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| In all seriousness, he is a better economist than | most congressmen; you'll soon find out why. |
This post is meant to clear up a lot of confusion about economics. People often will go back and forth debating fiscal policies and economics. It happens at all levels of society. When the quinessential hill-billy pulls out his shotgun, chews on a piece of straw, lowers the brim of his ten-gallon hat, and says, "I won't stand for no commies" he's just engaged in the wide-spread field of economics. Now, that doesn't say he's good at it, but he's participated.
As much as people may get up in arms over it, as much as people may hate it, and claim they hate talking about it. However, in my experience, many people who claim they hate economics will start conversations on economics and literally talk your ears for hours on the topic without realizing it. From "I won't stand for no commies" to "Look at this new dress I just bought" to "My boss wont' give me a raise."
People have been told economics is an annoying or hard topic, so they often don't talk about the meat of the subject, just skirting around the edges. Ironically, this puts them more in touch with the complex harder parts of economics rather than the more simple and easy-to understand core of it.
One thing to understand is that money is merely a symbol. Inflation goes up and it goes down, what money means changes from day to day. One day a dollar may mean a sandwich, another day in the past it may mean a full course meal, and a day in the future it may mean just the slice of cheese. Looking at money is very distracting, gets very complicated, and means practically nothing.
Now, you may be sitting here, asking, "lil Joshu, how can you say that the economy has nothing to do with money? That's all the economy is!" If you're one of those asking that, you have been one of those wrangled into what I call "the big lie." Money is no more needed for the economy than your stereo is for your car. It may be nice, it may make it more enjoyable, but in the end, you could remove it and it'd still run. And so, I remind you of...
The Barter System
It's inconvenient, it's slow, and it's economy at its most pure. It's the horseless carriage of economic systems, and it's the economic system upon which all other economic systems are built. So, when it comes to understanding the core of economics, we look at the barter system. A system without money.
Now, we have two cavemen. Grug and Tok live in the same village. Grug has a stick. Tok has a rock. Grug and Tok trade their stick and rock. Yay! Economy! But is it a healthy economy? If that's all there is, then... no. As far as the village is concerned, there is still one guy with a stick and one guy with a rock. In essence, nothing's really changed. The net benefit to the economy is zero. In reality, neither Grug nor Tok had any reason to trade, and they just spend their time staring and their rock or stick. They spend their time passing the rock and stick back and forth looking like little more than a couple of silly apes.
Now, lets make it a bit more complicated. Let's say that caveman generation goes by and nothing really happens. Grog and Tuk are the kids. They're a different story than their parents; they each got tired of losing their stick or rock to get the other, so they went out and got more. Grog went out collecting sticks and discovered a valley with trees. He now has 3 sticks. Tuk, on the other hand, went out collecting rocks and found a cave where he can find them, and has 3 rocks. The gathering of raw resources has started. Unlike their parents who just spent time trading a single rock and stick back and forth, Grog and Tuk have gotten surplus and both think, "Life would be so much better if I had a rock AND a stick."
Eventually, they learn from their parents, they trade. But instead of trading everything, they just trade from their surplus. Grog and Tuk trade a rock and a stick, each keeping two in reserve. Now Grog has 2 sticks and a rock, and Tuk has 2 rocks and a stick. Sure, the village may, as a whole, still have only 3 rocks and 3 sticks, but instead of having 1 member with rocks and 1 member with sticks, it has 2 members with rocks AND sticks. And thus, we start to get value being created. Our caveman village has just experienced it's first boost of economy.
Now, in the next generation, Grog and Tuk have become village elders and their kids have taken over the trading. Grig and Tak. Having grown up with both rocks and sticks, they experimented. Grig learned how to make a stone club by tying two rocks to the end of a stick. Tak, on the other hand, learned how to make a bow and arrow, using one stick for bow with hair for the string, and a rock tied to a small stick for an arrow. So Grig and Tak trade their rocks and sticks. It ends with Grig having four rocks and two sticks, and Tak having four sticks and two rocks. The village has only six sticks and six rocks, that's true. But value was created by them trading, and now, even more value will be created as Grig and Tak embark on industry. Grig and Tak turn their rocks and sticks into two axes and two bow/arrow sets. Now the village is all out of rocks and sticks, but it has something it likes better. Axes, bows, arrows. Grig and Tak each trade. Now instead of two guys, one with a pile of sticks and one with a pile of rocks, the village now has two cavemen with an axe and bow each. Both of their lives are better, and the economy of the village as a whole is significantly better.
A generation goes by, and Grig and Tak are known throughout the valleys. The legend of the axe and bow people grows, and other people come. The village grows. But nobody has anything Grig and Tak will trade their axes and bows for. So, Grig and Tak eventually die and pass on their axe and bow to their kids, Greg and Tek. However, in the middle of the night, a tiger attacks and kills a couple villagers while Greg and Tek are sleeping. Now something unprecedented in our stone age economy up until now. Then Greg and Tek take take their two axes and two bows. However, instead of trading for them, they just give them away, putting them by the campfire in the center of the village. They belong to the village as a whole. They say that anyone (especially a warrior) in the village can come get the axe and bow and arrow when they need them to fight off any tigers or other creatures that attack the village. Now, in this case, the value that Greg and Tek have went down. They both just lost something, but they realized something very important. Their economy was benefited by making sure everyone had access to something. The village's economy effectively went from two men armed with axe and bow to everyone being armed with axe and bow. And Greg and Tek can sleep feeling a lot safer.
All the examples point to they core ideas of economy. The strength of an economy comes not from money or who has the most of it. In fact, economy can exist and grow without any money at all. What does cause economy to grow is what individuals and society gain from the trades occurring and what those trades allow people to do and have. Now I could bore you with a million more caveman examples, comparing trading food (a perishable) for milk cows (a production source), for shiny rocks (a vanity commodity), or for hours of guard duty (services); or food trades during harvest season vs food during winter (changing scarcity); and much more, but that's getting into nit-picky details. For now, we got the basics covered. I merely mention them to give you something to think about later.
So, trades are the core of an economy. Now, something it should be noted, usually people trade when they think they're getting something worthwhile in return (a stick for a rock, a bow and axe for peace of mind, etc.) If our cavemen tried to trade one stick for a million rocks, they'd never agree. For trades to happen, both people have to feel they're getting benefit. When society gets more complicated and people can get stuff from multiple sources, this usually means that the difference between the value of what people get vs what they traded away is very close. In fact, we can end up treating almost any trade as equal; it doesn't matter if it's a loaf of bread for a used shirt or a million dollars for a rare diamond. The benefit of every trade is about the same since it exists in that grey area between what one person views what difference between two items being worth vs what the other person views the two items as worth.
This leads to big core idea (and scarily, a secret) of economics... one of the two pillars of the health of an economy is Trade Density. Trade density is how many trades are happening compared with how many people there are. In short, how fast is value being created.
Or, as one simple question:
How often are trades happening per person?
And if you want a good number for an answer, the answer would be calculated by:
The Trade Density equals the number of trades over a set amount of time divided by the number of people in society
or, for short...
Trade Density = (# Trades/Time)/People
or, if you want to go really full on mathmatician...
Td = (Tr/Ti)/P
So, that's Pillar one: Trade Density.
Now comes the second pillar (and why some very powerful people try confuse economics for the average people...)
Almost, paradoxically, the goal of an economy is, in essence, to end the economy. With each trade, items of value trade hands. They get into hands that can make them into better things, which in turn add value to the economy. The idea is that things are always moving to where they have more value, and where people are more satisfied. In short, economy is about bringing happiness, peace of mind, contentment, needs being met, etc. to the people in that economy. That's the whole point of any trade, is that people are more content with what they have than they were before. Needs and wants are being sated. Ideally, the goal of the economy is to sate everyone's needs and wants. At this point, economy would grind to a halt because noone would need or want to trade. Now, obviously that won't completely happen (people need to eat and food gets consumed, so that constantly needs replaced, and there's a few other items that will always need traded) but by and large, an economy can slow down (and it's a positive thing) because people are generally happy with what they have.
And this is the big secret that noone wants you to know, why ancient cavemen were better economists than congressmen in modern times, and more. There are always some people who will want more no matter how much they have. To them, the value isn't in having what they need, but in having more than everyone else. Kings who have taxed peasants for gold beyond what's needed, the Koch brothers who push for old dirty technologies they have the resources to profit off of instead of supporting moves to cleaner technologies, countries invading other countries, and more. Some people are, by their nature or upbringing, unsatable. And they know that if the economy slows down, their growing position compared to everyone else will eventually stop. They aren't stupid, they know what they want, and how to protect their interests. Kings would start wars as excuses to tax more, the Kochs have paid colleges to let them control who their economics professors are so the next generations of economists only believe what the Kochs want them to believe, tyrants talk about spreading their particular flavor of monetary trade and collective ownership system (communism vs capitalism) to fund their wars to spread their influence. And many, many rich people and organizations lobby congressmen every day, presenting them with complex numbers and graphs trying to persuade them to support one issue or another. They convince the congressmen it's good for the economy with smoke and mirrors, ignoring the one simple question of "Are people happy?"
But when you realize, that, like most human creations, economy exists merely for the goal of making people happy and sated, a lot of the bigger and more complex issues fall away, laid bare and naked for what they really are. And that's the second pillar of economics is:
How happy are those in the economy?
Now, unlike Trade Density which as a purely subjective value, this value (Approval Rating) is purely subjective. To find it, you would need to poll, interview, and survey. But in short...
Approval Rating = Percentage of people who find themselves benefiting from the economy divided by the percentage of people who find themselves being hurt by the economy.
or, for short:
Approval Rating = % Benefiting / % Distressed
or, if you want to go all mathematician again...
Ar = B/D
So the two fundamental equations by which to measure an economy are
Td = (Tr/Ti)/P
and
Ar = B/D
or, in layman's terms: The health of economy can be found by asking two questions:
How many trades are happening?
Are people becoming happy?
TL;DR: The health of an economy is based off of two things, and two things only - these are the most important things in any looking specifically at economics: the first is Trade Desnity (# of trades per time / # people) and the other is satisfaction rate (people's approval % of economy / people's disapproval % of economy).
If you keep those two things in mind, no politician, no slogan, no smoke & mirrors with numbers will be able to distract you from what's actually going on.
Sources:
There are no direct sources for this article. Many economy books deal with a lot of monetary theories that actually avoid the topics mentioned here. This post is a distillation of information I have pieced together over the years. For the most part, it is not built from previous sources, but trying to tear away the layers of the onion that is economics.
However, that's not to say that various books haven't helped me learn what I shared here. For delving more into the concepts that helped me reach this point, I recommend two books:
1. "For Us, The Living" by Robert Heinlein.
http://en.wikipedia.org/wiki/For_Us,_The_Living:_A_Comedy_of_Customs
you get it here:
http://www.amazon.com/For-Us-The-Living-Customs/dp/0743491548
He was the first economist I read that talked about analyzing economy without using money, and in learning to do so, economy quickly became much much clearer and many things much more obvious. I strongly suggest reading it, as he delves into the math of various economic systems, and their strengths and weaknesses (he wrote this back before world war II and predicted many of the economic ups and downs the U.S. has seen, and also created, using that information, predicted how it will eventually collapse, and offers an alternative economic system that contains a positive feedback loop to encourage it to always keep moving strong.) It's written as a novel but the (badly written) plot is merely a vehicle for the economic ideas.
2. "The Story of B" by Daniel Quinn
http://en.wikipedia.org/wiki/The_Story_of_B
you can get it here:
http://www.amazon.com/The-Story-B-Daniel-Quinn-ebook/dp/B00338075Y/ref=dp_kinw_strp_1
Although "The Story of B" is not about economics in any way, it is about decompiling ideas back to their ancient human origins (The Story of B specifically decompiles religion) and is an inspiration for this article in thought processes. It's the second in a trilogy, but you really don't need to read the first to understand the majority of The Story of B. Like "For Us, The Living," "The Story of B" has a plot that is merely a vehicle for it's more complex ideas and concepts and social analysis of history that it's trying to share.
