Confused by the Economy?

Economics + Acronyms = Confusion

Let’s get the ball rolling… I read about it everyday but I am pretty much still at a complete loss when it comes to economics, finance and banking. It’s possibly why I’m so poor all the time. Boom and bust as it were. So let’s attempt to dispel my ignorance with a brief breakdown of economic terminology and financial confusion.

The Economy

Perhaps one of the hardest terminologies to get a grip on is the actual word economy. Economy like history and sociology is an elusive intangible term and it is impossible to accurately define due to its many factors. The word economy can be used in many forms to mean several different things. When we talk about “the economy” we are specifically talking about the management of resources for a community or country with a particular focus upon its productivity. Attempting to place a numerical value to a countries “economy” is an arduous task due to the plethora of factors that need to be considered. To work out a value for a countries economy you need to factor in lots of variables such as the production of goods, the consumption of goods, the use of national resources and the exchange of these goods. No simple mathematical

"It's the economy, stupid!"

equation can be used to work out a countries economy and in-fact no simple description can be used to accurately define the word economy. Economics is the study of these variables and is probably best defines as the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires. Over the years economists have advocated and suggested various theories in an attempt to define and explain economic trends and situations. Perhaps one of the simplest economic theories is the idea of supply and demand.

Supply & Demand

“You want it… I got it”is the basic premise of supply and demand. The notion of supply and demand is an economic model based upon the price and quantity of a certain product. The theory was first mentioned in the 13th century and was later expanded upon during the Industrial Revolution in the 18th century. One of the key proponents of this theory was Adam Smith, often considered to be the father of modern economics. In his book The Wealth of Nations, Smith suggested that the price of products within a free market depends upon the quantity and demand for the product which itself is driven by the populous. Smith argued that competition between businesses would ensure that the price of products would reach an economic equilibrium between the price and the quantity, i.e if there is a scarcity for a certain item and the demand is high then the price would also be high. However, if there is a large quantity of a particular item then the price should remain fairly static, increases in competition would also help to lower the price due to an increase in quantity. Smith was also a major proponent of the division of labour.

Division of Labour

The division of labour is an economic theory that focuses on ways to increase productivity. The theory suggests that productivity can easily be increased by dividing the creation of a product into specialised areas of labour. This can be best seen in the model of a modern day assembly line where each worker has a specific area which allows him to concentrate on a particular task. By combining several tasks together an assembly line can make a potentially complex item with the minimal amount of educated labourers.

Essentially a well taught chimp could do it and that is perhaps the major problem with the division of labour many philosophers and economists, although realising its benefits to productivity and the free market, see it as inherently evil. The division of labour promotes automation and as seen throughout history the advances in robotics has lead to rising unemployment in certain industrial sectors. Karl Marx, another eminent economist suggested that “this division of labour on the one hand and the accumulation of capitals on the other, the worker becomes ever more exclusively dependent on labour, and on a particular, very one-sided, machine-like labour. Just as he is thus depressed spiritually and physically to the condition of a machine.” Marx suggests that this division not only encourages the intellectual stagnation of a worker but it also aids in alienating them from others, furthering the gap between rich and poor, supervisor and worker.

Marx’s comments eerily remind me of the Borg from Star Trek with their automatic response of “resistance is futile…. You will be assimilated”

To be continued….

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