________________________________________________________________
Economics 101

Why Should We Care about Economics?

The electorate must have a basic understanding of economics because we live in a market economy (as opposed to a planned economy where we have no influence on the market). Economics may not be the sexiest of subjects, but a fundamental grasp of the basic concepts is required to defend any proposal.


Fundamentals

Economics is a quantitative social science. It is said to be quantitative in that it can theoretically be measured (i.e., quantities can be observed). In fact, it may be completely expressed as a mathematical model. Bored already? Hang on; this will all make sense in one page of text. There are six things everyone in America should know about economics outlined below. This sounds much more boring and difficult than it really is, so let’s get started.


Market Types

There are four basic market types: traditional, command, free market and mixed market. A traditional market is characterized by direct bartering for goods and services. All early civilizations (and some tribal systems of today) are traditional. A command market is a planned economy whereby the government owns and controls the means of production. Communist and Socialist countries exhibit this behavior. A free market economy is one where the so-called “invisible hand” of supply and demand automatically determines how the market operates. Finally, a mixed market economy is a combination of a free market and a command market. The US is a mixed market, so that is what we will focus on.


Self Interest Theory

Economics is based on self-interest theory, which basically says that people will always act in their own self-interest. There really is no such thing as altruism (selfless concern for the welfare of others) because self-interest encompasses the behavior of altruism. In other words, people sometimes act in an altruistic manner (such as giving to the poor) because they see it in their own self-interest to do so (e.g. it makes them feel better about themselves).


Supply & Demand

In a market economy, the price of goods is determined by the available supply and demand for those goods. The optimum price is “automatically” determined based on market forces. If there is plenty of demand, there will be plenty of supply, and vice versa.


Short Run vs. Long Run

Economic theory places all events in a time window because the passage of time can dramatically affect economic outcomes, sometimes even reversing it. It is said that events that occur within a short period of time occur in the short run, and over time all events are measured in the long run.


Macro and Microeconomics

Economic theory comes in two basic flavors: microeconomics and macroeconomics. As their names imply, micro focuses on the small picture and macro the big picture. In the context of American Consensus, macroeconomics is the most important. Microeconomics is concerned with how individuals react to price changes. It attempts to measure and predict price behavior by measuring preference / indifference curves and estimating opportunity costs. That’s about all we need to know. On the other hand, industry and government use macroeconomics in an attempt to measure the past and predict the future by building economic models. Since they base all of their economic forecasts and budgets on these models, this is pretty important stuff (at least to them!). It’s important for the electorate to understand how they think, since we must trust them with our cash (God help us). In macroeconomic theory, the economy of a nation (say the US) can be modeled as a mathematical equation whereby the total output of the economy is expressed by the function Consumption + Investment + Government + Net Exports = Total Output. The higher the output, the “better off” we are. It is often expressed linearly as

C + I + G + X = O


The predominant input that makes the market go ‘round is C, the consumption component. When the economy is doing well, C is high. X and I are smaller players, but the effects of a negative value for X (which can reduce C) can be devastating, as we are seeing now in the US economy. When the economy is sick, it can be argued that G can be increased to stimulate the economy. This does not come without problems, because if what G produces is artificial in nature (i.e. something that consumers don’t actually have a shared need for or if it is produced in a grossly inefficient manner), the economy will be worse off in the long run even if it benefits in the short run. Therefore G is to be thought of as the “stimuli of last resort” because it is fraught with subjectivity. In other words, there is nothing natural or “invisible” about G with respect to supply and demand.


Quantitative vs. Qualitative Measurement

Economics is a quantitative social science. Although by its nature it cannot be an exact science, it is a sound science. However it is NOT qualitative in any way (other than it may be used to model the effects of qualitative actions). It may have some elements that exhibit accidental beneficial qualitative side effects, but when that occurs, it is purely coincidental. The point is this: economics generally models a free market, not a mixed market.


Summary

Even though a mixed market can be modeled using economic theory, the best approach is to first see what the free market would do without government intervention and then apply G only as necessary or desired. Conservative policy makers follow this practice while liberal policy makers either apply G liberally or ignore economics altogether, potentially bankrupting the nation. So the American Consensus platform in general endorses a conservative approach to policy making because it is believed that just like individuals, the government should avoid purchasing things it cannot afford. That is the safest policy for us all.