PRIVATE ENTERPRISE,
PROFITS,
AND THE PRICE SYSTEM:
AN OVERVIEW

How is it that we in America are, by and large, well-fed, well-clothed, and well-housed, while most of the world is dismally poor? What explains the incomes we receive—$125,000 for Willie Mays, $20,000 for a master plumber, $2,000 for a bracero fruit-picker? What has brought about rapid changes in job patterns over the years in the United States? Why has big business boomed in some sectors of the economy, while in others it has made little headway against small concerns?

There are no simple answers to these questions. Indeed, most of the website is aimed at answering them and others like them. As an introduction to the more detailed analysis that follows, this chapter sketches out briefly the foundations
upon which our economic welfare rests and provides a simple overview of the way our modern American economy operates.

THE FOUNDATIONS
OF ECONOMIC PROGRESS

Our ability, to produce the goods and services we want depends on the resources at our disposal and our knowledge of how to use them. The United States is rich in natural resources; it is rich in produced resources, such as factories, houses, and machinery; and it is rich in human resources, the most important of all. The American worker on the production line is the best educated, the best fed, and the most productive in the world. American engineering and mass production knowhow have produced Detroit’s fabulous auto plants, Pittsburgh’s steel mills, Oak Ridge’s atomic energy installation. Vast research expenditures generate a steady stream of new products and new methods. And the American businessman manages somehow to keep the whole combination going in a way that excites the mixed envy, dismay, and sometimes disdain of his less aggressive counterparts in the rest of the world.These resources and this technology are the real foundations of the American standard of living of our sweeping growth over the centuries.

In addition, we have developed a high degree of economic specialization and a complex exchange system. How many people do you depend on to get your everyday economic wants satisfied? You may say, not many. But think a minute. Who built the house you live in, and who provided all the materials to build it? How about the car that you drove to school, or the shoes if you came afoot? Where did your breakfast come from_—the eggs, bread, butter, milk, and so on? How many people contributed to the production of your clothes, and of the textwebsites you read? Suppose you take in a movie tonight, or watch TV. How many people have had a hand in making this possible?

To produce all the things we want takes many people, each specializing on what he can do best. Charlie Chaplin immortalized the forlorn worker on the assembly line, day after day screwing his single bolt onto the cars as they went by. But specialization goes far deeper than this.The engineer who designs the plant is a specialist. So is the lawyer who sees that the title to the land is clear. So is the banker who lends part of the money for the construction. So are the accountant who keeps the records and the secretary who does the typing. Only by dividing up tasks and developing highly specialized human skills and equipment can the economy obtain the benefits of “mass production.”

But specialization and division of labor would be fruitless without a system for exchanging the goods and services produced by the specialists. The lawyer, the banker, the truck driver, the engineer—all would starve if the intricate systern of exchange we take for granted didn’t enable them to buy the food they need with the incomes they earn. Even the farmer who might eat his own carrots and potatoes would be in desperate straits if he were really cast on his own—without electricity, new clothing, gas and repairs for his car, mail delivery, and the thousand things he gets from other specialists. Every minute of our daily lives we depend on the specialization and exchange all of us take for granted. None of us would dare specialize if we couldn’t count on being able to exchange our services and products for the wide range of things we want.

(1) Productive resources, (2) technology, (3) specialization, and (4) exchange. These are the four foundation stones of the productive power of the American economy—and of every other highly developed modern economy, communist or capitalist. These four basic factors make the difference between poverty and plenty. Many of the commonest economic fallacies are rooted in the neglect of these simple truths.

LIMITED RESOURCES

MEAN WE MUST “ECONOMIZE

Limited resources—which force us to choose among alternative uses of them—are the basic economic problem in every economy. There is not enough of everything so that everyone can have all he wants. If nature somehow provided bountifully all the things we want, there would be no need to work, no need to arrange for economic production, no need to choose among alternatives.We could have all we want of everything free, without working. But very few things are so plentiful. Human wants are vast, perhaps infinite. Resources to fulfill these wants are limited. They are “scarce.”

For most of the world, economic scarcity is painfully evident. Even we in the United States are far from rich enough to escape the ever-present need to “economize”—that is, to choose between alternatives when we would like to have both. At the individual level, few of us have all the money we want. If you have a vacation trip to Florida this year, you can’t afford a new suit. If you buy a new car, you can’t afford a new hi-fl too. Time is a scarce resource too. It would be nice this afternoon to play golf, to go to the movies, to study, and to pick up some spare cash by working.But you can’t do them all at the same time.

Scarcity, and the problem of choice it raises,is as ever-present at the group and national level as in our individual lives. If we use land for a shopping center, we can’t use it for a school. If we use steel for autos, we can’t use it for refrigerators. If we use engineers to design missiles and intercontinental rockets, they can’t work on airplanes and factories.

For the nation, the heavy hand of war points up vividly this fundamental dilemma of scarcity. Modern war is fantastically expensive, in money and, more fundamentally, in man and materials. In 1967 we spent over $70 billion—over 10 per cent of our national income—directly on war and preparation for war. If the government had merely left this money in the hands of the taxpapers, on the average every American family would have had nearly $1,500 more to spend on clothes, housing, and the like. Behind the diversion of money to military spending is the diversion of productive resources—men, machines, and materials. In a fully employed economy, we must choose between guns and butter, between missiles and margarine. If we use a big chunk of our productive resources for national defense, our standard of living in civilian goods is going to be correspondingly lower. There is enough electronic equipment in one space missile to provide a telephone system for a small city.

The Need To Economize

Because resources are scarce relative to what we want to do with them, we must “economize”
them. That is, we must choose among alternative
ways of using our resources so as to satisfy the
largest possible share of human wants with them.
We need to economize time, money, and produc-
tive resources, anything that is scarce. So far in
history, no economy has been rich enough to
escape this problem of economizing—of choosing
between alternative uses of resources that are too
limited to satisfy all human wants. Probably no
society ever will be. This is the central problem
of economics—though it takes a strange twist in
depressions, as we shall see presently.

It is easy to see that we must choose among
the products we would like to have produced
with our limited resources. But it may be less ob-
vious that how fast the economy grows—that is,
how fast we increase our total output—also de-
pends on where we allocate our limited resources.
To grow, an economy must use part of its pro-
ductive resources to build up future productive
capacity, rather than using them all to satisfy
today’s wants. If we use steel to make autos and
refrigerators for today, we cannot use it to build
factories that will increase production in future
years. If our engineers build TV sets, they can-
not spend their time on basic research to raise our
future standard of living. Thus, one of the choices
every economy must make is between present and
future. To grow fast means foregoing consump-
tion today. Shall we live less well today so we and
our children can live better tomorrow?

Unemployment ond Depression:

An Exception?

Few deny the basic fact of economic scarcity
in the world today. Yet in America the newspaper
headlines sometimes tell of millions unemployed,
of factories idle because the public doesn’t buy
enough cars, of massive waste of men and ma-
chines because there isn’t enough demand to buy
the goods and services that could be produced
with everyone at work. How can this be recon-
ciled with the proposition that limited resources
and scarcity are the basic economic problem?

Widespread unemployment of men and fac-
tories reflects a breakdown in our economic ma-
chinery. Resources are still limited relative to the
vast unsatisfied human wants they might help to
fulfill. People still desire better houses, more food,
more autos, more of almost everything—if only
they had the incomes to buy them. The unem-
ployed want jobs. Businessmen want to increase
production and give them, jobs—if only they could
sell the products. A million men involuntarily
unemployed for a year mean between $5 billion
and $10 billion worth of potential output lost
forever.

The problem of depression and unemploy-
ment, which generally reflects insufficient total
demand to induce profit-seeking businesses to
keep our resources fully employed, has been a
central one for America. In depression, we mis-
takenly and involuntarily allocate part of our
scarce productive resources into unemployment
and waste.