Tag Archives: Basic Economics

How a small, poor country became the top economy in Latin America

South America Map
South America Map

One way to learn about whether specific economic policies work or not is to look at different countries that have tried them. Believe it or not, patterns do emerge about what works and what doesn’t work, as you look across different times and places. I’ve been reading a book called “Money, Greed and God” with my friend Carla, which talks about what has worked to reduce poverty.

The author basically outlined two approaches. In the first approach, the government 1) confiscates the wealth of the most productive workers, 2) nationalizes (takes control of) the businesses of the most successful entrepreneurs, 3) restricts trading between citizens and with other countries, with minimum wage, price controls and tariffs. In the second approach, the government does the opposite: 1) lowers taxes on the most productive workers, and 2) lets entrepreneurs compete to provide goods and services to consumers, and 3) lowers restrictions on internal trading and trading with other countries, e.g. – eliminating minimum wage, tariffs and price controls.

Let’s take a look at two Latin American countries that went in opposite directions. Venezuela and Chile. Then we can finally find out which policies actually achieve results for the people.

Here is how Chile started out in 1973.

PROBLEM: Price controls and tariffs:

Prices for the majority of basic goods were fixed by the government in 1973. Even though Chile was and still is a small economy, the level of protection­ism was high. By the end of 1973, the nominal average tariff for imports was 105 percent, with a maximum of 750 percent. Non-tariff barriers also impeded the import of more than 3,000 out of 5,125 registered goods. Just as economic theory predicts, large queues in front of stores were usual in Santiago and other cities in Chile as a result of the scarcity caused by price controls.

PROBLEM: Government taking over private businesses:

The decline in GDP during 1973 reflected a shrinking productive sector in which the main assets were gradually falling under government control or ownership through expropriations and other government interventions in the economy.

PROBLEM: Deficit spending and government printing money:

The fiscal situation was chaotic. The deficit reached 55 percent of expenditures and 20 percent of GDP and was the main cause of inflation because the Central Bank was issuing money to finance the government deficit.

SOLUTION: lower or eliminate restrictions on trade:

The most important economic reform in Chile was to open trade, primarily through a flat, low tar­iff on imports. Much of the credit for Chilean eco­nomic reforms in the following 30 years should be given to the decision to open our economy to the rest of the world. The strength of Chilean firms, productive sectors, and institutions grew up thanks to that fundamental change.

SOLUTION: let competing entrepreneurs in the private sector provide goods and services to consumers:

A second fundamental reform was to allow the private sector to recover, adding dynamism to the economy. In fact, important sectors such as elec­tricity generation and distribution and telecommu­nications were still managed by state companies. After we implemented a massive privatization plan that included more than 50,000 new direct share­holders and several million indirect (through pen­sion funds) shareholders, these companies were managed by private entrepreneurs that carried out important expansion plans.

SOLUTION: let people take responsibility for their own lives instead of depending on government:

The 1981 reform of the Chilean pension fund system deserves special mention. Under the leader­ship of Minister José Piñera, an individual capitali­zation account program was designed with specific contributions, administered by private institutions selected by the workers. The Chilean Administra­doras de Fondos de Pension (Pension Fund Administrators or AFP) has been replicated in more than 20 countries, and more than 100 million workers in different parts of the world use these accounts to save for retirement.

SOLUTION: allow parents to choose the school that fits their needs from competing education providers, and push school administration down from the federal government to the municipal level, where it would be more responsive to voter’s needs:

In 1981, Chile introduced a universal educational voucher system for students in both its elementary and secondary schools. At the same time, the central government transferred the administration of public schools to municipal governments…  The financial value of the voucher did not depend on family income.

RESULTS: And I was able to find a nice short, description of how all that worked out for them on the far-left Wikipedia, of all places:

The economy of Chile is a high-income economy as ranked by the World Bank, and is considered one of South America’s most stable and prosperous nations, leading Latin American nations in competitiveness, income per capita, globalization, economic freedom, and low perception of corruption.

In 2006, Chile became the country with the highest nominal GDP per capita in Latin America. In May 2010 Chile became the first South American country to join the OECD. Tax revenues, all together 20.2% of GDP in 2013, were the second lowest among the 34 OECD countries, and the lowest in 2010. In 2017, only 0.7% of the population lived on less than US$1.90 a day.

According to the Heritage Foundation, Chile is ranked as the 18th freest economy in the world. The World Bank ranked Chile as the 50th highest GDP per capita for 2018, just below Hungary and above Poland.

Now, you can contrast those results with Venezuela. I have been blogging about Venezuela for years on this blog, and documenting how they raised taxes, banned guns, nationalized private sector companies, raised tariffs, and increased regulations. They are now ranked JUST ABOVE NORTH KOREA for economic freedom – #179 out of 180 countries measured. Basically, they did the opposite of everything that Chile did – transferring power away from parents, workers, business owners, churches and municipal governments to the powerful centralized federal government.

Wikipedia explains how Hugo Chavez took over in 1999 and enacted a communist revolution.

More:

Since the Bolivarian Revolution half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports. Further yet, price controls, expropriation of numerous farmlands and various industries, among other government authoritarian policies… have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country as has been the case with several technological firms and most automobile makers.

They confiscated private property, took over private sector businesses, implemented tariffs and price controls, redistributed wealth via massive welfare programs, and pushed all decision-making out of families and municipal governments up to the federal government. By depriving the producers of their earnings, the country caused massive shortages of goods and services, to the point where people are fleeing the country, consuming zoo animals, and selling their bodies as prostitutes in order to get food and water.

Application

In the next election, we are not picking a tribe because of how they make us feel about ourselves. We are not choosing in order to see ourselves as “nice” and “not nice”. We need to look at specific policies being proposed, and see what works and what doesn’t work. The examples of Chile (rags-to-riches) and Venezuela (riches-to-rags) are helpful for voters who want to get RESULTS instead of FEELINGS.

I’ll leave you with a list of links from previous posts so you can see how communism worked out for Venezuela.

Related posts

Is there evidence of systemic racism in the United States?

ANNOUNCEMENT: I’m going to be on the Free Thinking Ministries podcast today at 2 PM Pacific, 5 PM Eastern, with host Tim Stratton. Join us, and we will discuss Black Lives Matter, Christianity and more. And I’ll explain my plan to achieve the American Dream as a person of color and legal immigrant to America. Live stream link here.

Systemic racism is the idea that people can’t lift themselves out of poverty by making good decisions, because powerful groups in society that hold the poor down, regardless of their decisions. Do you think that America is a place where no matter what choices you make, you’ll never be able to be more properous? That’s what the leaders of Black Lives Matter think.

Here’s what Nikole Hannah-Jones, creator of the 1619 Project, says in the New York Times (a former newspaper):

To summarize, none of the actions we are told black people must take if they want to “lift themselves” out of poverty and gain financial stability — not marrying, not getting educated, not saving more, not owning a home — can mitigate 400 years of racialized plundering.

Got that? It doesn’t matter what individual choices a non-white person takes in America, they’re going to be poor. The “systemic racism” of the powerful whites will always keep them down. Single motherhood doesn’t make people poor, and marriage doesn’t make people wealthier. Dropping out of high school doesn’t make you poor, and getting a Masters degree in computer science won’t make you wealthier.

But let’s take a look at the data from the 2018 Census, and see the evidence.

White people are doing a bad job of keeping non-whites down

White people are doing a bad job of keeping non-whites down

Well, it looks like at least SOME people of color are able to do well in America despite all the “systemic racism” that keeps non-whites down. And do you know what those non-white groups at the top have in common? They’ve made good decisions, they’ve worked hard, they haven’t blamed other people when they fail, and they’ve saved their money instead of spending it on shiny junk.

Let’s look at some decisions that the non-whites who are prosperous have made, that those further down have not.

Asians marry before they have children, so the kids have two parents

Asians marry before they have children, so the kids have two parents

Education and marriage

This article is written by the far-left radical Nicholas Kristof, writing in the radically-leftist New York Times (a former newspaper).

Excerpt:

A new scholarly book, “The Asian American Achievement Paradox,” by Jennifer Lee and Min Zhou, notes that Asian-American immigrants in recent decades have started with one advantage: They are highly educated, more so even than the average American. These immigrants are disproportionately doctors, research scientists and other highly educated professionals.

It’s not surprising that the children of Asian-American doctors would flourish in the United States. But Lee and Zhou note that kids of working-class Asian-Americans often also thrive, showing remarkable upward mobility.

[…]There’s also evidence that Americans believe that A’s go to smart kids, while Asians are more likely to think that they go to hard workers… Asian-American kids are allowed no excuse for getting B’s — or even an A-. The joke is that an A- is an “Asian F.”

One reason Asians students do so well is because their parents are usually married:

Strong two-parent families are a factor, too. Divorce rates are much lower for many Asian-American communities than for Americans as a whole, and there’s evidence that two-parent households are less likely to sink into poverty and also have better outcomes for boys in particular.

American blacks have a 73% out-of-wedlock birth rate. A huge difference compared to Asians.

So, when Nikole Hannah-Jones tells you that education and marriage don’t matter, she’s just wrong.

Compound interest

Education and marriage are important, but so is saving your money. The wealthiest people in America are typically the ones who are experts at saving money early, and investing it. They know about the law of compound interest. If you invest money early and leave it alone, then it will grow into a fortune by the time you are read to stop working.

This graph explains compound interest:

Don't trust people with non-STEM degrees to tell you how to get rich

Investing $24,000 from age 21 to 41 vs investing $24000 from age 47 to 67

What does Nikole Hannah-Jones say when she looks at that graph? She doesn’t think that saving money makes a difference to having more or less wealth. She thinks skin color determines whether saving money makes you wealthy or not. The graph clearly shows what we should be recommending to young people of color. They need to stop spending money and start saving it, and the earlier the better. It doesn’t matter what your skin color is, saving money early JUST WORKS.

Similarly, when she says that home ownership doesn’t make you more wealthy, this is just terrible advice. It’s always better to pay down your own mortgage (at least when interest rates are low like they are now) than to pay someone else rent. You have to live somewhere, and paying for your own home is better because it costs about the same as rent, and then you get to keep the home when you’re done paying for it.

Communism

Nikole Hannah-Jones does have a “solution” to disparities in wealth. Her solution is communism. She wants to transfer money from those who earn, to those who don’t. But we already have tried that in the 21st century and it resulted in the deaths of over 100 million people. That’s not my opinion, that’s all documented in a book published by Harvard University Press.

You don’t even have to read the book to know the truth – just look at countries that score low on the Index of Economic Freedom, and compare their GDP per capita to countries that score high on the Index of Economic Freedom. The more communist a nation goes, the less wealth there is for the citizens. That’s why people in Venezuela are eating zoo animals and selling their bodies in prostitution in order to get food to eat and water to drink. Nikole Hannah-Jones wants to reduce economic freedom, but we know by looking at other countries that this reduces per-capita GDP over time.

There’s a lot more than could be said here, but the point is that we need to be telling American blacks to make decisions that match the decisions of other successful non-white communities in America. We need to start teaching young people basic economics so they don’t fall prey to charlatans.

How a small third world country became the top economy in Latin America

South America Map
South America Map

So, I’ve been watching the Democrat debates, and I’ve noticed that all of their candidates are proposing economic policies that they say will improve the lives of Americans. But have the candidates ever been able to try out these policies, and proven that they work? One way to evaluate policies is to look at other countries that have tried them, to see if those policies are proven to work.

I’ve been reading a book called “Money, Greed and God” with my friend Carla, which talks about what does and does not work to alleviate poverty. The author basically outlined two approaches. In the first approach, the government 1) confiscates the wealth of the most productive workers, 2) nationalizes (takes control of) the businesses of the most successful entrepreneurs, 3) restricts trading between citizens and with other countries, with minimum wage, price controls and tariffs. In the second approach, the government does the opposite: 1) lowers taxes on the most productive workers, and 2) lets entrepreneurs compete to provide goods and services to consumers, and 3) lowers restrictions on internal trading and trading with other countries, e.g. – eliminating minimum wage, tariffs and price controls.

Let’s take a look at two Latin American countries that went in opposite directions. Venezuela and Chile. Then we can finally find out which policies actually achieve results for the people.

Here is how Chile started out in 1973.

PROBLEM: Price controls and tariffs:

Prices for the majority of basic goods were fixed by the government in 1973. Even though Chile was and still is a small economy, the level of protection­ism was high. By the end of 1973, the nominal average tariff for imports was 105 percent, with a maximum of 750 percent. Non-tariff barriers also impeded the import of more than 3,000 out of 5,125 registered goods. Just as economic theory predicts, large queues in front of stores were usual in Santiago and other cities in Chile as a result of the scarcity caused by price controls.

PROBLEM: Government taking over private businesses:

The decline in GDP during 1973 reflected a shrinking productive sector in which the main assets were gradually falling under government control or ownership through expropriations and other government interventions in the economy.

PROBLEM: Deficit spending and government printing money:

The fiscal situation was chaotic. The deficit reached 55 percent of expenditures and 20 percent of GDP and was the main cause of inflation because the Central Bank was issuing money to finance the government deficit.

SOLUTION: lower or eliminate restrictions on trade:

The most important economic reform in Chile was to open trade, primarily through a flat, low tar­iff on imports. Much of the credit for Chilean eco­nomic reforms in the following 30 years should be given to the decision to open our economy to the rest of the world. The strength of Chilean firms, productive sectors, and institutions grew up thanks to that fundamental change.

SOLUTION: let competing entrepreneurs in the private sector provide goods and services to consumers:

A second fundamental reform was to allow the private sector to recover, adding dynamism to the economy. In fact, important sectors such as elec­tricity generation and distribution and telecommu­nications were still managed by state companies. After we implemented a massive privatization plan that included more than 50,000 new direct share­holders and several million indirect (through pen­sion funds) shareholders, these companies were managed by private entrepreneurs that carried out important expansion plans.

SOLUTION: let people take responsibility for their own lives instead of depending on government:

The 1981 reform of the Chilean pension fund system deserves special mention. Under the leader­ship of Minister José Piñera, an individual capitali­zation account program was designed with specific contributions, administered by private institutions selected by the workers. The Chilean Administra­doras de Fondos de Pension (Pension Fund Administrators or AFP) has been replicated in more than 20 countries, and more than 100 million workers in different parts of the world use these accounts to save for retirement.

SOLUTION: allow parents to choose the school that fits their needs from competing education providers, and push school administration down from the federal government to the municipal level, where it would be more responsive to voter’s needs:

In 1981, Chile introduced a universal educational voucher system for students in both its elementary and secondary schools. At the same time, the central government transferred the administration of public schools to municipal governments…  The financial value of the voucher did not depend on family income.

RESULTS: And I was able to find a nice short, description of how all that worked out for them on the far-left Wikipedia, of all places:

The economy of Chile is a high-income economy as ranked by the World Bank, and is considered one of South America’s most stable and prosperous nations, leading Latin American nations in competitiveness, income per capita, globalization, economic freedom, and low perception of corruption.

In 2006, Chile became the country with the highest nominal GDP per capita in Latin America. In May 2010 Chile became the first South American country to join the OECD. Tax revenues, all together 20.2% of GDP in 2013, were the second lowest among the 34 OECD countries, and the lowest in 2010. In 2017, only 0.7% of the population lived on less than US$1.90 a day.

According to the Heritage Foundation, Chile is ranked as the 18th freest economy in the world. The World Bank ranked Chile as the 50th highest GDP per capita for 2018, just below Hungary and above Poland.

Now, you can contrast those results with Venezuela. I have been blogging about Venezuela for years on this blog, and documenting how they raised taxes, banned guns, nationalized private sector companies, raised tariffs, and increased regulations. They are now ranked JUST ABOVE NORTH KOREA for economic freedom – #179 out of 180 countries measured. Basically, they did the opposite of everything that Chile did – transferring power away from parents, workers, business owners, churches and municipal governments to the powerful centralized federal government.

Wikipedia explains how Hugo Chavez took over in 1999 and enacted a communist revolution.

More:

Since the Bolivarian Revolution half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports. Further yet, price controls, expropriation of numerous farmlands and various industries, among other government authoritarian policies… have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country as has been the case with several technological firms and most automobile makers.

They confiscated private property, took over private sector businesses, implemented tariffs and price controls, redistributed wealth via massive welfare programs, and pushed all decision-making out of families and municipal governments up to the federal government. By depriving the producers of their earnings, the country caused massive shortages of goods and services, to the point where people are fleeing the country, consuming zoo animals, and selling their bodies as prostitutes in order to get food and water.

Application

In the next election, we are not picking a tribe because of how they make us feel about ourselves. We are not choosing in order to see ourselves as “nice” and “not nice”. We need to look at specific policies being proposed, and see what works and what doesn’t work. The examples of Chile (rags-to-riches) and Venezuela (riches-to-rags) are helpful for voters who want to get RESULTS instead of FEELINGS.

I’ll leave you with a list of links from previous posts so you can see how communism worked out for Venezuela.

Related posts

 

Wages of low-income workers have risen faster than middle and high income workers

In Trump's America, low-wage workers see the highest wage increases
In Trump’s America, low-wage workers see the highest wage increases

By now, everyone has heard about how the unemployment rate is at a record low. Not only that, but the unemployment rates for women, blacks and hispanics are also at record lows. But did you know that wages have been increasing at the highest rate for low-income workers? That’s right. It’s low-wage workers who are seeing their incomes go up the most.

Here’s an analysis done by an economist at Indeed.com, one of the largest online job boards:

The US economy added 130,000 jobs in August, and the unemployment rate was flat at 3.7%.

After this report, we can all take a breath, but not a big one. While we are still seeing many of the disconcerting trends of the past few months, the labor market continues to grow at a healthy rate.

Before assuming that the total job growth number in August is skewed because of Census hiring, remember that these are real jobs taken by real workers. Even if you remove government hiring, which accounts for around 34,000 jobs, this is still a number that is high enough to keep up with population growth. This month’s report reflects a slowing labor market but not necessarily one heading straight for a recession.

Wage growth strongest for low-wage industries

At this point in the expansion, we’d expect wage growth to pick up, but it is continuing to stall. In fact, wage growth continues to be strongest for workers in lower-wage industries. Labor force participation grew in the month, signaling a labor market still drawing workers off the sidelines. Job seekers are still benefiting from this job market, but let’s not count on this lasting forever.

That analysis was done in August of this year, and as you may have heard, the numbers since then have been even better.

CNBC explained:

The jobs market turned in a stellar performance in November, with nonfarm payrolls surging by 266,000 and the unemployment rate falling to 3.5%, according to Labor Department numbers released Friday.

Those totals easily beat the Wall Street consensus. Economists surveyed by Dow Jones had been looking for solid job growth of 187,000 and saw the unemployment rate holding steady from October’s 3.6%.

[…]In addition to the robust November gains, revisions brought up totals from the two previous months. September’s estimate went up 13,000 to 193,000 and the initial October count increased by 28,000 to 156,000. Those changes added 41,000 to the previous tallies and brought the 2019 monthly average to 180,000, compared with 223,000 in 2018.

So my point here is simple. Democrats are mad because they lost the election, and they really aren’t interested in whether president Trump is doing a good job or a bad job. The thing is, president Trump is doing a terrific job if all you care about is numbers. I understand that Democrats love their New York infanticide, their Seattle mayor pedophilia, their Democrat FBI agent adultery, their black face Virginia governor, their Clinton-funded Steele dossier, etc. But for the rest of us who just want to have a job, keep what we earn, and spend it how we want, this has been a great presidency.

It’s not just low unemployment and increased wages. Conservatives are happy about a never-ending stream of conservative judges filling up vacancies on federal courts.

Far-left Politico is not too happy about this:

The Senate confirmation of Lawrence VanDyke and Patrick Bumatay to the 9th U.S. Circuit Court of Appeals this month brought to nine the number of appointments President Donald Trump has made to the 29-member bench that serves as the last stop for nearly all legal complaints lodged in nine Western states. Democratic-appointed judges now hold a three-seat majority, compared with 11 at the start of Trump’s presidency.

If the trend continues, it represents a major shift in the liberal wing of the judiciary, meaning lawsuits for progressive causes won’t find a friendly ear as easily as they have. The circuit has been the go-to venue for activist state attorneys eager to freeze Trump policies on health care, immigration and other social issues. It ruled against Trump’s weakening of Obamacare’s contraceptive mandate, as well as multiple versions of his travel ban.

It’s now weighing the administration’s overhaul of the federal family planning program, the “public charge” rule that denies green cards for individuals who participate in programs like Medicaid — and it could take up the “conscience rule” allowing health providers to opt out of providing care on religious or moral grounds.

[…]The 9th Circuit isn’t the only court whose makeup has changed through Trump’s conservative nominees and McConnell’s singular focus on confirming judges. The 1st Circuit in Boston and 3rd Circuit in Philadelphia now have Republican-appointed majorities.

[…]A 9th Circuit panel of four Democratic appointees and seven Republican appointees in July allowed the administration’s overhaul of the Title X federal family planning program to take effect. The policy bars clinics that provide or refer patients for abortions from receiving program funds for reproductive health services like STD screenings and contraception and prompted Planned Parenthood to quit over the change. Another 9th Circuit panel this year ruled in favor of letting Trump’s Justice Department distribute grants to cities that use the money to crack down on illegal immigration.

[…]The Trump administration will likely seek a reversal of two separate lower court injunctions against the health provider conscience rule and has been asked by DOJ to freeze a recent nationwide hold on Trump’s order to deny legal immigrants entry to the U.S. if they can’t cover their health care costs.

If you have some time, and you want to really understand why the Democrats are so angry, I really recommend this recent show featuring Andrew Klavan:

And I also wanted to reflect on what the booming Trump economy has meant to me personally. I made more money from my mutual funds this year than I earned as a senior software engineer! I understand that “orange man bad” and “impeach the m*th*rf#$%&r. But I cannot deny that I am doing well financially, and it’s very clear from economists that this is directly the result of massive tax cuts, deregulation, and smart trade policies.

Politics isn’t about how you feel, and how you look to your friends. It’s more important than that. We need to have policies that solve problems for people who are struggling to get their American dream. Donald Trump has delivered those policies, and the results are not subject to debate. We have the numbers, and the numbers are very, very good.

What determines the prices of goods and services in a market economy?

Basic Economics: Prices are set by supply and demand
Basic Economics: In a free market, prices are set by supply and demand

A few days ago, I posted the meme above on the blog’s Facebook page. The meme makes fun of unionized public school teachers, who feel entitled to the same salary and benefits as doctors, software engineers, etc. in the private sector. I thought that all Americans were familiar with basic economics. But judging from some of the comments to the meme, that is not the case. This post will help.

So, the point of this meme is simple, it’s to point out that the teachers who belong to teacher unions are ignorant of basic economics, specifically, the law of supply and demand. As we’ll see in a minute, this is literally lesson 1 of Economics 101.

When there is more demand for a product or service than there is a supply for it, then prices go up. When there is more supply for a product or service than there is a demand for it, prices go down.

A good place to see this explained is in a book by famous black economist Thomas Sowell. Thomas Sowell has written many books, but he wrote one book in particular for people who have no knowledge of basic economics. It’s called “Basic Economics: A Citizen’s Guide to the Economy“. And the first few chapters explain how prices are set by supply and demand:

  1. What is Economics?
  2. The Role of Prices
  3. Price Controls
  4. An Overview of Prices

Most people who commented on the meme had some knowledge of basic economics, and how prices are determined.

Here’s Bruce:

Wages–the prices of labor–are set by free people bidding in an open market for the labor of people willing to work. They are not set by an emperor weighing abstractions. There are 3.7 million teachers working in the US, and only about 5000 professional athletes.

And Chris:

My coworkers and I (we are fintech people with highly specialized knowledge and computer skills) were talking about some computer-related consultants who are so specialized and so good that they command hundreds (if not thousands of dollars per hour). The top of the top cyber security guys, who do presentations at conferences on threats and vectors? Yeah, thousands if not tens of thousands of dollars per hour.

So far, so good. But others argued that the prices of goods and services are determined by a sinister cabal of politicians and other elites, who paid athletes lots of money in order to distract the masses with “bread and circuses”. Now, I know what you’re thinking. How does paying athletes MORE get people to care about sports? It doesn’t. Actually, it’s the (widespread) demand to see the performance of (scarce) elite athletes that causes the wages of those athletes to increase. It’s not a conspiracy – it’s free people making choices about what they want to buy in a free market.

It turns out that there are two views of how wages are set in an economy:

The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of “socially necessary labor” required to produce it.

LTV is usually associated with Marxian economics… The LTV is central to Marxist theory, which holds that the working class is exploited under capitalism, and dissociates price and value. Marx did not refer to his own theory of value as a “labour theory of value”.

Mainstream neoclassical economics tends to reject the need for a LTV, concentrating instead on a theory of price determined by supply and demand.

Marxists economists believe that the value of a good or service is determined by the social utility of the work produced. But classical (“free market”) economists believe that value is determined by the scarcity of the good or service relative to the demand from consumers.

So, a Marxist economist might say “teaching English is valuable because it is relevant and meaningful”. But, a classical economist would say “conducting a security audit on distributed point-of-sale system is valuable, because few people can do it, but many people want it”.

So, the conspiracy theorists view of economics, which asserts that teachers should be paid more than software engineers and doctors, is actually based on Marxist (atheistic) assumptions. And yet many of the people who hold to the conspiracy view of prices fancy themselves to be Christians and conservatives.

I’ve noticed that school teachers and non-STEM university students and professors are very likely  to hold to the conspiracy theory view of prices and wages. Robert Nozick wrote a paper about why this happens. It turns out that “wordsmiths” (his word) are conditioned by their performance in the classroom to expect success in the free market economy. But when they find that their “brilliance” in English poetry, Medieval history, or lesbian dance theory has no value to anyone else, they fall in with these Marxist assumptions and conspiracy theory views of the economy. It’s a coping mechanism for people who value academic acclaim more than doing something useful for their neighbors.

Consider this article from College Pulse about a survey of 10,590 undergraduate students:

Students with certain majors are far more likely than their peers to approve of socialism. Philosophy majors, in particular, have a positive view of socialism. Nearly 8 in 10 (78%) say they view the economic system favorably, followed by 64% of anthropology majors, and 58% of both English and international relations majors. Accounting and finance majors are least likely to view socialism positively (20% and 22% respectively).

Do you know what accounting and finance students have to study? Basic economics.

I noticed that the practical commenters who were trying to explain why teachers earn less than software engineers all had some experience working for a living in the private sector. A couple of them mentioned how studying economics on their own had led them to a correct understanding of how the economy works. That’s what happened to me, as well.

As soon as I got my first job as a software engineer, and finished my study of Christian apologetics, the very next thing I studied was economics. It was Dr. Jay Richards who got me interested in it, when I heard him speaking about economics in an apologetics lecture for Stand to Reason. I contacted him, and he recommended the works of two famous economists, F. A. Hayek and Thomas Sowell. And that’s what I want to recommend to you, too. Our continued liberty and prosperity depends on ordinary Americans taking the time to educate themselves about basic economics.