|
Level One: Invest In Production (Editor's note: "Level One: Invest in Production " is the eighth chapter of a book by Mr. Pugsley entitled "The Alpha Strategy", written twenty-eight years ago. We intend to post a chapter each week. Links to the previous chapters can be found at the end of this chapter-JSB)
No matter what job you now perform, whether you are a garbage collector, a mechanic, an electronics engineer, a dentist, or a corporate executive, you are producing a product and selling it to someone else. To produce your product, you have invested time and money in learning your skill and in acquiring the necessary tools of production. In general, the greater the investment you make in education and tools, the more you will produce, and the higher your income and standard of living will be. This investment in education and tools is the very best investment anyone can make. Once you have invested in an education, no one can take that investment away from you. Once you have invested in tools, those tools will produce more wealth for you. These investments will not be affected by inflation, nor by all the swindlers and con men we have identified. Only the changing tastes of the market and the competition from other producers will affect your investment. Education Logically, the first investment that anyone should make is in education. I use education in the broad sense of the word, however, not in the narrow sense of earning a college degree. Education means the acquisition of knowledge, and for the purposes of this discussion, it means the acquisition of knowledge that will enable you to produce a product or service that will be in demand by others. Your choice of the particular product or service is a personal one dictated by tastes, interests, abilities, intelligence, and the amount of capital you have to invest in education and tools. This book is not about which things you should choose to produce, but rather or not you can store any of your accumulated wealth in more education, tools, or facilities. Ask yourself whether it is possible to efficiently invest in more education in your own field. If you are an employee, raising your level of knowledge should increase your output, and your employer (your customer) will benefit from paying you a higher wage. If he fails to recognize that you are producing more, you can offer your services to other employers who produce similar products, and eventually you will find one that will compensate you for your increased output. If you are self-employed, you will find immediate and direct benefits from increased production, as you will have more products to sell, and will automatically earn more profit. Perhaps you can improve your productive abilities by reading, practicing, becoming an apprentice, taking a correspondence course, enrolling in a college, or by simply going into business and learning as you go. In any case, further education is the first place you must look to invest your money. A Second Trade Your current trade is not the only place you should look to invest. There are compelling reasons for almost everyone to invest in a second or third skill. Much of the turmoil in our world can be traced to the strain that individuals fell when their primary source of income is threatened by competition. the ripoffs that we discussed in Part I - subsidies, tariffs, minimum wage laws, immigration laws, strikes, coercive labor laws - are all rooted in individuals' desires to prevent competition from depriving them of their livelihood. If you choose not to attack your competition through the sword of government (and I hope that I have convinced you of the shortsightedness of using force against your competitor), you must recognize that someday a competitor may come along who produces a better product at a lower cost than you, and your customers may desert you. Cheap foreign labor may throw you out of a job, new machines may eliminate the need for your service, or new technology may make your product obsolete. If competitive forces do not succeed in luring away your customers, you may fall victim to an even worse fate; your competitors may use government to put you out on the street. Remember the railroads? Once proud, and employing an enormous labor force composed of individuals who had very specific and demanding skills, they are today a shell of their former greatness. Those employees who were caught in the industry's decline suffered. Most of them fought back through the railroad unions, or sought to maintain their jobs and rates of pay through coercive legislation. The more protection the unions won, and the more the union member's pay was held artificially high in the face of falling demand for rail services, the lower the profits of the railroads sank, and the fewer employees they retained. There was no solution for the railroad workers except to recognize that technology, consumer preference, and government intervention had destroyed the demand for their skills. It was time for a change. Those who were prepared - who had invested some of their wealth in acquiring other skills - made the transition to production of new products. Those who had refused to learn new skills suffered. Any one of those workers would have been far better off to have invested his money in learning a new trade than in simply keeping it in the bank and trying to live off it. It does not matter what your current job or profession is, or what product you produce, you are vulnerable. For example, right now the dental profession is undergoing severe strain. Changes in the birthrate, the use of fluorides, and better knowledge of the dietary causes of tooth decay have combined to cause a falling off in the need for tooth care. This translates into a declining demand for dentists, which affects everyone in the profession. The problem has been partially offset by increased use of dental insurance by industry, which has allowed employees covered by this insurance to use dental services more often than they did when they had to pay for such service themselves. But while insurance has increased demand, and thus softened the blow to the profession, the problem is still acute. Some dentists have gone back to school, investing in further education in order to move into specialty areas, such as orthodontics, where the market has been expanding. Until this field and others like it become saturated, they will have some respite. But who knows what forces will act on the medical professions next? Technology could change, new medical breakthroughs could lower demand for all types of medical services, or basic biological research could result in discoveries of cures for our major ailments. Even more of a threat is government. Government could destroy the profitability of medicine by socializing it completely, as happened in England. Or, less likely, government could turn medicine back over to the free market, and with wide-open competition, the incomes of most dentists and physicians would fall. No job, profession, or business is timeless. No product is invulnerable to change. Just the opposite. The competitive, inquiring, imaginative nature of man is such that almost all products eventually become obsolete. We have factories producing buggies or radio tubes one decade, and they are gone the next, replaced by automobile companies and electronics firms. It's ironic that his process of change and growth, which is so beneficial to all of us, is responsible for creating much of the demand for larger and larger government, since in seeking protection from change, individuals turn to the force of law. When your product is threatened by competition or change, why let the only thread supporting your income and well-being be the desperate hope that government will steal from others to support you, or that your union, trade association, or professional society will be able to drive away competition and thus force the market to deal with you? Instead, invest some of your savings and effort now in acquiring the skills to improve your product and lower its cost, so that the market will continue to choose it over your competitors' products. Or, learn to produce another product that you can offer in the marketplace when your present product loses favor. Those who invest a bit of their current wealth in preparing for change will be the survivors in this volatile world. Tools Education is one factor in production and tools are the other. Whether you are an accountant whose only tools are a calculator, an accounting pad, and a pencil; a mechanic who uses wrenches, drills, and hammers; or a manufacturer who needs warehouses, lathes, presses, and automatic screw machines, the principle is the same. The latest equipment increases production, and production equals wealth. The critical advantage you have by purchasing tools and facilities now, rather than holding money or other investments, is that while your paper wealth will decline in value, your tools will not. Once you buy an education, a pencil, a wrench, or a warehouse, you have it. No matter how rapidly inflation accelerates, you are protected. You have permanently avoided the fall in the value of money on that amount of your wealth. The same logic applies to all other things that you normally use in the course of your job or business. The carpenter who supplies his own nails and lumber, the hardware store owner who sells lightbulbs and chain, the manufacturer who sells shoes - all have an opportunity to stockpile the supplies, raw materials, and inventory required in their businesses. Some businessmen will immediately begin thinking of the costs involved in carrying large amounts of supplies, raw materials, and inventory. It is customary in business to finance these components through bond issues or bank loans. The concept of the Alpha Strategy, however, is to protect investment capital by taking it out of paper claims. If a businessman does not have surplus funds which would otherwise be stored in bank deposits, stocks, or other paper claims, then this strategy is not applicable. It may be prudent under rampant inflation to borrow money to buy materials in advance, but the investments in business assets referred to here would be made with surplus investment capital under the theory that these real goods would be the safest haven for that capital.
|
 |
 |
The affluence of our modern world is the result of two things: we have accumulated a tremendous store of knowledge that has enabled us to design better and better tools, and we have saved a major part of our production and invested it in these tools. The only difference between the shirtmaker of three hundred years ago, who turned out two shirts per day, and the shirtmaker of today, who turns out ten shirts per hour, is their tools. One used scissors and a needle, and the other uses sophisticated cutting and sewing machines. In the long run, the highest and best use of money is to invest it in the tools of production. The more of our surplus that we devote to building tools, the higher our production rate will go, and the higher will be our standard of living. Each individual must attempt to ascertain what is the optimal tradeoff between placing his surplus earnings into more tools of production, or into goods that will increase his enjoyment as he consumes them. Since this book deals with methods of accumulating wealth for future consumption, investment in the tools of production is the most logical starting point. As an Alpha Strategist, you are faced with the choice of investing your money in production goods or consumption goods; in other words, you can buy a sewing machine to make shirts, or you can buy shirts. Investing in production goods should be your first priority.
John Pugsley is chairman of