Economics in One Lesson - the Shortest and Surest way to.....

 Economics in One Lesson - The shortest and surest way to understand basic economics

The knowledge of economics empowers you to look beyond the present into the future that very few can see

Economics is probably the most misunderstood field in the world. Even acclaimed experts on the subject still struggle to understand certain aspects of it. The dynamic nature of the subject makes it so, and it even gets worse because economics affects our greedy nature more than anything else. It's easy to study physics or maths or art without having it interfere with your emotions, but it's hard to make economic policies without looking to cut some material benefits for you or the group you represent.

The interference of selfish interests accounts for why economic policies are constantly changing. If you study the economic history of your country, you will find that different policies have been enacted over time and most of these policies favor one group of the country while other groups suffer greatly from it.

An ideal economic policy should not only favor one group of people, it must prove to be in the best interest of the masses.

A very important metric for determining a good economic policy is its long term effect. You know a good or bad economist from the way he or she analyzes a policy. A bad economist sees only the short term benefits of a policy, but a good economist is able to analyze both the short and long term benefits of a policy then make his judgment based on his findings.

As complex as it may seem, economics can be reduced to just one single lesson and that's what has been discussed in this chapter. To reiterate, when making economic policies, don't just consider the immediate benefits, look at the long term effects; and if the long term effects are good, verify to be sure they don't just favor one single group, but all groups.

Did you know? Many classical economists made the mistake of focusing on just the long term benefits of their policies and it resulted in so many negativities. Economic policies must be beneficial both in the short and long terms.

Economic need only equals demand when there is sufficient buying power

Have you heard of the broken glass fallacy? It was first introduced in 1850 by economist Frédéric Bastiat in his essay titled “Ce qu'on voit et ce qu'on ne voit pas” (“That Which We See and That Which We Do Not See”).

He used the essay to illustrate that the money people spend to recover from damage doesn't add any value to society. His broken glass parable was quite popular in the 19th and 20th centuries. Many versions of it have been told but the underlying lesson still remains the same. Imagine that a young boy was playing and he mistakenly threw a stone that broke a storekeeper's glass. It's a disaster but since the boy did it unintentionally, the storekeeper decides to pardon him. But he still has his glass to fix — something he didn't budget for. It's obviously a loss on his part since he didn't budget for it but the glazier gains because he would make profit from fixing the broken glass. The underlying question is this: is the broken glass scenario a blessing simply because someone gains from it?

Many people — some economists included — believe it's an addition to society's wealth because the glazier gets a new customer. But this isn't so. It's actually a loss because the shopkeeper is using money he definitely budgeted for something else. Let's imagine it costs $200 to fix the window and he wanted to use that money to buy foodstuff. He would have had his store intact and his kitchen full of food items, but now it's not possible. He has to forgo stocking his kitchen to fix his shop, so it's definitely a loss.

The storekeeper's demand increased due to damage, but nothing happened to his purchasing power.

It's not economically wise to unevenly spend government money in the name of creating jobs

The government funds public projects mainly from the national reserve, taxes, and borrowed money, but mostly taxes. The reason most citizens are comfortable paying tax is because the government promises to use their money to build better environments and to create jobs for them. Hardly does the government fail to deliver on this promise, but there is an economic fallacy that governments sometimes fall into. It's the illusion of creating more jobs for citizens. Public funds shouldn't be used solely with the aim of creating jobs. It's great if the government is embarking on a project that the society needs and job creation comes as a result, but when government spenders put job creation as their main focus, they almost always fall into the trap of funding projects that the society doesn't need and it leads to unnecessary expenses.

This also creates room for officials to loot money. But when the focus is to use tax funds to create projects that would benefit people, it becomes easier to account for public funds.

The best way for the government to create jobs isn't to fund more projects but to create tax incentives that encourage the private sector to build more businesses that will employ labor.

It's critical to not forget the most important rule in economics when creating projects: the projects to be funded must have a way of benefiting the entire society, not just a select few.

Here's another reason why the government shouldn't be concentrating on job creation when using public funds: the more the drive to create jobs, the more the government would have to tax its citizens. This inevitably increases the percentage of personal and corporate income that is taxed. The result is that people and private corporations would be less likely to venture into new businesses for fear of being heavily taxed. In the end, it reduces the amount of jobs created by the private sector and the government's goal of creating more jobs is underachieved.

Private loans are economically better than government loans

Loans are issued to businesses and individuals to help them do business better and hopefully contribute to the national economy. Both private and public sectors issue loans to people, but there is a difference in the processes that both sectors follow. People in the private sector know that they don't have an endless stream of income, so they are very careful in how and to whom they give loans. Go to the bank to request for a loan today and you'd realize just how rigorous their process is. They want to make sure they fully vet you before lending you their money. They can't afford to take risks.

But the situation is different with the government. Somehow, economic advisers have managed to convince the government that it's okay to spend taxpayers' money in providing loans to people that the private sector has rejected. Take farmers' loans for example. It's difficult to see the bank lending money to a farmer who hasn't thoroughly proven that he can repay back at the stipulated time. But the government would create policies and programs to allow farmers to borrow money without being properly vetted to see if they can indeed pay back in due time.

Borrow a little and if you can't pay it back, it's your problem. Borrow a lot and if you can't pay it back, it's the lenders problem.

The government has this idea of charity when it comes to lending money to citizens and it doesn't do the economy any good. It's an economic offense to borrow money to someone you aren't fully sure can pay back. It's not like the government outrightly makes money available to every Tom Dick and Harry, but many of the people who secure government loans do so without proper vetting. This economic mistake needs to be checked because it does more harm than good to any nation it's implemented.

Are you scared that AI and robotics will take your job? Don't be!

It's possible that you've been told by the media, a friend, or your life coach that AI is coming to take your job. Many people all over the world are sitting on the edge because they've seen how technology has rendered someone they know jobless. Maybe you yourself have lost a job because your employer decided to use a machine to do the job of hundreds or thousands of his employees.

It's real. Technology has been taking jobs from people since the industrial age and it's getting more intense in the coming years as the world invents smarter machines. But there's the flip side — the side that most people don't see or even think about — technology doesn't just make jobs obsolete, it also creates new industries with new jobs.

Fear won't keep machines from taking your job, but adapting and learning new skills quickly will secure your value in the marketplace.

 

Machines may temporarily disturb the workforce by making people lose their jobs, but history has shown over and over again that after a couple of years, more jobs than were lost would be created. The phenomenon is interesting from hindsight. This is what happens: when a manufacturer embraces a new machine that can do the work of 50% of his staff and produce great quality at half the cost, he lays off the 50% he no longer needs. He makes a ton of profit since he is now able to produce more goods at less cost. He gets ahead of his competitors who are still stuck in the old way of doing things. But not for long because they will soon adopt the technology too. When they do, when everyone does, the cost of production reduces, the company that manufactured the machine employs more labor in order to produce more machines and most importantly, product price begins to fall. Soon enough, there would be no much profit for the employers because of competition and the products or services would become cheaper for consumers.

That's what the full cycle looks like. Understandably, people would lose their jobs in the early years of technology adoption, but these same people can reinvent themselves to be able to provide the skills that the market needs.

Conclusion

In the industrial age, there was a rise in trade unions because industries believed that was the only way they could keep their jobs intact. The function of these trade unions was to cut out the jurisdiction of every industry and to ensure their members don't lose their jobs to encroaching industries. The carpenter wasn't allowed to do the painter's job even when he could; the electrician wasn't allowed to do what was meant for the plumber and so on. All this was because people were scared of losing their jobs. However, the emergence of trade unions had negative consequences on economies. The impact was felt more by consumers. As a consumer, you had to employ the services of two or more different professionals to carry out a job that just one person could have done if trade restrictions weren't in place. Trade unions still exist today and they aren't entirely bad, but their activities need to be checked by economists and government officials to ensure they aren't doing anything that, in the long run, will indirectly affect the economy of the state or nation in question.

Trade unions shouldn't be scraped out because they provide security for workers since they are actively working to create better work conditions for their members. But the government can step in by monitoring their activities to ensure they don't do anything that harms the national economy.

Try this

Before making any economic policy, make sure it's not beneficial to only one group and it doesn't have negative consequences in the long term.