Hopefully at this point you have a better understanding of economics. The question you may ask now is how you can use this knowledge to help guide you through an uncertain future. As an individual this will be dependent on your circumstances. Consequently, it is not possible to provide you with specific advice on what to do. However, here are some general tips to go by:
Reward for Effort
Time is the one thing you will never get back, so use it wisely. Time can be spent, invested or wasted. As a born procrastinator I know how easy it is to waste time. Spend your time on things you need to do or enjoy doing. Invest your time in making your future easier. When in doubt think of yourself at 90 looking back and take the path of least regret.
Part of preparing for your future is to live within your means. As outlined in the explanation of monopoly and hegemony, a key factor in the flow of money from the poor to the wealthy is that the wealthy live within their means and the poor cannot. Subsequently the wealthy are able to invest in things that generate revenue, which in turn increases their ability to live within their means.
Value is Relative
At a personal level translate money into work hours. Include in this calculation the total hours related to work, including travel, and convert income into after tax dollars.[1] You can then ask yourself if that cup of coffee is worth working another 20 minutes, or whether the difference between [the purchase of this or that car is worth working an extra three weeks.
At a broader level, watch for changes in what people value. This is fundamentally what drives economic change. As outlined earlier, some of what people value will be driven by demographic change, and in particular, the fact that the population is getting older. This change is impacting on property prices. In the short term it is driving up housing prices as the supply of houses is not keeping pace with demand, and there is an underlying belief that property values always increase over the longer term. However the long term trend in many countries is that birth rates are falling below death rates, a trend which will eventually result in the supply of housing being greater than the demand, which in turn will result in falling house prices. Of course with property, location is everything. Are people moving in or out of where you live? Also keep an eye on what sort of property people are seeking. Do they want garden space or apartments, large dwellings or small? All of these things will impact on the value of your property.
But it is not just where people live that you should watch. Monitor how people are spending their time. Everything we do or don’t do has an economic impact: are people cooking or eating out; are people going to events or staying home; are people watching TV, playing video games, using the internet, or spending time with friends and family? Are people playing sport or watching sport? Consider the role your work plays in making all of this happen, and ask yourself whether your role is getting more or less important? Are your investments in things that are creating things that people value?
Trade requires a difference in value
In human terms, the reality of trade is that it requires a difference in value. The seller must value the money they are to receive as greater than the product they are selling, and the buyer must value what they are buying more than the money they are paying. Another key component of this is timing. Trade also requires the participants to want to trade now. Mild inflation helps this to happen, as people will bring forward a purchase if they think that it will cost them more in the future, either in lost opportunity or in real cost. Deflation has the opposite effect as people will delay a purchase if they think that it will cost them less in the future.
We are now accustomed to deflation in technology. Cars, computers, televisions, mobile phones and various other devices reduce in value as they are superseded by new technology. Various trades have also adjusted to an expectation that they will do more for less by changing the way they do things – in the most part using new technologies. Businesses have adopted new systems and processes so that they need fewer people. How vulnerable are you to deflation in what you do? What could you be doing that is going to be more valued by others?
Money is a catalyst
As previously discussed, money is a catalyst that has no real value. However the reality of money at an individual level is very different. To participate in trade you will need money. The global financial crisis placed money at risk. This risk is not over. The realignment of the catalyst to trade is a major readjustment in the world economic ecosystem that is only partially complete.
There is still too little clarity in world financial markets. The break-neck speed and astronomical volume of financial trading and all of its associated derivatives creates a constant cloud of confusion. It is a high risk game for a zero sum gain. It puts the overall system of money as well as individual financial institutions at risk. As an individual, ask yourself how you well you can cope if you could not access the money in your bank account.
It is good to keep in mind that governments have a unique relationship with money. Although Governments need to be funded, they are not a business. There are four key types funding that governments can use as part of their economic management.
- Wealth/income tax – taxing individuals and companies based on the assets and income they have, is the major source of government funding. Different countries do this differently, however most try to tax the rich more than the poor, and in most cases this results in the middle classes wearing most of the tax burden. Governments need to refocus their efforts on redistributing wealth from the top 2% of the population. This is likely to require tighter controls on international money flows, or widespread international cooperation.
- Transaction/behavioural taxes – originally a tool for discouraging particular behaviours such imports or alcohol consumption and smoking, this form of taxation has become more widespread to make up for the inefficiencies in collecting wealth/income tax. Governments often ignore the fact that the intelligent application of these taxes and duties can help shape positive behavioural change.
- Treasury/Government Bonds – bonds enable governments to borrow money. There are a number of different potential purchasers of government bonds. Treasury (an arm of the government), banks, businesses and citizens of the country, and foreign banks, businesses and individuals. When a government sells bonds to its treasury and the treasury pays for them by printing money – this is called quantative easing. While it still goes into the government’s current account as a debt, it has effectively cost it nothing and has put more money into circulation. The risk of this is that it devalues the currency and increases the probability of inflation. The reverse of this is when governments reduce the number of bonds on issue or notes in circulation – this is called quantative tightening. This is done to restrict economic growth and limit inflation.
- Government owned businesses – in some countries the government owns businesses, particularly those that have natural monopolies, such as water and electricity supply. This may also extend to the mining and distribution of natural resources like coal and oil. The relationship between government and business, like church and state, needs careful consideration.
So what should your government be doing? In recent times governments have been under pressure to balance their books or reduce their debt. Some governments have even sold revenue-earning government owned businesses to pay off government debt. This ignores the government’s special relationship to funding. A priority of government is to provide the catalyst to trade in sufficient amounts to facilitate trade. A key way of distributing funds is through government activity. This is a much higher priority than balancing the books.
Trade creates economic ecosystems
Economic ecosystems are human creations[2], like farms or gardens. They rely on social constructs and government action to function. As can be seen in parts of the world where these things are not fully functional, the economic ecosystem becomes overgrown by violence and corruption. Even in a fully functional society, these must be constantly weeded out. A thriving society requires a balanced economic ecosystem. The foundation of this alignment can be found in the hierarchy of need.
Governments should ensure that every individual in society has the bottom two tiers of survival and stability. This means that they have access to reliable water, food, shelter and safety. In many modern societies shelter and safety also include energy, healthcare and a basic education, for without these things the individual would be at a disadvantage. Ask yourself if your government is trying to create the sort of world that you would like to live in?
It is also important to recognise that economics is human activity at a personal level. If you can understand what value you are adding to whom, then you will get a sense of your role in the economy. If you then consider the need or desire that underpins this and the possible alternatives there are to meeting this, you then have a sense of your economic vulnerability. For example, demand for hairdressers is permanent but fluctuates with changes in fashion, whereas tattoo artistry on the other hand is an entirely discretionary spend by the consumer. Sometimes you might need to look at the bigger picture. Working as a mechanic for a business that has the maintenance contract for coal mining vehicles in a low quality mine means that you are immediately dependent on a vulnerable ‘food chain’ that is part of a much bigger ecosystem.
Economic measurements are incomplete
The economy is the result of human endeavour. Everything humans do, or don’t do, has an economic impact. With billions of humans having a direct input into the world economy by making independent decisions and undertaking individual activities every day, the economy has trillions of data points. While there are lots of measures of economic activity, there is no truly accurate measure of economic success.
A major focus of professional and academic economists is attempting to simulate economic activities in an effort to predict future economic activity. As a result, much of the discussion of economics is to do with the relative merits of the various economic models used to create these simulations. Throughout this book we have stepped back from economic modelling, measurement and simulation, in order to get a much clearer understanding of economics. I recommend using the six principles of economics outlined in this book to better understand the economy around you.
The economy will continue as long as human activity does. The key questions are around what sort of activity will be undertaken and to what ends. At various points in history a great deal of activity has been undertaken by some people to the detriment of others. The most obvious example is through war and slavery, and sometimes more subtly through trade. But trade does not have to have a winner and a loser. The best trades are a win for everyone involved. In all of your dealing it is good to aim for a win for everybody.
[1] . For example, if you earn $50,000 per annum and work 50 weeks of the year, that is $1000 per week. If you include travel and unpaid overtime, you might find you work 50 hours a week, thus earning $20 per hour, and if you are taxed at an average of 25%, you are working 40 minutes for every $10.
[2] Refer to Appendix for more explanation on economic ecosystems.