Free Enterprise - Principle 10

Principle 10: Ready access to capital is necessary for economic growth.

As we saw with the clothes factory, when one person has business success, that success will help others to have success. Success spreads! If a woman raises extra vegetables to sell, she helps the person in the market who rents her a selling space. She helps the nursery where she buys young plants and the company from which she buys seeds. After selling the vegetables, she spends the money and even more people benefit. She buys clothes for the family and the clothes maker benefits. She buys a radio and the store where she bought it benefits. She might even buy a small irrigation system (the one who sold it to her will benefit) and increase her yield. Then she has more vegetables to sell and more money to spend. And yes, even more people will benefit!

Because of entrepreneurs like her, the factory, the store and the nursery can continue to pay their employees. Those employees will spend their money at other stores and factories. This spending, in turn, helps other owners to keep or hire additional employees.

None of this happens if the woman can’t borrow the money to buy seeds and young plants! The bank in the drawing has a smiley face. Can you guess what that means? It means this bank is friendly to entrepreneurs who need credit to get their business going. That is where it all starts! Many people have good ideas for making money but usually don’t have enough money to get started. They need a loan in order to take that first step.

When people can readily borrow start up money, new business will start and jobs will be created. Not all will succeed, but some will. If they don’t have access to capital, their money making ideas will never be tried. Then everyone loses. When talented and hard working people have ready access to capital (money) the economy will grow!

Story

Andre spoke up. “I guess we could, well, sort of … you know, print up more money to go with what we had when we crashed. We would need it to be official—we could elect a committee to oversee the printing and control the supply of new money. It would represent the value we have added to this little valley since we got here. Then we wouldn’t have to lug around things to trade with—we could just use money to buy things with.”

“Yes,” said Marcella, “money systems are far more efficient than barter systems— everyone knows that. But can I get back to the point I was making?”

Andre was out done once again by Marcella. He hung his head and fell silent.

“As I was saying,” Marcella continued, “Some kids who don’t get your jobs will see a chance to get some of the money, new or old, for themselves. They will start making things to sell—sandwiches, mend pants and shirts for work clothes. They can do errands for those you give jobs too, and so on. They will get paid for all that—paid from the money you gave the workers for salary.”

“I get it,” said Sabetha. “It just goes on and on. Workers with jobs will get paid. Other kids will start little businesses so the workers will spend some of their job money at the new little businesses. Then the successful ones will need to hire more workers to fill the new jobs they add.”

Marcella, who seemed like the financial wizard of the group, summed it up. “We will just keep on starting new businesses and expanding the existing ones until there no more workers available. That way, everyone will have a job.”

Sabetha eyes lit up. “Wow!” she exclaimed. “Look at all the growing our little valley economy will do!”

And Marcella waxed wisely yet one more time that day. “And none of it would be possible if the boys couldn’t borrow money. Economies don’t grow unless entrepreneurs have ready access to capital—no loans, no growth.”

Andre knew she was right. But he didn’t have to like it—he wished just once he could look smarter than Marcella!

Activity: Pick three students to be Bank A, the “tight money” bank. Pick three others to be Bank B, the “easy money” bank. Instruct Bank A to have very severe standards for lending—you can explain to them this means they don’t like to make loans and will only do so if there is no risk at all to the bank (they make very few loans)! Instruct Bank B to evaluate their loan applicants, but to be eager to lend to those who have a reasonable chance of success in their new business.

Have the others in the class form groups of two or three and come with plans to form a new business (that will make them a profit plus create new jobs). Give them enough time to come up with their plan to submit to the bank.

Let the various groups role play by presenting their plans and asking for a loan at the hard bank and at the easy bank. It soon becomes obvious that if there were only Bank A, no one could get a loan—there would be no access to capital, no new jobs would be created and the economy would not grow!

Lead the class in discussing the importance of entrepreneurs having ready access to capital if the economy is to grow. What happens if entrepreneurs can’t get start up money for their projects? How many jobs will be lost if new businesses are not started? Will businesses that would have serviced the start business be hurt?

It all starts with entrepreneurs having access to capital so they can start new businesses! That is how the economy grows.