Introduction to Economics

This paper was written from my mind with no reference material.

 

I would like to share some of the things I have learned about economics. What do you think of when you hear economics? Money, trade, corporations, factories, employees, stores, supply, demand or something else? Through my studies I have be surprised to learn how much more economics is and how important it is to understand. Economics plays a big part of our lives every day.

To start I would like to share some of the major economic thoughts throughout history that stand out to me. Starting with the Hebrews, they taught the importance of being frugal. They also had important resets built into the system, every seven years all debt was forgiven so the society was not consumed with never ending debt. Every 49 years property was restored to the proper owner so if you had gotten in financial trouble and leased out all your property it was restored to your family so you had a chance to start over again. The poor were also able to sustain themselves by picking the leftovers of the crops. When harvesting a field the corners would be left unharvested and the trees would not be picked clean so those who where poor could go gather food for their own needs.

During the ancient Greek period there was a mixture of though on how the state economy should be managed. Plato wrote about a managed economy where property was held in common and the means of production were managed by the state. Aristotle countered this and believed in private ownership.

Through the Dark Ages of Europe we saw the development of feudalism. With the fall of the Roman Empire the feudal lords no longer had the powerful state to back them up in the management of their estates. The serfs were no longer required to give all of their work to their lord. They had to give a certain portion of their work but were allowed to keep the rest for themselves. With this change if a serf worked harder and more then he was able to keep the extra instead of just giving it to the lord. The serfs began to see the land they worked as their own, not the lords and they were just required to pay a portion or a tax to the lord. The lord still had a lot of power as the sale of goods still had to go through him and the purchase of supplies also went through him so he was able to control costs and profit off of the exchanges.

As the Dark Ages begin to end there was a new growth of towns and cities which allowed for trades and division of labor to become more specialized. You had many more craftsmen instead of everyone focusing on food production and survival. In the cities guilds began to form.  The guilds would control various industries, for example if there was a blacksmith guild you would have to join the guild to learn how to be a blacksmith and to work as a blacksmith in that city. Guilds are very similar to unions in our day.

As Europe shook off the Dark Ages and passed through the renaissance the formation of nation states began to form.  Once these nations were formed they begin to look for resources and power outside of their own borders. The brought the beginning of colonialism. The nations created colonies all around the globe in their name. Colonies worked much the same as feudal domains did in the Dark Ages. Those living in the colonies would work and develop their property but the trade was controlled through the parent nation. Goods were sold for cheap to the parent nation and supplies the colonies needed were bought at a high price through the parent so the parent could make profits of these transactions and control the trade.

During the late 1700s and early 1800s the colonial period was coming to an end and there were economic philosophers sharing their thoughts on how things should be done. Adam Smith shared the idea of supply and demand and the effect it had on prices. If the supply of a product is low and the demand is high then prices will rise as people are willing to pay more so they can get the product. If the supply is high and the demand is low then the prices will fall since there is a surplus of the product. These factors also drive production. If supply is low and demand is high then there is an incentive for producers to produce more or there is motivation for more people to become producers of the product. As more product is produced then the supply goes up and eventually meets or exceeds the demand.

Karl Marx was also during this time frame. He pushed for a central control of the means of production. The thought is that through the central control, production can be planned so the correct things are produced when they are needed and can eliminate any erratic fluctuations in the market, keeping things more stable. This feels very similar to what Plato proposed.

Frederic Bastiat was another economic philosopher during this time period. He was a strong proponent of free enterprise and keeping the government out of the way. One philosophy he shared was the concept of that which is seen and that which is not seen. Whenever we take action we focus on the result that we can see. We rarely look at the result that cannot be immediately seen and is often a negative result. For example let's take a look at minimum wage. That which is seen is those employees that are only making minimum wage get a raise and are able to afford a better life style. What are some of the things that may happen that are unseen? The companies have to raise their prices to pay the higher wage so the raise the employees got still buys the same amount of goods. Companies cannot afford to have as many employees so they lay off the less productive employees. So instead of making more money the employee is now without a job. Companies will only hire people they feel are worth the new wage so many of the people the new minimum wage law was meant to help actually hurts them the most since they cannot find a job because they do not have the skills to justify the higher wage. What also is not seen is what the employers would do with that money if they didn't have to pay higher wages. They may develop a better product enriching everyone, they may offer better benefits for the employees, they may give more to community, they may build or remodel working space or a handful of other things. I'm sure there are many other possible unseen results but this is just a few that came to my mind.

A more modern economic philosopher was Keynes and this is the philosophy that heavily influences the current United States philosophy. One thing Keynes taught is that during a down turn it is required to "prime the pump" or borrow money to throw into the economy to get it going again. A healthy economy is a large amount of money that is in action being spent and used. He also taught that once time were better it was time to repay the debt that was borrowed to prime the pump. In the United States we follow the first part of the philosophy but ignore the point of paying back the debt.

In the United States the banking system works off of what is known as a fractional reserve banking system. The United States government issues bonds (or debt) to the Federal Reserve Bank, which is a privately owned bank, in exchange for dollars. Next time you have a dollar bill notice it is a Federal Reserve Note. The Federal Reserve creates the dollars and delivers them to the United States which then deposits them into a bank. The bank only has to have a 10% reserve on the amount it loans out, but the loans it makes does not come out of its reserve but simply makes the money out of thin air. For example, if the bank gets a deposit of 10 million dollars it can then loan out 9 million dollars. It makes the loan of 9 million, but keeps the 10 million so the 9 million does not really exist. That 9 million is then deposited into another bank which does the same thing. On average for every dollar deposited, nine dollars are created out of nothing. All dollars in the United States represent debt. If every debt was paid off there would be no money left, in fact it is impossible to pay off all debts because of interest. Dollars represent all debt without interest attached so bankruptcy and default on loans are built into the system. Most of the money is electronic and does not even exist in the form of paper money. Paper money accounts for about three percent of the actual money supply. Because of this system all banks are bankrupt but the system keeps functioning on made up money.

The constant creation of money is the causes of inflation, or the cause of money losing its value. Each time money is created it takes its value from the existing supply of money making each dollar worth less. The total value of all the money together does not change, only the value of each single monetary unit. So as more and more dollars are created out of nothing, more dollars are needed to buy something. To guard against inflation money has to be based on some type of commodity. Gold and silver have been popular through history because they are fairly rare, have intrinsic value (they have a value in themselves such as being used to build microchips), they are easily divisible,  easy to transport and are durable. If a money system is based off of a commodity you cannot simply create more money out of nothing which helps keep values stable. Since the creating of the Federal Reserve and moving off of the gold/silver standard the United States dollar has lost over 95% of its value.

History and current life is full of many different philosophies on economics. There are some rules that impact our daily individual actions up to nations and the world. It does not matter what level actions are being taken, the rules don't change.

All human action is driven by choice. We make our choices based on what we think will bring us the most satisfaction. The key word here is "think". We often make choices that bring us pain and suffering but at the time the choice was made we thought it would bring us satisfaction or justified it in our mind even though we knew it was a bad choice. At the time we make the decision it is rational in our mind even if it is not logical. Consequences and reactions are all built on natural rules and laws, if we understand these rules then we have the ability to make good decisions that will bring us true satisfaction since we will truly understand how the world works.

We each put a different value on what will bring us satisfaction. For example, one person may put a very high value on a cigarette while another person will put no value on it. One person may put a very high value on a sports car while another person will put no value on it. We all have very different ideas of satisfaction, what works for one person does not work for another. The value of an object also depends on what we already have. If I already have three sports cars then the fourth is not going to be as satisfying as that first car was.  I more I get of something the less I will appreciate each individual additional item.

We will take the path of least resistance to acquire satisfaction. Man made laws come into play here to make plunder painful so it is not the easiest path. If there are not bad consequences for taking someone else's property then why would I go through all the trouble and pain of producing my own property? This is where government and control is useful in human action. Government is able to prevent action, which can be good in the case of things like theft, murder and other actions we would consider evil. Government is a failure at trying to get people to act or in trying to create since people are individuals and all take action for different reasons. Government can only make it painful to do something which is a poor motivator to take action.

To me the study of economics boils down to a study of how people act and interact with the people and institutions around them. A study of human action and their relationships. Is it better to have the people and their actions centrally controlled or is it better to let them be free to do as they wish or somewhere in between? What gets people to act and make the choices they make? Can we influence these actions and how do we influence them? I hope you got a little taste of economics and can see how big of an impact they have in our daily lives.