Self-Interest at Work; D. Haywood

DaleHaywood Self-Interest at Work THERE is no need to apologize for the self-interest of human beings and the desire to earn a good living that follows from it. This is simply the way we are. In a free enterprise system based on private property and the profit and loss system, earning a good liv ing very frequently translates into efficiently performing a service or manufacturing a product which oth ers value and for which they are 'willing and able to pay. This was pointed out by Adam Smith more than 200 years ago in ..An Inquiry Into the Nature and Causes of the Wealth of Nations: HEvery individual necessarily la bours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it . . . he intends only his own gain, and he is in this, as in, many other (~ases, led by an invisible hand to promote an end which was no part of his intention."

In sum, most, if not all, new busi nesses start with someone moti vated by self-interest being alert to some problem that others face. A new business then requires someone vvith imagination, ability, and cour[.r. Haywood is professor of business and finance at Northwood Institute, Midland, Michigan. He isca-au thoring with Mr. Lawrence Reed a textbook, When Men Are Free, from which this chapter is published by permission. 175 176 THE FREEMAN March age to follow through with practical solutions to that problem. This was precisely the case with Roger and Mary Lou MacGregor's business. The MacGregorYacht Corporation The time was about twenty years ago. The place was Costa Mesa, Cal ifornia. The ~~problems" that Roger MacGregor saw were rising sailboat prices and rising docking rentals. For most of his life, Roger had been around sailboats-building them and sailing them. Sailboats were his hobby. While a student at Stanford University, he 'conceived a new kind of cruising sailboat with a retractable keel. The boater who owns a cruising sailboat with a re tractable keel can tow his boat on a trailer behind his car. Thus, he can store his boat in his own back yard, thereby saving the cost of docking and slip rentals.

Starting a new business requires capital, money with which to buy (or rent) a building and machinery. The MacGregors started their busi ness with $5,000 of their own sav ings. It is significant that the initial investment was their savings. In a private property, profit and loss sys tem, the owners of private property at risk normally tend to look after that property very closely. Investors proceed cautiously when it is their savings that are at stake, for any losses will be their losses. There was no guarantee that prospective cruising sailboat buyers would actually buy the kind of sail boat that Roger conceived and that the MacGregors' firm manufac tured. As long as consumers are free to patronize whomever they please, there cannot be any such guarantee. In a free enterprise system, it is the consumers who are the ultimate judges of goods and services. Through their buying or not buying a partic ular product or service, consuiners detennine which businesses will earn profits and which businesses will suffer losses. The consumer is king.

It is not the producer, it is not the wealthy who guide the economy. Rather, it is the consumer who is in the driver's seat. A BetterProductat a Lower Price The MacGregors knew there was competition in the sailboat manu facturing business. They knew that the way to woo customers was to come up with a superior boat at a lower price. And they understood that if a firm is to sell its products for less than the competition, it must have lower costs. The MacGregors believed that the retractable keel feature of their boat made it a better boat than the com petition's. They sought to cut costs, and thus to cut the selling prices of their boats, through the application of assembly line techniques and the standardization of parts in the fab rication of their sailboats. Neither 1981 SELF-INTEREST AT WORK 177 the assembly line process nor thei standardization of parts is new, of course. But the MacGregors made a.

new application of these familiar techniques, for historically the! cruising sailboat manufacturing' business· has been a custom work. business. Reflect on what is happening here. In pursuing their own interests, the MacGregors were quietly trans forming, in a small way, an indus try geared to serving a select few to an industry geared more toward serving a less-select larger group. Characteristically, this is how many businesses and industries get started, and grow in a free enterprise sys tem. Division of Labor Initially, only Mary Lou devoted full time to Roger's hobby that was turning into a business. Roger kept his job at Ford Aerospace and Com munications CQrporation. But the MacGregors had correctly judged the demand for less expensive cruising sailboats with retractable keels. Consumers bought more and more of their boats. When production reached ten boats per week, Roger quit hisjob at Ford Aerospace and joined his wife full time. His hobby was no longer a hobby. It became a fullfledged business-the Mac Gregor Yacht Corporation.

As their business has grown, the MacGregors have split up some of its major functions. Roger has re sponsibility for production and sales. Mary Lou is responsible for finance and administration. Economists call this a division of labor. The basis for a division of labor is the difference in the abilities and the interests of the individuals in volved. Each individual does what he or she is relatively more inter ested in and better able to do. Such specialization usually leads to each specialist becoming even more pro ficient in handling his part of the business. The greater proficiency leads to greater productivity. And relatively high productivity is what it takes to survive in a competitive free market. Retained Earnings Finance Growth The MacGregors' business is prof itable. Thus, it has survived. The profits retained in the business have provided much of the financing for the growth of the firm. This is typi cal of many businesses.

The bulk of the profits of business do not go for the owner's personal consumption. Rather, most of those profits go to finance the growth of business. And it is thus that the wealth of many wealthy people gets tied up in assets that provide jobs, in assets that multiply the produ~ tivity of the people who use them, in assets that help generate still more goods and services for consumers. In the free enterprise system, much of 178 THE FREEMAN March the wealth of wealthy people is in forms that serve the masses. And the wealthy person who wants to preserve or increase his wealth has an ongoing obligation to see to it that his wealth continues to be in forms that serve the masses. But relatively high profit margins are short-lived in a system where there is private property, a free market, and a profit and loss sys tem. The top of the heap is a precar ious position. For example, as com petitors also adopt the assembly line and standardization of parts tech niques that the MacGregors pi oneered in the sailboat manufactur ing business, the competitors will be able to cut their costs too. Then, they also can cut their selling prices.

And so the MacGregors will lose whatever competitive advantage they had because they were the first to apply these cost-cutting tech niques to the cruising sailboat man ufacturing business. Thus, to hold, to say nothing of increasing, their share of the mar ket for cruising sailboats, the MacGregors are continuously ((un der the gun." To maintain relatively high profit margins in a free mar ket, it is not enough to come up with one or two new products. It is not enough to come up with one or two new ideas or new applications of ideas for cutting costs. No, to main tain above average profit margins in a free market, a businessman must repeatedly come up with new products that solve problems or in some other way appeal to consumers. The busi nessman must repeatedly come up with cost-cutting techniques. And he must do all of this ahead of the competition. Thus we see why the free enterprise system is such a powerful engine for economic progress.

The Uncertaintyand Insecurityin Freedom The MacGregor Yacht Corpora tionhas had a healthy birth and in fancy. Will this business continue to prosper and grow? As long as con sumers are free to buy someone else's boats (or other goods altogether), no one can say for sure. The MacGregor boats with retractable keels may in spire another generation of sail boats. Who will have the inspira tion? There is no way of knowing in advance. The MacGregor cost-cut ting techniques may spark another round of cost-cutting. Who will have this spark? There is no way of know ing in advance. Clearly there is a large element of uncertainty about this firm's future. In a free society, there is uncer tainty about the future of all busi nesses. But this uncertainty and at tendant insecurity are simply the consequences of freedom-freedom of the consumer to buy or not to buy from a given business; freedom of existing or potential producers to 1981 SELF-INTER]~ST AT WORK 179 begin, expand, or halt the produc tion of any item they believe there is a market for.

Not knowing exactly when or where or from whom the next idea for a new or improved product or new cost-cutting technique will come has been the source of both much mischief and of much good. Not knowing the source of the next surge of progress tempts some indi viduals to call for central planning, for government planning of our eco nomic affairs. Some individuals seem to think that not knowing exactly how the next spark of progress will come makes life unnecessarily chancy. Isn't it, they contend, more rational to ttimprove" on this chancy situation by methodical central planning? This line of reasoning is the source of much mischief. History has repeatedly shown us what happens when government central planning is substituted for planning by individual consumers and producers. Central planning stifles the self-interest motive. It constricts the spirit inside us that urges us to strive for the ttgoodlife."

This kind of planning is at odds with the nature of man. Although on the surface it appears that in theory po litical central planning should elim inate some of the uncertainty in freedom and accelerate economic progress, history clearly shows that in fact it is a source of instability and that in fact it retards progress. Those among us who are tempted to endorse central planning, be cause it appears to be the more me thodical way to progress, might profitably reflect on the life insur ance industry. For there is an ele ment of uncertainty in the life in surance industry that is in some ways like the uncertainty of the or igins of progress in a free society. Predictable Results The most capable actuary cannot specify which particular sixty-year old men will die next year. But the actuary studies history. Specifi cally, he studies the history of male deaths. He learns from history. He develops mortality tables. Equipped with the information in these mor tality tables, that actuary can very accurately forecast the percentage of sixty-year-old men in a large pop ulation who will die next year.

Knowing this percentage for sixty year-old men and the corresponding percentages for men and women of all ages, he can help his company confidently proceed with its. busi ness of insuring the lives of men and women whatever their ages. Similarly, a study of the history of free men and women enables us confidently to proceed in freedom. Although we cannot accurately fore cast details of how the free society will progress, we can confidently forecast that it will progress. Free men and women will progress be180 THE FREEMAN cause of the good feature of insecur ity. The good feature of insecurity is that it is a powerful stimulus. For the best way to cope with insecurity is to become competent. By ably serving consumers day in and day out, productive individuals can do much to reduce insecurity. Then, in a society in which there are large numbers of individuals busy trying to become more competent and more productive, the average level of ability and the average output of Sharing the Gains the individuals in that society rises tremendously. Indeed, the average ability and output can rise to the point where the «poor" person in a free society is much better off than the ((rich" person in a society that is not free.

Can the MacGregors, specifically, sustain their ((track record?" Time will tell. But as for the record of free men and women generally, time has already told. That record is decisive. Freedom is a condition required for maximum human progress. , IDEAS ON LIBERTY All economic gC1rins must be eventually shared. That is a basic principle of such broad application that it might be called a general (Claw of eco nomics." It works this way: 1. All business is done by agreements of some kind. 2. The agreements are voluntary. 3. Nobody agrees to anything unless he finds it in some way to his advantage. These add together to make the essential reason why economic well being is more widely distributed in the United States than it ever has been in any other country. For in a free economy, everybody gets a share of the values other people have to offer. But they also have to share a part of the values they themselves have to offer.

A million deals, agreements, trades, contracts, and bargains are made every day in this country. They are all voluntary, and go on the same principle as that of the most primitive barter between Indians and fur traders. Both sides gain, or think they "gain. But because of this principle of sharing, or ~~letting the other fellow make a profit, too," the free economy is one of history's greatest mecha nisms for the diffusion of wealth. HAROLD M. FLEMING William Blackstone On the Origin and Character of Rights By the absolute rights of individu .. als we mean those which are so in their primary and strictest sense; such· as would belong· to their per.. sons merely in Ii state of nature, and which every man is entitled to en.. joy, whether out of society or in it. ... Human laws define and enforce as well those rights which belong to a Dian considered as an individual, as those which belong to him consid ered as related to others.