by Dr. Lawrence Wilson
© October 2019, LD Wilson Consultants, Inc.
Economics is an extremely important subject because survival and happiness depend heavily upon getting the goods and services that we need to live.
Economics is often taught very badly in colleges. It is made into a complex and often mathematical modeling science and the basics are not taught. This is true today in the field of law, it is true in the field of medicine and it is true of economics. This article is designed to introduce you to the basics of economics.
WHAT IS ECONOMICS?
Economics is the study of exchanges of items of value between people. Let us examine this definition.
Exchange simply means people trading one item for another. One can also say it means buying and selling. Economics is the science of how and why and what and when people buy and sell in order to make their lives better.
Exchanging, or buying and selling, can be done in two basic ways:
1. Barter. This is exchanging one good or service for another. For example, let us imagine that I own some cows and you want meat or milk. Meanwhile, you own a shoe factory and I want a pair of shoes. Barter occurs when we get together and decide to trade milk for shoes.
The way we do it is to decide together how much milk is equivalent in value to one pair of shoes. Assuming we can agree, we then make the exchange. If we cannot agree on the value of the goods to be exchanged, then no trade will occur.
2. Money transaction. This is a more indirect type of exchange. Instead of trading directly – milk for shoes – each trader decides on a price for his goods expressed as an amount of currency or money. For example, milk might cost ten silver coins, or five ‘dollars’ or 8 ‘British pounds’, or whatever we are using for money.
Anything, by the way, that people decide to use can be used as money. During World War II, for example, cigarettes were scarce and the soldiers and others wanted them. So among the soldiers and some local people, cigarettes were used as a form of money.
When money is used, the transaction – milk for shoes – is broken up into two transactions. One person buy milk with money and the other person takes the money and buys a pair of shoes with it. For this reason, using money is called split barter.
FREE EXCHANGES OR FORCED EXCHANGES
There are only two ways that exchanges, or buying and selling, can occur:
1. Voluntary. Each person decides what he or she wants to buy or sell.
2. Forced. The government decides what people will buy and sell.
Voluntary exchanges. In economic terminology, voluntary exchanges are called the free market. A market in economics is defined as a group of people who want to buy and want to sell goods or services. A free market means that people are allowed to buy and sell as they wish.
Capitalism. Another word for this system of economics is capitalism. This system is fairly new on earth (since 1776) and has brought great prosperity and better health to people wherever it is implemented properly.
Role of government. In the free market system of economics, the role of the government is to be a referee, to make sure everyone follows the rules, and to make it easy for everyone to buy and sell what they wish.
Forced exchanges. In economic terminology, forced exchanges of goods and services is called a command and control economy. This is an older system that is today also called socialism, communism, Marxism, progressivism, liberalism, mercantilism and monarchy. These words all mean that a large and powerful government makes many of the decisions about:
- what goods will be produced
- what services will be offered
- who will make things
- who will offer services
- how much the goods and services will cost
- when people can buy them
- how much the people can buy and sell.
This system works very poorly wherever it is tried. It has kept most nations of the earth in poverty for thousands of years!
No free market allowed. In the command and control system of economics, a free market is illegal. This means people cannot buy and sell goods and services as they wish. What always occurs in these nations is called a black market. This means that people illegally buy and sell in order to obtain the goods and services they require. Another word for this is smuggling.
Role of government. The role of the government in these nations is to make most economic decisions. In economic terms, this is called industrial policy. For example, the government might decide that the nation only needs 3 car companies, 4 insurance companies, 5 clothing companies, etc. Industrial policy goes much further, however, and the government might decide that all the cars must be small, all the clothing must be a certain color or style, and so on.
In practice, these governments mostly reward their friends and punish their enemies by deciding who will do business and who will not. Also, government officials become very wealthy by taking bribes and forcing businesses to pay ‘tribute’ in order to exist. These governments always make lots of stupid decisions because decisions are made by career bureaucrats who are out of touch with the real needs of the people.
Another key concept in economics is value. Value is the motivation for trading or exchanging one item for another. In our example, milk must have value to the person who wants it, or presumably he or she would not want it. The same is true for a pair of shoes.
For example, if a person is allergic to dairy products, then a bottle of milk would have very little value for that person. On the other hand, if a person has very little to eat, a bottle of milk might have great value.
Similarly, if a person already has 10 pairs of shoes, then another pair of shoes might have very little value to that person. However, if one has no shoes at all and needs a pair of them, then shoes will have a lot of value for that person.
As you can see, the value of every item varies greatly depending on each person’s situation. This is a key principle of economics.
One might ask, what if I receive a gift. Is that still an exchange of items and an economic transaction. The answer is yes. The gift might be very valuable to you, even if you don’t have to pay for it. Or you might not like the gift and you promptly throw it in the garbage if you have no need for it. However, gifting is certainly a form of exchange.
Items refers to anything that people exchange with each other. Economics divides the items that people exchange into two large groups:
1. Goods. These are physical, tangible items such as food, wood, metal, plastic, office supplies, cars, houses, lamps and millions of other physical things.
2. Services. These are actions rather than physical things. For example, services include fixing the car, sewing a button onto a shirt, getting a checkup at a health center, talking with an accountant or attorney, cleaning up the yard, painting the house and millions of other jobs or actions.
These actions often involve physical items such as buying the paint to paint the house, but the action itself is also vital to the exchange and is counted separately in deciding on the value of the exchange.
THE LAW OF SUPPLY AND DEMAND
A critical principle of economics is called the law of supply and demand. It is an iron-clad law of economics that can never be ignored, although some theories of economics such as Marxism try very hard to ignore it. Let us examine it.
Supply. The supply of any item is the amount of it that is around. For example, if everyone in the area owns cows and they all give milk, then the supply of milk will be high. If there are no cows around, then the supply of milk will be low.
Demand. The need for milk or shoes, or anything else, is called the demand. For example, if food is in short supply and people are hungry, then milk is likely to be in high demand – meaning people really want it and need it and will be willing to pay a lot of money for it.
On the other hand, if food is plentiful or if many people do not like or do not tolerate milk, then the demand for milk will decrease.
This law applies to all goods and to all services.
ANYTHNG THAT GETS BETWEEN A BUYER AND A SELLER DAMAGES THE QUALITY OF THE EXCHANGE BETWEEN PEOPLE
This is another ironclad law of economics that most college courses and books overlook. It means that the best economic transactions are those in which the participants, or the buyer and the seller, are completely free and in control of the transaction.
Unfortunately, in many instances, this does not happen. The worst offenders in this area are governments. They often pass laws that stand in the way of economic transactions.
In our milk example, the law in many nations is that a person may not buy fresh milk right from a cow. The government says that the farmer must first heat the milk in the process called pasteurization. This kills some germs that might be in the milk, but it also damages the milk. As a result, the milk transaction or exchange is not as beneficial for either the farmer or the buyer.
Another common example of severe interference is when the government forces people to go only to licensed doctors or licensed anything. People should be free to visit anyone they want when they are ill, but in most nations, the only people allowed to work in hospitals, for example, are licensed nurses and doctors.
This restriction was “sold” to people as a way to assure quality, just as pasteurization is supposed to assure the quality of milk. However, in many cases it does no such thing. For example, medical licensing:
- protects dangerous and outdated practices,
- protects one industry by getting rid of competition from nutritionists and others
- reduces the availability of health care
- raises the cost of health care
- discriminates against some people who cannot afford certain schooling
- criminalizes the population
- deprives people of certain goods and services
- deprives those who want to offer certain goods and services from offering them.
- Thanks to the above, makes a complete mess of the economic transaction we call visiting a doctor.
This is why America, when founded, forbade such laws, which are called occupational licensing laws. In America, both the national and the state constitutions all say that the government shall pass no law abridging the right to contract. For 120 years, America had very few occupational licensing laws and the people were very healthy. However, beginning about 100 years ago this part of the constitutions has been violated. As a direct result, the health of the American people has declined sharply. For details, read The Case Against Medical Licensing.
Other articles about economics on this site are:
to be continued …