Part (1)
What You Need to Know about
Economics to Be Happier
By
Víctor Saltero
WHAT YOU NEED TO KNOW ABOUT ECONOMICS TO BE
HAPPIER
There are two subjects that should be taught to the world's children before they reach puberty. One is fluency of spoken expression, and the other is economics, as both will be pivotal to their development in their future lives.
A high level of ability in language use opens a lot of doors because it facilitates communication with others, allowing people to express their thoughts, feelings and desires effectively. This in turn facilitates the integration of young people into society; language unites us. I am sure that just about everyone will agree with this idea.
However, in the case of economics, no doubt there will be less consensus. I suspect that many readers will have furrowed their brows, wondering whether to continue reading, because they believe economics is a boring subject for specialists that ordinary people will never understand.
This impression is false. It is very easy to understand, and it is knowledge that is extremely useful because your whole life, from cradle to grave—and even afterwards—is affected by economics.
For example, social stability, which is so essential to your wellbeing, is the product of a stable economy. When governments make bad decisions in this area—or in any other area connected with it, such as the financial sector—they can end up ruining a whole country, although the consequences of their acts may take years to materialize, dragging you along with the disaster, and much of your happiness with it.
An understanding of economics is essential because it will help us to make better personal decisions. This knowledge will enable us to take the right approach to buying a home or a car; it will give us the tools we need to recognize the approach of a recession, so that we can take measures to minimize its effects; it will help us to decide whether we should take out a loan; and it will be very useful when we want to start up a business. And it will even allow us to work out whether the politicians we're going to vote for are making feasible promises, or merely spouting populist nonsense that would end up dragging society down and the wellbeing of our family with it.
A good knowledge of this subject gives us a clearer understanding of the world we live in, as its principles are the same in every country; conversely, without such knowledge we will walk through life blindly, with a greater risk of stumbling and falling.
Perhaps the first question that needs to be answered is: if economics is so important, why isn't it taught at school? The answer is simple: because nobody—our politicians least of all—has the slightest interest in ensuring that you know anything about this subject. They prefer to fill the curriculum with subjects like history, which is manipulated in keeping with the interests of the government of the day, or chemistry or math, which, beyond their basic rules, will generally not have the slightest relevance to our children's lives, and other subjects that make no attempt to transmit useful knowledge, but only convey the appearance of knowledge.
The political elite understand that a knowledge of economics would be a threat to their power. That is why they are not especially keen on letting citizens learn too much about it... not to mention the fact that they don't know much about it themselves because not even in the universities where this science is studied do they teach it effectively. What is generally taught is the particular jargon used in each economic sector: the financial sector, the industrial sector, the trade sector, etc. In short, the particular features and history of the different sectors, but no global understanding of the economy.
Indeed, we tend to take for granted that somebody who understands the financial sector, for example, knows all about economics. This is a mistake. The only knowledge that this person would usually have of this subject is how to manage that part of the economy and the particular features of that specific sector, but not how it interrelates with the rest. Nevertheless, we tend to assume that they are experts in economics because we hear them use financial jargon that we don't understand, although they probably don't know anything more about economics than you do.
And how did they manage to keep you and your children so indifferent to this subject? By creating a halo of complexity around it that it doesn't have— as will be shown below—and turning it into a boring and supposedly specialist topic.
Without further ado, let's take a closer look at the subject.
We'll begin by defining exactly what economics is. Economics is simply the science that studies every act of production and exchange of goods and services to meet any kind of need or want that people may have.
It has always been around. Cavemen offered any surplus goods they had to neighboring tribes in exchange for others they were short on. Such exchanges were their way of trading, in an age before the invention of money when this bartering process was the only means available to them. But it was a very limited economic system, and would be quite useless today with more than six billion people on the planet.
Money was invented more than 3,000 years ago, and since then economic concepts began evolving toward their current form.
Let's move forward to our times.
In human nature there is a desire to possess things, which is born out of the most powerful of our instincts: the survival instinct. This is why we buy food, housing, clothing and all kinds of goods that become more numerous and varied the more developed a society is, particularly as we move further beyond the simple economics of survival. And it is precisely because of this instinct, which is imprinted in the human brain, that every political and economic philosophy that eliminates or restricts private property inevitably ends up failing. Such a philosophy goes against our nature.
The phenomenon known as the economy comes into operation naturally whenever somebody needs something he doesn't have, because he will always find somebody else ready to provide it. And this is how the different specialized economic sectors come into being: production, transportation, storage, sales; and, if necessary, financing. Coexisting simultaneously with these different agents is the State, which becomes an economic sector of its own by taking a percentage of this movement of goods and services in the form of taxes.
These sectors are all mutually interdependent, and collectively they constitute the economy.
As noted above, the economy comes into operation when someone seeks a good or service, as this creates natural demand and that's where it all begins.
To facilitate understanding, I have outlined a simple formula that explains and regulates all the rules governing the economy, and that can be applied universally.
The formula is: Demand = production + trade = labor.
And by extension: labor = more demand + more production + more trade = more labor.
And so it goes on in an endless cycle.
Conversely, the absence of natural demand—a term I will make use of repeatedly—has a negative impact on the other factors, resulting in unemployment and poverty.
In short, when someone seeks something he wants (demand), somebody else will provide it by making it and selling it to him, having to create employment to produce what he has been asked for. These new workers will also need and want goods which, in turn, others will provide, for which they will also have to create work to meet this demand, and so on. But if demand is cut, whatever the circumstances may be, unemployment and poverty will ensue.
This is what this Formula means, and therein lie all the principles of the economy in a nutshell. The Formula also explains the reasons for the greatest economic successes, and likewise, the biggest economic disasters of all time.
As will be shown below, these disasters are invariably the product of erroneous decisions by certain professional sectors involved in the economy that upset the harmonious balance of factors involved in the Formula. Normally, they are mistaken decisions made by governments or by the financial world, which are the two economic sectors with the biggest influence on the economy, both for good and for ill.
The best way to explain this is to consider some real-life cases, which I will offer below.
The reason for the economic (and, therefore, social) failure of Africa is that there is no organized demand beyond what is necessary for mere survival; as a result, there is minimal production, trade and labor.
The failure of the USSR was caused by two main factors: the prohibition or restriction of private property, leaving its citizens without any motivation to work; and the fact that the government decided what should be produced and purchased—private companies were legally banned—and thus instead of being governed by the natural demand of its citizens, the economy was governed by the demand created and manipulated by the Soviet State, which ended up collapsing with a resounding crash because it was producing tanks and missiles in its factories when what the people wanted (natural demand) was bread, milk, clothes, and housing. In other words, production was not operating in harmony with demand. So the Soviet state fell apart after causing its citizens a lot of suffering. Today North Korea is doing exactly the same thing, and is headed in the same direction.
The Chinese learned from the Soviet failure and at once took to applying the Formula described above, and with its effective implementation they have turned their country into the world's second biggest economic power.
The secret of the economic success of the United States lies in the vitality of its natural and organized demand, which created and maintains a large middle class, which is, in turn, what creates much of the demand on which many of us around the world live.
As can be seen in these actual examples, in the negative cases the factors of the Formula are upset by manipulation or absence of demand, while the positive cases are the result of the effective application of that Formula.
In Africa, if there is no organized and natural demand, they cannot create employment that would in turn generate further demand and more employment.
In the former USSR, the State directed and manipulated demand by controlling industry, which only produced what the government instructed, not what the citizens wanted. As a logical consequence, none of the factors of the Formula could operate. In short, they were unable to get the economy running.
The United States, and now also China, have the largest middle classes in the world because they create a free yet organized and natural demand. In other words, both countries apply the Formula effectively, although sometimes they also make mistakes that end up affecting all of us.
THE ECONOMY OF ABUNDANCE, OR THE END OF POVERTY
The new economic context created by the Industrial Revolution, and the abandonment of the gold standard as the benchmark for the production of money, offers a number of possibilities that have yet to be fully developed, because economic leaders have failed to recognize all the opportunities presented by this new economic environment.
One of the fundamental features of the current economic model, which I refer to here as the “abundance model”, is that there are no limits on the production of wealth, which means that there should likewise be no limits on job creation and, consequently, the elimination of poverty. Poverty has always been and continues to be a product of what I call the “economy of scarcity”, as I will explain below.
Until relatively recently (and in fact, in many parts of the world it is still the case), the economy was based on a notion of insufficiency. Gold, which was used as the monetary standard, tied the solvency and value of the economy to this insufficiency. And the same was true of farming and mining, which were the main sources of wealth until quite recently. As a consequence of this economy based on limited resources, labor was obviously also limited.
