It seems to me that with all the whoop-de-do about socialism and what it is or isn’t, I figured an object lesson in capitalism might be appropriate. To allay any possible concerns that this is some highbrow academic lecture, please be assured it is not. Nope, it’s a very simple case study of capitalism at work.
This situation came about in the summer between my fifth and sixth grades. I decided I wanted a bicycle and knew I would somehow have to earn the money because we, like most families at the tail end of the Great Depression, couldn’t afford such frivolities. I had heard that the local newspaper offered “newsboys” the opportunity to purchase the daily newspapers for three cents each and then sell them for five cents thus making a profit of two cents a paper.
When I told Dad about this he wanted to know how I planned to work this scheme. I explained that I had saved twenty-five cents with which I would buy as many papers as I could and then sell them. We talked for a while, then he suggested a more formal approach. He offered to lend me another twenty-five cents giving me a total of fifty cents to work with so I could buy ten papers while keeping an additional four nickels for change in case a customer paid with a dime or quarter and thus I wouldn’t lose a sale. I also would put away all my daily profits separately and wouldn’t touch them because they were for my bicycle. I agreed and went to work.
Okay so what does this have to do with capitalism? Everything! You see, I was taking on the role an entrepreneur (“a person who organizes and manages a business undertaking, assuming the risk for the sake of the profit” – Webster) – and entrepreneurship is a fundamental principle of capitalism. With the help of Dad, I had developed a “business plan” with a specific objective in mind. The plan included investing my own “venture capital” and Dad’s “risk capital” which is defined as “funds invested speculatively in a business, typically a startup.” Sixty percent of my overall capitalization was allocated to the “operating expenses” of purchasing the newspapers while the remaining forty percent was “capital reserves.”
Furthermore I established a “sinking fund” which is defined as “a fund established by an economic entity by setting aside revenue over a period of time to fund a future expense, or repayment of a debt” – and my “sinking fund” was designed to do both. I also assumed the risk of “spoilage” because the newspapers I bought daily were of no value after that day. Yep, although my business of buying at wholesale and selling at retail was very small, it incorporated the essentials of any well-planned business venture.
Well, my business went along quite nicely as I learned how to peddle my papers on the street, and in bars, restaurants, “hamburger joints” and bowling alleys. I almost always sold out so I was usually making twenty cents a day on my fifty cent capitalization – that’s 40% return on my investment a day! How about them apples! I quickly repaid my loan from Dad and my bicycle “sinking fund” was growing. But then disaster struck.
The newspaper raised the price from five to seven cents a copy meaning I now had to pay five cents per paper. My operating expenses jumped by 66% so I could buy only six papers a day and my anticipated profit dropped 40%. In addition, I had to add fifteen cents in pennies – from my sinking fund – to my capital reserves so I could make change for a customer offering ten cents.
All this reduced my rate of return by over half and my contribution to the sinking fund by 40%.But that’s not all. Customers balked at paying the higher price – coughing up a nickel was fairly easy, but fishing around for the extra two cents was not. Furthermore, since they were used to paying only five cents I often had to show the price displayed on the newspaper to prove the increase. I started encountering “spoilage” problems and sometimes had to resort to an “inventory reduction sale” by “dumping” my papers at cost just to avoid a total loss.
It didn’t take long for me to realize my business plan was in tatters and so I, as do many other startups, went out of business – seemingly a failure. This venture was, however, was actually a success because my “sinking fund” was sufficiently healthy enough to get me a bike so my original objective was achieved.
Well, there you have it – a real life case study in the fundamentals of capitalism complete with entrepreneurship, a business plan, obtaining venture and risk capital, allocating operating and reserve capital, establishing and maintaining a sinking fund, and meeting the business objective. You know, maybe this example should find its way into a business course. At least that’s how it seems to me.
Bill Taylor is a regular contributing columnist to the Greene County Daily in Ohio. This column shared through the AIM Media Midwest group of newspapers.