Free Enterprise - Principle 7

Principle 7: Stability in economic conditions allows owners, workers & investors to predict likely future profits.

In the days of sailing ships, merchants, who thought economic conditions would remain stable, built ships like this one. That is why they took the risk and put their money into building it. With economic stability, they made profits. As long as economic conditions remained stable they could sell trade goods in countries all over the world.

In modern times, a worker takes a risk and buys a newer pickup with his wage increase. An investor decides to take a risk and put his savings into a start-up business. People take risks when they can predict they will profit from them. When economic conditions are stable it is possible to predict future profits. When economic conditions become unstable the predictions no longer hold true! When profits are predictable workers, owners and investors will all take risks in order to earn profits. This is true for workers and investors too, even though owners are used in the example below.

An entrepreneur wants to build a factory so he buys land. As the owner, he has to pay to install underground sewer and water utilities, pave the driveways and roads. He has to spend even more money to provide electric and phone service to his land. After that is done, he can learn all the building regulations and hire professional builders to construct his factory. He consults with lawyers and accountants to make sure he follows the law in hiring workers and keeping proper business records. The point is he has spent a lot of money based upon his predictions for earning a profit.

If conditions become unstable his predictions are no longer good. What if workers won’t come, or the product he was going to make can now be imported more cheaply, or the army demands bribes for so called “protection” or the business tax rate doubles—his predicted profits are lost! For his prediction of making a profit to come true, economic conditions must remain stable.

Story

Andre and Allen were more relaxed after they had met with the group. Rule of law would prevail and they were glad. It would be their best friend since they were going to run a business, make promises to others, and have people owe them money. They would be backed up by law.

“But I don’t know” Allen said to Andre. “We have rule of law so we can’t be cheated, but what if by some miracle we get rescued—the demand for huts might just go out the window!”

“So now that you are big shot businessman, you want us to stay lost out here forever!” Andre was grinning as he spoke, but he still made his point.

“No, you know I don’t really mean it like that,” Allen said. “But we don’t need anything upsetting the apple cart. Right now, we have customers.”

“Yes, we do” Andre said, “but your point is, that could change. We could be in big trouble. What good is it to have rule of law to make our contracts enforceable, if we have no contracts! We need a steady stream of customers signing contracts—not just a big rush, then nothing!”

“That’s what has been worrying me,” Allen said. “When I can see profits are likely I am willing to take a risk. But we can’t have things changing all the time—it’s impossible to predict how things will go. And most important, we won’t be able to predict profits.”

They decided to call the group back together and talk about how to keep conditions stable—so predictions could be made.

This time Sabetha was quiet and let someone else lead. She already understood that for her to get rich things had to remain stable. If conditions remained stable, plans could be made and carried out and the desired results would come. She could predict becoming rich—that is, if nothing major changed. She remained quiet so as not to make it any more obvious than it already was that she wanted to become wealthy.

After some discussion, David sarcastically said, “So, how do we control the weather? Got any ideas for that?”

No one had any ideas for controlling the weather.

“Better allow for things like that”, he said. “Too much bad weather and no huts will be built for weeks, maybe even months.”

They knew he was right. The weather could change any time it wanted—they could not predict the weather! Their group was focusing primarily on the hut building business and businesses related to that. If the hut building business failed, their dreams would dissolve.

Finally Kovrich summed it up, “We need stable conditions to keep business flowing and be profitable. We can figure a way to control the demand for huts. We can have the kids draw straws to see who gets to buy this month, another drawing for next month and so on. The demand for huts will keep materials needed, huts needed and workers needed fairly stable.”

Marcella added, “And we just have to live with the unpredictability of the weather. That could be really hard on the business.”

And then, as an afterthought, she added, “but I think enough of the conditions affecting the business are stable and therefore we can predict profits. I say, let’s move forward and expect to make profits!”

Activity: Ask the students to say situations that could make prices change. Teacher may lead them with an example: “If half of the milk cows in the country died, would that affect the price of milk (demand is unchanged, supply is cut in half)? Urge them to think of other situations that will affect prices.

After some discussion, ask them if they would risk investing in a new business if future prices are unknown because the economy is unstable—goes up and down a lot! They will probably say no—the instability creates too much risk! Lead them to see that 1) investors will not invest, 2) owners will not expand businesses and 3) entrepreneurs will not start new businesses unless conditions are stable enough to make profits very likely.

For homework, ask students to find an article, or report on a radio or TV story, about something that will have either a 1) positive effect or a 2) negative effect on the stability of the economy. They share the basic facts from the article or radio/TV story, and then tell the class why they think this situation will positively or negatively affect economic stability.