“Imagine there’s a country that only produced pineapples.” Shawn said, as he went into a hypothetical scenario in the college cafeteria.
“Now, imagine that there’s only one company that makes up this nation’s economy. Everyone is employed by this company in some form or fashion.”
“The entire economy is focused on this one pineapple company. If the company were to falter for some reason it would send the economy plunging into darkness.”
Shawn paused for a minute to get a sip of water, enjoying the look of amusement on your face.
“Ok, let’s say this company did some shady dealings, wasn’t managed properly, and it’s going to fail soon. If the company fails, the nation’s entire workforce will be unemployed. Everything will basically go to hell.”
“Sooo…,” Shawn says, pausing for a moment, “the government has to come in and bail the company out. Because, if it fails, the whole country fails. They can’t let the company fail, it would mean the end of that nation.”
Shawn looks at you with a satisfied smile. He thinks he’s got you cornered.
“Your move, Scrooge Jones.”
Now you’ve got a problem… how to respond to his scenario.
You Don’t Support Bailouts
You didn’t like the 2008 bailouts that Bush and Obama used to “stabilize” the economy. In fact, you think the whole idea of bailing out companies is a pipe dream.
The government shouldn’t be involving itself in the market. It shouldn’t be using taxpayer dollars to keep incompetent companies on life-support.
However, Shawn has your cornered. If you say the government (in his fictional scenario) shouldn’t bailout the lone pineapple company, you’re dooming the nation to disaster. If you support the bailout, you’re a hypocrite.
But, the two of you are forgetting five economic principles that could easily beat Shawn, and back you up.
Here they are…
Principle 1: Economies Aren’t Stagnate
In his fictional scenario, Shawn defined the economy as one company. In his mind, if the company died, the economy died.
He couldn’t imagine that individuals would create new pineapple companies to offset the dying mega company.
In the real world, the economy is constantly morphing, growing, and evolving. New companies enter and die all the time. Big companies die off, only to be replaced with new ones.
Companies merge to become more productive and efficient. Companies go bankrupt, opening up room for new competition.
New industries pop up (or die) all the time.
The economy is constantly moving, adapting, and changing.
Principle 2: Competition Isn’t Fragile
Competition is defined “as a market where no potential participant faces nonmarket obstacles to entry.”
“Nonmarket” meaning government obstacles to entering the market. That could be regulations, government monopolies, etc.
In English: competition equals a government free market. The less bureaucratic regulations exist, the more competition there is.
As long as the government isn’t involved in the market, competition always exists. Companies can’t kill competition because it’s always there.
If one company controlled the majority of the shoe market, all it means is that a suitable competitor hasn’t entered the market yet. The company isn’t keeping competitors from entering the shoe market by lobbying for government support.
Maybe the sole shoe company provides the best value and price possible (pun intended). However, if that company fails to provide the best value and price to its consumers, competitors will come in and supply what’s demanded.
Principle 3: The Economy is an Iceberg
Not trying to burst your bubble, but the US economy is bigger than GM, Coke Cola, and Apple.
Big companies are big for a reason. They provide value consumers want. But don’t be blinded by their bigness.
Just like the economy being a constantly evolving entity, it’s also extremely diverse. Take small businesses for example; over 50% of the working population is employed by a small business.
There are over 28 million small business in America. 22 million of those are nonemployer businesses (the owner is the only employee). “Employer-based businesses make up more than 75% of all businesses currently operating in the U.S.”
Also, “small businesses have generated more than 65% of the new jobs created in the U.S. since 1996.”
It’s easy to only see the economy for the big names in the market. But, the economy isn’t that superficial. There’s more to it than can be seen.
Principle 4: Big Doesn’t Mean Important
During the 2008 market crisis, everyone was flipping out about Goldman Sachs and Lehman Brothers going under. Heck, they flipped out over every company that exhibited any difficulty.
Then “too big to fail” reared its ugly head. It made the argument that these companies were too big, too important to let them fail. Letting them fail would cause even more damage.
That wasn’t the case. Remember the small business stats above? If anything, small businesses are too big to fail.
Politicians and the media were blinded by the mountain of big business.
Principle 5: Demand Regulates Supply
Back to Shawn’s scenario. Between all the pineapples and lost jobs, Shawn forgot to take into account Supply and Demand.
If he did, he would’ve figured out that the demands of the people would’ve been met.
Two things were demanded in Shawn’s fictional economy. Jobs and pineapples. That one company supplied both. Once it fails, both demands will no longer be supplied. Demand will soar, but the supply won’t be there.
This is where the market comes in.
Individuals will come into the market to fill in the supply shortage. People will start pineapple companies that will A) provide jobs, and B) supply pineapples.
If there’s a true demand in the market, it will be filled.
Back to Shawn’s Scenario
Now that you know these five principles, you can explain to Shawn how his fictional scenario would go down…
- There’s a nation that has one giant company that makes up their entire economy. It employs the entire work force. It also grows, harvests, and sells pineapples.
- The company begins to fail due to mismanagement, corruption, etc.
- The company has failed. The entire work force is out of a job, not to mention its one industry (pineapple production) is dead.
- The nation is now out of job and pineapples (two demands aren’t being met).
- Entrepreneurs begin to enter the market. They create businesses. These new businesses employ workers to produce pineapples.
- A one company market turns into a multi-company market.
- Both demands are now met. Jobs exist, and pineapples production is back up.
- The market is more diverse, and capable of withstanding crises.
Shawn thought he would be cornering you, but he ended up showing his ignorance of the market.
Sadly, Shawn isn’t alone. Too many Americans don’t understand the workings of the economy.
That leaves them as easy prey for the media and politicians to indoctrinate.
Indoctrinated “Shawns” are why you have to deal with more regulations, more laws, and more Crony Capitalism.
Here’s a thought: Meet a Shawn, help a Shawn.
Don’t let politicians and their minions win them over.
Sit down with Shawn, tell him how the economy really works. There’s no reason why you and I shouldn’t be spreading this message to everyone we know.
So what are you going to do? Are you going to help Shawn out? It’s your choice…