A Business Did That

Occasionally, one reads an articulate defense of capitalism. That is, if the reader is willing to wade through an endless swamp of malarkey to get there. Why is capitalism seemingly so hard to understand and so easy to misrepresent?

One explanation is that most of us receive little if any exposure to business practice in school. We learn history, math, some science, and maybe even art, but nothing about how money works, how to make investments, or how to grow a business. Consequently, our financial lives often turn out to be a mess and our ability to grasp what our leaders do with all that money they take from us is worse.

Everything our government does has a basis in business. No business, no government goodies. This fact is often forgotten as the debate over how much government there should be rages on. Let’s take it one step further and note that every economic decision faced by an individual has a basis in business.

For example, let’s say you were going to invest some money, but not in a business as such. Say, a savings account. (The fact that right now saving accounts are paying next to nothing is irritating but not material to my point.) How does the bank get the “extra” money to pay you interest? Why, they loan it out, of course. They loan it to a business, either directly or through their investment in a bond or some stock, which is an investment in a business.

No matter how many links there are in the chain, at the end is a business. This must always be true because at some point economic value must be created. A business does not just create more money (that falls under the purview of government–a tale for another time). It must create something from a set of resources (land, labor, and capital). If I buy a blank canvas, paint a picture on it, and then sell it for more than I paid for the canvas, I am in effect a business. I have invested my time and the price of that blank canvas to create something that is more valuable than the total of my time and the canvas.

Compare this to a public sector “investment.” While it is true that government can invest money, it is bound by the same rules as private investors. Somewhere along the way, a business has to create wealth by using that money to create products or services that are more valuable than the resources used to produce them. The problem with government is this: Money is taken from citizens–money that could have been invested elsewhere–and used for government’s purposes. There is a net gain in value creation only if the government’s investment was wiser than the ones that would have been made by the private sector. (Pause for laughter.)

One often hears objections to the above argument by invoking the “multiplier effect.” This alleged effect comes from all the good that is supposed to flow from government’s spending. A dollar of government spending boosts the economy. In fact, the claim goes, it boosts it so much that we get more than a dollar of wealth creation from it. For those who for a moment wanted to believe such a thing happens, I offer this article.

Another objection is that government makes it possible for businesses to do what they do by building infrastructure (roads, bridges, and according to Obama, the Internet). While roads and such are essential to business, it is not a given that they must, or even should be built by government. Further, it is business that creates the wealth government confiscates to build all that great stuff.

Obama may be squealing about criticisms of his “You didn’t do that” gaffe, but for my money it actually does represent his deep and abiding antipathy toward business. We may rightly despise the crony capitalists who rig the game by playing politics, but we cannot despise the businessperson who plays fair without despising wealth itself. And wealth, my friends, is not just the Ferrari in the driveway. It is the bread we eat, the medicine we take, and the homes in which we live. None of that exists without someone somewhere engaging in business.

Our current President expects businesses to cough up their profits to whatever cause he and his ilk deem worthy because he thinks they acquired it through luck. His failure to understand the real America–the one full of businesses large and small that face challenges he cannot even fathom–is a nation of people who showed the world what entrepreneurs can do. It is a nation of people who set new standards for human living that even kings could not have enjoyed theretofore. For a President of the United States to insult the character of these heroes is a travesty. May we, come November, show him who does what.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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