Economics 101

ECONOMICS 101

By Roland Watson

Economics, and economic systems, who can understand them?

- There are many different economies around the world, and levels of economic activity, from your corner store to the trade between nations, and they are all interconnected.

- There are innumerable economic determinants, and factors, and all the linkages that exist between them, and all the indices and other measurements of them.

- And, economic activity involves every one of us, and every institution, through billions and billions of separate transactions, every day.

Economies affect our lives in many different ways. (They are one of the best mirrors of the human experience.) They of course regularly assist us, but not infrequently they also cause us great disruption and harm. And this may occur through events that, like the butterfly of weather systems and chaos, are so remote from us as to be unseen, much less understood or controlled.

Economics truly is the dismal science, but it wasn't always this way. The origins of modern economic systems were small and manageable. Individuals produced what they could, and bartered any surplus that they had, usually to other people in their own village. But, as larger communities developed, and the techniques of agriculture were improved, and as people created the first desirable crafts, they took to visiting other nearby villages to sell their crops and wares. These were the first traveling salespeople. Also, at certain times, such as when crops were harvested, temporary markets would be set up, to which anyone could bring their produce. This is how economies started, and in many rural areas of the world it is still how they work today.

At this point the economies were non-monetary, but this changed with the introduction of coinage around 700 B.C. (Bertrand Russell, A History of Western Philosophy) With coinage, they began to develop in sophistication and complexity. The key function of coinage, in addition to facilitating trade, was that it allowed the conversion of goods to a savable store of value. Grains, even in storage, would last only so long, but coins could be stored, or saved, forever.

Coinage divorced people from the need to produce their own food, and through this it enabled the foundation of trades. Further, through the use of savings it also enabled the first "investments," in the ingredients needed for greater production capacity, and in the tools associated with new production technologies. With all of this markets increased dramatically in size, bringing about concentrations of economic power, and with them the first modern forms of economic competition, and the production and marketing strategies used therein.

This process of economic evolution also fueled the formation and development of a variety of economic institutions, since it enabled people to specialize. Prior to the development of markets, an individual was basically responsible for every aspect of his or her life. With few exceptions, you (and your family) had to provide yourself with - make, grow, catch or find - everything that you needed. This all changed with markets: now you could specialize, and then trade for anything else that you required.

Economic institutions developed around production specialties, progressing from village cooperatives and castes, to guilds, and then corporations. Similarly, the first financial institutions were created, starting with the proverbial moneychangers at the temple gates.

Throughout this process, the purpose of the economy also evolved. Originally, economies existed to facilitate the efforts of their participants to meet their basic needs. Markets were "efficient" in the sense that their use, founded on specialization, enabled greater production. You could use them to get what you needed, and since more was produced, there was more to go around.

The creation of markets also led immediately to the creation of income and wealth inequalities. Some people accumulated more savings than others, because they had access to more productive land, or marine habitats, or specialized in products that were the subject of great desire, or had or developed greater abilities and skills, or simply worked harder. And this was the second purpose of an economy, as the vehicle by which such individuals could accumulate savings and wealth.

Related to this, markets began to serve as a means for speculation, since they provided the mechanism by which different products and services were valued and priced. Market participants could speculate on future price movements, and also seek to manipulate them in their favor.

Lastly, one other purpose of an economy also developed, which was linked to the first, but on a broader social level. The economy came to be seen as a means - a structure - by which various social goals could be achieved. Through increasing efficiency and hence production, and through accumulating a store of savings via thrift, societies as a whole could achieve greater prosperity.

In the modern world we can say that economies, for most nations (but perhaps not for most people), have achieved the first purpose. We are able to get what we want, and in amounts at least sufficient for our survival. Economies have fared best, have achieved the greatest success, with regard to the second purpose, the accumulation of wealth, but this has occurred only for a small minority of people. As to the last purpose, only a very few societies have created a great store of wealth, and made it available to everyone via widespread distribution, and thereby achieved a high level of economic prosperity. (The clearest examples of this are the Scandinavian nations, but even they still have a long way to go.)