Thursday, April 22, 2010

Common Sense Guide to Understanding Economics

1. Government intervention always has unintended consequences. What government gives to you, it must take from you first through taxation.

2. Apply situation to simple island economy

3. Economy is just people, property and transactions. Think of it in these terms and not in terms of nations or governments. Think in concretes, not in abstracts.

4. Prosperity is a function of productivity

5. Productivity requires division of labor, capital accumulation, and entrepreneurship. All these can only take place in a market economy.

6. Remember that money is just paper used as medium of exchange. Taxation only takes paper from you, it is spending which transfers actual resources and is therefore destructive.

7. Trade happens because of inequality of valuation of the traded good

8. Price is the objective expression of subjective valuations and allows for economic calculation or the allocation of resources to their most productive use.

9. Profit lets you know what makes sense to produce in society. Private enterprise does good mainly because it wants your money. State subsidization of private firms will make it less accountable to the consumer.

10. Capitalists do not and cannot consume all their wealth, what is not consumed by them is then invested back into the economy to benefit the general public. Capitalists, then, do not gain at the expense of others.

11. Labor is the ultimate resource and demand for it is inexhaustible, supply of labor balances against supply of firms resulting in the market wage rate.

12. International trade is no different from trade within nations and consequently no different from trade among small communities and households. Restricting trade among households would compel a family to grow their own food, manufacture their own clothes, dig wells, among other things. It would give a lot of jobs to family members but everyone would be poor.

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