Economics

I want to discuss economics. Over the last few months I have come to realize that economics is a little understood, little known, and little respected field. By all means, if any readers disagree with me, feel free to let me know. I’m not kicking myself for the way I dismissed economics when I was younger. I was, after all, young. But it would seem to me that the study, or at least familiarization, with the fundamentals of economics, should form part of the core of any educational curricula, anywhere in the world.

And a disclaimer, the field of economics is a lifetime study. So please do not regard this article as an attempt to impart more than a scattering of observations on the subject. I myself am still spending at least a couple of hours a week studying economics. I don’t see that stopping in the near future.

One link worth looking at … a series of short videos called the Crash Course in economics. I found them quite informational.

https://www.youtube.com/watch?v=3ez10ADR_gM&list=PL8dPuuaLjXtPNZwz5_o_5uirJ8gQXnhEO

I found this an extraordinarily difficult article to write. As a field of study, it is very broad, and in some ways very difficult to understand. I found it especially difficult to winnow out the good writers from the bad writers. I don’t mean that the bad writers were saying the wrong things, but it is clear that some people were adversely affected by a lifetime in academia when it came to writing style. Very difficult to tease out the information that one is looking for. In the end I had to seriously trim down the scope of this article.

 Adam Smith

Adam Smith

Let me try to give some definition of what economics is before I begin. It isn’t the easiest task. I found one definition that I liked, by Alfred Marshall, a 19th century English Economist.

Economics is “a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment, and with the use of the material requisites of wellbeing”. A little bit of thought about that definition and it can be easily seen that there is almost no part of life that economics doesn’t, to some extent or other, impinge upon.

Modern economics could be said to have been born in the year 1776, when Adam Smith (Google him and the Scottish Enlightenment) wrote “An Inquiry into the Nature and Causes of the Wealth of Nations”. This sounded the death knell for what was called mercantilism (known as economic nationalism). [Mercantilism - economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. It was the economic counterpart of political absolutism] One way to look at this was the concept that there was a ‘fixed’ amount of wealth (gold, money, resources) and one nation could only grow wealthier at the expense of all other nations.

Adam Smith changed this (the school of mercantilism). I’m summarizing this, but in essence, the ‘wealth’ of nations is the value of all the goods and services which a nation can provide. Thus it is not a zero-sum game where in order for one nation to be wealthy, other nations have to suffer. I also find it intriguing that he developed this school of thought even before the Industrial Revolution had ever gotten started. Adam Smith was very much a believer in laissez-faire capitalism. I am attaching a link to a video (only 60 seconds long) which is an amusing summary of his concept of the “invisible hand”.

https://www.youtube.com/watch?v=LCRNI04tnN8

Britannica_Economics-large.jpg

To the right is a diagram that shows some of the economic processes that go on in today’s industrial economy.

There are a multitude of different specialties within the broad field of economics; macroeconomics, microeconomics, development economics, resource economics, labor economics, agricultural economics, and the list goes on and on.

Probably the two main fields of economic study that are worthwhile defining briefly are microeconomics, and macroeconomics.

Microeconomics: This deals with the behavior of individual entities such as consumers, business firms, traders, and farmers and the forces which act upon these entities.

Macroeconomics: This focuses on aggregates for entire economies, such as the level of income in the whole economy, the volume of total employment, the flow of total investments, etc. and the forces which act upon and affect these aggregates.

In addition, there are a large number of specialized fields that are inextricably part of economics and vice versa; finance, money, banking, industrial organization, technology, international trade, governance and policies, the environment, science, etc.

As should be evident by the above, economics is inextricably interwoven with every aspect of our daily lives, perhaps more so now in this day and age than ever before in the history of mankind. Thus, I reiterate, everybody who wishes to live and participate in the world today should have a basic understanding of this field.

The fundamental unit in all economies is the transaction. A transaction is where one entity exchanges money (or credit) to another entity in exchange for goods, services, or financial assets.

The summary of all these transactions is what forms the economy.

Pricing is determined by the amount of money exchanged for a good, service, or financial asset.

Individual markets are those that are dedicated to a particular type of commodity. E.g. there is a wheat market, a steel market, a mobile telephone market, etc. Some markets are made up of other markets,, e.g. the mobile telephone market; there is a market of course for the finished good, but the finished good is made out of materials from other markets; glass market, chip market, silicon market, indium market, tin market, labor market, etc.

And if you sum up all of the transactions in all the markets, that forms the economy.

In the theory of competitive capitalism, it is assumed that transactions are achieved through voluntary cooperation, and that all parties involved in the transaction benefit from it and are thoroughly informed about all aspects of the transaction. The premise is that when entities offer a good, service, or financial asset for sale, the entities who wish to purchase that from them are free to compare what is being sold with similar goods from other sellers. Then if the item to be bought can be found for a better value from another seller, the purchaser is free to go elsewhere. This check and balance is what determines market prices. Naturally, that does not survive contact with the real world. But it is a good basis to start from.

Markets are affected by opaqueness of information, government regulations, human nature, and a plethora of other factors. When you add in the extraordinarily complex web of factors involved in global trade today, economics becomes a swampy mess. [Apologies for the overly technical terms there 😊]

While studying some of the policy mistakes that were made in the past, within the 20th century primarily, it is clear that the leadership in that day and age simply did not have the breadth of data that is available today. Today we have a far better grasp, or we should have a far better grasp, on what can affect economies. Which makes some of the policies being pursued in the world today such as tariffs, extraordinarily stupid. I might mention that the Smoot-Hawley Tariff Act (1930 – United States), which is regarded as contributing to the Great Depression, was actively resisted by thousands of well informed economists and industrialists, including Henry Ford, and yet Herbert Hoover, then President of the United States, went ahead and signed it into law anyway. Just goes to show how incredibly stupid politicians can be. The parallels between this and what Trump is doing currently (Aluminum and Steel tariffs) are disturbing.

Just for information – here were some IMMEDIATE effects of the Smoot-Hawley Tariff Act. Common sense will tell you what effect these had on the American economy and employment.

·        June 18, 1930, the tariff takes effect.

·        Switzerland talks of boycotting American products.

·        June 30, Italy raises its automobile tariffs.

·        July 22, Spain -  Wais Tariff of 1930, primarily aimed at auto imports from the US. Automobile imports to Spain from the US fall 94% in 3 years.

·        September 17, Canada passes the Canadian Emergency Tariff. Most tariffs jump by half.

·        November 20, 1931, Great Britain passes the Abnormal Importations Act. This lets the Board of Trade double import duties on any and every product it chooses.

·        February 1932, Great Britain doubles down with the Import Duties Act, which adds another general tariff of 10%.

International trade promptly crashed

·        In more than 20 countries, imports and exports fell at least by double digits between 1930 and 1931, with an average decline of more than 27%, according to data from the National Industrial Board. In the United States, exports cratered 37%, while imports fell by 32%. [Professor Ramon P. DeGennaro – GCP – Globalism & Nationalism]

And economics is not just about the subjects mentioned above. To paraphrase Milton Friedman (b. 1912 d. 2006 – Nobel Prize Economics 1976), it is also CLOSELY linked to our political and civil freedom.

Some examples of political and civil freedoms being affected by economics:

·        British citizens couldn’t travel to the U.S. after WWII due to monetary exchange controls

·        US citizens who are required by law to pay a percentage of taxes to support a retirement plan administered by the government, in which they have no visibility or control.

·        US citizens threatened with imprisonment because they lowered the price of their chickens (Schechter Poultry vs. United States) due to the National Industrial Recovery Act (one of FDR’s New Deal programs in the 1930s). Incidentally, when taken to the Supreme Court, the conviction of the Schechter’s was overturned, and the Act eventually declared unconstitutional – but by then it had done massive amounts of damage to the economy.

But, as Friedman points out, politicians do not necessarily want a great deal of economic freedom. A great deal of economic freedom will automatically start encroaching upon the power and reach of governments. So why would they be interested in economic freedom? As with most large bureaucracies, their existence is an end in itself. So, when you have big government, their urge to interfere is unrestrained.

And it is interesting to note that many large government agencies and international institutions are formed in the wake of world events that cause mass uncertainty, such as world wars and 9/11. Look at the TSA and the DHS since 9/11. This is exactly when people are worried, and the “masses” are more willing to hand over responsibility to a paternal organization that promises to look out for them. And once they are formed, they are like a cancer. Extremely difficult to get rid of. The UN, WTO, World Bank, and the IMF were all formed around the chaos of WWII. And look at them today and how they have the ability to affect the global economy. That is yet another article.

Personally, I strongly support the ideas of libertarianism, free trade, and globalism. Just think about the way the world is today. Libertarianism aside, how could we have what we have today without relatively free trade and globalism? Think about it. I doubt that at any time in history, has been possible to communicate, travel, and purchase the incredibly broad range of products that we can, as cheaply as is generally available now. I can call from South America to Asia (essentially for free on top of my low monthly subscription fee for Internet services) on a device that has materials from all over the world, using technologies and software from all over the world, that I purchased for a relatively low sum of money. I can get on a plane and travel from South America to Asia for as little as a couple of thousand dollars. And do so in a period of about 40 hours. When in our history of the world have people been able to travel like that? In many places in the world, I can log onto my computer (another device that is assembled out of materials, technologies, and software from all over the world), using fiber-optic cables that span the globe (or via satellites that orbit the earth), get on to Amazon.com, and purchase almost anything from anywhere in the world to be delivered anywhere else in the world for basically quite reasonable prices.

I grew up all over the world in the 60s and the 70s. A phone call from Africa to the United States might take two or three days to arrange and cost tens if not hundreds of dollars. When I asked my parents for money from boarding school, I had to actually write an airmail letter and put stamps on it. Most goods had to be shipped by sea taking months, and the only people who could usually afford to get them were people who work for large multinationals who paid all the customs fees. I compare that to today and even though I grew up with it I still am amazed.

So, when I hear groups of people complaining about globalism and free trade, I wonder if they can actually hear themselves.

It is true that change of any kind impacts economies and people. And economics, contrary to everything I have said above, is not about numbers, it is about people and how they are affected.

I know of course why politicians love to demonize globalism and free trade. It’s an easy target. Good heavens! Why would one ever dream of questioning oneself and one’s policies inside of a country when you can point the finger outside at the foreigner. The dirty, stinking, foreigner (who, incidentally, allows us to buy goods cheaply like phones and computers and clothing and shoes). How dare that outsider indulge in globalism and free trade at the expense of closing the factory down the street. Which can produce the same goods, but at three times the cost.

The Adkins diet. I’m sure many of you will remember that. It was a low or no carbohydrate diet fad in the early 2000s. At its peak, it caused the Krispy Kreme chain to close a number of stores and of course the people working in those stores lost their jobs, and the indirect industries that would have supplied those stores, such as makers of flour, sugar etc. would also have been impacted. Not only did it close stores but it scaled back expansion plans. But you don’t hear politicians demonizing that. The outsider is always the easier target.

https://www.nytimes.com/2004/05/08/business/krispy-kreme-runs-head-on-into-a-low-carb-wall.html

And, very briefly, another source of change to the world economy, which has nothing to do with globalism and free trade, is the effect of technology. Self-driving cars? That’s going to have an enormous impact on the world. And you can’t point to the cause of that being globalism and free trade. It is more common sense. We are of course, in the early stages of autonomous vehicles. And of course, every time one of them has an accident, the media (God bless them), love to sensationalize it. But I would think that a city full of autonomous vehicles would be significantly safer than a city full of vehicles driven the way I see them driven in Buenos Aires, or the Philippines, or Saudi Arabia, or Los Angeles at rush hour. I rest my not inconsiderable case.

So, in summary, I would make the following observations:

Globalism and free trade is good, protectionism and isolationism are bad.

Economics is not just about numbers, it is about people and how they are affected by what goes on in the world. But to think that restricting free trade and globalism is the solution for protecting groups of people from change … idiocy.

Big government (and related institutions), inasmuch as they create regulations and policies which affect the global economy, is out of control. Government is of course, needed to provide a framework for rule of law, property rights, contract enforcement, and public services such as defense and law enforcement. Nobody wishes anarchy. But it is run by politicians, and as far as I’m concerned they are inherently self-serving and ill-educated. And those conditions are exacerbated by seemingly limitless stupidity and greed.

Economics is an extraordinarily complex field, but it is certainly worth knowing about – just as a matter of self-defense if nothing else.

I will try in my article next week to do a basic analysis of the issues with the aluminum and steel tariffs that Trump has put in place.

I hope you enjoy the article or at least find it interesting and I look forward to any comments.