RECONNECTING ECONOMICS AND COMMON SENSE
by Farid A. Khavari
The economies of the world are crumbling because Economics, as preached and practiced in the great economies of today, has lost touch with the realities of human life in favor of science-fiction intellectual frippery. How do you win the Nobel Prize in Economics? Dream up an arcane trading algorithm, which in real life nearly destroys the entire global financial system. (Remember Long Term Capital Management, the prototype for the 2008 debacle?)
The “Gini coefficient”, “Pareto efficiency”, “opportunity costs”, “production frontiers”, “Laffer curve”, “Phillips curve” and “Golden Rule of economic growth” and other economic myths all have their devotees. Reality discredits Keynesianism, Monetarism and Marxism alike.
No one with a lick of common sense can believe the propaganda that the current stock market bubble and inflating home prices mean that we are “recovering” the “wealth” that was “lost” since 2008. Only governments or “experts” could say this with a straight face. The fact is that trillions of dollars of new money has gushed into the financial system, causing gross inflation in the stock market and housing. Meanwhile, no one in the real world can believe that unemployment is improving, when job creation lags population growth and most newly created jobs pay less and more people are employed part time.
No major economy in the world today is sustainable, yet every nation has all of the ingredients required to create permanent prosperity and financial security for every citizen, if they would just realize it and act accordingly. And if they are smart, they can do it with zero cost.
What makes every major economy today unsustainable is simply consuming more wealth than is created. Building a house, or manufacturing almost anything, creates wealth. Trading stocks and other financial activities at best transfer existing wealth from one party to another and at worst diverts wealth from wealth-creating activities. Costs like interest, health care, insurance and government consume wealth. In order to be sustainable, an economy must create more wealth than it consumes.
The good news is that when a wealth-creating job is created, it eventually creates more wealth than it cost to create the job and then goes on to create wealth every year. Conversely, a wealth-consuming job keeps on consuming wealth forever. Wealth-creating jobs are easy to create, and further net wealth can be created in the economy by reducing costs of all kinds, starting with energy and health care, while improving health and financial security for everyone, which creates more wealth-creating jobs.
Jobs involving products and services which reduce costs create many times more wealth even than the best construction and ordinary manufacturing jobs. For example, a product that saves $2000 in energy per year adds $2000 in net wealth to the economy every year for as long as it lasts. Money that is not consumed paying for energy can be saved or invested or spent on other products and services that create more wealth.
Here is a simple example of how wealth-creating jobs can be created at zero cost.
Let’s build houses that sell for $140,000 with a 10% profit margin. If we build these houses efficiently in 120 days, we will have an average of $37,333 in capital tied up in any given house, if we have equal numbers of starts each month. With $100,000,000 in capital, we build 2,760 homes in a year and create nearly 3,000 wealth-creating jobs. Now do the math: each job cost $37,000 to create. Each job pays $50,000. And the return on the $100,000,000 capital is 112% per year. This means that creating these jobs does not cost, it pays. And it pays very well.
Every wealth-creating job that is created eventually creates two more jobs; those jobs create more jobs, and so on. Wealth-consuming jobs tend to destroy wealth-creating jobs.
By the way, in our example above, every new employee earns enough to afford the houses he or she is building. Henry Ford sold plenty of cars during the Depression by paying workers enough to afford cars. This model, with attention to capital velocity (turnover rate) can generate jobs in other activities just as profitably. It’s not magic, it’s just common sense. I call it “Zero Cost Economics”.
Any government could apply these concepts instantly and at zero net cost. Whether by legislation or simple executive policy decisions, millions of jobs can be created and the balance can tip from wealth-consuming back to net wealth creation.
However, the principles of Zero Cost Economics can be applied by the private sector in any country without waiting for government action. This described in a brief paper, “The Zero Cost Cities Project”
Farid A. Khavari, Ph.D. is a noted economist and author of ten books, including the classic Environomics, and Towards a Zero Cost Economy and numerous articles.