Economics Part 2: Prices

The most basic and simple principal in all of economics is as follows:


People buy more at lower prices. People buy less at higher prices. Producers produce more at higher prices. Producers produce less at lower prices.


In a market price coordinated economy, prices guide consumers and producers to where goods are most valued. This is the reason that these type of economies have a much higher standard of living than countries that are coordinated by a central planner or some kind of command economy like North Korea, Cuba, or the Soviet Union of the past.

Prices are not a good or bad thing. Prices simply convey information to both consumers and producers. The most important information that prices convey are how scarce resources are. When prices are high that usually means that that resource is very scarce and not a lot to go around. Thus beach front property is highly expensive because there is far more people wanting to live on beach front property than there is room available. Some might complain that this means that only those who are "rich" can afford the most scarce products. To an extent that might be true. But at the same time under non-price coordinated economies the leaders of the country make those decisions. I'd much rather trust markets than some super powerful leader who has the power to tell me what and where and how much of something I can have.

Furthermore, due to beach front property being highly price, most individuals cannot afford this property and thus hotels and rental property is often built there allowing society to have an opportunity to enjoy this property instead of an individual being able to afford it to him or herself.

Prices convey information that resources are very limited but they can also convey the message that this good is readily available. Computer prices have fallen in recent years due to the fact that the resources are readily available and much cheaper than they use to be because of this fact. Without the mechanism of prices, people would buy too much of an extremely scarce resource and prices might not convey the information that this item is now readily available to people that it use to not be available to at an affordable price.

More on prices role next time

Economics Part 1: What, Why, and How

Economics is defined best as: The study of the allocation of scarce resources which have alternative uses.

Simply put, economics studies how we get what we need and want when we get it. During the times of the garden of Eden there was no need of economics. Resources were unlimited. God supplied Adam and Even with anything and everything they needed. There was no reason to economize because there were not costs due to resources being unlimited. There was not work to be done in order to produce their food, water, clothing, etc.. God provided unlimited resources for them.

Today and ever since that time period in history, all resources no matter what that resource is, are scarce. Meaning that the sum of everything we want in life is more than what is available in society. We have unlimited wants but not unlimited resources. This is the idea of scarcity: that resources are limited.

Simply put, economics attempts to teach us the best way or "most efficient" way to spread out or "allocate" limited resources or "scarce resources" to the many different ways those resources can be used or in other words to their "alternative uses".

So that is what and why we have to economize. Allow me to finish part 1 with how we economize.

Most countries throughout history have relied on kings and lords to make decisions of how much to produce of a good and where and when to send it. All matter of production and distribution of resources were left up to the leader of a nation or small state or community. The lord was the leader of the manor in a Feudalistic economy. The dictator and the czar were the decision makers in a Communist nations. During Biblical times, kings were the decision makers. For thousands of years leaders made economic decisions.

Beginning around 1776 the idea that a market or the "invisible hand", as Adam Smith(author of the Wealth of Nations 1776) called it, could guide resources quicker and more efficiently. Meaning, instead of one leader sitting somewhere whether that be in Moscow, Russia or in Washington D.C., a market of prices would be in charge of allocating resources which have alternative uses. A market is made up of consumers and producers who are willing to come into agreements about what they want and what they are willing to give up to get it. And if those choices are left up to those consumers and producers and decisions were based on the costs or prices of making those agreements, then these decisions could be far more efficient since those individuals know far more about their own needs in their own situations than some arbitrary leader in some far away city.

Part 2 coming soon

Economics Series

Now that I am teaching economics full time at Stone Memorial High School, my constant focus on economic principles have motivated me to begin a series on my blog in which I attempt to lay out why I think the way I think. I will attempt to show you why an economic way of thinking is so much different than the way of thinking many of you have been taught. But in reality this blog series will teach you about economics the same way my students are being taught it minus the hour and a half five days a week. This blog will not be as detailed but will teach you the concepts that allow me to think in a way that is usually different from many others, but practical in hindsight.

In the coming days and weeks and even months I will be posting many parts to this series that will be brief and easy to read and will teach any of you who are curious, about economics principles, the reason for economics, and how an economist thinks.

I hope you enjoy

"Radical"

My brother recently preached a message about being "radical". Such a revealing message about truly believing what the Bible says as a true Christian. I would hate to try and compare the importance of that message to a political analogy and therefore I will not. But it got me to thinking about the fact that many people would call me a radical as well due to my political views.

Historically speaking George Washington, James Madison, Alexander Hamilton, John Jay, and the many other founders are discussed and talked about as American Heroes. Founders of our nation that aside from slavery are some of the greatest men the word has ever known. King George called George Washington the Greatest man ever when he did not elevate himself up to dictator after the American Revolution.

These men and myself and many that think like me, believe in the idea of Federalism. The idea that local governments and states should make most of the governing decisions in our lives. They were not pro-democracy as some have suggested. In fact Madison feared Democracy and power to people who could not possible have the knowledge at hand to vote on every issue. They also hated the idea of a strong central government though as well. But they all believed in the formation of a "federalist" type government in which the Central "national" government had very little power outlined in the Constitution. While all other powers would be left to the states and local governments.

Yet today I'm considered a "radical" along with many other men in the world who still view "federalism" as the ideal form of a government system. Glenn Beck and Rush Limbaugh to name two men who favor this. Is it really radical to believe the way that those great founding fathers of ours believed? Is it really radical to believe that the federal government is inefficient in nature and that it should not do things that are not in the constitution such as Social Security, Welfare, Medicare, Regulations on business, marriage issues, education, and the hundreds of other issues that it gets involved with.

If these men are great for starting this wonderful nation. We conservative libertarians can't be too "radical". Right?

My Income

I'm excited to finally be able to settle down in Crossville, TN once again and begin doing what I love doing more than anything- Teach and Coach. I teach economics now and that is the subject that usually disagrees with the establishment thought. Being that I have a degree in the subject I disagree with some of the notions that my fellow colleagues have despite my love of working with them.

It rarely takes too long for the subject of teacher pay to come up when there is a room full of teachers meeting. Sometimes only one teacher is needed. A couple weeks ago I went out with a friend of mine from Knoxville named Brittany. She had a friend that she introduced me to and the first thing he said after meeting me and finding out I was a teacher was something along the lines of "Man, I love you public servants. I am one of the biggest supporters of teachers getting more pay for what they do. Your job is way too important to make so little."

I then told him I make roughly $25/ hour and he looked surprised. But its true. I work roughly 190 days only each year. I understand there is preparation that teachers have to put into their jobs but the same is true of many other professions that work all year. I have so much vacation time during the summer, a week in the spring, a week in the fall, a few weeks during Christmas, and all weekends and other holidays in between. As a first year teacher with only a B.S. I make roughly $25 dollars per hour. This does not include coaching pay (which is far far less)

His last line was that teachers should get more pay because their job is so important. It might be true that developing the minds of the future citizens of our society is more important than some occupations. But pay is not and should not be based on what I or any one other person believes is of great importance. In a free society, pay is based on a market that involves both supply and demand. This is because a "price-coordinated" economy, like ours is when government isn't involved, prices allocate scarce resources which have alternative uses. Put differently prices is what transfers goods to where they are most desired and needed and in some cases in low supply.

As a teacher I have chosen a worthy occupation and career that hundreds of thousands or millions of others have also chosen. Millions cannot choose to become surgeons because most people in America do not have the capability much less the determination and commitment to become a surgeon when more than ten years of training and extensive and high level education is required for such an occupation. Teaching is a somewhat easy degree to earn as it is a Social Science with far easier course work and far fewer years of training required.

We do have a shortage of qualified math and science teachers because within the teaching profession it is a tougher subject to teach and earn a degree in. Thus as an economist I believe those teachers should be paid more than I or a PE teacher where we have a surplus of qualified teachers to work in these areas. If this was ever allowed to happen, we would never have a problem finding math and science teachers. More would choose to earn their degree in those areas where they can earn more pay. That is how the market works. I know most teachers get into the profession for reasons aside from pay. But some teachers choose subject material that is easier than math and science because they know they will be paid the same despite it being easier. So no one can tell me that pay has nothing to do with our motivations. And there is nothing immoral or wrong with this either. That is why American prosperity and other Capitalistic price-coordinated economies have prospered so much. Prices coordinate resources to where they are most needed not where we believe the occupation is morally more important or valuable.

I love my job and my pay is sufficient. Not because I don't value what we teachers do. But because I value our economic system and the prosperity of our nation as a whole. And this prosperity has come about because scarce resources which have alternative uses are allocated more efficiently when goods go where they are in least supply and highest demand, instead of where good intentions might lead those resources.

Tuly Greedy

If you watch the news and listen to politicians you will occasionally and actually with much repetition hear them talk about the "greed" of capitalists such as the banks and wall street investors. It is true that banks and wall street want to make as much money as they possible can. It is also true that we as individuals do as well. We can call this "greed" or we can call it human instinct. But greed is not what led to the housing crisis and thus economic recession. Regulations, government pressured loans, and terrible incentives generated by the promise of bail outs is what led to the bubble and since crash of the housing market leading us into a long and tough recession and now tough times. Recently the unemployment rate dropped to I believe 9.5%. That is good news until you read that it dropped because many people stopped looking for full time jobs and became "discouraged" workers. These individuals are then taken out of the labor market which makes the unemployment statistic improve. Without this statistical jargon, the unemployment would be just over 10%. What can be done?

In reality the quickest and best way to fix the current problems would be to stop the entitlement spending that our federal government does and overhaul the tax code. America has the toughest tax code to understand and the current tax code disincentives investment and expansion. People would be more willing to invest and create businesses if they knew that they could keep most of the money they worked hard to make. But in our system if a person wants to expand their business they must first know they are not just going to benefit a little from doing so but they must benefit enough to pay for the extra taxes, regulations, and oversight, before being willing to invest into that.

Why not overhaul the tax code? I like the Fair Tax which is a national sales tax that would then eliminate all other taxes that businesses and individuals pay. In other words you only pay federal taxes when you buy something and you don't even pay taxes on food at that. You also bring home your entire check from work and the acronym FICA becomes non-existent. This would generate many new businesses and jobs for the American People. There is one large problem with this. This eliminates the need for lobbyists to try and sugar up the politicians to get tax benefits for themselves. Businesses would strive under this fair tax but some businesses would not like this because of the added competition that it would bring. (competition benefits us as consumers though). Politicians benefit with donations to their reelection bids and perks by helping businesses get around certain tax laws. Politicians in other words have much more power under the current complicated tax code. Who is greedy? I say the politicians that refuse to let go of their power despite knowing full well America would benefit.

Happy Independence Day!!

You have made enough money!!

Recently the President of the United States Barack Obama made a resounding statement in which he said: "I do think at a certain point you've made enough money." That statement while appealing to a certain sector of the population, is a rare and scary statement made by a man of such power. In fact it is a dangerous way of thinking. During a time where making money is hard to come by I definitely do not want to encourage those people who employ American Citizens that they should probably stop what they are doing, because "at a certain point you've made enough money."

Big Business owners and CEO's and those who have sold their companies to shareholders are those that the president are referring to. This is amazing to me. If you look back in history of our nation at when people like Gates and Buffett made most of their money, I bet you will find a correlation between that and employment in the United States. It is the richest in America that have ran successful businesses that employ Americans who need to work and work most of their lives until they retire late in life. If these rich Americans quit what they did these middle class Americans would be in major trouble. If these rich smart Americans gave up their jobs and let others do those jobs, those others might not be as good. Decisions that lead to layoffs could be made which will hurt those who are much poorer and working hard for a living on the floor level.

What is sad is that there are a lot of people in America who don't care and don't understand why this statement is dangerous for our nation's economy. Those some Americans probably support many of his anti-business policies. Those same Americans will be hurt by a policy that would have successful people to stop making money. And those same Americans might be so ignorant that they will not be able to look back and connect the dots. But they will love it when our welfare system is expanded even more to help them out.

Rich people, keep making money!