Jason White in Northwest Alumni Magazine

Dr. Jason White, Principal and Director of Investments at Family Investment Center and Associate Professor of Economics at Northwest Missouri State University, was recently published in the university's alumni magazine. In the article, Jason reflects on his experiences as founder and faculty adviser for the school's Students in Free Enterprise (SIFE) team and the importance of a free enterprise capitalist society.

Click here to view the full article.

Entrepreneurship matters

By Dan Danford, CRSP
Family Investment Center

Sometimes, I run across a thought or quote that's just too good not to share. Here's something I spotted in the latest issue of Ingram's business magazine that I wanted you to see:

The Promise of Entrepreneurship

“The importance of entrepreneurship can never be overstated. We have seen that, over the past three decades, nearly all new job creation has been generated by new and young companies. We shouldn’t pretend that every new company will succeed, let alone be the next Google. But by increasing awareness about the promise of entrepreneurship for everyone, and reducing the costs and barriers to starting and growing a new company, we can boost job creation and economic growth overall.”

Carl Schramm, President and CEO, the Kauffman Foundation
Ingram’s Magazine, April 2010

Capitalism isn't going anywhere, and here's why

By Dan Danford

A friend was recently pondering the merits of socialism. I think he’d like to soften capitalism, and make it friendlier and more compassionate. He’s a sensitive guy, and he likes to help as many folks as possible.

But there are some problems with that. First of all, capitalism got us here. Socialism could never create the living standards we all take for granted today. No rewards for creativity or innovation results in neither of those things, and they've been responsible for myriad advances in everything from safety to medicine. Personal recognition and reward for exceptional effort are the very essence of capitalism. I’d suggest that many Americans who aspire to creativity and innovation do so precisely because they've been freed from challenges inherent to earlier socialistic regimes.

Compare the relative accomplishments under both systems in the 1940s, ’50s, and ’60s - especially the standards of living among middle classes. There's no real comparison where it really counts: how the typical citizens live their daily lives. I don't tout capitalism because it's morally superior, but because it's done more for more folks than any other contemporary system.

Some argue that socialism strips away the temptation for corruption, but that’s not true. Corruption exists under every social system. I’ve grown weary of the “corporate greed” theme. I suppose it is inevitable, given the situation with bank bailouts and Wall Street shenanigans. Most of us work for decent companies, though, which exist to serve customers. They are profit-making organizations, but those profits fuel our entire system.

Basic economics provides support to those of us who favor capitalism. At its simplest, there are just two basic types of economic activity: producers and consumers. Producers are farmers and businesses, and some professionals.
Everyone else is a consumer. All of us consume things, of course, but many people work in jobs that consume, too. Take public education, for instance. There’s no question that teachers do meaningful work. So do judges, and fireman, and legislators. Still, it’s important to note that they are paid with tax money.
The same thing goes for other government workers, social agencies, and charitable groups. The money that flows to them in taxes or other support originates from society’s producers. Those groups, in turn, pay their workers who pay their taxes and consume more goods. But the spigot of money flows directly from farmers, and businesses, and other people and firms who support them.

According to a recent article on federaltimes.com, the single largest employer in Kansas City, Missouri, is (are you ready for this?) the Federal Government. Think about that for a second. Now think about this: no producers, no taxes, no money. Wages and taxes from producers and their employees cover the entire cost of education, social agencies, and government.

I don’t make excuses. I despise criminal or unethical behavior, but crime is such a wee part of corporate America. Yet, some folks think every business is bad and every MBA is a crook. There are no easy answers. I understand my friend’s points. There's clear need for regulatory and government activity, and unhampered capitalism can be dangerous. There’s a definite role for government and a need for balance.

But I also fear unintended consequences. Some of our most regulated activities, including medicine and public education, display ample reasons for concern. Regulation itself can create massive barriers to entry, and monopoly status.

Consumer pricing, access, and service suffer because well-intentioned regulations favor incumbent vendors. Incentives for creativity and innovation fall idle.
Personal recognition and rewards are the very essence of capitalism. They are the key elements missing from socialism. Until those statements are reconciled, there is little hope for success in socialism.

Sales commissions are bad for consumers

By Dan Danford, MBA, CRSP

Here’s the disclaimer. I hate sales commissions. Not just in the investment industry, but everywhere. I understand that they are a fact of life in certain trades or businesses, and that they aren’t going away anytime soon.

And I also understand why they exist. In its simplest form, a sales commission is capitalism at its purest. Employees who sell the most are rewarded the most.

I’m one of the strongest capitalists you’ll ever meet. I like business and I love entrepreneurs. I’ve started two companies myself, and I serve on the local Chamber of Commerce Board. I earned an MBA and I’m a champion for small business owners everywhere. I like employers and I absolutely love productive employees.

Take a group of employees and assign them widgets to sell. Each widget sells for $10, and each salesperson keeps $1 for each widget sold. At week’s end, the person selling the most gets paid the most.

It’s a simple system, and it works really well for the company. Besides rewarding the most productive employees, it also limits the boss’s salary expense. No sold widgets equals no salary. Similarly, when times are fat, everyone makes money. Who could argue with that?

Well, I can, and I will. None of those arguments work for the consumer. In a lot of ways, sales commissions are actually bad for consumers.

- They align the salesperson’s financial success above the customer’s.
- They add costs to the product. Without the commission, that widget would sell for $9.
- They reward employees primarily for their persuasion skills and charm.
- It’s true that they only get paid when a buyer decides to buy, but that doesn’t mean that the buyer necessarily reached an informed decision. In fact, most of us know that the exact opposite it true in many cases.

In a perfect world, buyers would research a product ahead of time, know exactly what they need, and discover a fair and reasonable price to pay. There would be no need for a costly “information middleman.”

Does anyone buy a new car today without Internet research? We know the accessories, manufacturer's suggested retail price, dealer’s invoice, and even the auto’s safety and other ratings from respected third parties. For a used car, we can easily access the car’s accident and repair history. Truthfully, most of what the salesperson does is accompany us on a test drive and add $1,000 to the price.

The same thing is true with mutual funds and insurance policies. Anyone can look up Morningstar fund ratings or get Internet price quotes. It’s true that a professional can add experience and judgment – even valuable experience and judgment – but throwing a sales commission into the pot can ruin the stew.

Morningstar tracks some 25,000 different mutual funds or share classes. Some feature commissions to salespeople and others don’t. If your investment advisor (agent, broker, representative, or consultant) gets paid through sales commission, then they’ll only be showing you some subset of what’s available. And that subset, however large or small, features higher fees to pay those commissions.

Don’t misunderstand me. I think most investors need professional help. I’m not against hiring a bona fide advisor to help create and monitor an investment plan. What I’m against is paying that person through the sale of certain products or services. Especially if other products and services might to a better job for a lower price. That’s the hidden hazard with most sales commissions.

Information we receive shouldn’t be distorted by the salary scheme. Is the Chevrolet salesperson ever going to tell you that a Ford truck is better value? When you last visited the Verizon wireless store, did they volunteer that Sprint might offer better value for your usage and region? When was the last time a paid salesperson told you “no, that’s not the right product for you.” Wouldn’t we be happier if they did?

Like I said, I hate sales commissions. They are good for the company and bad for the customer. Warren Buffett famously advised, “Never ask a barber if you need a haircut.” Never, never, never, ask a commissioned salesperson what they recommend.

Lessons on the job, Part 2

Editor's note: This week on Twitter, we're giving out tips on securing summer jobs for teens and college students. You can find us on Twitter @family_finances. Contribute your own thoughts on this in comments or in a separate e-mail to robynsekula@sbcglobal.net.

By Robyn Davis Sekula

I’ve spent most of my working life contemplating the relationship between work and money, and I’ve found out some interesting things about myself that have helped guide my work choices.

I’ve heard people say, “I love this job so much I’d do it for free.” What a naive comment. Of course you wouldn’t. If they stopped paying you, you’d stop showing up. We work because we have to – but it’s a bonus when you love what you do, or these days, if you even like it. We work because we need the money – and often, because it gives us a sense of satisfaction. But that relationship between work and money will always be there.

My first real job involved working at a Chick-Fil-A, that wonderful haven of tasty crispy delicious chicken sandwiches. I discovered a few essential truths: if you eat fried chicken every day, you will get fat. And, if you have a well-run company and treat people with class, chances are, you’ll serve better food and your workers and customers will notice how good it feels to be in your restaurant. They’ll want to come back. I made something close to minimum wage, which is what I deserved with zero experience. But the job had other payments that made it worthwhile. I remember two significant things the owner did to show his appreciation to us: on a Sunday, they took us all to an amusement park, and paid for all of us to enjoy a day together; secondly, the owner took all of the graduating seniors to the nicest restaurant in town for dinner. I thought this was how all fast food franchise owners behaved. It’s not. He was an unusually nice person who cared about us, and to this day, if I saw him in public, I’m sure he would know me. What a guy – and what a company. I’ll eat there faithfully until the day I die of heart disease from eating too much fried chicken (and I’ll have a smile on my face). The employees are courteous, go out of their way to be helpful and talk to my children and I every single time we visit. We all love the place for the food and its kind spirit. Essential lesson: it’s profitable to be nice.

Next in the list of significant jobs was waiting tables at a Shoney’s restaurant. As it turns out, this was the job that taught me the biggest money lesson: act professionally, be nice, work quickly, and make more money. With waiting tables, you’re assigned a group of tables that is your station. I saw that station as my own workplace. I wanted those seated in my station to be happy and enjoy their experience (even if the food kinda sucked). I saw myself in some ways as an entrepreneur – it was up to me to see how much money I could make. I worked really hard and was good at my job and thus, made good money. But, that job also taught me something else: life without college puts you in a mind-numbing job like that for the rest of your life. Essential lesson: it’s profitable to be nice, and even better to be both kind and knowledgeable.

After this, I worked in a series of newspaper jobs. The newspaper industry pays famously low, and I saw it, at the ripe old age of 21, as a sign of my virtue that I made so little money. I believe that first job paid me less than $1,000 per month after taxes. Wow. I can’t imagine living on that now. After about a year at my first newspaper job, I was climbing into mounting credit card debt. I was discussing it with my now-husband who said, “You can’t just keep charging things. You don’t make enough money to survive. You need to get a second job and pay off that debt.” As I saw it, I was a professional, and the demands of being a police reporter meant that I needed to be available in the evenings, weekends, etc., in case there was a newsworthy crime I should cover. He reminded me that they only paid for the time that I worked – they didn’t own me – and had no right to tell me what to do with my time off. He was right. I took the second job, paid off the debt, saved up enough for a vacation, and then, after we got engaged, we jointly saved $10,000 to pay for our own wedding and honeymoon. Essential lesson: it’s not virtuous to work for a pittance, and if you are, likely, someone else is getting rich off of your back. (Exception of course is public service jobs. But note to journalists: newspapers are not strictly public service. They're not a non-profit. If they don't make money, they close, and the profit formula involves editorial side working very cheaply. This is OK to accept - but know that's what you're doing.)

Fast forward a little. I’m 37. I’m now self-employed. I work hard, and I make more money now than I ever have in my life. In my newspaper career, if I worked hard, all I got was tired. Now, if I work hard, I make more money, which really means something to me now. I’m paying off debt, saving for retirement and saving for my three daughters’ college. The money is meaningful to me because I have goals, and that’s one of the biggest lessons I’ve learned. Without a set, monetary goal, your money floats away freely, frittered away on consumer purchases, meals out and meaningless, mundane everyday experiences. I am happier than I’ve ever been, because finally, my skills and knowledge are being put to great use, and I make enough to change our lives if I stick to my plan. Essential lesson: There is great risk in being self-employed, but for those who enjoy marketing themselves and have significant knowledge in their field, there is great reward. But be prepared to work hard.

So tell me what lessons you’ve learned. Post in the comments. How has what you made influenced how you feel about your job?

The challenge of tinkering with capitalism

By Dan Danford

A friend of mine (and a very bright guy) was recently pondering the merits of socialism. I think he’d concede that Cold War ideologies carry little influence today, and that capitalism easily won that battle (not so easy for citizens behind the Iron Curtain, however). Yet, I also think he’d like to soften capitalism, and make it friendlier and more compassionate. He’s a sensitive guy, and he likes to help as many folks as possible.

Capitalism got us here. No doubt, socialism could never create the living standards we all take for granted today. No rewards for creativity or innovation results in neither of those things, and they've been responsible for myriad advances in everything from safety to medicine.

But, he’d recognize that war as already won, and suggest that today’s world calls for a different model, somewhere between yesterday’s extremes. A different point along the capitalizm/socialism continuum.

Unfortunately, creativity and innovation swing somewhere in that balance, too. Personal recognition and reward for exceptional effort are the very essence of capitalism. I’d suggest that many Americans who aspire to creativity and innovation do so precisely because they've been freed from challenges inherent to earlier socialistic regimes.

Compare the relative accomplishments under both systems in the 40s, 50s, and 60s - especially the standards of living among middle classes. There's no real comparison where it really counts: how the typical, usual, or normal citizens live their daily lives. The human quest to see result for our efforts - in a nicely manicured lawn or a well-prepared family meal - extends into the public and workplace.

Noted financial journalist C.W. Barron once noted that "everything can be improved," and I agree with that. Society keeps evolving and the problems and solutions are increasingly complex. I don't tout capitalism because it's morally superior, but because it's done more for more folks than any other contemporary system. Certainly, it could be better, but it's just as certainly been better than socialism.

Corruption is always a problem. Corruption exists under every social system (damn it!), but capitalism stands alone as the only system that has raised so many people out of poverty and despair worldwide. It's frustrating, perhaps, but capitalism mostly works.

Personally, I’ve grown quite weary of the whole "corporate greed" theme. I suppose it is inevitable, given the situation with bank bailouts and Wall Street shenanigans. Most of us work for decent companies, though, which exist to serve customers. They are profit-making organizations, but those profits fuel our entire system.

Basic economics. At its simplest, there are just two basic types of economic activity. Producers and consumers. Producers are farmers and businesses, and maybe some professionals. They are, in essence, the people who create, grow, manufacture, or provide valuable services for a profit.

Everyone else is a consumer. All of us consume things, of course, but many people work in jobs that consume, too. Take public education, for instance. There’s no question that teachers do meaningful work, and contribute mightily to society. So do judges, and fireman, and legislators. Still, it’s important to note that they all are paid with tax money.

The same thing goes for other government workers, social agencies, non-profit and charitable groups. The money that flows to them in taxes or other support originates from society’s producers. Those groups, in turn, pay their workers who pay their taxes and consume more goods. But the spigot of money flows directly from farmers, and businesses, and other people and firms who support them.

According to a recent article on federaltimes.com, the single largest employer in Kansas City, Missouri, is (are you ready for this?) the Federal Government. Think about that for a second. Now think about this: no producers, no taxes, no money. Wages and taxes from producers and their employees cover the entire cost of education, social agencies, and government.

I don’t make excuses. I despise criminal or unethical behavior, but - although numbers in the news often seem quite large – crime is such a wee part of corporate America. Yet, some folks think every business is bad and every MBA is a crook. Often, these mistaken souls are teachers, social workers, and civil servants who live and work (one way or another) downstream from corporate profits.

No easy answers. I understand my friend’s points. There's clear need for regulatory and government activity, and unhampered capitalism can be dangerous. There’s a definite role for government and a need for balance.
But I also fear unintended consequences. Some of our most regulated activities – medicine and public education, to name just a few - display ample reasons for concern. Regulation itself can create massive barriers to entry, and monopoly status (check out the pharmaceutical industry). Consumer pricing, access, and service suffer because well-intentioned regulations favor incumbent vendors. Incentives for creativity and innovation fall idle.

Personal recognition and rewards are the very essence of capitalism. They are the key elements missing from socialism. Until those statements are reconciled, there is little hope for success in socialism.