Monday, September 5, 2022

(267) THE FRUITS OF YOUR LABOR IN THE ECONOMY: A Labor Day Reflection, a Simple Model of How the Economy Works

AMDG

All these terms make economics and the economy appear quite complex.  The model below simplifies it all to its bare essentials from a Christian point of view.  It all boils down to people who work, consume, buy, sell, borrow, save, invest, and pay taxes.

        Labor Day helps us to appreciate the value and fruits of everybody's labor.  Your labor may produce a good such as a farm product, coal, electricity, a machine, a craft, etc.  Your labor may produce a service such as the distribution of goods to consumers in a store, plumbing, repair, a beautician that makes a woman feel good about herself, banking that mobilizes savings and lends it to investors to produce more.   Your product may serve hundreds if not thousands of people. 

       The fruits of your work is a salary or wage which is a convenient medium of exchange for trade that can buy the fruits of the labor of thousands of other workers…..goods and services that you and your family need to live in dignity.  Money in itself has no value (just paper), but is worth what we all think it is worth as with inflation.  Part of your wage or salary goes to your parish, charities, and governments whose workers can provide services for you and many in the community…..police and fire protection, national defense, roads and their maintenance, public health, education, social work, etc.  That’s essentially the way our economy works…..a trade of work (my product) for work (your product).  

    Thanks be to God I have talents or skills that you don’t have; you have talents or skills that I don’t have as we labor to meet each other’s needs.  We exchange the fruits of our labor for the common good of all.  By labor we must serve each other with honesty and trust.  The Christian worker works hard to produce a quality good or service not simply for money, but also because somebody out there will use his/her good or service.  

       You produce for others and others produce for you through the markets that use money as a means of exchange.  We depend on each other with our labor.  Both father and mother sacrificially provide for and serve the family in and out of the home.  God intended all of this and love of neighbor is key to an effective society and economy.

        We labor for each other in our jobs.  We do our best to produce a high quality product because somebody out there is using the good or service we produce.  That is an act of Christian love.  What I produce you may use.  What you produce I may use.  With the money we earn as a medium of exchange we buy each other’s products.

                                                        Market Exchange

                        Abilities                Taxes

                        Skills              ----------------------------------->     Common Good

                        Resources              Government Services

                                                        Sharing

Every person with his abilities, skills, and resources can labor for the common good of all. while receiving recompense (money) for his/her labor, giving the worker the ability to buy (trade) for for the goods and services produced by others to satisfy his/her personal needs.   Market exchange through the medium of money, taxes, government services, and sharing facilitate the process.

    The essence of this article is what is written  above, but let us go into greater detail and depth to obtain greater insights and understanding on how a national economy should work.  

Two Models of the Gross Domestic Product:

Circular Flows of Goods, Services, Labor, Capital, and Money in the Economy

 

A Simple Model of the Circular Flows of Goods, Services, Labor, Capital, and Money in the Economy.  Taken from Baumol & Blinder, Economics: Principles & Policy Dryden Press.

         The above diagram gives a simplified version of how a national economy works.  As previously stated, a model is a simple representation of reality to facilitate understanding.  This model is commonly used in Economics textbooks.  Basically, it shows the interaction between Business (the producers of goods and services) and the Community (the consumers or households) with information flowing between them.  Business consists of farms, shops, landlords, governments as providers, and other organizations that produce.  The Community consists of individual consumers, households, renters, stockholders and other owners of the various means of production, and governments as spenders.      

        The upper loop shows the Product Market, where Business provides goods and services to the members of the Community in return for monetary purchases.  The sum total value of all goods and services produced in a national economy is called the Gross Domestic Product (GDP) according to the following formula:

 GDP = C + I + G + (X - Z)

 where C = the total value of all goods consumed (food, clothes,                          television sets, telephone, water, electricity, soap, paper,                     cosmetics, etc.) and services used (beautician, stores,                           banking).  This is about 70% of GNP.

            I = investment, which are expenditures of resources on capital                  goods that can produce now or in the futureThey                              include  buildings, machinery, equipment, etc.


G = government expenditures on buildings, human resources,       materials, vehicles, weapons for the military, etc. to                provide services and national defense.

            X = the value of exports of products sold to other countries.

           Z = the value of imports of products purchased from other                        countries.  These must be subtracted from consumption                       since the country did not produce them.

      The lower loop shows the Factor Market, where the Community provides the land, labor, and capital in return for remunerations or compensation.  The more common word is income.  Employees receive wages for their work; depositors and bondholders receive interest on their savings; and owners of buildings receive rents for their use.  The business and its profits belong to the owners or stockholders, who receive part of the profits as dividends. The business then reinvests the remaining profits as savings, which are called retained earnings.  We can imagine that the investor also receives the retained earnings and then reinvests it into the firm.  The business pays part of the remunerations as taxes to the Government as do individuals on their wages, dividends, rents and interest received.

      Investment requires savings and I = S. Business borrows money from savers who sacrifice consumption in return for the payment of interest which is the cost of money.  Business may borrow through the sale of interest bearing bonds or may borrow from a bank which mobilizes savings by paying interest on deposits.     

        Some individuals and entities wear two hats.  A landlord has a house to rent as a business and is a consuming member of the community.  The shop is a business while the shop owner is a consumer.  Similarly the farm is a business and the farmer is a member of the community.  The beauty salon is a business and the beautician-owner is a member of the community.  Government as a spender and receiver of taxes is classified as Community since it represents the people, while Government as a provider of services is classified as Business.  

        Prices of goods and services are determined in the product market while labor costs, interest rates, and stock prices are determined in the factor markets.  In a Free Market System prices and rates are determined by the laws of Supply and Demand while in socialist and autocratic systems government controls apply. 

        In the inner loop the Community gives land, labor, and capital in return for goods and services as the net effect.  Money serves only as a convenient means of exchange.  In the outer loop, there is a flow of money between Business and the Community.  The sum total value of all the goods, services, investment, exports less imports is exactly equal to the total remunerations of wages + interest + dividends & retained earnings.  

        In a healthy growing economy, there is a rapid flow in both the outer and inner loops.  However, if the flow is too rapid, the economy overheats and there are shortages of labor and capital as well as products.  This results in increases in demand and decreases in supply, causing higher prices and labor costs, i.e., inflation..

        Again we see the interaction between Business and Society or Community in the net exchange of the resources of land labor and capital for goods and services.  What makes an economy is what it produces.  Each one of us acts as both a consumer and a producer of a good or service while working in a business (often his own), a government agency, the military, or a non-profit organization such as a church, charity, or educational institution. 


In this more detailed diagram Government (G) is considered apart from Community and Business.  Government spends across the Product Market for products of Business such as vehicles, buildings, and weapons.  It also spends across the Factor Market for the wages of its employees who are part of the Community.  Prices in both the Product Market and the Factor Market are determined by the laws of Supply and Demand.  In total Government expenditures (G) should be equal to Taxes (T).  More often than not G > T and there is a deficit.  The Government either borrows from the Community through the issuance of bonds or Treasury Notes or simply borrows from the Federal Reserve Bank which dutifully issues more money and the Community (Country) has a problem with inflation.  More money being spent on the same amount of goods abd services causes prices to rise and thus inflation.  Taken from Pride, Hughes, & Kapoor. Business.  Boston: Houghton-Mifflin. 

        In all three models above transactions are made across the product and factor markets by the laws of Supply and Demand in the Free Market System.  Businesses buy from each other across the product markets.  These purchases are costs to each firm which the Community or Government consumes or invests and covers these costs in the final price of the product.

       For the economy to function efficiently there must be honesty and trust that each employee does his best to produce a quality good or service, confiding that each business or consumer will do what it agreed to do.  Otherwise, conflict and lawsuits result.  Again love of neighbor (the ultimate customer and fellow employees) is essential.  Again the labor of each person is very important and essential in an interdependent society.  

        When every person does his part, the company prospers and jobs are more secure, the investment of the stockholders of the Community are more secure for their retirement.  Furthermore, the entire community prospers.  

        What makes a country and its economy is its people that produce.  The most important resource of a business is its people.....their knowledge, skills, and abilities along with their dedication. hard work, ingenuity, character, and education.  It takes good people to do manual work in a labor intensive business and skilled people to develop, operate and maintain the equipment in a capital intensive curve.  

        And there's always a need for capable manage to plan, organize, advise, lead, coordinate, and control the human, material, and financial resources of the organization be a private enterprise or a government organization.  Thus each business must treat their employees well because of their value to the business and their tremendous value as persons created according to the image and likeness of God.  All of this is really overview of how the economy works.......really Christianity in practice when Church social teaching is followed.  Then the common good is achieved as God intended.   

Bibliography

Baumol, William J. & Blinder, Alan S. (1994). Economics: Principles and Policy. 6th. ed., New York: Dryden Press.

Pride, William M.; Robert J. Hughes; & Jack R. Kapoor (2005). Business, 8th ed. Boston: Houghton-Mifflin 





                                                              


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