If there is one topic today which stands above the rest in terms of profound and pervasive misunderstanding, it is religion. If we skip that one, we have history. Then probably philosophy. Then science. The list is pretty exhaustive. Somewhere, probably nine or ten categories of human knowledge down the line, we’ll bump into that only partially familiar concept of economics. Webster gives us this only mildly helpful definition of economics:
a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services
The problem with the term “social science” is that it puts a bad taste in the mouth of anyone who believes in objective reality (and if you don’t believe in object reality, are you certain you are even reading this?) Social science typically brings to mind visions of survey taking students and the overzealous college faculty who analyze those surveys to the detriment of society by drawing far too many conclusions from far too little data. But economics isn’t like this at all. Economics is a very simple concept which predates modern science and is certainly far more coherent than any so-called social science you could think of.
Economics derives from the Greek “oikonomikos”, which has in mind the notion of managing a household. Still, this doesn’t tell us everything that the topic might entail, and it entails a great deal. In this post I’d like to examine a few of the most basic concepts of economics that everyone seems to get wrong.
Wealth and Stuff
Wealth is the central concern of economics. To clarify, the production and transfer of wealth is the central concern of economics. Some silly modern economists like to forget that the production of wealth is just as important to economics as its transfer, and they often talk about silly notions instead as if economics were a zero-sum game, with X wealth in the world and no way to generate more. Just where X wealth came from instead of 0 wealth is not a welcome question in such circles, I am sure, but I digress.
Wealth comes in a variety of forms, but is really given its value by two things: supply and demand. This most basic of economic principles is often ignored, but should still be emphasized: As demand increases and supply decreases, the value of some good or service increases. As demand decreases and supply increases, the value of some good or service decreases. This holds true regardless of any other circumstance. It is easy, upon hearing of this rule, to forget one aspect of economics that is fundamentally important: that “demand” we just looked at is produced by both the wants and needs of real life people. It is ultimately people, then, that influence the value of a good or service.
Money is directly related to wealth. Money is a proxy. That is, instead of me producing cheese to give to Bob who produces paper that I need and forming a barter agreement, I can produce cheese for anyone who wants it and buy paper from Bob even when he doesn’t want cheese. Money simply allows wealth to be fluid, instead of static. It allows buyers and sellers to easily buy and sell as they choose. The value of money is influenced by 1. How much money is in the marketplace (more money = less value), and 2. How much money people are willing to spend most of the time. This means it can be difficult to determine the exact monetary value of a good or service, because there are a ton of factors. However, the first source of value directly influences the latter, though it is easier to summarize the entire situation by saying that the value of a good or service – in monetary terms – is determined by the overwhelming number of transactions that occur.
If a ton of people buy a product for more money than you are willing to pay, you’ll just have to increase your asking price. If a ton of people are buying a product for less than you are willing to pay, you might drive up the price but you’ll certainly get the product. And so forth. At this point, everything is just an exercise in logic.
More Complicated Stuff
Okay, all the pieces are in place. We have wealth, which is essentially the goods or services we can produce or own, and we have money, which represents goods and services due to an overwhelmingly large number of transactions. We have supply and demand and all of the laws that follow. Everything is good.
There are a couple of other topics I would consider basic to the knowledge of economics. The first is debt. Not everyone is capable of producing enough goods and services to acquire the goods and services they desire at a particular moment. In those cases, people who have produced more (those with more money) can loan those who have produced less (those with less money) some of their assets, assuming they will eventually repay them with interest. Interest is nothing more than a motivator to get people to lend money; without this, there would be no lending of money as there would be no reason to do so (lending =/= charity). Going into debt is usually inadvisable, by the way.
Investments are related to debt, but only sort of. Investments work by having a person who is slowing producing more and more (by controlling a company, for instance), and who could use outside sources of money to purchase the goods and services (capital and labor) that he needs to expand further. He isn’t hoping for your charity however. You see, in exchange for this investment, you’ll receive partial ownership in the company, either in the form of control, dividends, or just plain investment returns, which are created by his using your money to grow his business.
One final concept is insurance, which is one of the least understood areas of economics that exists. Insurance, boiled down to its most essential components, is nothing more than a gambling system that tends to benefit everyone involved. For a fee, you pay into a pot of money along with a ton of other people. The pot is intended to cover the cost of creating an insurance company, paying its staff, and, primarily, to cover any expenses you might have to pay for an extremely expensive (but extremely rare) emergency. The more common the emergency or the more expensive it is, the higher the fees, by definition. This is not an unfair practice; it is simply the only way that insurance works. Insurance is ideally designed for rare situations where few people are ever going to need the money. It is terribly suited for things you can expect to pay for.
Then suddenly, Government!
Now that the basics of economics have been laid out, there are a couple of areas that get to be muddled up by the benevolent and always-thinking-of-us government we have. Minimum wage is one of these muddlings that occurs. Remember that value is defined ultimately by what people are willing to pay for a good or service, and it is determined thus by supply, demand, and quantity of a currency in the market. Well, minimum wage takes this basic idea and says “screw it”. Honest. Minimum wage tells a person that the service they perform is, instead of the X that society has determined it to be, X + 5 instead. Now, for the first paycheck these minimum wage folks take home, this is great! But, the service being performed by minimum wage folks still has the value of X. They aren’t suddenly producing more or working harder (usually). The market will adjust – the market being the collective supply and demand of all people buying and selling goods and services. Ultimately, the relative value of X + 5 against all goods and services will be just what X used to be. It will have the same buying power. This is inevitable. It is demonstrable. And while it ultimately doesn’t change anything for the minimum wage folks in the long run, it does have the effect of a minor earthquake for the economy, which ends up displacing and hurting people for the benefit of the votes of a few uneducated people.
If this sounds harsh, just think through it logically for a moment. Suppose what you do for a living is work at a fast food place, and your manager pays you $9 for your work. Pretty good. But minimum wage is bumped up to $11. Tell me, what matters more to the economy, the number that comes after the “$” sign, or the amount of work you do? Remember, the value that comes after the “$” is determined by the economy, so it would be circular to say it goes the other way around. To arbitrarily change this value is simply to shock the economic system in place with new values for every good and service to compensate. This is called inflation, and while it is produced by a number of things, minimum wage is partially responsible for it. In fact, inflation is all that minimum wage produces on a long-term scale. Oh, and votes. Don’t forget the votes. Very important.
Universal health insurance is another silly notion with unintended consequences (politicians are famous for destroying more in unintended consequences than they create, but this would take a series of books even to outline). Remember that insurance covers a small number of people from having to pay extremely large fees for extremely rare circumstances. Universal health insurance abolishes this. Instead, everyone is covered for every condition. This means there is absolutely no incentive whatsoever to pay for anything of your own money or to try to earn enough to do so, as might previously have been the case in our imperfect, but still wonderful healthcare system. Insurance, which depends upon rare circumstances, is now being forced on situations that occur expectedly (granted, this occurred even before government-mandated health insurance; it will just get worse now). When a situation arises that includes expected and routine costs, insurance is a terrible candidate to help pay for those things: a marketplace with competing goods and services is much better suited. We don’t have much of a chance for that option at this point, but it would have been the way to go.
I’ll Shut Up Now
That’s about it for a basic introduction to economics and a couple of the silly things the government does without such a basic introduction being readily assimilated into the minds of politicians and citizens alike. Economics is fun to poke around in precisely because it is, fundamentally, logical in most ways. While you could study with SocialScience™, that terrible and malevolent form of grant-money grabbing enterprise, you could much more easily just think rationally about the basic ideas of money, value, wealth, supply, and demand, and end up with a far more helpful predictive method and summary of what you can observe.