can I get more customers to voluntarily give me their money? A failure to answer this question leads to the failure of one's business.

This may seem like a very simple observation, but for those who are daily forced to ask the question, it leads to a world view that can be quite distinct from millions of other workers who work for wages.

Thinking back on things Dad taught me about business — whether explicitly or by accident — there are three main lessons I was able to learn:

One: Increasing Income Requires More than Just Raising Prices

Business owners hate to raise prices. After all, raising prices alienates customers and annoys them. Higher prices mean fewer sales. Sticker shock may be unpleasant for the customer, but it's often even worse for the business owner — who wants to make the sale just as much as the customer wants the product or service.

So how to avoid raising prices? The answer lies in lowering costs of doing business. A business owner can lower costs by finding ways to more cheaply produce the goods and services one sells for a living. This can include finding a cheaper office to lease, or finding lower-cost labor. It might mean finding less expensive delivery trucks or a less expensive healthcare plan for employees.

In the end, if these costs can be brought down, the business owner may be able to lower his prices and out-compete his competition. This will lead to more sales, and higher incomes. Lower costs mean higher net revenues. It also means he can deliver more goods and services to his customers — which enriches everyone.

Some wage earners, of course, often take a different view. For them, getting a higher income often just means hanging around long enough to get a higher salary through seniority. Or they might advocate for a "raise" through government mandated increases on health care spending, or mandated family leave, or a minimum wage. 

The larger effects of these latter "strategies," of course, are unemployment and lower real incomes. But wage earners who think they benefit from intervention don't see it this way.

Two: Politicians Only Drive Up Costs

This brings us to another important lesson one can learn from business owners: "the government won't help you."

Oh sure, government can help in the very short term if one can convince lawmakers to pass laws that help one's specific business or industry. But such laws don't exist in isolation. Those same legislators are also busy passing laws that benefit the competition and hurt profitability in other ways.

Given the rapid spread of costly government regulations against business in recent years, it's a safe bet that the overall effect of lobbying government for "favors," won't end well.

Overall, government intervention have the result of driving up costs. And then we're back having to raise prices again.

Thanks to labor regulations, environmental regulations, alleged "consumer protection" laws, taxes, tariffs, and a host of other government interventions, business owners are faced with constant upward pressure on the cost of doing business. This leads to declining net revenues, and declining income. It means being able to hire fewer people, and it means less profit available to re-invest in the business.

Wage earners enamored with government intervention, on the other hand, don't care about keeping costs down. They want higher prices — at least for the goods and services in their industry. This is why they like tariffs, immigration controls, and minimum wages. In truth, of course, all of these things just drive up the cost of doing business, leading to fewer hires, and putting downward pressure on wages. But all many wage earners see is the "protection" they receive from an immigration mandate or a higher tariff.

When the government raises tariffs on, say, steel, this raises the prices of delivery vehicles that a business owner must buy to run his business. This means less business growth and fewer hires. The wage earner who favors government intervention, on the other hand, only sees fewer steel imports and more local steel production. "We've saved jobs," the wage earner then says. "Score one for the working man!" In truth, the "working man" now has fewer jobs to choose from overall. 

Similarly, our interventionist wage earner doesn't want any new migrant labor to enter the country. As far as they're concerned, there's no need for it. Workers have a tendency to overestimate their own value, and think "those business owners don't need any migrant labor. We're doing a wonderful job!" Many business owners would beg to differ, of course. Many wage earners like to console themselves with a myth that business owners like migrants because they'll work for below-market wages. This is not the case. The fact is that many business owners like migrant labor because they're better workers. After all, many of the native workers can't even pass a drug test

Again, at the heart of it all is the question business owners must ask themselves daily: how can I convince the customer to voluntarily give me his money?

The focus is on the customer and the public at large, and on contributing to society by delivering a good or service at a price people want. The business owner can't afford to wait around until the locally-born workers sober up enough to become efficient workers. He can't afford to pay more for steel-based products because steel workers can't be bothered with learning skills that are more in-demand.

But tariffs, and immigration controls, and so-called "pro-labor" legislation forces this on the business owners. His customers, however, don't care. They want the same products at the same prices. Or lower ones. The business owner then finds himself constantly trapped between the government's efforts to drive up wages and the cost of doing business — and the demands of the customer.

The business owner, naturally, just wants to please the customer. But governments make this harder every step of the way.

Three: The World Is Changing All the Time

And this brings us to the last lesson Dad taught me: "the world is changing all the time, and you'd better figure out how to deal with the change."

For many workers, of course, an ideal employment situation looks something like this: learn some skills, find a nice employer to work for, and then do the same thing for a few decades. Then retire. Maybe in the past some workers even managed to do this.

But it's not the Old Days anymore, and this model of employment simply doesn't work. The worker must be entrepreneurial minded. He must ask himself: how can I deliver something to the customer in a way that makes me valuable?

Moreover, producing value as a worker might be inconvenient. One might have to move to another city to make a living. After all, there's no such thing as a "right" to an employer within a 20-minute commute of where one already lives. If one worked in the West Virginia coal mines for many years — but now the coal mines have become unprofitable thanks to cheap oil and natural gas — it's time to move on. Sitting around and popping painkillers won't solve the problem.

Yes, moving around to find work can be extremely unpleasant. Residential mobility has its downside. But so does poverty and unemployment. 

It would be nice if we could return to a time — one that almost certainly never existed — when earning a living required little more than just showing up. But that world has definitely never existed for business owners and entrepreneurs. They've long understood that driving up the cost of living in order to pander to certain groups of wage earners has never made America "great." Unfortunately, these entrepreneurs are very much in the minority, and thus democracy is not on their side. 

Ryan McMaken (@ryanmcmaken) is the editor of Mises Wire and The Austrian. Send him your article submissions, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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