Every economy works by a set of rules:
I'd like to set out a set of common sense rules that will
form the framework of my discussion here on Time to Shrug. My undergraduate
degree was in accounting and economics, and while I'll be drawing on my foggy
recollection of my college classes, I'll mostly be trying to highlight the kind
of self-evident things that most Americans already understand at some level but
haven't ever really consciously tried to put into a comprehensive framework.
1. The economy is made up of millions of individual units
(people). Each unit is constantly trying to optimize its standard of living
against a complicated set of opposing variables which include the amount of
time worked and the amount of free time to pursue other ends.
2. Reasonable investment in a unit (person) almost always
results in a higher productive output for that individual. This investment can
take a variety of forms. Examples would range from things like giving someone a
shovel (a fairly small investment) to giving them a bulldozer (a relatively
large investment).
3. Earnings is a measure of someone's output. Obviously,
there are ways for people to game the system to some extent or another, but
absent those types of behaviors a person, entity or nation which produces more
value will achieve a higher level of earnings than another entity that produces
less value.
4. All units in an economy will have to consume some level
of resources to continue to exist.
5. When the production of an entity exceeds its consumption,
then savings results. At this point, the individual or the nation has put more
into the economy than it has taken back out.
6. Savings is a prerequisite to investment. This doesn't
necessarily have to be the savings of the nation or individual who is seeking
the investment, but if there hasn't been production in excess of consumption
then there is nothing there to invest.
7. Investment
represents a form of consumption. Resources invested into a
particular activity are not available for use somewhere else. This means that
not all investment is created equal. Malinvestment in the economy can be worse
than not investing. Rather than making a bad investment it is better to wait
and save the money for use in a good investment at some later point.
