Imagine that you have five adult children, and they decided to engage in different activities. The eldest son chose the oil business, the second – agriculture, the third daughter – light industry, the fourth daughter – restaurant business and the fifth son chose furniture production.
You gave start-up capital to each of the children, and they began to work.
At first, all businesses developed in pretty much the same way. But then everything changed. When the price of oil began to rise.
With the same expenditure on production of food, furniture, clothing and oil, oil revenues have become disproportionately large. Your eldest son began to grow rich: he built a big house, bought himself and every member of his family cars, began to spend holidays in exotic countries every year.
Due to the fact that your son sold the oil to other families for their money, the other families’ money streamed into your house and, due to this, became less valuable. If earlier for one candy wrapper of theirs your family gave one of your own candy wrappers, then now a half of it is enough.
What about the other children?
Of course, they started getting something from their older brother. The oilman’s family regularly visited the restaurants of the fourth daughter. From this, her incomes started growing, too. In addition, the rich man spent money on the purchase of clothing, food, utilities, services of a housekeeper, gardener, security guard, driver, coach in the gym and so on. Children of the other four children of yours got these jobs. Thus, the oil money willy-nilly leaked through the oilman’s fingers and spread to the pockets of all family members. And since the eldest son was rich and did not regret the money, all the people who served him received a fairly high salary. Much higher than in neighboring families where there is no oil. Your family got used to such income, and now no one here agrees to work for less.
Meanwhile, other families in the neighborhood continued to live with no manna in the form of oil money. They were still willing to work for the same price and produce the same amount of goods: food, furniture, clothes, cars. Their products are therefore relatively cheaper than the same goods produced by your children. At one time (or rather gradually and imperceptibly), your children suddenly realized that it is more economical for them to buy cheaper products in other families and sell each other here than to work hard and pay their family members much more money for work. Therefore, instead of production, shopping centers, shops, car dealerships, restaurants, in general, everything that serves oilmen, whose business brings the maximum income, began to thrive. And now your third daughter has closed the garment factory and converted her building into a shopping center. The fifth son closed the furniture factory, and opened a store instead and sells furniture produced by other families. The second son is scraping by on agriculture. Only the fourth daughter lives well with her restaurant.
Seeing this situation, you are trying to somehow influence the situation in the family. You appeal to the pride of children, encourage them to open their own production with their own brands. You want all products to be produced in your family, to be independent from other families. You even build some objects using the money from the family budget and open them solemnly. But everything is useless. You will not go far on patriotism and enthusiasm. The economy is stronger. And it forces you to do what is more profitable.
That’s where you understand that you did something wrong. The situation was out of control. Although smart people had warned you.
What had to be done to prevent this from happening?
You shouldn’t have allowed the eldest son to receive all the oil revenues and spend them. You should, on the rights of the father of the family, have established a high payment (tax) for him and not allow to conceal his profits outside the family (transfer prices). All the difference that he received more than the other children should have been taken from him and directed to the common family needs. For example, spend more on infrastructure: roads and communications, heat, electricity and water, electronic systems, as well as the development of human capital: schools and colleges, so that your children and grandchildren were the most educated and then, thanks to the developed infrastructure and their own brains, and not oil, earned their living and developed your family.