The Common Sense behind Basic Economics: A Guide for Budding Economists, Students, and Voters PDF
Preview The Common Sense behind Basic Economics: A Guide for Budding Economists, Students, and Voters
The Common Sense behind Basic Economics The Common Sense behind Basic Economics A Guide for Budding Economists, Students, and Voters Justin Vélez-Hagan LEXINGTONBOOKS Lanham•Boulder•NewYork•London PublishedbyLexingtonBooks AnimprintofTheRowman&LittlefieldPublishingGroup,Inc. 4501ForbesBoulevard,Suite200,Lanham,Maryland20706 www.rowman.com UnitA,WhitacreMews,26-34StannaryStreet,LondonSE114AB Copyright©2015byLexingtonBooks Allrightsreserved.Nopartofthisbookmaybereproducedinanyformorbyany electronicormechanicalmeans,includinginformationstorageandretrievalsystems, withoutwrittenpermissionfromthepublisher,exceptbyareviewerwhomayquote passagesinareview. BritishLibraryCataloguinginPublicationInformationAvailable LibraryofCongressCataloging-in-PublicationData Vélez-Hagan,Justin,author. Thecommonsensebehindbasiceconomics:aguideforbuddingeconomists,students,andvoters/ JustinVélez-Hagan. pagescm Includesbibliographicalreferencesandindex. ISBN978-1-4985-0900-8(cloth)--ISBN978-1-4985-0901-5(electronic) 1.Economics.I.Title. HB171.V452015 330--dc23 2015027863 TMThepaperusedinthispublicationmeetstheminimumrequirementsofAmerican NationalStandardforInformationSciencesPermanenceofPaperforPrintedLibrary Materials,ANSI/NISOZ39.48-1992. PrintedintheUnitedStatesofAmerica Tomytwodaughters,JuliannaandAgnes.Mayyoulearnmorequickly thanyourfatherthatcommonsenseisn’tsocommon,asmuchasitis obtainedthrough(very)hardwork. Contents Introduction ix 1 WhyisEconomicsSoDifficult? 1 2 HistoryCanBeConfusing 5 3 HowWeMakeEconomicsDifficult 13 4 Man,ThatAin’tTrue 19 5 CommonSenseEconomicsDefined 25 6 EconomiesComeinAllShapesandSizes 27 7 Supply,Demand,andTighty-Whiteys 35 8 Where’dThatPriceComeFrom? 43 9 DoMarketsFail? 53 10 EntrepreneurshipandProfits 63 11 TheBusinessCycle 71 12 Inflation:OneSneakySucker 77 13 Jobs 89 14 TheGreatestEconomyEver(Seriously,Ever) 97 15 ToSaveorNottoSave,ThatistheQuestion 103 16 UncleSam’sVISABalance 109 17 DoWeReallyNeedUncleSam? 115 18 DollarsandCommonSense 127 19 TheGlobalEconomy 133 20 CurrentIssuesinEconomics 143 References 151 FurtherReading 155 Index 157 AbouttheAuthor 161 vii Introduction “1InthebeginningGodcreatedtheheavensandtheearth,”2[andmancreated economicstomessitallup.]—Genesis1:1–2(ConfusedStudents’Revised Version) As a first-year economics student, or anyone else trying to wrap your headaroundwhathasbeencalled“thedismalscience”(Galbraith1977), you might be wondering if masochism became trendy right around the timeeconomicswasinvented. AlthoughitmaysometimesseemlikestudyingtrigonometryinLatin, economics really is no more difficult than any other discipline. At first glance, it seems like complete nonsense, but then you learn a little bit (which means, quite sadly, that you now know more than 90 percent of yourpeers)andbegintothinkthatyou’resmart.But,ifyouareoneofthe even smaller percentage of humans that decides to delve a little deeper into the field, you’re probably going to find what I did: The more I know the more I realize I don’t know and the more I know that the people I thought knewdon’tknoweither. Evenafterspendingyearsasastudentofeconomics,aswellassome timeteachingit,Ireallydon’tseemyselfasan“expert”inthetraditional sense of the word, often defined as one who is widely published and reviewed by his peers in academia and requested to present papers to audiences filled with other academic superstars, who stroke each other fortheirrespectivelevelsofgenius.Thereareplentyofmensmarterthan me out there who have done this for a living over a career spanning decades.(NowI’mstartingtoquestionifIshouldbedoingthis.) ImaynotbequalifiedtogarnertheattentionoftheNobelcommittee (yet),butIamastudentofthedisciplinewhohappenstobeoneofthose (partially insane) individuals who enjoys reading, studying, teaching, and writing about the economy. Like the quote suggests, the more I do learnabouteconomics,themoreIrealizeIneedtolearn. WHODOESKNOW? Itdoesmakemefeelalittlebetter,however,knowingthatnearlyevery- oneelsehassomethingtolearnaswell.Afterall,economicsisarelatively newacademicdiscipline,whosebeginningssurroundthelatenineteenth century.Beforethistime,philosophers,professors,andresearchersfrom ix x Introduction otherfieldsspenttimeinwhatwenowconsiderthedistinctandseparate fieldofeconomics. Yet, there have been thousands upon thousands of books published onthetopicintherelativelyshortperiodoftimesince.Evenaquickbook search for the subject “economics” at Amazon yields 2,106,823 results. If eachbookhas300pages,whichIassureyoumanyhavemore,andIread 200 pages per day without a day off, it will take me 8,658 years to read themall!(ExcludingtheseveraldozenorsothatI’veread,itshouldonly take about 8,657 years.) Even if 99 percent of those books are just recita- tions of the knowledge presented in the other 1 percent, that leaves me about eighty-seven years to read all of the books presenting original re- search and thought on economics. This doesn’t include research papers, journal articles, Ph.D. dissertations, Wall Street Journal editorials . . . I’ve gotalottolearn. Thepursuit ofknowledgecanbeoverwhelming.But,asyou cansee, so can the presentation of that knowledge. Once someone knows, or thinks they know something (e.g. this guy), they now have to find a properandacceptablewayofpresentingit.Unfortunately,thepresenta- tion can often skew the message. Want to be acknowledged and re- spected as a highly-reputable academic? Better learn the pedantic and complexeconomics-speakoftheresearchworld.Scholarlyjournalsaren’t so keen on contractions, slang, relatable humor, or, well, any type of writing that isn’t drier than the Atacama Desert (by the way, that’s the driestplaceonEarth). Once you learn their language, you begin to realize that they don’t know as much as you thought they knew. Many so-called scholars are merely repeating in their own words what they’ve read someone else writeintheirs,inasensereportingonsomeoneelse’sfindings,thehisto- ryofeconomics, or attempting toexplain current economies.Thereisso much room for disagreement in any of these categories that entire re- searchpapersaredevotedtojustexplaininginterpretations. If not busy explaining others’ explanations, then scholars attempt to comeupwithatheory.Youknowwhatatheoryis?Atheoryisbasically an educated guess. Put all of this together and you begin to realize that therearealotofpeoplearguingaboutwhatsomeoneelsesaidandalot of guessing going on. That’s right; many of the smartest people in the worlddon’tknoweither. THEBASICFACTS There are, however, some basic economic ideas that have been so long- heldthattheyhavebecomewhataveragepeoplewillcall“facts,”which in the language of the academic is known as “theory” or “principle.” Even these basics, although rarely disputed, have been misrepresented, Introduction xi presentedpoorly,ordenouncedbyother,evenlessknowledgeableindi- vidualslookingtomakeanameforthemselvesbymakingabigstink. The basics of economics are among the most misunderstood of any academic discipline. That’s because most people learn about economics in one of three ways: 1) In the classroom from a college professor who addsalotoftheunnecessaryacademicflufftotheconversation;2)From theeditorialpagesofnewspapers(opinionsfromcablenewsortalkradio as well); or 3) From their weird Uncle Charles at holiday gatherings. In thefirst,youwillfindalotofconfusingcharts,graphs,andequations.At least that’s what most people complain about. Something like “…but pointb isnotastableequilibrium”isnotsomethingyou’llhearinevery- 1 daylanguage.Ontheotherhand,opinionsfromcommentators,although sometimeswell-explained,oftenlackatotalunderstandingormisssome importantpointgiventhelimitedamountoftimeinaparticularsegment. Nomatterhowmuchyourespecttheirvastknowledge,sometimesenter- tainment value trumps the necessity for a thorough and accurate expla- nation.YourweirdUncleCharles,orwhicheverotherinterestingperson- alityyoucome across,seemstothinkeveryonewantstoknow hisopin- iononpoliticsandeconomicsinthemostinappropriateofcircumstances, regardlessofwhetherheknowsanythingaboutanything. With such misinformation being strewn about, it’s easy to see why everyoneisconfused.Thetruth,however,isthatbasiceconomicsisactu- ally quite simple and even more commonsensical, and it should be ex- plainedthatway.But,itrarelyisandthat’swhyI’vewrittenthisbook:to explain the basics of the basics in simple and easy-to-understand lan- guage. DOESITREALLYMATTER? Perhapsthebiggestproblemisthatourelectedandappointedleadersare people too.Manyofthem,althoughwell-educatedandwell-intentioned people, often lack the basic economic understanding necessary to run a mom-and-popicecreamshop,nolessyourcity,state,or(helpme,Lord) country’s finances! It’s not always their fault (though mostly it is); we expect them to know everything, and we’re disappointed when they don’t.But,theyshouldknowthebasics,ataminimum. How will you know if they know if you yourself don’t know? Well, it’s time you knew. Otherwise the masters of the universe who keep temporary residences in D.C. will continue their antics with the realiza- tionthatlittleofthefollowingisunderstoodbytheaveragevoter.Ifyou the voter don’t understand what our wonderful leaders are doing, you caneasilybefooledintothinkingthattheyaretheauthoritiesonsubjects that they themselves don’t even understand, which leads to all kinds of Washingtoniantomfoolery. xii Introduction Therefore, I hope to expose some of our mutual misunderstandings here, so that neither the politician, nor us mere mortals, can be pushed over or manipulated to pursue or promote policies that will have unex- pectedandundesirableeconomicramifications. COMMONSENSE,BYTHEBOOK Weshouldfollowour instinctsmoreoften.Just knowingtheverybasics will show you how legislators ignore economic principle almost as em- phatically as they try to convince you of what they do know. They will morelikelywearasuitthatisn’tnavybluebeforeadmittingamistake(or they will try to convince us that they are right and all economists are wrong). If only the combined C.Y.A. efforts of Washington, D.C. could somehow be bottled and sold, we could solve the world’s energy prob- lemstomorrow. ToensureIdon’tmakeanymistakesmyself,I’vetriedtomaintainmy ownopinionsintheirrightfulplaceinsidemyhead.I’vebasedthisbook onlong-establishedeconomicprinciples,instead.Infact,I’vebasedmuch ofitonseveralofmyfavoriteclassicbooksandtextbooksoneconomics, whichyoucanfindinthe“GuidetoFurtherReading”and“References” sectionsattheendofthebook,yetI’vealsointentionally(perhapssome- timesunintentionally)leftoutalotsoasnottoboreyoutotears. In addition, you won’t find any fancy charts, graphs, formulas, or overly wordy academics-speak. Too many who use obscure language intendtodistractandconfusetheaveragepersonfromrealizingthatthey really don’t know what they’re talking about in the first place, or, even worse, try to hide the fact that they don’t want you to know enough to participateinthepoliticalprocess.That’swhyI’vebrokenitdownsothat anyonecanunderstand,inplainEnglish,andsothatnoonecaneversay toyou,“It’sreallycomplicated.Justtrustme.” Because we only really understand and remember what we use, I’ve tried to incorporate much of the basic economic concepts into further explanations ofwhattheymeantoyou andme.After someofthechap- ters,you’llfindasectioncalled“FocusonEconomicPolicy,”whichtakes an example of a policy that D.C. legislators are kicking around and ex- plains what it is, how it ties into that chapter’s discussion, and what it means to you. (If you’re too excited to read the next chapter, feel free to skipthese.) The following are (for the most part) not contentions or guesses or what should-bes. These are the principles that any and every economy has adhered to since the beginning of time. Yet for some reason it has becometoodifficultformanytounderstand.Itshouldn’tbe.It’scommon senseandI’mgoingtoshowyouwhy.
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