Economics Lesson 1: the Basics

Economics are poorly taught and poorly understood in general, and are the subject of political battles. However, every citizen needs to understand the basics of economics, to be able to wisely analyze the various proposals our governmental leaders propose. We are currently undergoing an economic crisis of historic proportions, so it is vital that people understand what is going on. Most economics are actually simple and comprehensible, as you will see.

First, you have to understand the difference between wealth, jobs, and money. In short, money is not wealth, and all jobs do not create wealth. Consider: government could multiply the money supply tomorrow by 100, but it would not bring us any more tangible goods. We would just have more money.

On a personal level, money can bring us wealth, but on the economic level, money is just a means of exchange. The amount of money in society does not create wealth, it merely allows for wealth to be exchanged. Wealth is a combination of goods and services that people can make or provide.

Wealth is totally dependent on the creative effort of the people. The more creative people around you, the more wealth available to you. By creative, I don't mean artistic, I mean creating things, and creating services.

Let's say you live on an island with 10 people. Let's say those ten people do nothing all day but lie around on the sand. Even if you are busy creating wealth, like harvesting coconuts or something, they will have nothing to give you. You could define money however you wanted, imagining say a huge treasure chest of gold coins, or suitcases full of 1000 dollar bills, but the fact is, you are still as poor as ever. Everyone depends on your coconut industry, and beyond that, you all have nothing of tangible benefit.

Now let's say those 10 people are not lazy good for nothings. Let's say they all spend their days in creative activity. One is busy fishing the lagoon, one is busy harvesting wood from the island's trees, one is collecting roots from the forest floor, one is hunting small animals, one is weaving vines, one is fashioning clothes to wear, and so on. Suddenly, you have a great deal of tangible wealth available. It doesn't matter if you have any money at all, as you can see, wealth does not depend on money, it depends on the stuff you have available to improve your life. Money by itself does not improve an economy, only creative activity does.

The wealth of a nation of a million people is measured the same way. If your society of 1 million has only 1000 people doing creative activity, it will be poorer than a society with 100,000 creative people, and it will be poorer than a society of 1,000,000 creative people.

Let's go back to our island of 10 example, humming along at maximum productivity, all 10 people working. Let's say one of them then gets injured. Now only 9 people are working. But then one person has to provide care for the injured one. So really, only 8 are being productive. The one providing health care is not really doing anything productive. Caring for the sick and injured, as necessary as it is, is not a creative activity, and does not help the economy. It is a job, it is an activity that takes up the day, but it does not create wealth. So, sick people are bad for an economy, not only because they remove themselves from the productive economy, but also because they require health care, which removes other people from the productive economy.

Back to our island. Let's say that injured person dies. Now, there are only 9 people on the island. Total productivity just went down, and your island became poorer. A population fall makes you poorer, if it removes productive people. However, the health care worker is now relieved of that burden, so they can rejoin the productive economy. Thus, while you are poorer than when you had 10 productive workers, at least you are better than when you only had 8 working. The death of the injured one was actually a blessing for you.

Let's say a group of 4 people then washes up upon your shore. You population now rises to 13. If they start working, contributing to your island with creative activity, you overall island wealth goes up. This is a general rule of economics: population expansion is good for the economy, if the new population is productive. This makes perfect sense, as more people equals more produced.

But what if one the newcomers becomes a trouble maker, committing crimes against the others on the island? Your productive workers now falls by one and your economy suffers. And, you have to respond by appointing one of you as police officer, to bring the criminal to justice and administer punishment. Your productive workforce falls again, as another person stops producing. This is another law of economics: the police function, as necessary as it may be, is bad for the economy. Just like with sick people, criminals are bad for an economy, not only because they remove themselves from the productive economy, but also because they require police, which removes other people from the productive economy.

War is similarly bad for the economy, as I have discussed elsewhere. Imagine using your island resources to attack another island. You would be made poorer just by having to send your people and your resources off to some other island to attack them. How much worse would it be for your economy if they came to your island, killing your people and destroying your things. War is bad for the economy even on the offensive, but especially on the defensive. War may be necessary for you, as being poor is better than becoming enslaved or dead, but it is always bad for the economy.

Think of these basic laws the next time you hear about the growth and opportunities available in the health care or criminal justice industry. The contemporary and future growth of those industries are a very bad sign for our economy as a whole. The ideal situation for the economy involves conditions of peace and health.