Economics Is Easy, And Can Be Learned In 5 Minutes

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The science of economics has been made out to be impossible to understand much less articulate. If you have five minutes, it's time to learn economics and blow the roof off the "dismal science."

The mission of the economic institution is to create a system of sharing scarce resources to promote civility and increase the standard of living to the greatest number of people. This must be accomplished while dealing with the unlimited demands of human nature against the realities of scarcity, alternative use, choice and opportunity cost.

Fortunately this conundrum is easily answered by efficiently taking resources, known as capital, and growing the economy by creating wealth. This is accomplished through productive actions that efficiently answer the fundamental questions of what, how, and for whom so more needs are met with fewer resources.

The greater the wealth creation and economic expansion, the higher the standard of living enjoyed by all members of the society. In other words, if we have a larger economic "pie" and more people thrive, then with a smaller pie people may die. Since the famous proverb teaches us that a rising tide lifts all boats, it goes without saying the fundamental focus for all of us should be: how do we create wealth?

History (Italian Renaissance, early Greece, Jamestown, Soviet Union, Berlin, Cuba) tells us the most effective way of creating wealth is by using a market economic system where the means of production and distribution are privately held by individuals within a free society who profit from the exchange of goods and services. This system is called capitalism. The word capital literally means wealth in the form of direct or indirect ownership of resources that are scarce. Because of scarcity, an inadequate supply places value on resources based on their utility in meeting demand.

So what is the capital that makes up capitalism? Peruvian economist Hernando Desoto tells us "to unravel the mystery of capital, we have to go back to the seminal meaning of the word. In Medieval Latin, ‘capital' appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat they provide. Livestock are low maintenance possessions; they are mobile and can be moved away from danger; they are also easy to count and measure. But most important, from livestock you can obtain additional wealth, or surplus value, by setting in motion other industries, including milk, hides, wool, meat, and fuel...Livestock also have the useful attribute of being able to reproduce themselves. Thus the term "capital" begins to do two jobs simultaneously, capturing the physical dimensions of assets (livestock) as well as their potential to generate surplus value."

Wealth is thus created by the actions of man in altering raw materials to make them more useful in meeting demand. Efficient actions that can alter resources to increase their value include innovation in: knowledge, skills, harvesting, transportation, labor, equipment, distribution, and consumption.

When changes are made to resources that improve their usefulness to others, additional value is added to them. This additional value is considered capital. When capital in the form of goods and services is voluntarily exchanged, wealth is created.

This exchange method happens in what is known as the free market. The market is the mechanism that drives the allocation of these resources from those who have to those who need. The result is the movement of scarce resources to their most efficient use to offer the best possible standard of living for the most people within a society.

The governmental institution facilitates the economy by guaranteeing a system of formal legal ownership: a recording system of titles, deeds, property records, etc. over a person's land and possessions that are documented under a system of law. This creates the incentives necessary to motivate man to act on resources to create additional wealth. In order to foster capitalism, a nation must have in place a stable government institution that includes constitutional law, order, and justice.

In fact, private property rights and protections are a fundamental component of a market system because property, defined as the natural right to one's person and possessions, is also the basis for morality; and that any behavior that is counter to this natural law (i.e. murder, theft, rape) is immoral. This is but one example of how natural laws govern the principles of capitalism and give it legitimacy to successfully create civility to elevate mankind. Just as the statue of justice is blindfolded, the free market operates without discrimination based on principles not politics.

Unlike the linear perspective of intentional causation found in a command economy, a spontaneously ordered economy is difficult to comprehend. It takes a subtle and sophisticated understanding to accept the nuanced principles that make up the laws of Capitalism. To understand Adam Smith's "Invisible hand," is to trust a systemic process of paradoxical truths that when applied to man's inherent nature creates the best possible outcomes for groups of people who live in a world of limits. Market economics may seem counter to every instinct one has, but trusting the sometimes "mystical" principles of capitalism is what offers the most people the highest standard of living.

The beauty of capitalism is in the efficient operation of the system and the people it quietly serves. Its economic effectiveness is measured in less hunger, greater health, longer life, and increased populations; not in affective dogma, conventional wisdom, and political correctness. As such, we must as Hayek said, submit to impersonal forces that has made possible the growth of civilization because, as Bastiat hoped, we have taken into account both the effects of what can be seen and those that must be foreseen.

Capitalism also has a unique psychological component that forces man to come to terms with himself before he can come to terms with the philosophy. This is achieved by self-awareness through understanding that man is not perfectible, and acts by his nature out of self-interest. Upon this enlightenment, one can realize that greed for wealth can be used against itself for positive ends. By pitting one man versus another within a civilized competitive structure it becomes a necessity for man to cooperate in ways that are beneficial to others to satisfy purely selfish motives. In other words, two negatives, in the form of self-interested men, make a positive outcome for society as a whole because in order to selfishly gain, one must first serve.

One must also not confuse wealth with money. Currency and price systems (based on supply & demand) offer a numerical language to facilitate wealth creation by acting as a surrogate for productive behavior. Money is a way to transfer wealth or to give people incentives to produce wealth; but it is not capital and does not define wealth.

With that said, the determination of economic wealth is most often connected with financial holdings. This is because money represents real productivity and efficiency in delivering goods and services to one's fellow man. Those who are the most successful in doing so are rewarded with the most "certificates of performance" which act as medium of exchange to the wealth they have added to society. Money is only a symbol of productivity in meeting the demands of others.

No institution created by man is perfect, including capitalism. Other systems may sound and feel better but moral exaltations never put a meal on the table, or a roof over someone's head. Free markets are best aligned with natural laws and thus are the furthest removed from the dictates of imperfect men. It can be said of capitalism what Churchill once said of democracy -It is the worst possible system, except for all the others. Market approaches sound the worst but work the best while socialist approaches sound the best but work the worst.

Lastly, yet most importantly, wealth creation can't be accomplished without freedom; the greatest expression being individual choice and accountability. If we couple this to the old adage that a fool can put on his jacket better than a wise man can put it on for him; then we can surmise that freedom is best expressed through knowledge which is greatest at its source and not with elite decision makers. As such, individual freedom, with the associated choice and cost, is the proper fuel to propel economic growth.

We have the answers to the scarcity and sharing questions. Any social or political actions that keep wealth creation from occurring to its maximum potential are unacceptable at best and immoral at worst. A competitive free enterprise entrepreneurial market exchange economy that allows life saving prosperity to the greatest numbers of people must guide us all. And that ladies and gentleman is what economics is all about.



Dean Kalahar recently retired from teaching economics and pyschology.  He has authored three books, including The Best of Thomas Sowell, a user-friendly guide to Sowell's insightful thinking on a wide range of social and political issues. 

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