Now we are ready to introduce another concept into the land of Noz: Government. One year the people of Noz got together and decided they needed somebody to paint lines down the middle of the streets so they wouldn’t crash into each other. They also decided it would be good if there was somebody to conduct studies; it would be helpful if somebody found out whether owls hoot louder on hot nights than they do on cold nights. And, remember the land of Roz, where the Standard of Living is only 10 thousand Buks a year? Those people have been making noises like they might want to come over to Noz and take things. Well, the good folks of Noz decided they needed an army. So they got together and established a government, and elected the repairman to be the head of their government. Titles such as President, King, Mayor, Chairman are already in use by real governments, so let’s call our leader The Wizard.

Now the land of Noz . . . which formerly had ten producers . . . now has nine producers and one non-producer, the government. And the people of Noz realized The Wizard, while not doing repair work anymore, certainly has to live so he should be paid 25 thousand Buks a year for serving as the head of the government.

So now we have a government to paint lines, make studies, and protect Noz. Isn’t Noz better off than it was before? Well, from one vantage point it is, but let’s take a look at the economy.


It looks like the total GDP has gone from 250 Buks down to 225 Buks. And over on the side we have The Wizard making 25 thousand Buks, but where do those Buks come from? They have to come from the 225 thousand Buks. There is no other place to get that money. We’ll call that 25 thousand Buks, which each of the remaining citizens will pitch in to provide TAXES. Now the 225 has to drop to 200 for the nine workers. That leaves 200 thousand Buks for the nine to live on.

Year 2 now has The Wiz, the government, and nine workers with a Gross Domestic Product of 200 thousand Buks for nine people.

Year 2: 200,000 ÷ 9 = 22,222 Buks average Standard of Living

So the Standard of Living of Noz is a little less than the 25 thousand it used to be, but now people have lines down the middle of the street so they are less likely to kill each other; they are going to finally find out if owls hoot more on hot nights or cold nights; and, by golly, those people from Roz better stay out of Noz or The Wiz will shoot them.

Well, let’s go on with it. Let’s go to Year 3. When something happens to the artist . . . let’s say either he’s getting to an age where The Wiz says he should retire, or let’s suppose he gets injured, or let’s suppose . . . anything. And let’s say the people of Noz, together with The Wiz, pass a law and say not only should the artist not work anymore, but he should be supported by the government. So the government pays him, let’s say 15 thousand Buks a year.

Year 3

Good grief, that adds up to 160 thousand Buks for the Gross Domestic Product, and with eight producers and two non-producers the producers are only averaging an even 20 thousand Buks a year.

Year 3: 160,000 ÷ 8 = 20,000 Buks average Standard of Living

All right, let’s go one step further. Everybody knows governments have lots and lots of laws and some of the laws are pretty weird. So The Wiz decides one day that instead of the farmer working so hard and so efficiently and making 15 thousand Buks a year, now the government is going to pay the farmer 15 thousand Buks a year not to produce any crops. (Sound familiar? It should.)

So now we have Year 4 with an artist not working, a farmer who is paid not to grow and a repairman who is The Wiz. We have seven people producing the Gross Domestic Product, and three people being paid from what the producers produce. Now let’s remember that whenever the government gives money to someone it must first take money away from someone else; so let’s see how the workers of Noz fare when the government helps someone else.

Year 4

 Now the Gross Domestic Product for the seven people is 130 thousand Buks a year, and that has each of the seven averaging a little over 18 thousand Buks a year.

Year 4: 130,000 ÷ 7 = 18,571 Buks average Standard of Living

What do you think? It is beginning to look like a cancer. If it keeps up, it will ruin Noz.

Let’s continue. Back in the days when The Wiz only had to paint the stripes, make the studies, and ward off Roz, he could handle all that. But now come all these additional burdens, such as tending to the unemployed and showing the farmers how to live better. He can’t handle this workload; he’s got to have an assistant.

We’ll just call this assistant what he is . . . let’s call him a bureaucrat. And, let’s say . . . the movie producer is the logical one to serve this role. But he’s used to big Buks, and he’s obviously got to make more than the idle farmer and the unemployed artist . . . so let’s say we pay him 20 thousand Buks. After all, he’s serving his country and can certainly do with less of the frivolous things in life, but he can’t make the Buks The Wiz does.

So now we have Year 5 where we have six of the people producing and four living on taxes. We have the farmer enjoying his spare time at 15 thousand Buks, we have the unemployed artist being paid 15 thousand Buks, we have a 20-thousand-Buk bureaucrat and we have a 25-thousand-Buk Wizard. These are not excessive salaries, and each seems a worthy expenditure. But let’s see what has happened to the economy.

Year 5

That amounts to a Gross Domestic Product of 60 thousand Buks a year. For six working people it turns out their Standard of Living is now 10 thousand Buks each.

Year 4: 60,000 ÷ 6 = 10,000 Buks average Standard of Living

Now what kind of shape is Noz in? What happens as the government gets bigger and bigger?

It seems as the government gets bigger certain people seem to be better off. The farmer used to work really hard and now he’s paid a living wage just to do nothing, and the unemployed artist doesn’t have to paint pictures anymore . . . all he has to do is get his government check each month. Being a movie producer is tough work; being a bureaucrat doesn’t pay that well but on the other hand it’s security for life. And, of course, Wiz doesn’t make any more than he did before, but the power satisfies him.

Let’s not go to the trouble to make non-producers out of any of the remaining producers, but can you see what would happen if we did it with maybe two more producers? Pretty soon the non-producers outnumber the producers and the number of non-producer votes . . . assuming Noz is a place where there is voting . . . are going to outnumber the votes of the producers. Then wouldn’t you say it’s reasonable to expect the non-producers, the recipients of tax money, are certainly not going to vote themselves less money . . . that just isn’t the way people tick.

You may have a lot of trouble with one concept. What we are saying for our model Noz is absolutely clear. But in real life, if for instance the artist is out of work, isn’t it reasonable that somebody else should come along and be an artist and replace the lost production? And isn’t somebody going to replace that farmer who is paid not to produce . . . and won’t somebody come along and make movies, the position vacated by our new bureaucrat? And won’t there be somebody trained in repairing things who can take up the slack left by The Wiz?

You are essentially right, and we are probably able to handle that concept at this point. Let’s stop a minute and take a look at Noz’s working force. In Year 1 we had ten people producing 250 thousand Buks a year and a healthy Standard of Living of 25 thousand Buks each. Then in Year 5 we had six people working and four people not working. Let’s suppose the four people that weren’t working are replaced by new additions to Noz, so let’s put that Gross Domestic Product for Year 5 back to 250 thousand Buks a year out of the economy. Now, where must these Buks come from? Well, they must come from the producers, out of the 250 thousand Buks, since there’s nowhere else they can come from.


So now let’s take 75 thousand away from the ten producers in order to subsidize the four non-producers, and that leaves 175 thousand (250 – 75 = 175) Buks per year for the ten producers or an average of 17,500 Buks for the ten workers as an average Standard of Living for Noz . . . down from 25 thousand in order to support the government and its programs. Same results, just a little slower process.


Remember the old saying about putting straws on a camel’s back?

You may say that needy people are still needy, and a nation can’t exist without a government. And it certainly needs an army, and I mean a strong army. But where do you draw the line? That, my friend, is the BIG ONE! And that is not decided by economists, it is decided by politicians.

Now, let’s go back and review, just briefly, what we all agreed to . . . and that is: Production up — things get better; production down — things get worse. It looks like we are ready for our second vital economic principle:


We probably disagree on where that line should be drawn, but there is no question, once you work through the math, the line has to be drawn.

I would say you now know more about economics than ninety-nine percent of the people in the world, and at least more than ninety percent of the politicians and probably more than a great number of economists . . . only because you understand that: production is the key to economic health and that government, unless restrained, will sap a nation.


Suppose you had a brother who would die unless he had a kidney transplant. Would you give him one of yours? Without hesitation. Suppose now you had two brothers and both of them were going to die unless they had a kidney transplant. Would you give them each one of your kidneys? You may think that’s an unfair question. You would definitely give one . . . and might not know about the other. Each is of equal need. Is it fair to say if you resolved both their needs it would kill you? What right do you have to live and let your brother die? Now suppose you had three brothers . . .You don’t have three kidneys. Which brother will you give it to? Each has a real need.

Well, let’s look at it a little different way. Let’s say you are a passerby and there’s an accident. The medics come and discover that unless one of the victims has a pint of blood now, that victim will die. Would you volunteer your blood? Of course. Suppose there are two victims and they are both about to die unless they each have a pint. Would you give two pints? Sure. How about three, four, five . . . how about twenty? You don’t have that many pints. Is it right that you survive, or should the medics take all your blood in order to . . . let’s say. . . let you die in order to save perhaps ten?

Is that an unfair question? Let’s go back to the land of Noz. Where do we draw that line? At what point does the government cease doing things for people? At what point does the government stop helping people? What is the difference between what people ‘need’ and what they ‘want’? Should the taxpayers see to it that every unemployed person gets a new car each year? You might say that’s ridiculous. Well, what’s not ridiculous? What is right? When government spends, the economy drinks its own blood, which in turn enhances its thirst. Because it keeps drinking, it must die. So, what’s right?

But, let’s touch on one additional point. Let’s deal a little with what some might feel is fair. Let’s go back to Year 1 with everybody producing and everybody consuming, which represents the highest Standard of Living we’ve discussed. As soon as we take someone out of the working force and have the workers taxed in order to support that non-producer . . . instead of taxing everybody a little, let’s just tax the rich, okay?

When we made the repairman The Wizard, and, as in our amended model, somebody came in and also became a repairman, the government needed 25 thousand Buks in tax money. Let’s take it from, for instance, the doctor. Everybody knows doctors make a lot of money. So now the doctor, instead of making 40 thousand Buks a year, makes 15 thousand Buks a year. Now, how many people are going to put in the 10 or 15 years in school, start at the bottom of the heap and work those long hours for 15 thousand Buks, knowing the government is going to take the rest of their income away from them?

Or, better yet, let’s get away from Noz and be realistic. In real life, if the government took all the money that all the rich people in our country earned and simply gave it to poor people, contrary to popular opinion, it would barely make a dent in what we call poverty.

That’s how the numbers come out. And how much can the government take away from the doctor so that pretty soon there won’t be any doctors?

Professor Frankum
How to Understand Economics in 1 Hour

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