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October 22, 2013
The Dismal Science
Federal Government and Business
by Adam Smith

As I was watching the latest budget fiasco in Washington D.C., I was reminded of the differences between how the federal government works and how a business operates.

This is not a bad thing. They both have very different roles to play in our lives. And they both, when taken to extremes, can really be dispiriting when seen in action.

It will be instructive to investigate these differences and will hopefully provide you with additional understanding of what you see in the business marketplace and what you see happening in D.C. The caveat I have for this analysis is my experience has been with large companies. The smallest I ever worked for was about $500 million in sales per year. But I think the points made are general enough to apply to any business.

If you think about what a business is, you realize it is someone that collects assets — cash, equipment, raw materials, people — and is trying to use those assets to make something to sell to someone else and make a profit.

This is easy to see with a carmaker. A carmaker takes raw materials, builds plants, and hires people to produce cars that they want to sell for a profit. The carmaker is doing something that we (at least I) could not do for ourselves and we pay a premium over what the car actually costs to produce.

What about that big box retail store in your town? When you think about it, you realize that they do not actually make most of the stuff they sell. So why do they get a profit?

You have to start expanding your understanding of what “make” means. The retailer is making the market. They are the middleman that brings together buyers and sellers. Companies that are very good at being the middleman make a very good profit.

What about a service industry — what do they “make”? Generally, they provide expertise. Many times a service company provides assurance to the company they work for that a complicated piece of the business is in compliance with laws or that something they will be offering to the public (think of an advertising program) will have the desired effect.

Again, a company is gathering a collection of assets and using those assets to try and make a profit.

The ugly side of business is on display from time to time. The BP oil spill in the Gulf of Mexico is an example of a company that disregarded the impact of a deep sea well that became uncapped for a few more dollars on their income statement.

Also, some businesses are all about making every last dime they can. Some CEOs and CFOs only look to see if they can find someone else to lay off and make life miserable for employees by not providing a comfortable work environment.

Government, on the other hand, should be endeavoring to help its constituents live better, fuller lives. This can be done by engaging in activities that citizens or groups of citizens cannot do for themselves.

For example, government provides for the defense of the country, they provide regulations for business so that we are protected from unscrupulous businesses, they provide parks (except during shutdowns) for us to enjoy, and they provide a safety net for us in case we struggle to provide for our needs.

The government should be providing a framework that allows the citizens to pursue whatever makes them happy without infringing on the rights of others.

The ugly side of government is open for all to see right now. They can force charitable organizations tied to various religions to pay for abortions against their religious beliefs. They now (with the help of the Supreme Court) are able to tell people that they have to make certain purchases like health insurance.

The government lives off the work of others. They get their money by coercion. If you do not pay your taxes they will put you in jail. Thus, at the federal level, the government is mostly immune from the consequences of making bad decisions. Make bad investment decision, just go get more taxes. The congressional districts are drawn to protect a district for a political party and results in extremes from both parties to get elected to Congress.

When you live above the fray of everyday life and people hang on your every word and power and wealth are yours, you can begin to think of yourself as better than other people. This description could be said about the aristocracy of Europe. It could also be our lawmakers in D.C.

These good and bad points about business and government are dependent on the people in each.

In the majority of big businesses there are people that for one reason or another do not provide a lot of benefit to the company. They may have been with the company a long time and are waiting a few more years to retire. The benefit the company gets from these employees is not close to the cost of keeping them as an employee. But the company does keep them because employee decisions are made by people. And many businesses are filled with good decent people.

Many people in Congress are good decent people. I remember hearing a congressman (not one of the ones you always hear) interviewed, and he was well-spoken, thoughtful, reasonable, and had a great love for his country. It was then I realized that there must be many just like him. These are the people that never get the spotlight.

Our economy has made us the most rich and prosperous country ever. Politicians that are willing to run the risk of hurting our economy to the detriment of thousand or even millions of citizens just to score political points are neither decent nor good.


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