Below are some economic principles that people often forget when talking about economics. Yet they are obvious and tend to be regarded as trivial by most.
- Economics is “a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services.”[1]
- Economics is concerned with the behavior of people.[2]
- In addition to the behavior of people a multiplicity of factors affect economics including weather, geography, earthquakes, volcanoes, disease, global warming, and even the sun and the moon.[3]
- Because of the large number of factors that affect economics, economic behavior is chaotic.[4]
- Money is only useful as a medium of exchange.[5]
- Government is responsible for managing the economic environment of the people whom the government serves.[6]
- In practice free marketplaces do not exist and are not desirable[7]
- Despite all of the above, economic theories[8] are helpful for government to use for managing the economy.
- Strict adherence to a given economic theory is a recipe for disaster.[9]
- Part of the marvel of elected governments is their ability to change peacefully in response to poor application of economic laws.[10]
- Individual short-term greed[11] is poorly understood and the cause of much economic distress.[12]
- A[13] key to economic well being is the ability to manage[14][15] and gratification.[16]
- Another key to economic well being is to recognize that working together creates greater wealth for all, than working as individuals.[17]
- As entities become larger and more interconnected, the behavioral effects of individual components can become more profound if not properly managed.[18]
This is not meant to be complete list of principles or a description of economic theory. Rather this is meant to be a baseline of principles that we need to understand before having a complex discussion of economics.
[1] Taken directly from the first definition in Merriam Webster Online.
[2] One of the assumptions that many economists make is that they know what motivates people to act in a certain way, and that people act as they predict people will. Such behavior is frequently mislabeled as rational behavior.
[3] For example, the tides affect commerce via shipping.
[4] Consider the Global Economic Cost of SARS. Also consider the blackout recently experienced in the northeast of the United States. See the New York Times Week in Review for August 17, 2003.
[5] Today, many people do not even see most of their dollars. Their money is bits on a computer stored somewhere.
[6] The U.S. Constitution starts with the phrase promote the general welfare. The ways the Federal government are to manage the economy are further elaborated as:
- To borrow money on the credit of the United States
- To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
- To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;
- To establish post offices and post roads;
- To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;
This does not include the constitutional sections of justice and security that are preconditions for management of an economy.
[7] Consider a marketplace without government regulation, i.e. no court system to arbitrate disputes, no security, no mechanism for fixing the value of money, no rules, . . . Such a marketplace reverts very quickly to the marketplace of warlords or the feudal society of the dark ages in Europe.
[8] Physics is an inexact science that is also concerned with chaotic behavior. This doesn’t prevent Newton’s Laws from being useful for analyzing and predicting the behavior of the planets. The trick in physics is to understand what simplification is acceptable when making a prediction. Predicting even gross economic behavior is more akin to making long term weather predictions than making predictions about the position of the earth relative to the sun in a day, or month, or year.
[9] Consider the physicist who drops a pound of air captured in a large hot air balloon expecting it to fall at the same rate as a pound of hot air captured in a balloon the size of a pound of iron. The pound of air in a large hot air balloon rises. The pound of air captured in a balloon the size of a pound of iron falls. Too many politicians expect the same simplified models to work despite very different circumstances. Top economists recognize their lack of knowledge and are constantly changing their predictions in response to observed behavior.
[10] This happened when President Clinton ran for office the first time. People recognized that the economic stewardship of president’s Reagan and Bush was not working. President Clinton effectively kept the focus on economics and some of the policies of eighties where changed, i.e. taxes on the rich were increased, interest rates were lowered, and investments applying research to enhance productivity were made. The result was a shift to a much healthier economy.
[11] People repeatedly act for short term gratification, despite knowing and understanding that it is not in their long term best interests. For example, why would any person who is in a sexually satisfying long term monogamous sexual relationship have sex outside that relationship? Is the risk of contracting genital herpes worth the moment’s gratification (much less gonorrhea, is syphilis, or HIV infection)? Yet people do it all the time, despite the long term risks. Just look at the television advertising for drugs to manage herpes to get an idea of how prevalent such behavior is. Obviously few people say no.
[12] Part of the drive to constantly lower taxes is short term greed by the rich. This is despite the fact that the rich frequently get much richer under progressive higher tax rates for the rich than under flat tax rates. For example compare the rates of people becoming rich under presidents Reagan and Bush to that of Clinton. Or compare the rates of wealth created for the rich under presidents Kennedy and Johnson to that of Nixon and Eisenhower.
[13] Please note “A” is not “The” meaning there are other keys or necessary conditions.
[14] The word manage is very carefully chosen. The economy needs people to have wealth, just as people need sex. The question is the management of these drives not denying them.
[15] Managing greed is a part of the Judeo-Christian heritage. For example the 10th commandment is Thou shalt not covet thy neighbor's house, thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor any thing that is thy neighbor's. In other words do not be greedy.
[16] One interpretation of the story of the Loaves and Fishes is that it is an admonition against greed. There is plenty of food to go around if we share.
[17] People who work together will create more wealth than individuals. Hence, the strength of corporations, cities, states and nations. Part of the strength of the U.S. is shear size. The same need for increasing size is driving the European Union.
[18] We see this in the phenomena ranging from Ossama bin Laden to power blackouts covering major population and economic centers in the United States and Canada. Fifty years ago there was no way that someone of Ossama bin Laden’s limited resources could affect the United States. Before the blackout of 1965 we could not conceive of a blackout affecting the U.S. and Canada in the way the most recent one did in 2003.
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