By Jack Cumming

It’s common to date academic economics from the publication of Adam Smith’s The Wealth of Nations in 1776. Of course, economics — that which we now consider economic expertise, as the theory, science, and mathematics of collective finances — existed long before Adam Smith. We can gain insight by stepping back slightly and reexamining the basics.

Many senior living enterprises are not-for-profit. It’s often thought that not-for-profit is an intermediate organizational form between government — which looks collectively at the national economy — and private interests, which focus on the productivity and rewards of individuals. Is a collective approach better? Or are we more likely to prosper with individuality? Of course, equal opportunity, equity, and justice for all are overarching considerations.

Basic Economics

Let’s say you work in a senior living community. You may receive part of your pay in a free lunch. When farming was ubiquitous, it was not uncommon for farm workers to be paid in produce. Money came later. Before there was money, there was barter.

It’s no exaggeration to say that the development of money as a concept was central to the specialization of function that powers much of the efficiency of a modern economy. Now consider the development of share ownership of enterprises. At one time, the size of a person’s cattle herd might have been a measure of wealth. Then, as nomads settled into farming, wealth was measured by land. Just think of the lords of the manor of England.

Money Economics

The development of stock ownership, a claim on the financial success of an enterprise, took the concept of wealth to a whole new level. Amassing wealth in the form of stock ownership, which was readily convertible into the money of the realm, gave rise to a commercial aristocracy. Industrialization and functional specialization unleashed modern prosperity and gave us the world in which we now live.

Now back to that job you have in senior living. If you work for a share-owned company, you might be paid, at least partly, not only in free lunch but also in shares. Marketable or redeemable shares in a company are much the same as money. That takes a bit of thought. Let’s say, you’re given $100 in cash, or alternatively, you’re given 10 shares worth $10 each. On paper those are equivalent. You may prefer the cash because it’s acceptable in more places, but financially the two payments are the same.

In that instant, though, is where the difference emerges. Those 10 shares may be worth $15 before you have to spend that money. That would give you $150 of value, likely more than enough to offset the erosion of inflation. Cash will inevitably erode in its purchasing power with inflation. Given today’s circumstances, it’s likely that the share payment will rise in value, just as it’s likely that the cash payment will lose value. That’s simple economics.

Not for Profit?

You may now be asking, “What about not-for-profits? Aren’t they better because they aren’t tainted by the filthy lucre of money?” The appropriate response is to question whether that is true. If a not-for-profit burns through all its money, it is as bankrupt as is any misguided investor-owned enterprise.

Moreover, if the not-for-profit prospers and is financially successful, it’s not the shareowners who benefit — one of whom might be you in our example above — but some abstraction, the state? The attorney general? The beneficiaries? The executives? the board? — it’s just not clear. It’s nearly as mysterious as questions about who prospers and who loses depending on how effectively a nation is governed.

Good Governance

That brings us to the biggest question of all. If a government is of the people, by the people, and for the people, why are the people penalized by a persistent loss of value in the currency. To be blunt, inflation is a penalty for people who trust cash.

Money, today, is a claim against the good faith and fair dealing of those who govern, i.e., those who determine national policy and who oversee the acts of government. If the relative value of the currency goes up, that’s an indication of sound government, just as a rising share price over time is an indication of good corporate governance.

Now, we need to pause here to emphasize those words “over time.” Modern accounting, and its companion “accountability,” tend to look at financial performance in annual increments or even more frequently. Moreover, modern business practice ties operators to budgets which are most often rigid at least for a year. Dynamic budgeting which responds to changing business circumstances is still rare.

It’s no wonder that most people find finance confusing. It’s been disconnected from common sense and has, instead, become an academic exercise governed by codifications, laws, and a convoluted tax code.

Starting Fresh

Just sweeping all that aside, and looking at enterprise and national prosperity through the clarity of reason, clears the way for sharper thinking and better results. This is true not only at the enterprise level, but also at the personal level, e.g., how much personal debt is too much, and at the national level, again, how much national debt is too much.

The senior living industry can make a start by moving away from the artificiality of the not-for-profit/for-profit distinction and beginning to look at mission fulfillment in the most responsible, most efficient, and most effective way possible. It’s just simple economics, or common sense, if you prefer.