Thursday, January 3, 2013

Crash Course in Economics

Economics is one of those subjects that requires both an intense interest in its study and at least an above average IQ (greater than 115) to at least have some decent grasp of it.  However, just about every asshole and his mother has an opinion on economics, despite having next to no knowledge on the subject and not even taking a course on it is high school or college.  Indeed, when you were paying attention in school, it was probably when they were putting the condom on the banana anyway, so I guess it’s no loss that school boards don’t require basic economics as a prerequisite for graduating from high school.

So, in an effort to try and make you less of an asshole in economic understanding, much like me, I’m going to impart some of the basics of what I know.  Please note that I could be wrong as well, since I am no expert:

  • Firstly, understand that economics is the study of the use of scarce resources that have alternative uses.  This is economics professor Thomas Sowell’s own definition.  Ludwig von Mises considered economics as a subset of praxeology, which is the study of human behavior.  A scarce resource is simply anything that a finite use.  The air we breath, so far as we know and in spite of environmentalist’s best scare tactics, is not a scarce resource on the human scale.  It is definitely possible that everything on earth is a scarce resource to some degree, just that things like air and salt water is so enormous that even with 7.5 billion people, it seems limitless.   The other part of the definition is the alternative uses.  This is key, as every resource could be put to multiple uses.  You can take fresh water and drink it, boil it for pasta, freeze it for ice, or mix it to make broth for soup, for example.  What economists are studying is how a certain resource is used by the interactions of economic actors.
  • Among scarce resources that are often discounted by many mainstream economics are currency and labor.  The use of one’s time for productive labor is just as much a scarce resource as the product or service he or she provides.  Labor is limited by both time and people capable of performing a specific task.  As for currency, it is often discounted but usually what is discounted, even by many prominent free-marketeers, is the flow of credit.  Credit is just as much a scarce resource and a part of currency as money is.  How credit is used is very important because credit expansion is primarily responsible for inflation.  The mechanics of which are unimportant as they are intentionally complex, just understand that as more loans are made either to the individual, the business, or the government, the more currency enters the market.  This brings up the next point.
  • Supply and demand is the primary principle behind economics.  The supply of scarce resources combined with the demand for said resources affects the cost of scarce resources.  Costs are flexible and are never easy to determine.  In the Soviet Union, where prices were determined by a bureaucracy, it was found that despite setting a price on a good or service, they could not beat the law of supply and demand.  As supply increases and demand remains static, the cost of the resource goes down.  As demand increases and supply remains static, then the cost of the resource goes up.  This is an easy concept to grasp until you start considering multiple resources which overlap.  For example, as the supply of mortgage credit went up, the demand for housing rose, which by and large remained static, which caused the housing boom.
  • Finally, understand that whatever you do or don’t do with your scarce resources, you are affecting the another economic actor in some fashion.  Human beings, through the interactions of the market, are vastly more connected than many of us realize, more often to their own indifference.  The cattle rancher doesn’t care about the upscale couple enjoying a steak dinner one thousand miles away.  He just simply cares about getting a good price for the sale of his cattle so he can meet his needs and desires.  Understand that these strings are hard to map completely and that no one organization or individual can completely map the billions of interactions that go on each day, despite the best efforts of the government lackeys charged with doing so.

This is a portion of what I know, but I think it best highlights some of the very basic things you need to know about economics.  This does not mean, however, that you are any more an expert than I am.  I still have much to learn, but I feel it is important to relate what I have already learned to others.  Make the best use of it and try and work out your own theories about it.  Then read up on it and see if your theories are correct or valid or if someone else has simply thought of it.