Friday, July 02, 2010

The Visible Hand # 4

It's a good idea for individual companies to reduce expenses as much as possible. Lowers costs give them an advantage in the market. They can reduce prices or increase their profit margins.

Since labor costs are often a huge part of expenses, it makes sense for companies to break unions, cut benefits, speedup work, lay off US workers and move work to third world countries. However, if a lot of companies do this, then a lot of ordinary people, who are both workers and consumers, are short of money.

Wages have not gone up for ordinary American workers for the past 30 years. For a long time, till the collapse of the housing market, many Americans were maintaining their life style through debt: borrowing against their homes and using credit cards. This has stopped, and the result is a recession which may become a depression.

As I have already said, it is good business to cut labor expenses, but the economy in general suffers, and businesses suffer when consumers -- finally -- are unable to buy.
Another example of the visible hand.

There are ways to solve this problem, through laws and government regulation. But the point is, left to themselves and their own self-interest, businesses will injure the general society and themselves.

This is very obvious stuff. People have known it since the 19th century. That's why the government has intervened so often to regulate business and to invest in the general welfare.

I guess the question is, do we want to continue with a system which is self-destructive unless it is tightly regulated and rescued over and over?


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