“Simple” Economics

“It’s simple economics, son; I don’t understand it at all.” A big part of what is so funny about this line by South Park‘s Randy Marsh is that it is so true. In a general sort of way, people simply do not understand economics. And, what is worse, many people are simply too intimidated by the subject to really attempt to understand it.

I number among those who do not understand economics, but as in so many fields, I am trying to learn. One of the greatest difficulties is the way that people talk about money and prices. “Eggs cost $2” or “this ring is worth $2,000,” as if the dollar is a fixed unit like a yard or a gallon. (Hopefully, the irony of the variable British pound [£] is not lost on us.) But for the most part it is the dollars themselves that change far more than the production of eggs or the value of a ring.

Another language problem in understanding economics is “inflation.” Every careful shopper (and most people who are spending their own money are careful) observes the prices of everyday items climbing and falling. Well, mostly just climbing. They call this increase in price “inflation.” But inflation means two things. “Price inflation” is the changing price tags; “monetary inflation” is the increase in the money supply. As it turns out, the latter is the primary cause of the former. As banks create money by making loans or the Federal Reserve spends money that it creates “out of thin air”, each existing dollar becomes less valuable and the rise in supply of dollars drives down the demand for dollars and prices of everything else goes up. See, simple economics… I still don’t understand most of it, but getting down some of the language is a good first step.

Beer of the Week: Sapporo – In Korea, one can get Sapporo in bottles or in cans. The cans are imported from Japan and the bottles are imported from Canada. Despite the 5,800 extra miles the beer has to travel to get to the Korean grocery store (to say nothing of the fact that bottles are more difficult to transport because of their weight, fragility and shape,) the Canadian version is cheaper.  The economics behind this disparity is no doubt simple. Yet, the mind fairly boggles when the prices are first encountered. The Japanese version is a reasonably good beer. It is crisp and clean tasting with a hint of hops and yeast in the finish. Just be sure that it is good and cold.

Reading of the week: The Mystery of Banking by Murray N. Rothbard, Chapter IV, Excerpt – Rothbard is a very good writer, which makes his treatise on the economics of fractional reserve banking very accessible despite the daunting subject matter. In this excerpt, Rothbard presents a simple and interesting parable borrowed from Hume and Mises about monetary inflation that shows how simply increasing the money supply only helps the profligate and hurts “the cautious and thrifty.”

Question of the week: Given the profound impact of economics on daily life, why is it that so few people really put in the trouble to attempt to understand it?

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