The Second Law of Natural Economics

When you understand that the only source of economic activity and economic growth is the act of people using their personal labor resource, you can make the intellectual leap to the next logical result.

Every economic action relies upon a decision by a human being.

As it turns out, people are far more predictable than any statistical model of the economy.  In fact every statistical model of the economy tries to predict what people will do when some external stimulus is applied.

The problem with most economists and most statistical models is they ignore the actual decision point in preference to an analysis of various charts, graphs and some dubious equations.  They stop thinking like the rest of us and begin thinking like statisticians.

The reality is that basic human nature provides a far more consistent and predictable model for understanding economic events or non-events than does any statistical model.

In our current economic environment, there is a glut of houses for sale at very reduced prices – plenty of supply.  We are also continuing to produce the same number of people graduating from high schools and college and thus have the same number of people available to start new home situations – plenty of demand.  Economists call this new demand “household formation”.  A classic approach to the economy would predict that the housing market should be improving.

Some economists, realtors, builders and investment advisors and media pundits have been predicting a bottom to the housing market.

The rest of us know that isn’t likely to happen for a while.  We know that our personal situations do not encourage us to buy a new home.  It doesn’t matter how “affordable” a house might be in the classical sense.  We aren’t buying.

The reality is that our own personal understanding and the way we make decisions is pretty much the same for all of us.  It is simply a matter of human nature.

Thus, the Second Law of Natural Economics states that human nature provides a predictable model for understanding how large economies will behave.