Explain Economics to a Layman

Economics Economics Questions
1

I just realised that, just like most people, even though I’m familiar with economics jargon, I don’t really understand what’s going on.

Here is my understanding so far, in VERY simple terms.

  1. What IS an Economy?

As far as I can tell, an economy is a group of entities (economic agents) engaging in exchange (economic activity). I use “economy” as synonimous with the word “market”.

  1. What IS an Exchange?

Two economic agents own something they subjectively value, but each value even more what the other one has. So they make a permutation of goods that is mutually beneficial.

Coming back to question 1, the only thing needed to keep an economy going is constant exchange.

  1. What IS Money?

If something is valued by a sufficient number of people and it can’t easily be created/destroyed/faked, it functions as money.

  1. How can Money be wasted?

People always claim that in our “consumerist” society, money is wasted on irelevant stuff instead of going to “important areas”. But how can money be wasted? How can anything be wasted?

Combining points 2) and 3), money can’t never be wasted (unless physically destroyed), money can only change their owner.

  1. What if the quantity of money remains constant?

Why shouldn’t the ammount of money on the market remain constant? Isn’t “adding more money to the market” a form of theft that devalues everyone else’s money?

Why would anyone add more money to the market?

  1. What IS the State?

The state is a parasitic economic agent that can unilaterally engage in economic exchange through initiation of force.

  1. Is “creating goods” more important than “performing a service”?

Socialists seem to think that things “produced” (such as manufactured goods or agriculture products) are more valuable than services (spending one’s time to accomplish an activity).

I can’t see how such distinction is relevant.

How is someone who works the field better or more important than someone who mops the floor or someone who writes books?

  1. What is an economic crisis?

This is a big question, that is a dillema to me. Most people I’ve asked said “there is no money”, but how can there be no money? By definition, money can’t be created or destroyed.

As long as there is economic exchange going on, what keeps economic agents from exchanging goods according to their own desires?

2

Answering (5), under a gold standard the money supply can increase if there’s mining of new gold. The new gold is mined and spent into circulation. Also, if there’s not enough gold, then people will start using silver or copper or other goods as money.

Services are just as valuable as goods, if there’s a legitimate service. For example, lawyers provide a “service”, but the only reason you need them is because that’s the way the legal system is organized. The legal system is so complicated that you need a lawyer whenever you do anything. The rules and procedures for the legal system were written by lawyers. Lawyers earn a high salary, but they’re merely profiting from State violence.

Some “services” are only necessary due to the State. Those are worthless. Other services, like medical care, have the costs artificially high due to State licensing requirements. A doctor provides a useful service, but the price is artificially high due to State licensing requirements that restrict the supply of doctors.

Regarding “What is an economic crisis?”, the answer is the Compound Interest Paradox. Some people here on mises.org give me a hard time whenever I mention it. The nature of fiat debt-based money guarantees periodic economic crises and periodic boom/bust cycles. It’s built into the rules of a defective monetary system.

An economic crisis is an excuse for insiders to steal from everyone else. During an inflationary boom, insiders profit by printing new money and spending it to buy tangible assets. During a bust, individuals lose their homes and savings but insiders qualify for a bailout. The recent multi-trillion dollar stimulus and bailout was pure theft.

Boom/bust cycles don’t occur in a free market. They’re an artificial creation of the State. Negative real interest rates cause inflationary booms followed by a bust. For example, the Fed Funds Rate is currently 0%-0.25%, while true inflation is 15%-30% or more. This give the banksters and incentive to borrow as much as they can and buy tangible assets.

3

This isn’t true. Jesús Huerta de Soto provides an elementary overview of the history of banking in Greece, Rome and during the Middle Ages, and shows how a boom/bust cycle can occur. The difference is how widespread and dramatic it is. The more monetary policy is centralized, the more banks and people it will effect. Nevertheless, a single bank can undergo credit expansion, catalyzing a temporary boom, and then undergo the inevitable bust.

4

I haven’t read de Soto’s book (yet), but what happend to those single banks that went through a bust? Did they close their doors or did they (at least sometimes) get bailed out or received special government treatment?

It seems that a bank in a truely free market system where both the bank and the depositers actually loose their shirts during a bust is unlikely to engage in any serious credit expansion even if it was legal to do so.

5

  1. The term “economy” refers to a complex system comprising of billions of people making thousands of different decisions every single day. Every single actor has different desired ends and employs different means towards those ends. Economics is a science that contemplates how resources should be allocated in order to maximize potential utility; who or what allocates resources most efficiently? Is it the market? Or a group of omniscient central planners?

  2. Correct.

  3. Money emerges from voluntary exchange, from indirect exchange. Indirect exchange requires a double coincidence of wants (I make apples, you make oranges; I want an orange, you want an apple). Something with high use-value, that is, something which is desired by many, obtains exchange value. When apples are demanded by all, I won’t just produce apples for my own consumption, but for exchange; likewise, others will demand apples not for their own consumption, but for exchange. Historically, precious metals were chosen by the market since they don’t rot, are easily stored, and historically had high use-values (jewelry, ect.,).

  4. Money is “wasted” when it is taken forcefully from one person/group and given to another, creating a net loss in utility.

  5. The money supply in an economy should always remain constant so that producers and consumers aren’t confused by arbitrary shifts in prices (including wage prices, commodity/service prices, and the rate of interest). Prices serve as real time facts for market actors, they allow for accurate calculation and resource allocation. When this is disturbed, market actors are acting “blindly.” The degree of “blindness” depends on the severity of arbitrary monetary disturbances.

  6. Correct.

  7. Value is completely subjective and entirely depends on the individual. An economy may demand services over manufactured commodities, and as such, should specialize in the production of services. But this condition is extremely rare in actual free market economies. The U.S has an intense demand for services, and the most sophisticated service industry in the world, but this probably wouldn’t be the case if it weren’t for extreme interventions causing major disruptions.

  8. An economic crises is the end result of an extended distortion process, brought about by inflation. The creation of inflation distorts price signals and expectations, thus creating gluttony of malinvestments which either cannot be completed at all, in time, or without stealing resources away from actual warranted economic activities. In essence, it’s a re-structuring process, where capital and labor are drawn away from false market activities to actual sustainable activities.

I hope this helps.

6

Well, of course, the banks went bankrupt/failed. But, bail outs are just the government response to a bust (which inevitably hits the financial sector, because they are the ones who propagate the boom). The bust still comes into existance. It just centers around one bank. It is, effectively, a local bust that isn’t propagated throughout the entire financial system because there is no banking centralization created by a government-sponsored central bank.

7

So in a system with no government bailouts, a bank would still be planting the seeds of its own destruction? It would not learn, and neither would its depositors, that a credit expansion boom is unsustainable? I find it difficult to believe that anything other then 100% reserve banking would emerge on the unhampered free market. Like I said, I didn’t read Soto’s book yet, so I am not sure what his position is regarding the boom/bust under a free banking system.

8

de Soto’s book doesn’t support my argument. It just gives historical cases of banks failing due to credit expansion by that single bank. They are merely used as historical examples which support the Austrian Business Cycle Theory. My argument’s foundations are in the same theory. No, I don’t think that a small portion of bankers/business men will learn. My argument is essentially the same argument Austrians use when defending their theory against people who claim that the Austrians assume businessmen are stupid because they don’t learn from their past mistakes of investing during a credit boom (as if businessmen had had to have foundations in economic theory or knew where exactly the increase in M2 was coming from—people are still fooled by Greenspan claiming that M2’s growth was a result of an increase in savings in China).

There will be bankers and businessmen who think they can pull out before the bust, or they can regulate their credit expansion in such a fashion that it won’t result in a bust. A good example is Milton Friedman, who recognized that the Federal Reserve was a big influence in the creation of the Great Depression, but believed that by correcting mistakes the Federal Reserve could have averted that disaster. Obviously, knowing and abiding by the ABCT is not synonymous to having experience of a boom and bust and understanding why that came about.