Economics 101

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It’s really very simple. One does not need to take a graduate course in Economics to figure out why a productive society prospers and how it can be destroyed. As Tim Harford explains in The Undercover Economist, “Economics is partly about modeling, about articulating basic principles and patterns that operate behind seemingly complex subjects.” The key word is “seemingly.” The other part of Economics is plain common sense—the part which all too many economists refuse to practice since it deprives them of shamanistic status as delvers into realms of mystical complexity. Paul Krugman comes immediately to mind. “[I]ncreased government spending,” pontificates The New York Times guru, “is just what the doctor ordered, and concerns about the budget deficit should be put on hold.” One may be pardoned for thinking that it is Krugman who should be put on hold.

There are, it’s only fair to note, a handful of practitioners who command respect for the combination of wit, learning, insight, humility and levelheadedness they bring to the discipline. Milton Friedman provides an excellent example of this rare breed of thinker, a man who could turn pertinent aphorisms on a lathe and who was no stranger to prudence and good sense—what Aristotle in the Nicomachean Ethics called phronesis. But the Friedmans among the economist caste, the exemplars of phronesis, are a small minority. As for the current political class in the U.S., Sarah Palin and Paul Ryan are conspicuous for economic reasonableness and practical acumen that coincides with what everybody knows—or would know—if they thought about it.

For the basic issues are by no means complex. We recall that the word “economy” comes from the Greek oekonomia, namely, household affairs, domestic management, as Aristotle lays it out in the Politics. High finance and market speculation, for all their daunting ramifications, are only an esoteric derivative of straightforward economics. Of course, managing a nation involves many more factors and “parameters” than attending to the family budget. But the underlying structure is the same. As every responsible householder is aware, there are, in effect, four basic principles that must be taken into account to ensure economic viability.

1. You must earn and produce.

2. You must try to spend less than you earn.

3. The remainder should be saved or carefully invested in case of emergency and for the future.

4. And if you borrow beyond your present means, for reasons that are deemed necessary (e.g., mortgages, auto purchases, domestic appliances, education, etc.), there must be an empirical presumption of feasible repayment that does not lead to destitution.

Complications will naturally arise in a world prone to sudden disruptions—nothing in life is absolutely secure. And admittedly, on the scale of macroeconomics, which deals with interest rates, inflation, unemployment, trade imbalances, bond markets, monetary policy, resource procurement and so on, contingencies will be introduced that demand a higher degree of economic savvy than that required by the everyday householder. Moreover, fiscal dispensations are often tied up with political objectives and calculations, which tend to generate intricacies and convolutions not easy to disentangle. There are electoral constituencies that need to be satisfied if a political party is to cling to power, an exigency that muddles economic rationality—although this is also true, mutatis mutandis, with respect to clamoring family members in the interests of domestic peace. Nevertheless, these four principles represent the bedrock of economic management at any level of organization, whether that of the individual family or of the nation considered as an organic whole.

Economics is often defined as “the science of scarcity” and the study of how to make the best of diminishing returns. Regrettably, the current economic climate in the U.S. is characterized by the scarcity of intelligence and the study of how to make, not the best, but the worst of returns that continue to diminish. As Steve Forbes says, “People know that something is wrong with the dollar…You cannot trash your money without repercussions.” Clearly, the four principles of solvency have been systematically violated. Production is down. We spend more than we earn—as well as spend what we haven’t earned. Surpluses are non-existent. And borrowing is out of control, with no pragmatic arrangement or prospect of repayment. The result is a weakened currency and a nation in disarray.

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  • The_Lord_Regent

    Make your decision, people. Massive entitlement cuts now equals a crash landing – hurts but most will survive. Continue as the D.C. set (all Dems and many GOPers) have done and we all spin in nose first. Pick.

    • Jim_C

      Sure, it hurts people who are already hurting, except even more. And those who are not hurting, who have actually done very well during the last 10 years–they won't feel a thing. But God forbid we raise their taxes–heavens no! Not our Great Producers! Why, just give them more tax breaks–and eventually you'll feel that heavenly trickle down. Any day now, I promise!

  • tanstaafl

    Politicians thought they had the perfect plan. Buy the public votes legally. Increase government spending on targeted groups and watch the results roll in. Game's up and now you have to pay the fiddler. Like the Lord Regent says – you have to have entitlement cuts now- you cannot delay.

  • 080

    It is prudent not to follow government statistics. They obviously had no clue to the economic nakhba. Now try this.On Jan. 3, 2011 The Standard and Poor 500 stock average stood at 1273,12 and gold was at 14l7.20 per ounce. Dividing out we get a value of .90 as the S&P average priced in gold. Today the S&P was at 1328.98 and gold was at 1483.50. Dividing out the get the value of .90 as the S&P average priced in gold. Exactly the same as the beginning of the year. But the S&P in dollars is up by about 6 per cent. This means that the actual rate of inflation is about 3 times greater than thegovernment is letting on. For every one per cent inflation the government gets rid of about 140 billion dollars of debt. With an inflation rate of 6per cent the government gets rid of about 890 billion dollars of debt.

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