The First Law of Natural Economics

Posted on December 8, 2011 by MMP

Natural Laws of Economics

    Traditionally, economists like to talk about the economy in terms of money and statistics.  Actually, money contributes to their overall tendency to do this because it’s the way we tend to think about our interactions in the economy.  We earn money and we spend money.  Sometimes we save and invest money.

The problem with this approach is that it lends itself to obscure sounding theories that most of us have no desire to know about.

A more practical and effective understanding can be achieved by thinking about the personal transactions you make in the economy.

When you take a job, you are entering into a contract to trade your labor for some compensation.  You typically get paid with money which you can then trade for other things.  Ultimately you are trading your labor to buy something you want or need.

The government would like you to believe that it is the spending part that causes the economy to grow.  But, the truth is that you would not have anything to trade with if you did not first trade your labor.

With this perspective you can begin to understand that nothing can happen in the economy unless and until people expend their labor.

Every economic event depends upon this first action.

Next you can realize that everything you do has an economic consequence in your life.  You only have your labor.  If you trade it for something you have an asset to trade with.  If you do nothing, your labor potential just evaporates with the passage of time.

Think about it.  If people were not using their labor, would there be any economy at all?

It doesn’t matter what political system you consider.  It’s the same for Capitalism, Communism, Marxism, etc.  Those political systems only govern how the products of people’s labor will be distributed through their respective societies.  The ultimate question is who does the work and who benefits.

Those decisions don’t change the basic economic truth that nothing can happen, nothing is produced or consumed, without the expenditure of human labor.

I call these basic economic truths the Natural Laws of Economics.  The statement immediately above is The First Law of Natural Economics.

I will post additional Laws as I talk about them.

You can read more about the Natural Laws of Economics and eventually see all of the Natural Laws of Economics as they are posted on the associated pages on this website.

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What Is Money?

Posted on November 7, 2011 by MMP

This might seem like a really ridiculous question.  We use money every day.  Certainly we all have an understanding of what it is.  But answering the question and understanding the answer can lead to a tremendous and much deeper understanding of our economy and the personal decisions we must make to be successful in our lives.  Additionally, the history of money is a story of intrigue and imagination.  It’s interesting and entertaining.  And it gives you lots of neat things to talk about at parties.  Everyone likes money!

From the most basic point of view, you should understand that like everything else, money is an invention of man.  This is significant.  There is nothing magic about money.  People ultimately decide everything about money, including what to use for money and how to value it.

As you can imagine, this has led to many different choices and experiments throughout history.  Think about it.  If you could make the decision as to what we would use for money, what would you pick?

I would be inclined to look through my closets and find the thing I had the most of.  This might lead to a choice of something like staples, paperclips or toothpicks.  Don’t laugh!  When a Government makes a choice about using something for money, this is essentially what they do.  Keep in mind that there isn’t anything magic about Government either.  A government is just a group of people with the power to govern.

People have chosen to use a tremendous number and variety of things for money.  Through the years people have used paper as well as the traditional metals such as copper, gold and silver.  Iron and stones have also been used.  People have also used beads, bullets, whiskey, cows and even tobacco.  Sadly, my cache of paperclips remains relatively worthless.

When you are talking about money, it is really easy to get distracted.  So to start, let’s get really basic and look at what it is that money is supposed to do.  What is the reason it was invented in the first place?

The simplest way that we describe money is to say that it is a “medium of exchange.”  That just means that we use it to buy and sell things.  Money does other things that are much more important, but this is the most common thing that is done with money.

Money allows us to interact with each other and to trade the things we make or collect for other things.  Imagine if you worked on a farm and there was no such thing as money.  The farmer would have to pay you with the food that you helped to grow.  If you wanted to “buy” anything else you would have to find someone who had what you wanted to buy and who also wanted the food that you had.  You would also need to do this before the food goes bad.  If you worked in a factory making widgets, you would likely be paid in widgets and have to find a farmer or someone with food who wanted to buy your widget just to be able to eat.

Everyone benefits if they can agree upon a thing to use as money.  Just the fact that they agree to use it as money gives it the ability to be used for trading.  Once an object is designated as money, everyone will want to have some of it so that they can buy what they need and everyone will be willing to accept it in a trade because they will understand that they can use it to buy other things they want.

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Who or What is the Economy?

Posted on November 2, 2011 by MMP

Our temptation when asking this kind of a question is to jump right into the fray with everyone else.  We always start with a feeling that everyone else knows more about it than we do and we are playing “CATCH-UP”.  This is where we get over-powered by economists, politicians and political pundits.  They bury us in very complex things and tell us it is much too complex for the common person to understand.  It is not unusual for political people to pit their Nobel Prize winning economist against the other guy’s expert who has equally impressive credentials.

The unspoken message is “It’s too complex for you to understand-go back to your life”. Or in the more popular expression, “It’s the economy, stupid!”

Let’s try a different approach.

Start by assuming that you are the only person on the earth.  You have to work to feed yourself.  If you don’t do it, it doesn’t happen. (very important!)

Suppose there is a fruit tree from which you get your food.  You have to expend your resources, time and energy, which we call labor, to get the fruit from the tree.  Your compensation is the fruit which you can now consume to sustain yourself.  This is the activity which gives rise to the expression “the fruits of your labor”.

This is the basic building block of the thing we call the economy.  Without people doing something there is no economy.  If there were no people on earth, there would be no “economic activity”.

Now, we know that the thing we call our economy is far more extensive and complex than our one man example.  But there are some very important things that we can learn from this example which remain true, no matter how complex an economic system might become.

The first economic truth that we can observe is that, in terms of an economy, nothing happens unless someone does it.  The basic event that we call economic activity involves a human being expending their personal resource of time and energy, their labor, to produce a result.

This is true in our one man example.  It remains true if you examine your family as an economy.  It continues to hold true when you look at your community, your state, your country, or the world.  It holds true whether you involve the Government or not.

The basic economic truth is this: Nothing is produced, no economic result is achieved, unless a human being uses his or her personal labor resource to achieve that result.

This answers the question we began with.

In your life, YOU are the economy.

In your family, you are an integral part of that economy.  The same is true in each successively larger economy, you just become a smaller part as a percentage of the whole.  But there can be no doubt, when someone such as your parents or your Government is talking about the economy, they are talking about you and how your labor resource is going to be used.

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WELCOME!

Posted on August 3, 2011 by MMP

The subject of Economics, as it is traditionally taught, is horribly boring!  It is filled with statistics and charts and an overwhelming number of theories which frequently seem contradictory.  Most people come away from their first encounter at least slightly confused and often lacking any interest to learn more.  Economics seems like something foreign to our experience.

Yet Economics touches every part of our lives.  Understanding the value and nature of money will allow us to control it and use it as an effective tool to help us lead very successful lives.

Failing to understand it can lead to disaster and turn us into slaves.

The good news is that it isn’t nearly as difficult to understand as many people would have you believe.  Even better, it doesn’t have to be so obscure and boring.  There is a lot of interesting and entertaining history in economics that can teach us very valuable lessons.

The basic concepts of economics can be understood in the context of our normal lives and doesn’t have to be complex or obscure.

Please look around the site and click on the various menu items to get a sense of the range of topics we are going to cover.  There isn’t much info there yet, but we will fill it in as you learn more.

See you in class!

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