Economics is often described as a science. In science we have the ability to run experiments, keeping variables the same, then the same outcome should happen. There are certain physical laws that make that happen. When, for instance, you touch a lit match to paper, it will burn every single time. Or if you drop a rock off a building it will fall every single time. That is science. There is another form of science, one that studies reactions made when there is a choice. Rats in a maze for example. But the rat will have a choice, and will not always choose the correct path.
The same is true of Economics. Because economics studies human behavior when it comes to money, it is important to note that they have a choice. The choice they make will inevitably equate to an economic result. Assume a man takes his money and places it under his mattress, because he is afraid of bad times ahead, and stops trusting banks. That money leaves the economy. The result is that money supply decreases which may affect another person from getting a loan to buy a washer. The people who manufacture the washer don't sell that washer, as a result they don't have to replace the inventory and lay off a worker. In this scenario, the fear of bad times results in bad times.
Now let's assume the man decides that banks are OK, so he deposits his money in a bank. Banks make money from loans. The bank loans money to the other man to buy his washer, the company needs to replace that inventory so the keep the worker on the payroll. This result is much better. The economy grows.
But why would this one person decide to bank his money, or hoard it? It is his choice after all. How does he arrive at that choice? Do we not listen and watch what goes on around us? Do we at least listen to a few minutes of news per day? Or talk at the water cooler? Or visit with friends and family? The reason this person would hoard his money is if he is afraid of total economic collapse, he might turn it into precious metals or jewels, but he will not place it where it can help the economy. This is one reason that the Government made owning precious metals illegal during the Great Depression. To force people to invest in more productive things. But it still relies on choice. Perhaps it was real estate or jewelry instead of savings and investment. There are always choices, and our guy will always choose what he believes is in his best interest.
That is why the public psyche, is so important. News media can drag the economy, when they report only bad news. Government can drag the economy when they dwell on the negative. Stimulus's will not work, because after the first layer, that money goes to the processor's choice, perhaps under the mattress. Politicians in particular, need to accent the positive. Like FDR in the 1930's or Ronald Reagan in the 1980's. Both set the economy booming, and yet they would be considered political opposites. But both caused the psyche of the nation to improve, taking the money from under the mattress and letting it be productive in the general economy.
In the present, we have a problem. Media reports disaster is coming in Europe, oh and China's economy is slowing down, and oh unemployment is at 8.3%, and, and, and...
The Speaker of the House is busy blaming the President, who is busy blaming his predecessor, or Congress. Not exactly a positive message. Do they know what they are doing? If the do, they deserve to lose their jobs, for being complicit. If the don't, they deserve to lose their jobs for being incompetent. Or at least that's my opinion...
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