Economics for Beginners

Economics for Beginners (BeginEconomics.org) is a series of videos designed to show that economics is not a complicated subject fit only for people with college degrees. But that economics affects everyone on a daily basis in both big and little ways and is a normal aspect of our day-to-day life. Using short animated videos basic and fundamental economic topics come to life. Perfect for someone looking for a simplified introduction to elementary economics or parents looking to supplement their child's economics education, the series includes discussion questions and additional readings that will ensure that viewers are not fooled by myths, lies, and distortions and ensure that students are not fooled by the road to serfdom.

For more information, visit BeginEconomics.org.

Economics often is considered a dry or “dismal” science. In schools, it is often taught with a focus on abstract supply and demand charts or complicated mathematical formulas. When we think about economics or “the economy,” we think about money, goods, or services — or perhaps government policy. Although these are aspects of an economy, economics at its core is about human actions.

It’s about the choices and actions we make as individuals. It’s about our individual wants, needs, and abilities. And it’s about how we interact with others to benefit each other and build the society around us.

Imagine, for example, if a single person were stranded on a deserted island.

For this person, let’s call him Bob, the top priority is obvious — survival. He needs water, food, and shelter. Some of Bob’s resources are obvious; there may be coconuts or berries that can be foraged for food. Just as important, however, is his time. He must economize his time, dedicating it so as to best ensure his own survival. Does Bob focus on finding water, or does he dedicate his first few hours to building a shelter? Right away, Bob is forced to make decisions about trade-offs — the costs of making one decision over another.

Bob may decide that he can survive three days without water and so focuses instead on creating a shelter for the night. Another person in this situation may choose differently, but it is Bob’s individual judgment that guides the choices he makes.

Bob’s decision may not be the right one. Risk and uncertainty are an inherent part of our human existence. Perhaps Bob ends up spending so much time building a shelter that he does not give himself enough time to find water when he desperately needs it. Bob’s decision affects the number of days he can survive on the island. In this case, his profit is measured in terms of the number of days he is able to live having made this choice. A loss could be his death.

Notice that Bob’s economic decisions have nothing to do with money..

When we think about “cost,” we often think about prices, such as comparing the prices of cars. But the proper way to think about costs is not simply to consider the money we're spending on a certain item, but all of the other possibilities we're giving up in order to obtain that item.

Henry Hazlitt was an American journalist who wrote the book Economics in One Lesson. In it, he starts with a story about a baker who owns a shop.

Imagine now that a kid decides to throw a ball through the front window of a bakery. The baker is understandably upset but is comforted by a friend who encourages him to see the larger picture. The baker now has to buy a new window, and this purchase will benefit the glass store. The glass store now has to buy materials and can pay its workers. Perhaps some of these workers end up buying the baker’s bread. So this act of destruction isn’t really a tragedy, but an event that will benefit the local economy and others!

Unfortunately, this clever scene doesn’t really tell the whole story.

After all, if the baker’s store window had not been broken, he would have both his window and his money, money which he could have spent in other ways than making repairs.

Perhaps he would have bought a new sign for his business or a new suit for himself. The gain for the glassmaker is a loss for the signmaker or the tailor. Unfortunately, now we will never see how the baker would have spent his money. Instead, we will only see the new window that he had to fix.

What Hazlitt described is called opportunity cost. The money spent on the new window is not simply the dollar price of his purchase, but of all the goods and services he could have purchased with that money.

In the words of Hazlitt: “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.”

If the mistake in the baker’s friend’s argument is obvious to you, you may be surprised to learn how many “bad economists” there are in the world today.

For exampl..

It is common to hear that “money is the root of all evil.”

We are told that money is synonymous with greed, and that desiring it is somehow inherently bad.

This is not true. Money is perhaps the single most important creation in the history of mankind. Just take a moment to consider a world without it.

Think about all the things in your life that you enjoy: a house, a cell phone, a book, a new computer game, new clothes, car, a meal at your favorite restaurant. How many of these things could you provide for yourself?

Luckily, thanks to money, you don’t have to. Instead, you can specialize in doing a specific task—maybe you play music, or build surfboards, or repair cars—and then you use the money you earn to buy products or services from others.

This wasn’t always the case.

Before money, peaceful societies used a system called barter, exchanging one object for another.

Imagine Bob has a fish and Tom has clean water. The two could trade with each other. But what if Tom doesn’t like fish? In order to get the desired water, Bob could trade with someone else for something Tom wants.

This is called indirect exchange.

In the different societies, there were certain items that everyone wanted. These made up the earliest forms of money.

Throughout human history all sorts of things have been used as money, such as salt, tobacco, grain, sea shells, livestock, or furs. Over time societies ended up embracing some form of metal, such as gold and silver, as their preferred form of currency.

Why is this? Many societies value these shiny metals as jewelry, luxuries, and for industrial use, but they also have many other benefits. Metals are hard to destroy, they are uniform and divisible—any two ounces of pure gold are the same—and they are easy to carry around if turned into coins. They are also scarce and difficult to mine, so you can’t manufacture new money as if it grew on trees.

It was the invention of money that truly allowed human civilization to thrive. ..

It is common to hear profit attacked as exploitation and greed. How many supervillains have appeared in TV shows, books, or movies with the diabolical plot of putting “profits over people”?

In reality, profit is a powerful mechanism for human cooperation, and serves to make sure that the earth’s resources are maximized to serve the best interests of humanity.

Why?

Think of profit as the reward for making good decisions.

Profit doesn’t have to be only about money—selling something for $5 that you made for $3. It can also be something immeasurable: volunteering time to a charity can be profitable if doing so benefits a cause you’re passionate about.

The benefits of profit are obvious. We want to benefit from our actions, rather than be disappointed by them.

Now let’s look at the benefits of profit beyond an individual level.

The world is a complicated place, full of billions of individuals with different opinions and interests, and a future that is never predictable. Add to this that there are many resources that have numerous uses. For example, iron can be used to make all sorts of things—from refrigerators to cars to medical devices.

Given this web of complexity, decisions on what to make and how to produce it are beyond anyone's comprehension. No single person can imagine a way to fulfill the needs and desires of every single other person.

Luckily, no one has to.

Instead of one single person trying to figure out how to use all the world’s resources, property rights allow individuals to own these resources. These individuals can then sell these resources on markets, where others can buy them and combine them with other resources to build new products.

The individual who risks his money buying resources to build products to sell is called an entrepreneur. In doing so, he also invests in capital goods (such as machines and buildings) as well as laborers, who have a variety of skills.

All of these parts of production have costs. The entrepreneur is hoping..

The civilization of mankind can be traced to the establishment of property rights. With property rights, individuals could own land, capital, and goods and then trade or sell them to others. This economic activity is referred to as “the market.” This doesn’t mean it necessarily takes place in a physical market; it simply means that goods and services are voluntarily traded.

For most of human history, property rights have been limited to those in power. For example, a king or lord had ultimate control over those who lived under their protection. If the king desired beets, farmers were to farm beets. If the lord needed horseshoes, blacksmiths forged horseshoes. Ordinary people had the ability to trade among themselves, but those in power could direct their production if they so desired, or punish those who resisted.

The emergence of capitalism changed this.

Capitalism is mass production of goods to satisfy the needs of the greatest number of people.

Capitalism was revolutionary by recognizing property rights for all, regardless of background and social standing. Under capitalism, even the most vulnerable in society had an absolute claim to their own labor and property. It did not guarantee equality of property, but capitalism eliminated any right by anyone else to infringe upon it.

In doing so, capitalism empowered consumers—rather than those in power—to influence what was produced in the economy. This happens via the profit mechanism. If enough people demand a good and it can be sold for more than it costs to produce, that means the production of that good is profitable.

Some of the richest people in the world today have made their money not by appealing to the rich, but by appealing to the masses. Walmart’s business model, for example, is geared toward selling goods cheaply to as many people as possible.

Critics of capitalism try to condemn it as “greed.” This is false. Greed and envy are human vices, and they exist in any economic system. What capitalism d..

Activists blame “capitalism” for the world’s biggest problems, like the high costs of healthcare. Some even argue that economics itself is simply propaganda for businesses to exploit workers. Government schools often celebrate regulations, subsidies, and other interventions, because they protect consumers against “exploitative” businesses and capitalist “greed.”

The truth is precisely the reverse. The profit-and-loss economy lowers prices and increases the quality of goods through competition, which benefits society as a whole. When government intervenes in this production of goods and services, it does so by passing laws and enacting regulations that benefit and favor certain businesses over others, all in the name of “protecting” the public. This granting of privileges and favored status to people because of their political power or connections is called cronyism. The beneficiaries of cronyism serve the politicians and bureaucrats who appointed them and not the consumers who buy the products from the regulated companies.

For example, imagine you run a small business that produces vegetable soup. Your top priority is satisfying customers. A satisfied customer is a returning customer. To this end you choose your vegetables, recipes, packaging, and distribution based on your best estimates of what the consumer wants. If consumers like and value your vegetable soup, you earn profits. If consumers don’t value it, you suffer losses. Competition and business reputation ensures efficiency and happy customers.

Now imagine that the government decides to regulate the vegetable soup industry. Bureaucrats, not knowledgeable businessmen, now decide the full process of making soups, mandating the quality of the vegetables, the type of ingredients, the techniques for making soup that can be used, and even how you can advertise your soup. To enforce these new regulations, the government requires licenses and compulsory inspections. As a soup producer, you must now spend con..

Economics is the study of human action. Using economics, we can understand how social orders can create different results based on how they allocate resources.

In a market economy, production is guided by enterprises seeking profit and innovation. In a crony economy, the government influences market outcomes by interference and intervention. A third economic system rejects markets entirely in favor of central planning.

This is socialism.

In this system, central planners set the stage and drive the economy while individuals serve less innovative roles in society in exchange for goods, services, and security. While a market economy rewards those who best serve customers, the promise of a socialist economy is that everyone's needs are taken care of equally.

This is a command economy, where central planners decide what is produced, in what quantity, and who should produce it. Instead of people being allowed to choose what goods and services they prefer to spend their money on, they are provided only with what goods and services the central planners have chosen for them.

Since some individuals prefer thinking for themselves and wish to pursue their own course of action and reject central planning, socialist countries tend to be politically authoritarian.

The economic consequences of central planning are just as bad.

For example, profits serve to reward and encourage innovation and efficiency. If you are the first to create a new product or find a cheaper way to provide a service, the individual that risks capital is financially rewarded. Under socialism, there is no incentive to innovate because the rewards go back to the planners.

Additionally, central planners only operate on their own knowledge and agenda, which is always less than the collective knowledge of society. Think of the difference between a published encyclopedia, which is static and unchanging, and a decentralized alternative—like Wikipedia, which is constantly evolving and growing.

One vit..

Economics is what is called a “value-free science,” meaning that it answers questions without any consideration for politics or ideology. A good economist can explain the benefits of free markets, or the consequences of socialism, not because of any political bias, but because of how human beings respond to a world with scarce resources.

Often, however, when we discuss economics, we do so within the context of politics—such as during an election period, or how a tax increase may impact the local economy.

Some call themselves “progressives”—implying that their political and economic views are “modern” or “forward looking.” Throughout American history, “progressives” have claimed to promote an economic system that is a “third way” between capitalism and socialism. They advocate an economy “regulated by experts,” rather than by politicians or free markets.

There is, however, nothing “progressive” about this.

This system of government has the same problem as “cronyism,” the mistaken belief that government can do better than the market system.

Markets work by coordinating the supply and demand of resources and products all around the world. Because of prices, entrepreneurs, businessmen, and consumers are able to calculate the best way to achieve their desired ends.

Progressives do not trust individuals to make these decisions on their own. Instead, they want markets and prices regulated by so-called experts, whose influence comes from universities or politics, not from producers creating goods or services that people want and can use.

A basic mistake the progressives make is the belief that enough specialized education can empower individuals with better knowledge than the market can give. In this way they justify increasing political and legislative power to grab more control over our society. This is dangerous.

Economically, whether or not this government intervention is the product of simple political corruption, or sold as “regulation by experts” is irrelev..