The Economy: Much Ado About Nothing
All of the current economic craziness boggles my mind. Ever hear the phrase “much ado about nothing”? And I’m not talking about your typical Today Show segment.
It’s much ado about nothing because there is no economy. I’m not trying to go Matrix on you here: the economy is just an abstract idea that describes commerce and trade. Just like there is no actual “internet” that you can see or visit. We humans just like having words to describe ideas.
The people who oversimplify the economy into “good” and “bad” don’t understand the nature of our markets. People who say “well, we can FIX the economy,” are not only fixing what isn’t broke, they’re fixing what isn’t there. They’re called liberals.
If you pay attention, you’ll notice the subtle misunderstandings people have about the economy. They wonder what to do. They might ask questions about how to “fix” it. The answer? Nothing needs fixing. There is no “it.” If there IS an “it,” “it” has already been figured out.
Back in 1776, a Scottish economist named Adam Smith wrote The Wealth of Nations. Although this is considered the founding of “modern economics,” I’m going to go out on an non-Economics degree limb and go so far as to say this:
Adam Smith figured it out.
In a free market, people naturally balance trade, supply, and demand because they’re working in their own interests. Adam Smith called it “the invisible hand”. I saw this summary at Wikipedia (not sure if it was Wikipedia or Wikipedia quoting another source):
A very simple real world example of how the invisible hand works is the queue for a supermarket checkout. Each customer getting in line selfishly chooses to maximize his own interest, that is to check out in the shortest time, regardless of the other customers. Their utility maximizing choice is to get in queue in the shortest line; this means that eventually customers queue up in lines all of the same length. Therefore even without the slightest direction and by following only their selfishness, the lines are all of the same length, which is arguably the most efficient disposition.
Supply and demand keeps us in balance. Let’s use low home prices as an example. If no one is buying homes, it means the demand is down. With sunken demand comes sunken prices; otherwise, you can’t get anyone to want to buy your house. Eventually, the prices come low enough that demand increases again: who can resist those prices? People start buying more houses, and with the increased demand, homeowners realize they can get more money and raise prices again. It’s self-regulation.
Even additional government incentives are unnecessary. The market has its own incentives: I read about one entrepeneur who started a rubble-removing business in New Orleans just because of Hurricane Katrina and made millions. He didn’t need a subsidy. I mean, look at all the negative consequences for biofuel incentives. Government interference - even to provide subsidies - often just throws in a monkeywrench.
My guess is that the economy is like the weather: a storm corrects an imbalance, and afterwards, balance is achieved.
Because of that, storms wouldn’t be “good” for the weather, nor would they be “bad” (except for their effect on human life, which we’ll ignore for the purposes of argument). They’re just a part of the cycle. Likewise, economies hit prosperities, depressions, recessions, and balance themselves out. It’s not something that needs to be micromanaged. I’m sure there’s always money to be made; you can’t “buy low” if prices aren’t low at some point.
So when I hear politicians talk about “solving the housing crisis,” it sounds stupid. It’s like trying to solve a thunderstorm. Unnecessary, probably futile, and probably going to cause more trouble than it resolves.
As for managing the economy? Please. It manages itself; and we’ve known that since 1776.
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