Saturday, June 16, 2012

The Fire Triangle: Basic Economics and Firefighting

There is a basic philosophical and scientific principle that when a very complex situation begins to resolve into simplicity you are on the right path to an answer that works. This principal is called Ockham’s Razor. According to the dictionary here in Microsoft Word it is: “The philosophical and scientific rule that simple explanations should be preferred to more complicated ones, and that the explanation of a new phenomenon should be based on what is already known.” I’ve also heard it expressed as “All things being equal, the simplest explanation is most likely to be the most accurate one.” Even more simplified than that, not to mention very popular among engineers is a little thing called “The Scotty Factor” which is stated as “The more they overthink the plumbing the easier it is to stop up the drain.”

There are an awful lot of words there to express a very simple concept. I prefer to break that down even further to just plain old “Keep it simple stupid.”

I get a kick out of all of these debates in the world of politics regarding the economy and what to do about it. It’s no wonder the subject is so confusing. It’s based on the longest of explanations and most complex ideas, which are only opinions of experts based on opinions of other experts, who wrote books about the other expert’s opinions and won Nobel Prizes for their writings. Since none of their theories lead to any practical understanding or resolution of any problems that anybody can measure, and their predictions of what is going on in the world are mostly wrong, I can only assume that most of these guys know nothing about anything other than how good their voices sound when broadcast on national television.

In attempt to help simplify the subject for the readers who may be interested, I wrote some of the basic understandings I’ve observed regarding money on this blog some number of months ago. It's appropriately titled The Rules of Money. That post only covers what money is and how it acts, but is not really designed around the idea of economics involving the establishment of jobs and companies and yes, the dreaded (rightfully so) labor unions.

To understand more fully the subject of economics I first need to explore the completely unrelated subject of shipboard firefighting in the United States Navy. (Bet you didn’t see that coming did you?) Yes, it does work as a useful analogy and one that a lot of people can understand when relating the basics of fires to the basics of economies.

When you are on a Navy vessel of any sort doing any job, one of the things you have to learn is firefighting. Out at sea you can’t really call 911 and ask for help to put out the fire. So you have a very simple decision to make; you either fight the fire or feed the sharks. Most of the time people prefer to fight the fire although there have been exceptions. As a result practically everybody is trained on how to combat fires.

In the firefighting classes you are taught that there is a thing called the Fire Triangle, which is to say you need three things to start a fire and keep it burning. The removal of any one of these three things will cause the fire to go out. The three things are fuel, heat and oxygen. If there is no fuel there is nothing to burn so the fire goes out. If there is no heat the fire goes cold and goes out. If there is no oxygen the fire suffocates and goes out. It’s pretty basic to the understanding of fire, and having this knowledge, as simple as it is, saves lives.

Now in modern politics, or older politics for that matter, I often hear people say things like, “Without consumers the economy would collapse because nobody would buy anything from the companies, therefore it’s the consumers that are important! Nee-ner, nee-ner you greedy capitalist butt-faced pig!”

One of the responses to that intelligent and well thought out comment is, “Oh yeah?! You crap-for-brains pinko Socialist! Without labor unions (who never seem to realize that labor unions are socialist in nature themselves) nothing would ever get built for consumers to buy!”

Another response to this highly civilized debate is, “Without the company owners and management there would be nobody to buy anything from or anyplace to work so you all need to bow down to me!”

To which the former two groups of people, these days, would respond with, “Shut up you greedy and selfish One-Percenter and give us all of your money!” I think it’s a humorous side note that the people who are usually calling other people greedy, always seem to be the ones trying the hardest to get money from other people in exchange for doing basically very little or nothing at all, but I digress.

Look people, it’s really very simple. Fuel is provided by the owners, starters or managers of a company. Heat is provided by the employees of the company. Oxygen is provided by the consumers. The fire itself is the life of the company as a group of people working together. Thus we have the Economic Fire Triangle.

Too much income tax on the consumers remove the oxygen from the fire and put it out because there isn’t enough money to pay the employees or the owners to keep the company going. Too many government regulations and corporate taxes remove the fuel and put the fire out because there isn’t enough money or material to pay the employees, maintain the company or produce product. Too many labor regulations remove the heat and put the fire out by making it impossible to do the job or pay for the future benefits and salaries to the workers. Thus we have introduced the rather dim-witted firefighters of this analogy, who should probably be restrained, because we wouldn't want the economic fire put out do we? It’s cold out there!

In a sane world the owners and managers would work with the consumers and employees to make a good product at a fair price, realizing that they depend on these other people for their income as well. In a sane world the employees would work with the owners as opposed to against them, with the full realization that not to do so would be biting the hand that feeds them, to establish a fair and sustainable wage, as well as understanding that the owners and managers are rightfully going to make more than them because they’ve sustained the risk and additional effort of putting a company there to work for in the first place. In a sane world the government would realize that if they get out of the way of company owners, employees and consumers, and just let them ignite as many economic fires (by analogy of course) as demand can establish, there would be plenty of cash moving which would allow them to do quite well for all the people. Then we would all be able to stay a nice and toasty warm.

Here’s where Ockham’s Razor really comes into play…it’s not a sane world out there!

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