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Wednesday, Nov. 26, 2014

Econ 101

Posted Sunday, September 30, 2012, at 1:18 PM

Believe it or not, economics is an offshoot of sociology.

Sociology is the study of the behavior of people in groups.

Economics is the study of the commerce of people in groups.

More simply, the study of economics is a study of human nature.

Whenever you look at groups of anything, they generally distribute into bell shaped curves.

That means most of the group will be average of near average, some will be extraordinary, and a few will be true outliers.

If you need more explanation, I am certain it will take about 30 seconds on the Internet.

Therefore, when you discuss the behavior of groups, you are typically discussing the average or near average where the majority of people lie.

Human nature is not that complicated and has remained unchanged from the first records of recorded history.

The Old Testament of the Bible is a good exposition of human nature from roughly 3,000 BC to 1,000 BC.

You will note that the stories ring just as true today as they did when they were written down.

We modern humans have can openers and air conditioning now, but otherwise, we remain basically unchanged.

Looking out for number one is number one.

The prime motivators are fear and greed.

Given available resources and information, people will choose what maximizes self-interest.

People desire to accumulate wealth because it is a way to store potential power, influence and personal comfort.

Most people are basically honest, but are not afraid to shade the truth, or even flat out lie, to protect self.

Other than helping their genetic descendants, people are basically unwilling to hurt themselves to help others, especially "for the common good."

Most people won't work longer or harder than required to provide for their personal level of perceived needs and security.

There is an old saying, "If two horses are hitched to a wagon and one horse is willing to pull, the other will usually let him."

People are basically the same.

When someone else is willing to provide their needs and security, they will usually let them.

Human nature, by in large, cannot be improved and uplifted by legislation.

Likewise, by in large, economic activity cannot be improved and uplifted by legislation. However, both can be suppressed by legislation. While culture through time can shift human behavior, the flexibility is limited and behavior tends to bounce back and forth down a narrow channel along the mean.

Supply and demand determine price. Supply is the availability of product. Producers will continue to produce so long as the return, after taxes, regulatory costs, litigation costs, defects, etc., is greater than the cost of production.

Demand is the willingness of consumers to purchase a product. Many factors effect demand. However, as cost to purchase goes up, demand goes down. As cost to purchase goes down, demand goes up.

Price is the cost of goods and services. In a competitive free market, supply and demand set price. Imagine a seesaw with two children on it. If the children weigh the same, it balances. If the children are of different weights, you have to shift the position of the fulcrum to bring the seesaw back into balance. In economics, price is the fulcrum that moves until supply and demand are balanced. That is price moves until the quantity available matches the number of people wanting to buy.

This is why sellers can's simply raise price to cover increasing cost. Do you remember when President Clinton was trying to pass socialized medicine? When person from a pizza company asked him what they were supposed to do about the increased compliance costs, President Clinton responded "Raise your prices by $5 per pizza."

When price goes up, demand goes down. As volume of sales go down, profit goes down. Due to competition, the profit margin most things is very narrow and volume of sales is what carries the company. To cut costs, the producer has to either start using inferior components or cut labor costs. Inferior product typically drives demand down further compounding the problem.

Information effects supply decisions and purchase decisions. The economy is effected by both reality and perception. Perception can be manipulated making changes in an economy. However, perception cannot normally override reality long term. For example, the media can tell you that we are in a recession or a recovery. To the extent that they are believed, people will respond accordingly. However, once reality is perceived, people will adjust their behavior accordingly.

Wealth is stuff. Money is a medium of exchange and a way to store potential stuff. Money is potential wealth, but not actual wealth. Just like water behind a dam is potential kinetic energy for turning turbines. The value of money is measured exclusively by its potential to be exchanged for stuff. The more stuff money can buy, (declining prices) the greater value it has. The less stuff money can buy, (increasing prices) the less value it has.

What is good for individuals is also good for a nation. What is bad for individuals is also bad for a nation. Just like individuals, nations which accumulate wealth grow stronger and prosper. Just like individuals, nations that spend wealth grow weak and struggle.

Debt is never good. Debt may sometimes be necessary, but is never good. Debt is the depletion of wealth.

"When people, or nations, accumulate a lot of stuff, doesn't that mean that others have less stuff?"

Not when there is economic freedom. When there is economic freedom, both sides of a transaction get what they want and both "win" and prosper. When economic freedom is regulated away, one side, the other side, or both "lose" as they are deprived the full benefit of the value of the transaction.

Humans desire both freedom and security. When freedom is taken away, people inevitably find ways to get around the impediments. The more that freedom is regulated away, the greater the incentive for the regulators to be influenced with bribes.

What does General Electric spend in campaign contributions to get tax code provisions that allow them to pay $0 in federal taxes when the rates are 35 percent and up? How do the "rich" find ways to avoid taxation and regulation of their personal businesses? When regulation is small and freedom is large, there is little incentive to give bribes and little leverage for authorities to compel them.

Regulating economic activity always yields negative results or "unintended consequences." State and federal governments have severely criminalized the manufacture, sale, and possession of drugs. That stops people from using them, right? Chicago has virtually banned all firearms. Chicago isn't one of the top places for murder in the country and you can safely walk anywhere in the city at night, right? Regulating automobile fuel economy convinces people to buy more efficient cars, right? Regulating economic activity merely distorts an economy depressing compliant producers and giving premium profits to those who provide circumventing the law.



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