You know, I've gotten into a discussion of basic economics with some guy who apparently believes that it is wrong for one group of Iraqis to be selling water to others Iraqis in the city of Umm Qasr.
While looting is not a good way to carry on (even though it is almost inevitable), it is also an inevitable reaction to a breakdown in law and order, and happens whenver the police are incapable of preventing it, either through a breakdown in communications (such as during the New York blackouts) or through a power vacuum (as is happening in Baghdad). People see the opportunity to "re-distribute the wealth" and maybe they'll get lucky and they'll improve their lives at the same time.
But that is not my point. It may get dry in places, so if you have no interest in learning the nuts and bolts of economics, feel free to check back later.
First a few simple observations.
- All Economics is barter. All of it, without exception.
- Profit acts as an encouragement to work harder or faster or better than your competitors.
- Money is just a simple way to conduct multiple trades.
People tend to think of economics (when they bother) as some absolutely complicated phenomenon that can only be understood by the heart attack candidates on the trading floor of NASDAQ and the NYSE, and those ivory-towered theoreticians who teach it, one dry phrase after another. Their awareness of economic factors begins and ends with the Dow Jones numbers regurgitated on the nightly news.
They never bother thinking about it as a living thing that reacts to events not because it would normally do so, but because all those Type "A" personalities thinks
that it should. Look, the fact that a bomb goes off in Jerusalem should have no bearing on whether a particular stock's value should change, but it does. Why? Because every other time a bomb has gone off in Jerusalem that same stock's price has dropped (completely missing the fact that it was their own shift in perception that made them think it would be worth less than it was before
that bomb went off the first few times). "If 'A' happens, sell shares of stock 'B'..." These guys should talk to Pavlov.
Look, let's take the simplest example: A man needs a box of widgets from the store. He goes to the store and buys them. But how does he do that? (Don't you roll your eyes at me
, youngster, I'm making a point here...) He gives them money, right?
But what is money? Pretty pieces of colored paper and shiny bits of metal, nothing more. How do you get this money? You perform a task for your employer, with varying degrees of efficiency. In return for your labor, he gives you all of these pieces of paper. If those pieces of paper were nothing more than your employer's IOU, you wouldn't be able to trade that IOU for the widgets, right?
You perform a task, spending your time and effort to do that task, and you don't get those pieces of paper, what would you do? You'd go to the next guy and perform those tasks for him to get those pieces of paper. But why those
pieces of paper? Why not (say) a shiny rock you found in your front yard? Here's the kicker. If all parties to the transaction accept the terms of that transaction, you could buy a car with a five-pound bucket of sand. (Unfortunately for those of us who want a new car, not many car dealers would be willing to make such a trade, because they want to make a profit on those cars.)
But suppose you wanted to avoid the middleman, and you went to the store owner and said, "I need that box of widgets, but I don't have any of those shiny bits of metal. I can, however, dig holes for you." If the store owner needed a hole dug badly enough to "trade" you for the time and effort of digging holes, then you dig a few holes, the store owner gets what he wants, and you get to walk out of the store with your box of widgets, which is what you
The catch there is that not many people will accept direct labor for their goods and services (how many people need a hole dug for them, after all?), so you have to find another way to do it. However, the system created a way to do it. You have found a man who needs lots of holes dug, all over the place. He's willing to trade you a piece of paper in exchange for a full day's labor. You can take that piece of paper down to the store and they will give you anything you want off their shelves (up to a certain limit - the value of all those holes you dug) in exchange for that piece of paper. (They will later take that piece of paper to someone else and trade it for more supplies to re-stock their shelves.)
But you want to be able to go to more than one shop, and maybe get a little choice in what flavor of soup you eat for supper. Sounds reasonable, so instead of a single piece of paper, he gives you several pieces of paper with funny colored printing on them and a bunch of little pieces of metal. Each place you go, you can trade a specific number of these little pieces of paper for whatever you want them to do, whether it is to provide you shelter from the elements, or food to feed you and your pet parakeet, or to get someone to cut your hair. It's all a trade, every bit of it, but little pieces of paper are easier to carry around than your shovel. Or whatever the tools of your trade happen to be.
This is where the second point steps in... You are working hard, and trading as efficiently as you can (finding the lowest "prices" for what you need), and even managing to have a few of those pieces of printed paper left over at the end of the week. After a few weeks you can take the excess down to the local store and trade them for a really nice meal (a steak, rather than soup and a bologna sandwich) or a box you can plug into the wall to watch pretty pictures and listen to the sounds. Of course, you have to work a little harder to dig more holes to get the electricity to make the box work. But there are only so many hours in the day, and you're working as hard as you can.
You can try finding a second job digging holes, your employer can start giving you more pieces of paper for your efforts (as a gesture of appreciation for your working so hard to dig his holes for so long - a "raise"), or you can think of a way to dig holes faster with the same effort (become more efficient). The extra pieces of paper you get for the increased efficiency is your "profit", and can be used to get all kinds of shiny new stuff. Your employer has more holes for the same amount of time, so he can do whatever he does with all those holes (and isn't it weird that they're all gone by the time you show up again in the morning?), so having more holes means he
is being more efficient, from the point of view of the people who are willing to trade their own pieces of paper for their very own hole, and so he has a profit incentive, too.
Money is just a simple way to carry around all that labor in your pocket (and credit/debit cards are just a modern affectation).
But all transactions are barter
. Every single one.
If confidence in a nation falters (as we're seeing in Iraq right now) and there is no one to say hoe much the printed papers will buy, then people are going to realize tjhat wealth lies not in those pieces of paper, it lies only in what those pieces of paper can be traded for. If the perception is that the pieces of paper aren't worth as much as they used to be, then it takes more pieces of papers to get that same box of widgets, and the 'price' goes up. To such drastic levels in some cases, that the Deutschmark had plummeted to such worthless levels that it was rumored to take a wheelbarrow full of them to trade for a loaf of bread.
If an item is in high demand (everybody needs that better mousetrap), then it becomes more valuable than the pieces of paper, and it (again) takes more of those little pieces of paper, and the price goes up. (Supply and Demand)
Try this as a mental exercise: The next time you cash your paycheck, realize that you are actually trading your skills and abilities for those pieces of paper, which you can then trade for other goods and services that you may need later on. The next time you buy groceries, realize that you're not "buying" and he's not "selling", you are indirectly trading your efforts and expertise for that food by using the middleman of "money".
If you remember nothing else, remember these things: Money is the universal indicator of value received. The more value, the more money received. And all trade is a barter. The rest will fall into place.
Enough for ECON101. Good morning.