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March 9, 2009

Let's Talk Parasites and the Economy

hink about this: The government cannot create wealth. If it could, it would have no need for taxes.

This is a simplification, of course. (Governments can support activities that create wealth.) But the main thing to keep in mind is that politicians and bureaucrats through their taxing power consume wealth that is created by others.

Parasites

Parasites are not necessarily bad. There are parasitic organisms that rely on a host and offer something in return. Some parasites are even necessary for the health of the host. But the distinguishing characteristic of a parasite is that it requires a host. It requires something to feed off of.

And even good parasites, when they get to be too many, can kill the host.

In an economy, in simple terms, there are hosts and there are parasites (some good, some bad, some good in small quantities).

Hosts create real wealth. Parasites consume the wealth created by hosts.

Real Wealth

What is real wealth (as opposed to unreal wealth or secondary wealth)? Which of the following would you say is real wealth?

1. The government prints up $10 billion dollars.
2. A man invents a process that yields 10 times as much corn per acre than before.
3. A bank takes in $1 million in credit card finance charges.
4. An insurance company collects $5 million in payments.
5. A man sees that his stocks are worth $100,000.
6. A woman has a 401K and a IRA that together are valued at $250,000.
7. A plaintiff's lawsuit results in $10 million in damages, divided up 50-50 with lawyers.

The answer is: Only number 2 is real wealth. All the rest are either unreal (1, 5, 6) or secondary (3, 4, 7).

In other words, only the man who invented a process that increases corn yields by 1000% has created real wealth. If you have trouble recognizing this, then you are a potential sucker for thinking parasites are hosts. You are open to being conned, by both conscious and manipulative parasites, and good-intentioned parasites.

A Fable About Wealth

20 people live on an island. Each person can live per day on one fish (average 6 hours to spear an edible fish) and one coconut (average one hour to climb and get) and a gallon of fresh water (an hour's round-trip hike). Traditionally, each person catches their own fish and gets their own coconut and water. It requires 8 hours of work each day to accomplish all three tasks. If someone cannot get their food and water for a day, they have to rely on someone else working a 16-hour day, or several people adding hours to their day to take up the slack.

One day Leo gets an idea. He tries to talk the other 19 people into getting his food and drink for a day so he can develop it, but they think he's crazy and refuse. They simply do not have the minds that can see Leo's vision and how it would work. Leo decides to go hungry for a day in order to invent his fishing pole with hook, line, and sinker.

The next day Leo goes off to a remote beach and catches 10 fish in two hours.

Suddenly Leo has real wealth. He can either salt the fish and save them so he can have several days of less work, or he can give away or trade his fish for mutual benefit. If he is willing, he can spread the wealth by teaching others how to fish, for a fee.

Leo gets four people who want to learn how to fish and become fishers. They agree to help him with food and drink so he has the leisure to make 4 fishing rods and teach them to fish. In exchange, they agree to give him one fish out of every 10 that they catch for one year.

Now Leo only has to work 2 hours each day getting a coconut and water. He doesn't have to fish since he gets plenty of fish from the four fishers. Because of his personal efforts he has not only generated wealth for himself in the form of extra fish and leisure time for other creative pursuits, he has helped to increase the overall wealth of the community. Since more fish can be caught each day than is needed by the entire community, trade sets in. One fisher trades fish to have non-fishers help him build a better hut, for example.

Meanwhile, Leo (who seems to be the only one who has an inventive spirit and the skills to implement) sees a way to relieve the entire community of having to walk an hour to get water. He pitches his vision for a water canal/aquaduct to deliver the water to them. All he needs is community support in the form of getting him and 3 volunteer workers their coconuts and water each day and he will build it for community use. All he asks in return is that the community agree to give him 4 coconuts a day for a year as a reward for his extra work.

They agree, even though many of them are still skeptical, unable to see what Leo sees. But the fishers are believers and some of the others. So the project goes ahead.

The project is a success and the entire group benefits from water pouring into their local resevoir. Now everyone only has to work an hour each day for coconuts and whatever they have to do to get fish from the fishers. They are free to develop basic specialized functions, like gathering firewood and doing specialized labor for others.

Meanwhile, Leo thinks about coconuts. He invents a sling and one day comes to the village with 20 coconuts that he knocked down in one hour. He's in a generous mood and shares with everyone and offers to make anyone a sling who wants one for the price of four coconuts per day for a year.

Leo becomes a very wealthy man who does not have to work for food and has an excess for trading. But who does he trade with? Well, some visitors came in a boat from another island and they opened negotiations with the village to take off their hands extra fish, coconuts and water in exchange for various fruits that grow on their island.

Trade begins and both islands flourish. All due to the vision and skills and risk-taking done by Leo.

Parasites and Hosts

In this fable, Leo is a host and he is able to help others become hosts as well. The only parasites in this story would be those who stop working entirely and rely on the charity of others giving them an excess of food and water. (Hey, there's plenty to go around. Why should I work?)

Also, with leisure comes the desire to create words and words and laws and interpreters of those laws (lawyers). These people start talking about taxes and the need for everyone to contribute to the "community chest" so that other projects, like Leo's canal/aquaduct, can be financed "for the good of the community."

More middlemen are created. Politicians, lawyers, bankers, insurance agents, tax preparers: All people who can be good parasites up to a point. But when politicians scheme with bankers and lawyers and tax preparers and insurance agents to pass laws coercing people to use their services, and allowing frivolous lawsuits that merely transfer wealth rather than create wealth, the parasites begin to kill hosts. And people in the community get confused about where real wealth comes from, especially people who are dependent on politicians giving them money and lawyers providing opportunities for big cash settlements. Tax law gets so complex that everyone is required to pay a tax preparer. And of course insurance begins to go too far and everyone is required to be insured for everything, and more opportunities for frivolous lawsuits arise.

People like Leo are rare. More often people have ideas that are less worthy and less workable, or even downright silly. But with town councils and meetings and emotional persuasion, people of the community get talked into supporting ideas that don't work and even though people get paid out of the community chest, no real wealth is generated.

At a certain point, a few people start envying Leo's good fortune and start talking about "fairness" and how unfair it is for Leo to have so much without working. ("Hey, other people are working and he's just sitting their collecting fish and coconuts. It's not FAIR!")

Envy is a pernicious human emotion and politicians and lawyers of the worst kind take advantage of it. Laws get passed and taxes are raised on Leo's "excess" (i.e., capital gains in a loose sense) Soon everyone thinks it's a good idea for Leo to pay more than others (to be fair, you know).

Meanwhile, Leo is beginning to see the way the wind is blowing, he shrugs and decides to move to another island where he is free to develop his other ideas. Until the parasites grow with envy there as well.

Meanwhile, the 19 remaining villagers wonder why there seems to be less wealth to go around, espeically since so many people seem to be lawyers or otherwise working for the town council.

They look at the four fishers and decide they should be taxed more. And so it goes until the four fishers decide to shrug and go to another island.

And the town council promises more unemployement benefits and wealth transfer, and they begin printing up paper money without any real wealth backing it up and soon everyone wonders why prices rise and goods are scarce, and why everything is going to hell in a hand basket and they end up blaming it all on the greed of Leo and the fishers, who are just so damned selfish.

Hosts can only take so much from parasites. And parasites don't seem to have the vision to see what happens when they kill off their hosts.

For continuing updates on why Leo shrugged, be sure to read Instapundit.

Posted by witnit at March 9, 2009 8:17 AM

Comments

Fair point, but.... is he a genuine wealth creator for inventing the process, or only when he actually uses it to grow that wheat?

Posted by: Pete UK at June 8, 2009 10:33 AM

That'll teach me to answer in a rush! The answer is "yes".

Posted by: Pete UK at June 8, 2009 11:02 AM

Hey Wit, Have you ever read "Economics in One Lesson" by Henry Hazlitt? Sounds like you're on the same wavelength.

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