Basic Economics Simplified

Economic decisions have existed since cave people began determining how much meat or berries were worth a spear point or arrowhead. Somewhere along the line they discovered that if some people speciailized in making arrowheads and traded for meat, and vice-versa, that both groups could profit from the exchanges, each having more food, raising their standard of living.

Various media acted as money to facilitate exchanges of goods and services, including arrowheads, stone beads, salt, and metals. Most civilizations settled on metals as mediums of exchange, including gold, sillver, and copper. In 1776 a Scotsman named Adam Smith, usually considered to be the father of the science of economics, described how economic exchanges took place in his book The Wealth of Nations.

Smith noted that economic activities taking place in the British Isles, people supplying meat and vegetables, lumber, insurance for cargo on ships at sea, etc, were guided by a kind of spontaneous order. He said that it was if an "invisible hand" decided how many people became bankers, lawyers, farmers, and so on, and how much of such commodities as wheat or turnips were produced.

He noted that while "restraint of trade" like the tariffs or import quotas on foreign goods such as wool and textiles desired by farmers and trade unions, might allow those special interests to to increase their profits, but by reducing the benefits of specialization and trade, protective measures reduce the wealth of societies as a whole, ie, reduce the "wealth of nations." In arguing against government intervention in economic activities, Smith was essentially arguing against macroeconomics, although that term had not yet been invented.

Modern macroeconomics, the theory that governments should manipulate taxing and spending policies in order to create thriving and stable economies, is often credited to John Maynard Keynes (1883-1946), who is widely described as the Father of Macroeconomics. His books include The End of Laissez-Faire (1926).

In 1971 when President Richard Nixon took the US dollar, the world's reserve currency, off what remained of the gold/silver standard, he is reputed to have said "We are all Keynesians now."

The removal of the US dollar from the discipline of the gold/silver reserve requirement allowed for easy expansion of US government spending. Easy money and an easy-money attitude may have facilitated the creation of banking innovations such as derivatives and the explosion of federal, state, and local bond issues backed by the full faith and credit of such entities as the Federal Reserve, Detroit, Los Angeles, etc.

In the forty years since Nixon declared us to be Keynesians the US has run up huge budget deficits made even larger recently by "economic stimulus packages," and has resorted to "quantitative easing" (formerly called "currency debasement") printing money to try to get the economy "moving again," besides raising money by selling bonds (IOUs) to people who are not Keynesians, including you, me, and the Chinese government.

Mainstream economists in the US blame Bush policies, Obama polices, the voters, Congress, 9/11, Hurrican Katrina, global warming, and other things for US economic stagnation, but Keynesian macroeconommics remains a Sacred Cow, and gets none of the blame. We are told that the problem is that we need more of it. More taxes and more spending. Eventually, we might begin to wonder whether Adam Smith's advice wasn't better than the advice of economic planners plodding toward a central command economy.

 

We also have a government with blinders on to avoid the problem. Even if we get the workforce back to work in large numbers, the underlying problem will continue to worsen. Public debt, as we saw in Greece and see at enormous rates in Britain, is consuming the US spending force of people, which are those who earn and spend most or all of what they earn. We cannot generate the level of demand necessary to sustain our economy without growing personal (household) debt. It's been happening for years and now we find a country where so many are strapped just to make it payday to payday, often turning to debt for the most basic of needs as their incomes in the household are insufficient for the levels of spending they enjoyed before the downturn. Mortgages, cars and credit cards have been made far too easy for consumers to go into debt to obtain, with regulations allowing debt beyond reasonable levels and continued borrowing.

I don't know how we fix it. It will require an effort beyond anything the federal reserve or private enterprise can provide. An FDR type of change will be required. I have heard a couple economists suggest debt forgiveness for household debt as a possibility. We focus so much on jobs, which will certainly help, particularly to boost tax revenues as people are able to earn and spend more, but to get back to demand levels we need I think we'll need some type of out-of-the-norm intervention beyond monetary policy.

 

I think that you've nailed it on the head except for the comment on generating demand. It seems to be common knowledge not only among American economists, but known to every Jack and Jane parroting TV news, that the US has a CONSUMER-DRIVEN ECONOMY; that it doesn't really matter what incentives people have to go out and get a job, or to put up with the new extra paperwork demanded by OSHA, the IRS, the State of New Jersey, or whatever, to grow a few more acres of wheat or assemble a few more widgets, as long as they are willing to go out and spend themselves into owing their souls to the company store, the banksters. Am I nuts (actually that's beside the point), or doesn't the idea of a consumer-driven economy rather than a production-driven economy seem to stand logic on its head?

I don't know how to fix it either, and have no constructive suggestions to make for the US, but if a least we can personally understand what is going on, we might be able to take personal steps to deal with the situtation. Would you like to collaborate on a sure-to-be best-selling book called How to Profit from the Coming Economic Catastrophe?

 

No doubt we're the most consumer driven economy on the planet, but I think people are just running out of creative ways to get more money via lending/credit cards. Once they can't get access they're stuck looking at a stack of bills they can't afford or can barely afford. Then all their income goes to house/rent and servicing debt. I'm not sure what they're doing with the urges to buy more stuff, though. Has to be like some wicked withdrawal because we're trained from birth to buy buy buy in this country.

I wish I knew how to profit from what's coming. If I were a major bank I'd probably be set.

 

Metals were used as a medium of exchange because the metal itself held some value. Today's currencies largely do not. The best utility of currency is that it preserves opportunity--I should be able to sell you a bow and arrow today with the expectation that in the spring I would be able to buy an expected amount of strawberries with that currency as if I waited until spring to trade you the bow for the berries. That is no longer true.

Quantitative Easing has never been focused on adding economic activity. It was intended to stop economic contraction. The rest is just how it was packaged and marketed to make it more palatable to the public that its sole purpose was to keep the federal government solvent. Telling people that the government was insolvent would have created a run on the banks.

Sustained period of economic growth at 3.5-5% are just not possible unless driven by some other bubble that will result in some other great recession. We do not currently have the industrial capacity to maintain that sort of growth. People just need to accept that what they consider stagnation in relation to the tech and housing bubbles is reality. The party is over. Time to clean the mess and live with the stench and the memories of economic glory days.

 

Adam Smith? He would be way too egalitarian for the class ridden Americans!

 

I don't like the way that quote of mine looked. The context included 'WHETHER Adam Smith's advice wasn't better."

But yes, elites like the royalty in Saudi Arabia and Lebanon, and the elite of the US revolving door military-industrial- congressional establishment crony capitalism, live off the taxes of working people, whereas Adam Smith's version of free enterprise was egalitarian.

 

Nope. His main approach was focused on issues of morality. Put it this way: in today's language he would be a liberal. He wouldn't be able to stomach the class system enabled by right wing economics in the US. And, as you already know, the invisible hand wasn't really a major element of his work. Its exaggerated by those that deliberately want to hide from his egalitarian nature

 

Yes, we agree, I think, with Wikipedia that Smith's earlier work, The Theory of Moral Sentiments 1759, which Smith considered to be his most important work, "provided the ethical, philosophical , psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations."
His Theory of Moral Sentiments provided the underpinnings for egalitarian free enterprise, not the fascistic crony capitalism that exists presently in the US.
http://en.wikipedia.org/wiki/The_Theory_of_Moral_Sentiments

 

I don't think so. His invisible hand was a relatively minor element of his output. He's effectively been hijacked by right wingers who underplay the nature of market failure. This is a regular feature. See, for example, how Ricardian comparative advantage was used to support neo-liberalism (i.e. free trade run amok) to the detriment of economic development

 

I didn't mention the "invisible hand," but I think that it's going to take quite a bit of book burning and revisionist history to document that when all was said and done Adam Smith professed a belief in centralized command economics and stated "We are all Keynesians now!" You're not proposing that we go that route, are you?

 

Scroll back: "He said that it was if an "invisible hand" decided how many people became bankers, lawyers, farmers, and so on, and how much of such commodities as wheat or turnips were produced."

I'm referring to his egalitarianism. Would that mean support for a Keynesian perspective? We'd never know. He perhaps would be sympathetic to the post-Keynesian understanding of how market power generates macroeconomic instability

 

I meant to say that he said "It was AS if an invisible hand..." I don't know how many times he said that inThe Wealth of Nations Maybe he only said it once, but he said it some years after he wrote A Theory of Moral Sentiments , which might as well have been called The Theory of the Golden Rule

While are a little bit sketchy on the economic details, I agree with you that Smith's heart was in the right spot as an egalitarian.

 

The left spot perhaps (in terms of US politics at least!)

 

I'll go along with left if it's the Classical Liberal, peace and freedom, left.

Do I hear "Sold!"

 

Classical liberalism is long dead. Its now merely corrupted by the right wing elements who also sully the term libertarian

 

Well, in any case, I'm sure that we are in total agreement with regard to peace and freedom!

 

End of capitalism then? Jolly good!

 

End of crony capitalism! Stonkingly brilliant!!! Hip, hip, hoo-ray!!! Hip, hip, hoo-ray!!! Hip, hip, hoo-ray!!!

 

Have you ever wondered why the pressure groups who tend to use the word "crony capitalism" also tend to be financed by business interests? Its largely a means to hide from the very nature of capitalism (and its innate tendency towards market concentration)

 

To Peace, then! To Peace!! Unlike crony capitalists, conservatives, and neo-concervatives, we are in total agreement that Peace is not necessarily a bad thing! To Peace!!!

 

Then welcome comrade socialist!

 

This is a long discredited depiction of history based on ideological speculation of how it "must have been".
Hunter-gatherer societies, of the type in which humans lived for the first 90%+ our existence, have "Gift Economies".

Anyone who says Smith was against any & all government intervention hasn't read him.

Adam Smith advocated the taxation of Land & other Economic Rents, along with the regulation or nationalize of basic infrastructure, monopolies & other rent yielding assets.

 

You realize, by arguing that the market will heal itself macroeconomically, you are making a macroeconomic argument? So he wouldn't be arguing against macroeconomics as a field, just what you think general consensuses of macroeconomics is (It's not actually all Keynesian, google "new classicals"!)

What about Freshwater economists? Milton Friedman, Robert Lucas, Edward Prescott? They're all laissez-faire economist, especially Lucas and Prescott.

Which is odd, given the movement was starting to move AWAY from vulgar Keynesianism. This move is completely consistent with monetarism and the views of Milton Friedman for instance. For future reference, Politicians say thing that sound good, not that are correct. Don't cite any of them as an authority on economics. It's a pretty unforgivable sin.

#1 is we are printing so much money, why is the deficit so (*)(*)(*)(*)ING LARGE.
#2 How the hell does low interest rates cause more financial innovation. Shouldn't high interest rates imply more sophisticated financial management, as it implies higher rates of return on financial innovation (because payments you receive should be higher, with higher interest rates paid to you).?

What's REALLY awkward about this, is policy is less traditionally Keynesian in this time period. If you want to talk about Keynesian policy in it's glory day you need to talk about it from 1945ish to Nixon/Carter/Reagan era, who all started the beginning of the end of old style Keynesian economics. Furthermore, I'm pretty sure the Chinese government passed a stimulus package. Also, labeling individual behavior as Keynesian or not shows a complete misunderstanding of the term. Keynesian economics is a type of macroeconomic policy. Not an individual behavior.

Yes some economists would say things like this. The Boys at the University of Chicago want a word with you. People like Edward Prescott attribute the recession entirely to the coming "Obama Taxes." It's helpful to know what actual macroeconomist think before you go telling people what they think.

You realize Keynesian economics today is rather different from what it was at the end of Nixon's era right? Milton Friedman would be a conservative Keynesian economist today, because he thinks monetary policy can affect the economy in the short run. Furthermore, freshwater economists tend to oppose interventionism in the macro economy. So I do not have any idea where you are getting this Sacred Cow garbage.

 

What about Freshwater economists? Milton Friedman, Robert Lucas, Edward Prescott? They're all laissez-faire economist, especially Lucas and Prescott.

Which is odd, given the movement was starting to move AWAY from vulgar Keynesianism. This move is completely consistent with monetarism and the views of Milton Friedman for instance. For future reference, Politicians say thing that sound good, not that are correct. Don't cite any of them as an authority on economics. It's a pretty unforgivable sin.

Yes some economists would say things like this. The Boys at the University of Chicago want a word with you. People like Edward Prescott attribute the recession entirely to the coming "Obama Taxes." It's helpful to know what actual macroeconomist think before you go telling people what they think.

You realize Keynesian economics today is rather different from what it was at the end of Nixon's era right? Milton Friedman would be a conservative Keynesian economist today, because he thinks monetary policy can affect the economy in the short run. Furthermore, freshwater economists tend to oppose interventionism in the macro economy. So I do not have any idea where you are getting this Sacred Cow garbage.[/QUOTE]



I'm not just arguing against Keynesianism, but all of macroeconomics except for those parts of microeconomics formerly relating to private banking and insurance which statist economists have meshed into macro as nation-states have intruded into these areas. Macro in its inception was limited to the actions of nation-states-- taxes, subsidies, tariffs, etc., and I am arguing for individualism and against statism. My wife graduated from the University of Chicago, as perhaps you did, and tends to agree with you. However, as a believer in the logic and ethics of total emancipation, individual liberty, ("idealistic," "far-fetched," "crazy," whatever), I have no belief in the rights of "sovereign states," or that states have any rights at all, and instead believe in the sovereignty of individuals.

In this regard I am in total agreement with Professor David Friedman. He loved his parents Rose and Milton Friedman, but he views monetarism, like all tools of statism, as an infringement on individual sovereignty. He outlined how totally free markets might work, addressing problems of externalities, in his book The Machinery of Freedom.

http://www.amazon.com/Machinery-Fre...7682&sr=1-1&keywords=the+machinery+of+freedom