Economics For Dummies, 3rd Edition

Sean Masaki Flynn

• Editore: For Dummies
• Anno: 2018
• ISBN:
  9781119476276
• Edizione: 3
• Argomento: Economics
• Categoria: Economic Theory

Understand the science of wealth and prosperity

• Find FREE quizzes for every chapter online
• Learn about good markets, bad monopolies, and inflation
• Decode budget deficits and trade gains

This book gives you everything you need to understand our rapidly evolving economy—as well as the economic fundamentals that never change. What's the best way to fight poverty? How can governments spur employment and wage growth? What can be done to protect endangered species and the environment? This book explains the answers to those questions—and many more—in plain English.

Inside...

• Get the fascinating scoop on behavioral economics
• Understand the model of supply and demand
• See how governments use monetary and fiscal policy to fight recessions
• Discover game theory and the secrets of cooperation

Part 1

Economics: The Science of How People Deal with Scarcity

IN THIS PART …

Find out what economics is, what economists do, and why these things are important.

Decipher how people decide what brings them the most happiness.

Understand how goods and services are produced, how resources are allocated, and the roles of government and the market.

Chapter 1

What Economics Is and Why You Should Care

IN THIS CHAPTER

Taking a quick peek at economic history

Observing how people cope with scarcity

Separating macroeconomics and microeconomics

Getting a grip on the graphs and models that economists love to use

Economics is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources. And because every country, every business, and every person has to deal with constraints, economics is literally everywhere. For instance, you could be doing something else right now besides reading this book. You could be exercising, watching a movie, or talking with a friend. You should only be reading this book if doing so is the best possible use of your very limited time. In the same way, you should hope that the paper and ink used to make this book have been put to their best use and that every last tax dollar that your government spends is being used in the best way.

Economics gets to the heart of these issues, analyzing the behavior of individuals and firms, as well as social and political institutions, to see how well they convert humanity’s limited resources into the goods and services that best satisfy human wants and desires.

Considering a Little Economic History

To better understand today’s economic situation and what sort of policy and institutional changes may promote the greatest improvements, you have to look back on economic history to see how humanity got to where it is now. Stick with me: I make this discussion as painless as possible.

Pondering just how nasty, brutish, and short life used to be

For most of human history, people didn’t manage to squeeze much out of their limited resources. Standards of living were quite low, and people lived poor, short, and rather painful lives. Consider the following facts, which didn’t change until just a few centuries ago:

• Life expectancy at birth was about 25 years.
• More than 30 percent of newborns never made it to their fifth birthdays.
• A woman had a one in ten chance of dying every time she gave birth.
• Most people had experienced horrible diseases and/or starvation.
• The standard of living was low and stayed low, generation after generation. Except for the nobles, everybody lived at or near subsistence, century after century.

In the last 250 years or so, however, everything changed. For the first time in history, people figured out how to use electricity, engines, complicated machines, computers, radio, television, biotechnology, scientific agriculture, antibiotics, aviation, and a host of other technologies. Each has allowed people to do much more with the limited amounts of air, water, soil, and sea they were given on planet Earth. The result has been an explosion in living standards, with life expectancy at birth now over 70 years worldwide and with many people able to afford much better housing, clothing, and food than was imaginable a few hundred years ago.

Of course, not everything is perfect. Grinding poverty is still a fact in a large fraction of the world, and even the richest nations have to cope with pressing economic problems like unemployment and how to transition workers from dying industries to growing industries. But the fact remains that overall, the modern world is a much richer place than its predecessor, and most nations now have sustained economic growth, which means that living standards rise year after year.

Identifying the institutions that raise living standards

The obvious reason for higher living standards, which continue to rise, is that human beings have recently figured out lots of new technologies, and people keep inventing more. But if you dig a little deeper, you have to wonder why a technologically innovative society didn’t happen earlier.

The Ancient Greeks invented a simple steam engine and the coin-operated vending machine. They even developed the basic idea behind the programmable computer. But they never quite got around to having an industrial revolution and entering on a path of sustained economic growth.

And despite the fact that there have always been really smart people in every society on earth, it wasn’t until the late 18th century, in England, that the Industrial Revolution actually got started and living standards in many nations rose substantially and kept on rising, year after year.

So what factors combined in the late 18th century to so radically accelerate economic growth? The short answer is that the following institutions were in place:

• Democracy: Because the common people outnumbered the nobles, the advent of democracy meant that for the first time, governments reflected the interests of a society at large. A major result was the creation of government policy that favored merchants and manufacturers rather than the nobility.
• The limited liability corporation: Under this business structure, investors could lose only the amount of their investment and not be liable for any debts that the corporation couldn’t pay. Limited liability greatly reduced the risks of investing in businesses and, consequently, led to much more investing.
• Patent rights to protect inventors: Before patents, inventors usually saw their ideas stolen before they could make any money. By giving inventors the exclusive right to market and sell their inventions, patents gave a financial incentive to produce lots of inventions. Indeed, after patents came into existence, the world saw its first full-time inventors — people who made a living inventing things.
• Widespread literacy and education: Without highly educated inventors, new technologies don’t get invented. And without an educated workforce, they can’t be mass-produced. Consequently, the decision that many nations made to make primary and then secondary education mandatory paved the way for rapid and sustained economic growth.

Institutions and policies like these have given people a world of growth and opportunity and an abundance so unprecedented in world history that the greatest public health problem in many countries today is obesity.

Looking toward the future

The challenge moving forward is to get even more of what people want out of the world’s limited pool of resources. This challenge needs to be faced because problems like infant mortality, child labor, malnutrition, endemic disease, illiteracy, and unemployment are all alleviated by higher living standards and an increased ability to pay for solutions to such problems.

Along those lines, it’s important to point out that many poverty-related problems can be cured by extending to poorer nations the institutions that have already been proven by already-rich countries to lead to rising living standards. In addition, developing nations can also learn from the mistakes that were made by already-rich countries back when they were in the process of figuring out how to raise living standards — mistakes related to promoting economic growth without causing massive amounts of pollution, numerous species extinctions, or widespread resource depletion.

Consequently, there are two related and very good reasons for you to read this book and get a firm grasp about economics:

• You can discover how modern economies function. Doing so can give you an understanding not only of how they’ve so greatly raised living standards but also of where they need some improvement.
• By getting a thorough handle on fundamental economic principles, you can judge for yourself the economic policy proposals that politicians and others run around promoting. After reading this book, you’ll be much better able to sort the good from the bad.

Framing Economics as the Science of Scarcity

Scarcity is the fundamental and unavoidable phenomenon that creates a need for the science of economics: There isn’t nearly enough time or stuff to satisfy all desires, so people have to make hard choices about what to produce and consume so that if they can’t have everything, they at least have the best that was possible under the circumstances. Without scarcity of time, scarcity of resources, scarcity of information, scarcity of consumable goods, and scarcity of peace and goodwill on Earth, human beings would lack for nothing. Chapter 2 gets deep into scarcity and the tradeoffs that it forces people to make.

Economists analyze the decisions people make about how to best maximize human happiness in a world of scarcity. That process turns out to be intimately connected with a phenomenon known as diminishing returns, which describes the sad fact that each additional amount of a resource that’s thrown at a production process brings forth successively smaller amounts of output.

Like scarcity, diminishing returns is unavoidable, and in Chapter 3, I explain how people very cleverly deal with this phenomenon in order to get the most out of humanity’s limited pool of resources.

Sending Microeconomics and Macroeconomics to Separate Corners

The main organizing principle...