Economics Explained for Anyone
You may have a graduate degree in economics. You may be a senator or congressperson. You may be a head of state. And you probably will still not understand economics. But - if you read this simple essay and understand it so that you can explain it to someone else - then you can say that you understand economics.
History of Economics
There have always been economic systems as long as there have been societies of people. The fact that economics was not understood does not mean that an economic system did not exist anymore than to say that people did not have a circulatory system until William Harvey described the circulatory system in 1628. Economic systems conform to laws of nature just as do circulatory systems - and just as men have developed many theories and systems of medicine from acupuncture through allopathy, homeopathy and a great variety of other approaches to heal and manipulate the body - they have developed many different systems to manipulate the political economy.
At various points in humanity's history certain individuals have made discoveries that have then been developed into fields of study. William Harvey described the circulatory system in 1628. Then in 1687 Isaac Newton published the Mathematical Principles of Natural Philosophy, commonly known as the Principia, and is known as the father of Physics. Wilbur and Orville Wright kept careful notes in their process of building the first airplane that they flew in 1903. Their study became the forerunner of modern aeronautics. It is possible to point to other giants and founders of fields of study such as astronomy, chemistry, electronics, computers and so forth.
The father of the study of economics was Adam Smith. In his 1776 book "The Wealth of Nations" he called the study Political Economy and it was referred to by this title for many decades. Properly, that should still be the case because all economic systems are politically based. Adam Smith was a professor of Moral Philosophy and that is also still the proper field for the study of economics.
Types of Economic Systems
Just as there are many different medical systems, all based upon dealing with the human body, or different types of airplanes based upon the same laws of aerodynamics, or different kinds of computers based upon the same principles of electronics and logic there are numerous economic systems that deal with the same physical reality and human nature. No one political/economic system is necessarily any more right than one system of medicine, one type of airplane, or model of computer. Some medical systems, airplanes, computers, etc. are more suitable for certain situations than others - and the same is true of different political/economic systems. Still all of the systems, medical, aeronautic, computer, or political economic must deal with same underlying reality of the world.
To understand economics one needs to understand these ten simple facts.
There are economic goods and non-economic goods.
There are economic goods and non-economic goods.Economic goods are things that are bought and sold and non-economic goods are things that SHOULD NOT be bought and sold - such as love, honesty, loyalty, truth, life, justice. But in truth we can think of instances when non-economic goods are bought and sold as by prostitutes and dishonest judges. That is one reason that the study of economics should be a part of moral philosophy.
Economic goods are created and destroyed.
Economic goods are created and destroyed.Because they need to be created and because they can be destroyed they are in a state of what we call scarcity. It is this scarcity that creates their economic value.
The creation of economic goods always requires labor.
The creation of economic goods always requires labor.That is to say effort by one or more individuals. This labor therefore also has economic value. Some views of economics are based upon the 'labor theory of value' but other factors also contribute to production and value.
The creation of economic goods always requires raw materials or what Adam Smith called land.
The creation of economic goods always requires raw materials or what Adam Smith called land.The materials may be grown on the land or taken from the sea or mineral mines or from oil wells and so forth but eventually all physical things can be traced back to Mother Earth. The raw materials because of their scarcity also have economic value.
Economic goods are also used to make further economic goods.
Economic goods are also used to make further economic goods.These special economic goods such as factories and machinery, trucks, trains, ships and many other things used for further production, rather than consumption, are given by economists the special name of "capital". The moneyworth of those things came to be called capital and people often think of capital as being money, but money is not a real thing - it is simply numbers and a veil. Money is no more a real thing than the numbers in the notebook of an aeronautical engineer are the airplane itself - or the words in a catalog are the product itself. Later in this essay we shall discuss money more fully. The money by itself is worthless and can be made larger, smaller or non-existent by those who manipulate the numbers but the physical things of capital have value.
The above three items - land, labor and capital (the later being real factories and such) are called the factors of production
The above three items - land, labor and capital (the later being real factories and such) are called the factors of productionbut in order to make them work one needs another factor that we call management, or sometimes entrepreneurship, to organize / control them and to put them together and to work. This management/entrepreneurship therefore also has an economic value.
Technology changes the means and methods of production.
Technology changes the means and methods of production.It was not until the early 1900s that Thomas Edison greatly influenced the use of electricity with his light bulb. This was long after Adam Smith had written the Wealth of Nations in 1776 - and a bit after Samuel Morse had ushered in the era of distant communication in 1844. In the time of Adam Smith even the internal combustion engine had not been developed and he wouldn't / couldn't have imagined the bustling modern highways, airplanes, satellites or the Internet and almost instantaneous communication. All of these things affect how our economic systems work today although they do not invalidate Adam Smith's initial insights as to the roles of land, labor, capital and entrepreneurship.
In 1776, at the time of Adam Smith's "Wealth of Nations", James Watt had barely discovered his principles of steam and human power, horses and the wind still largely powered the world. Today, we recognize the economic essentiality of energy in its many forms from the sun, wind, water, oil, nuclear and so forth. The form / source changes. Whereas at one time coal was king we today realize that no matter what its source - energy is essential.
Economy of Scale is also something that progressed beyond anything that Adam Smith might have imagined.
Economy of Scale is also something that progressed beyond anything that Adam Smith might have imagined.Today's giant plants, mills, refineries, corporations interlinked about the earth by modern communication and computer and control systems would have been as unimaginable to Adam Smith as jet airplanes.
The present day technology and manufacturing systems have determined the present structure of the current economic system.
The present day technology and manufacturing systems have determined the present structure of the current economic system.Advances in technology have led to greater control over the factors of production but they have not been accompanied by equal advances in social organization on the political side of the political / economy spectrum.
While scientific investigation has led to the asking and answering of many questions about the physical reality there has not been a necessary and equal balance of advance on the side of Moral Philosophy in the Political / Economy spectrum.
Changing conditions of technology have caused the need to ask questions of Moral Philosophy such as regarding the effect of scale upon the environment, the use of transportation in connecting markets, the control of communication, the social allocation of resources to warfare versus to welfare, the right of entitlement, issues of privacy, and so forth.
In point of fact, since the time of Adam Smith, economies have become much more Knowledge and Service based.
In point of fact, since the time of Adam Smith, economies have become much more Knowledge and Service based.There has been a major shift in both what is produced and in what is consumed and not just in the way that things are produced and consumed. These shifts in emphasis between the factors of production, plus the change in the products along with scale and control of distribution have occurred without conscious direction as to their results and consequently the system is becoming dysfunctional.
Is the entitlement to be determined for an individual by whom their parents are?
Is the entitlement to be determined by the contribution that an individual makes to the political economy?
Does everyone have a right / obligation to contribute to the political economy?
Some may say that entitlement should be determined only by the free market and that the laissez faire free market is a natural order of things just like gravity and shouldn't be interfered with. The same 'natural order of things' argument could then be used against the existence of airplanes.
Should individuals be motivated solely by altruism?
More importantly, should we try to effect motivation through education?
Some people will feel that motivation is a facet of the self and that it is therefore sacrosanct and that there should be no outside interference. Whether or not this same principle should apply to advertising in the free market system is somewhat undefined.
Through strength of their individual wills?
Through choice of the masses?
Through selection by those already in power?
What is to be share balance of the contributors of land, labor capital, management?
Simply those determined by a free market mechanism?
Those determined by those who have power, influence and control?
In point of fact much of the resources of production goes for developing the means of destruction. Is this not somehow paradoxical?
I have set out a series of questions but I have not provided any answers. The answers that an individual will give will be based upon their study of moral philosophy.
The Divine Prophets have given humanity guidance upon such questions as to whether or not they are their brother's keeper and as to what the motivations and actions of individuals should be in life, so there is nothing that I can add beyond the Writings of the Spiritual Giants in that regard.
If I were to design a course on economics I would call it Emotional Economics because people become so emotional about their economic views.
The ideal of communism as described in the Bible and elsewhere, where one contributes to the society to the utmost of their ability and takes only what they need - has never been achieved. The experiment has been tried many times - but has always failed because of the selfish nature (nature of self) in which people have been created. Major social economic attempts towards communism in countries areas such as Russia and China failed and were later modified but remained under totalitarian control. Over-centralization has repeatedly been shown to have very detrimental effects.
Laissez Faire Capitalism
The opposite of centralized communism, Laissez Faire Capitalism also proved a failure for most people in whatever countries it was implemented. A few people would be very rich but the majority were impoverished. Moreover, such systems repeatedly go into cycles of depression - some of which can be very long enduring and which create periods of great impoverishment for the masses within the system.
The term fascism should not be confused with totalitarianism although there may be some inherent reason why it always ends in that state. Fascism is simply the control of government by industry. The US is today a fascist state because the large corporations are the main contributors to the political parties and determine who will run for office. There is a continual flow of people back and forth between those who run the large corporations and those who run the government. Since the corporations contribute to and control both of the US parties there is continuity in the policies of the government no matter which party is currently in office. The interests of the government therefore predominantly express the interests of the corporations.
There are no countries with systems that can be called 'pure' capitalist, communist, or facist. Most are somewhere along a spectrum of socialism. While some lean more towards capitalism, fascism, or communism in the end each embodies some of the qualities of the other and each to some degree directly concerns itself with the overall needs of society.
A free market economy has proven itself the best regulator and efficient allocator of most of the resources of production for consumer products. Bureaucracy is very inept at making those decisions and cannot easily determine the inputs or outputs for the most simple of products. "I Pencil" is a very enlightening essay on the input side and one only needs to look at a commodity like bread in New York City to see how the market delivers sufficient each day with very little wasted or left over.
On the other hand, the market economy does not do well in undertaking large projects such as the pyramids, Hoover Dam, rockets to the moon and so forth. Nor does it often satisfactorily meet many tasks required for health, education, fire protection, and other public needs. These needs are provided for through socialist mechanisms.
Some people think that economic considerations should be confined to providing a stable money supply. The monetarists often advocate a metallic standard such as gold. William Jennings Bryan said: "Crucify me not on a cross of gold", but he was actually a metallist also - just a bimetallist because he also wanted the free coinage of silver.
Because someone or some society does not happen to have silver or gold does not mean that they should be crucified by starving to death or doing without the other necessities of life. Money is looked upon as a medium of exchange - but in a gold monetary system, when an individual or even a large community does not possess the medium, then there cannot be any exchange unless they can arrange for barter or some other medium.
Money is also viewed as a store of wealth. Usually it is not the thought of as the single store because people would generally have property and other goods that they valued - but in a gold monetary system it would be the only store that they could be directly exchanged for all other commodities. In actuality, most gold based systems would exchange certificates of ownership of gold rather than the physical gold itself and most usually there would be accounting registers of ownership of the certificates rather than possession even of the certificates themselves. The point being, however, that anytime one wanted the physical gold they could have it and that theoretically there would be enough gold stored somewhere to satisfy the demand if everyone wanted their physical gold all at the same time.
Money is also a measure of value and there could not possibly be enough gold in the world to equal the value of all the goods in the world. Much of the value that many people have is in their homes. All of their homes could not be exchanged for gold without greatly depreciating the value of the homes or increasing the value of gold such that it would have to be exchanged in such minute parts as to be indivisible.
The question becomes the value of things. Price and worth is not the same thing. People need homes and having gold per se does not satisfy that need. The homes have worth and are an asset. Mortgages monetize that asset and allow the money to be used for other purposes. The issue then becomes how the asset is monetized. In the process of monetizing the asset, there are created what we call fiat currencies. While here only homes have been given as an example, in actuality production plants, inventory, and almost anything else, included expected future earnings for a college loan, can me monetized. The created fiat currencies permit the greatest flexibility in increasing economic activity but they are just a numerical convenience of accounting, just numbers on a page, or the electrons on a computer general ledger which can be brought into or taken out of existence. Therefore money is a veil to the real economic activity employing the factors of production that we mentioned earlier and the monetarists who would control the economy by money are simply manipulating the veils through such methods as interest.
The Keynesian system, one of the popular theories of economics today, has tried to manipulate the real factors of production through money. John Maynard Keynes wrote The General Theory of Employment, Interest and Money in 1936 at the depth of the Depression. His views eventually became the predominate system of economics taught in universities and practiced by governments. Still, it is much like trying to control something by pushing on a string.
In what has become the topsy-turvy world of economics, the main concern became not production but rather consumption and today one hears much about the need for the restoration of 'consumer confidence'.
The option of just directly putting all the factors of production - labor (people, workers, managers), land (farms, mines and raw resources), capital (plants, machinery, and equipment) to work is ignored out of the desire that the 'free market' will determine what goods and services will be produced and that the 'free market' will determine who will get the products. The alternative of direct social planning as attempted in China and Russia did prove disastrous.
The Best Economic System
One can only conclude that all of the economic systems presently practiced by humanity have failed at one time or another to provide what a theory of Moral Philosophy might see as an optimal production and distribution of goods in their societies.
Russia and China greatly improved their systems by permitting and instituting some market incentive practices while the US and those economies associated with it greatly increased production, mainly of war goods, through deficit spending.
In all the economies - those with power, influence and control have generally implemented plans in accordance with their own perceived best interest rather than for some over-riding sense of universal benefit and justice.
Throughout the world, whether in communist, capitalist, mixed economy or whatever type of economic system, it is always a very small minority of individuals with immense concentrations of power or wealth who have set the destiny of events. They are often in conflict with each other as they seek to further concentrate and enhance their power, influence and control. Most often this conflict works to the detriment of the masses of the rest of the people in the world who often find themselves exposed to unemployment, poverty, depression, conflict, and sometimes in war to threat to life itself.
There are remedies, but none that humanity has until now proven able to implement - nor will be able to implement until circumstances become such that they create a shift in human attitudes. The majority of people, high and low, are presently motivated by greed and self. So broadly is this apparent that it is thought to be the basic engrained nature of man himself.
No system, capitalist, communist, or whatever may be proposed - will be able to overcome that seed of destruction without a spiritual shift in the consciousness of humanity. All present systems provide for advancement and promotion of sociopaths, individuals who are motivated by self and greed without any sense of conscience. The very nature of these systems is that they select only those individuals who are willing to make every effort and requirement to promote and advance their self.
What should the meek individual do? In the present day there is nothing that they can do but strive to live according to what they consider to be right and to try to inspire others to do likewise. Circumstances determine the situation that one is in. If one lived in the time of Mongol hordes, one would have to suffer the raw force of those hordes. If one lives in the time of mass depression and weapons of mass destruction then one must accept that they are going to feel the effects of the age in which they live.
Attempts to only save one's self and family is simply indicative of the overall selfness of the times. Attempts to advance the spiritual awareness of humanity will bring one more into atune with the spiritual purpose of life and their own proper destiny. However, there is no need to get emotional about advocating or changing any of the present economic systems because they are all in their death throes.