How Does An Economy Work?

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Global Intergold Gold Bars
Global Intergold Gold Bars

The concept of an economy could – and should be – applied to your household in as much as an economy should be applied to a region. i.e. Country, State, County, City or Barangay. The five burros of New York City could be considered “Barangay’s.”

The word economy is Greek and means “household management.” Economics as an area of study was touched on by philosophers in ancient Greece, notably Aristotle, but the modern study of economics began in 18th century Europe, particularly in Scotland and France.

The Scottish philosopher and economist Adam Smith, who in 1776 wrote the famous economic book called “The Wealth of Nations,” was thought of in his own time as a moral philosopher. He and his contemporaries believed that economies evolved from historic bartering systems to money driven and eventually credit based economies.

To form an economy, groups of people leverage their unique skills, interests, and desires to trade with each other voluntarily. People trade because they believe it makes them better off. Historically, a form of monetary value was introduced to make trade easier.

People are financially rewarded based on the value others place on their productive outputs. They tend to specialize in those things in which they are most valuable. Then they trade the portable representation of their productive value for other goods and services. The total sum of these productive efforts is referred to as an economy. For example. Detroit, Michigan produced good steel, where the state of Hawaii produced good pineapples.

To further understand an economy without getting into extreme specifics, an economy encompasses all activity related to production, consumption, and trade of goods and services in an area. These decisions are made through some combination of market transactions and collective or hierarchical decision making. Everyone from individuals to entities such as families, corporations, and governments participate in this process. The economy of a particular region or country is governed by its culture, laws, history, and geography, among other factors, and it evolves due to the choices and actions of the participants. For this reason, no two economies are identical.

There are two basic types of economies: Market based and Pure market. Market based economies allow individuals and businesses to freely exchange goods through the market, according to supply and demand. The United State is mostly a market economy where consumers and producers determine what’s sold and produced. Producers own what they make and decide their own prices, while consumers own what they buy and decide how much they’re willing to pay.

Through these decisions, the laws of supply and demand determine prices and total production. If consumer demand for a specific good increases, prices tend to rise as consumers are willing to pay more for that good. In turn, production tends to increase to satisfy the demand since producers are driven by profit. As a result, a market economy has a tendency to naturally balance itself. As the prices in one sector for an industry rise due to demand, the money, and labor necessary to fill that demand shift to those places where they’re needed.

Pure market economies rarely exist since there’s usually some government intervention or central planning. Even the United States could be considered a mixed economy. Regulations, public education, social security benefits are provided by the government to fill in the gaps from a market economy and help to create balance. As a result, the term market economy refers to an economy that is more market oriented in general.

Command based economies are dependent on a central political agent, which controls the price and distribution of goods. Supply and demand cannot play out naturally in this system because it is centrally planned, so imbalances are common.

Growing an economy is primarily done with individual labor and is more productive – and worth more – when he or she can more efficiently turn resources into valuable goods and services. This could be everything from a farmer improving crop yields to a hockey player selling more tickets and jerseys. When a whole group of economic actors can produce goods and services more efficiently, it’s known as economic growth.

Growing economies turn less into more, faster. This surplus of goods and services makes it easier to achieve a certain standard of living. This is why economists are so concerned about productivity and efficiency. It’s also why markets reward those who produce the most value in the eyes of consumers.



There are only a handful of ways to increase real productivity. The most obvious is to have better tools and equipment, which economists call capital goods. The farmer with a tractor is more productive than the farmer with just a small shovel.

It takes time to develop and build capital goods, which requires savings and investments. Savings and investment increase when present consumption is delayed for future consumption. The financial sector – banking – provides this function in modern economies.

The other way to improve productivity is through specialization. Laborers improve the productivity of their skills and capital goods through education, training, practice, and new techniques. When the human mind better understands how to use human tools, more goods and services are produced and the economy grows. This raises the standard of living.

Economies have become extremely complex. Of course, anything that involves a government is bound to become complex in way that most of the population would not be happy with. As noted above, in the days of old, a farmer might trade a pig for a bag of seed or even a broken tractor that is repairable. Both of the farmers know that it will take work to make the materials they now have on hand to produce something that they can sell at the local market.

The distinction here that should be noted is that both farmers know that work is involved to produce goods for sell.

But what if the work stops, say to a really bad weather year where the fields are flooded. At this point, a farmer would go to the local bank to ask for a loan and the first question the bank is going to ask is “do you have collateral?”

In as much as one country might ask another country “what collateral do you have that is worth the amount you are asking for?” Land? Gold? or finished products that could be held as collateral.

An economy can only be sustainable if all of it’s population is in the workforce. So what happens if the workforce of 300 million people is suddenly reduced to say 100 million or even 50 million. The simple answer is that you now have a deficit. A deficit does not have to mean a negative number in the amount of dollars you have.

In the case of a workforce deficit, the burden of the economy now lies on the shoulders of the remaining workforce. To compound a workforce deficit, if the governing body of the country in question was to say issue $2,000 payments to everyone aged 16 and above as has been proposed by Minnesota congresswoman Ilhan Omar, would effectively bankrupt a country.

First. A 16 year old is not a driving force of labor to help maintain an economy and second, that same 16 year old almost certainly does not have any money management skills, but is more likely to spend it on nothing that could help a small business – or an economy – survive, never mind that the deficit from such an action would be larger than the budget of the government itself and would equal 60% of the total gross domestic product produced.

But what about during normal, thriving times? Again, if you only have half of the eligible workforce population working and the rest of the population living on welfare, the same deficit in production is going to apply. Goods are not made and taxes are not paid, leaving a deficit.

Now what about one country that was mad at another country. What would be the easiest way to decimate an economy. Release a virus might be one way. It would be more effective – and quieter – than dropping a nuclear bomb.

It is for many reasons that if the world economies are to not only recover, but to thrive in the future, there has to be a complete gathering if you will from all that are able to work, to do just that. Go to work.

David

Author: David

As a retired traveler, IT systems engineer by trade, Electronics engineer by hobby. I spend my free time writing about subjects giving the reader events in history to ponder, as well as current events.

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