Economics for Everyone _ A Short Guide to the Economics of Capitalism

An artwork that I painted back in 2017, during the period when I finished my A’ Level examinations and was waiting to enter university. As you can tell, my skills are not that great, but i really do enjoy art!

This is a book that is really informative about how the capitalist economy works. It explains the different roles of each stakeholder in the economy and their relationships with each other. Another informative book that i highly recommend!

The following section is lifted directly from the book itself. It summarises the key points mentioned in the book.

1. The economy depends on social relationships, not just technical relationships, and (like society) it evolves and changes over time. There is no “natural” order to the economy. There are no inherent, unchanging laws governing its behaviour. What we call the “economy” is simply the way human beings work together, to produce goods and services, and then decide what to do with what we produce. And there’s nothing permanent about it. Everything about the economy — technology, geography, social relationships — changes over time.
2. Economics is an inherently subjective, value-laden, political discipline. The economy is not natural, unchanging, or objective. And the study of the economy — what we call economics — is just as subjective and impermanent. The economy embodies conflicting interests between different groups, and economics closely reflects those conflicting interests. No school of economics can claim to be neutral or objective. Different approaches to economics rise and fall, depending on the course of economic (and political) debates and conflicts. Every approach to economics combines an analysis of how the economy works, with a set of values and assumptions regarding how it should work (and in whose interests). Beware of economists bearing free advice — especially if the economist claims to be “objective.”
3. Productive human activity is the only force that adds value to the resources we harvest from nature. “Work,” broadly defined, includes all forms of productive human effort — including paid employment, unpaid work within households, and the managerial work of business executives. Without work, nothing happens in the economy. There are a few goods which humans can consume directly from nature (like fresh air, peace and quiet, or wild berries plucked from a bush). Everything else requires the application of human effort to transform the resources and raw materials we get from nature into goods and services we can use.
4. Using tools makes work more productive. Humans discovered very early on that it is much better to use tools than our bare hands. The invention, production, and accumulation of “tools” (defined broadly to include machinery, structures, infrastructure, and other kinds of physical capital) has been the central feature of economic development through human history. Developing and accumulating more advanced tools, and training people to use them effectively, must occur at the same time. However, tools themselves are not productive: it is the know-how embodied in those tools (that is, knowing to make tools first, and then use them to produce the goods and services we actually want) that is productive. Merely owning a tool is not, in itself, a productive act.
5. In capitalism, most work consists of employment. Employment is work that is performed for someone else, in return for the payment of wages and salaries. About 85 percent of households in developed capitalist economies rely on employment as their dominant source of income (exchange hours for money). Managing the employment relationship is a central aspect of capitalism. Employers face a complicated challenge to try to minimise their labour costs, while simultaneously maximising the effort and discipline of their employees. This relationship introduces an inherent conflict of interest between workers and capitalists. At the same time, there are times when workers and capitalists may choose to cooperate with each other.
6. Unpaid work is also important. A great deal of productive, necessary work occurs inside the household: out of sight, behind closed doors, and generally without pay. Most of that work is performed by women, whose opportunities in the “outside” economic world are constrained as a result. Remembering that this work needs to be performed, analysing how and by whom it is performed, and making changes to it over time, are central issues in economics.
7. Competition is a central feature of capitalism, and forces companies to behave in certain ways. Capitalists aim to maximise the profits on their investments; one way to do that is by poaching customers, workers, resources, and capital from other capitalists. Competition therefore introduces a new constraint on the way that individual capitalists operate. It’s no longer just greed that motivates them, it’s also fear. That fear (of being driven from business by more successful competitors) forces executives to behave in certain ways, regardless of their personal preferences or values. Capitalism has become more competitive over time, not less (thanks to technology, globalisation, privatisation, and improved management skills). Even very large global companies face competition that is unforgiving and ruthless.
8. The condition of the natural environment is crucial to our prosperity. The environment is both a source of direct ecological benefits (fresh air, open spaces, recreation, and so on) and a source of raw materials for production. The economy cannot continually run down the quality of the environment without humans eventually paying an enormous economic price. Developing sustainable practices (to stabilise and preserve environmental quality) is an urgent economic priority.
9. The financial industry is not, in itself, productive. Financial institutions can play a useful role in facilitating investment (borrowing money to startups or companies in debt so they can produce goods) and production by companies in the real economy. But this function may be overwhelmed by pointless, wasteful, or downright destructive financial activity (the secondary market). Speculators seek to profit from the purchase and resale of paper assets, rather than from the production of useful goods and services. Today there are over two dollars in financial assets for every dollar of tangible capital.
10. Government has played a central, supporting role since the beginning of capitalism. Government is not the “enemy” of free-market capitalism. In fact, without government capitalism wouldn’t exist at all. Government actions and programs have tended to reinforce and stabilise the basic relationships of capitalism: guaranteeing private property rights, supplying business with needed inputs (like reliable infrastructure and skilled, disciplined workers), expanding markets, and managing social relationships in a way that promotes both stability and profitability. At the same time, working people — thanks to their sheer numbers — can use democratic openings to force governments to respond to their needs and priorities, but only when they are sufficiently motivated and well-organised.
11. Globalisation can strengthen an economy, or it can weaken an economy. Globalisation is not new. But modern globalization is inherently biased in favour of corporations and investors. Free-trade agreements and other aspects of globalisation give them more mobility and more power, while limiting the ability of national governments to regulate international flows of goods and capital. In contrast to free-trade theory (which claims globalization benefits everyone who participates), globalisation may help or hurt a national economy. It can increase or decrease demand for a country’s products (via the trade balance), and it can strengthen or weaken investment (via capital flows). A country’s competitiveness determines whether globalisation is helpful or harmful.
12. Workers and poor people get only as much from the economy as they are able to demand, fight for, and win. There is no reason to believe that the success of capitalists will ever naturally “trickle-down” into improved living standards for the bulk of humanity. Neoclassical theories which claim that everyone gets paid according to their productivity are theoretically inconsistent and empirically false. Income distribution is determined by power, more than markets. Demanding a fairer deal from the system, and building the organisational and political power to back-up that demand (through unions and other social justice movements), is the only way to redivide the pie. And if those demands come up against a hard limit in the form of the system’s willingness or ability to meet them, then the time will have come to look at alternatives.

The following are some sentences used in the book to explain certain concepts … i like how the book explains them …

1. The main type of work done by people in a capitalist economy. Employment (wage labour): about 50 percent.
   Top management and owners: no more than 2 percent.
   Proprietors of small businesses and farms: about 10 percent.
   Unpaid work (in households or the community): about 40 percent.
2. A company is owned by a number (possibly a large number) of different individual investors.
   Corporations issue SHARES reflecting the up-front investments made by different owners; usually, these shares can then be bought and sold on a STOCK MARKET.
   The distinction between the investors who own the company and the top managers who control it on a day-to-day basis is a constant challenge facing corporations.
   The joint stock corporations seems to make it possible for anyone to become a “capitalist,” in the sense of owning a little bit of a private company. Some might give a few token shares to their workers, to make them “feel” like owners and promote closer identification with management.
3. The tax systems of most capitalist countries are heavily biased toward investors (not surprising, given their political and economic influence). As a result, tax rates on dividend and capital gains income are usually much lower than tax rates on labour income. This is especially ironic since the people who receive most of that investment income are very rich.
4. 85 percent of households in developed capitalist economies depend on wage labour.
5. The banks’ balancing act between “greed” (for profits on loans) and “fear” (that loans won’t be paid back) tends to evolve in cycles, and these cycles can affect the whole economy. When economic times are good, fewer borrowers go bankrupt, and banks become less sensitive to the risks of loan default; they thus push new loans more aggressively, stimulating new purchasing power and faster economic growth. The reverse occurs when times turn bad: banks become hyper-sensitive to the risks of loan defaults, they pull back their lending, and this causes a CREDIT SQUEEZE which reduces overall purchasing power and growth even further. Ironically, banks’ fear of defaults can actually cause defaults — since their lending restrictions produce an economic downturn and hence bankruptcies (among both businesses and households). This cyclical, profit-driven process is called the BANKING CYCLE, and it is a major cause of the boom-and- bust cycle visible under capitalism.
   The expansion of credit money (and hence the expansion of purchasing power) depends on the willingness of companies and consumers to borrow, overseen by the profit-maximising judgements of private banks and other financial institutions.
6. Private bank lending is a lucrative business: private banks, quite literally, have a license to create money.
   But it is an inherently fragile business, too — always hanging on the hope that depositors will remain confident in the stability of their bank, and never collectively demand their money back at the same time.
   In response to periodic bank failures (and the immense economic and social damage they caused), government regulators instituted rules for a FRACTIONAL RESERVE system: banks had to keep a certain fraction (usually less than 10 percent) of their total loans on hand at all times as hard currency, to guard against a rush of withdrawals. Governments also used other tools (including requiring banks to keep certain amounts of their own money on deposit with the government’s CENTRAL BANK) to further stabilise the banking system, and also to try to smooth out the ups and downs of the private banking cycle.
7. Finance sits “above” the real economy. It provides credit (new money) to capitalists, allowing them to invest sooner and faster than if they had to pre-save all their investments.
   In return, the banks receive a share of profits in the form of interest and loan repayments.
   The remaining residual profit is retained by the actual owners of the company.
   Bankers, like capitalists, live very comfortable lives, and a portion of their interest income (which was siphoned off from capitalists’ profit income) is devoted to the same luxury consumption patterns as the capitalists they lend to.
8. Causes of inflation can be a mix of reasons:
   increase in employment, demand pull inflation, excess spending
   higher labour costs, pass cost to consumers
   higher profits -> If companies feel they can increase prices without losing customers
   increases in raw material prices
9. CENTRAL BANKS are probably the most important single actors on the economic stage.
   They have an immense impact on the economy — more than governments. They have the power to closely regulate everything from prices to job creation to incomes through their MONETARY POLICY: using interest rates (and, occasionally, other policy instruments) to either stimulate or discourage growth and job creation.
   Central banks directly control interest rates on short-term loans they provide to private banks, as part of the normal day-to-day clearing and accounting operations that occur in the financial system. In turn, private banks use this interest rate as a guide in setting the rates they charge customers for everything from home mortgages to business lines of credit. (Of course, the banks add a generous profit margin for themselves.)
10. Companies can have access to various financial resources: Bank loans (as mentioned above), Corporate bonds in bond markets (companies can borrow directly from investors, cutting out banks as the middleman), Issuing Equities in Stock markets.
11. The development of secondary financial markets has thus opened up a Pandora’s Box of speculative financial activity. Investors become less concerned with companies’ real businesses and more concerned with their paper assets. And the profits from innovative financial “engineering” — developing and selling new types of paper assets — can be immense. -> Think, Trading……….Individuals and investors can become far wealthier, far faster, by successfully playing the financial markets rather than through the gradual, often boring process of building a successful productive business.
    A typical speculative cycle begins with the “discovery” of some new asset: perhaps a new product, a new technology, or even just some amazing new kind of financial derivative. In the 1600s, in one of capitalism’s first speculative episodes, Dutch investors drove the price of new breeds of tulips to astronomical highs — peaking in 1635 at as much as several thousand Dutch florins for a single tulip bulb (equivalent to as much as US$75,000 today). Initial investor interest, concentrated among insiders, drives up the price of that asset. Other investors see rising prices (and the associated speculative profits), and pile in for a piece of the action. This in turn drives the price even higher.
    No matter what the initial spark for the upward motion, it is soon overwhelmed by purely speculative pressure. Investors’ hopes for quick trading profits become self-fulfilling, driving the price still higher … for a while, anyway. But eventually something shocks the confidence of investors. Insiders, smelling trouble, sell out first. That produces an initial price decline. Suddenly greed turns to fear, and other investors sell their assets en masse. Once again, the herd mentality of investors becomes self-fulfilling — but this time in a downward direction. The end result is a faster rise, and a deeper fall, than could be justified by any “real” economic factors. In the interim, the bubble produced an immense waste of resources, and untold losses for those who didn’t reach the financial exits in time.
    In many economies (especially those in the Anglo-Saxon world), this endless paper chase has come to dominate economic news and economic moods. It’s assumed that if the stock market is rising, the economy must be healthy (once stocks has been issued, it has no relation to the production of the companies issuing it….). Indeed, pompous executives commonly describe their efforts to boost the wealth of their shareholders as the “creation of value.” And they can seemingly create billions of dollars of “value” overnight, if their company’s shares catch a rising speculative tide.
    Today there are over two dollars in financial assets for every dollar of tangible capital.
12. The rupture of any link in the long financial chain of modern capitalism can set a crisis in motion. For example, when speculative investments are financed with borrowed money (as is often the case), sudden speculative losses can force the investor to default on those loans; this can cause trouble for the bank or other lender which made those loans, and the losses begin to cascade from one player to another. At the beginning, these losses may have little impact on the real economy. Eventually, however, a financial downturn can impact on real investment, production, and employment. This is especially ironic — since the rapid expansion of finance which created the fragile conditions in the first place had little positive impact on the real economy.

The end :)

I actually studied H2 economics for my A’ Levels examination. I wonder why I wasn’t taught all these concepts…..i think it is so important for everyone in this world, irregardless of their occupation, to understand this.