The Basics of Economics, part 1.

This was first posted over on SB, but was also written with this Blog in mind; if parts of this post seem a bit odd, they would probably make sense if you’d been on that thread.

Human economic behavior, is defined by how the human psyche functions. The ingrained human desires, motivations, and thought patterns define how all economies function.

The following are some of the primary human motivations:
1. Desire for survival. This affects food, shelter, and clothing.
2. Desire for companionship/acceptance of others. This affects the form the above takes, as well as luxury goods.
3. Desire for pleasurable experiences. This, again, affects all of the above.
4. Desire to create/produce something meaningful. This affects how pretty much everything is produced. Notably, I’m marking this as a desire to create something, for the act of creation itself, not just in order to earn money.
5. Desire for something transcendent/supernatural. As a Christian, I believe this is the desire for a relationship with God, but all except for an extremely small minority of hardened atheists will agree that the desire for this exists, if disagree about the forms.

These things are universal to all human beings, and if you are going to disagree with me at this point, I suggest you ignore the rest of my argument, and go study the world a bit more, taking note of how all of these factors are present in every single culture in the world.

The various desires listed above can take wildly different forms, but some common ones are gaining acceptance by having similar possessions to others, or possessions that are seen as desireable. The desire for pleasure can take the form of eating tasty foods, sexual relationships, adrenaline-junky activities like skydiving, nature hikes, birdwatching, videogames, book reading, movie/TV watching, it goes on and on. The desire to create something meaningful can be anything from a painting, to a song, to a movie, to a book, to a business, to a building or landmark, to an entire freaking nation. Or even just the accumulation of large amounts of wealth. Some people’s desire for a large social circle or family may fall into this category, though I think of relationships more along the lines of number 2 myself.

The desire for the supernatural or transcendent can take the form of everything from meditation, to drug trips, to reading sci-fi/fantasy, to religious orthodoxy, to obsessive scientific study trying to understand the universe at a deeper level. Personally, it takes the form of aggressive pursuit of Truth, as I believe all Truth originates with God, and I should be willing to face it, whether I like it or not.

If you know all of these things, and combine it with the fact that in time, people always desire more (be it more material goods, deeper or more meaningful relationships, more relationships, more time in solitude, more ‘enlightenment,’ whatever), and you can gain a pretty good idea for how economies will function on a gross scale.

Primarily, that there will always be demand for things that fill these desires, and that money can, and will, be made by meeting this demand.

In this mentality, economic behavior can be defined as being either constructive, or destructive, I will describe below.

Constructive behavior:
Farming wheat.
Farming cows.
Mining Iron.
Manufacturing cars.
Servicing cars.
Shipping goods.
Creating entertainment media.
Purchasing any of the above.

In all of these examples, a person is working to a productive end, creating something, or paying another for their work, giving them the funds they need to continue their activity.

Destructive economic behavior:
Theft.
Arson.
Vandalism.
Assault (including lethal and sexual assault.)
Abusive/controlling business practices.

The last is business practices by which you exert influence and power to attempt to force people to do business with you, in a way that is disadvantageous or destructive to them. Examples would be mining companies that moved miners to a settlement where they controlled the only resource access, EG the Company Store, where they charged the workers unreasonable prices, more than they could ever hope to earn, forcing them into functional bondage by charging them more than they could ever earn. Another would be a business trying to control a monopoly on a service by selling their service or product at below cost whenever a competitor tries to enter the field, then charging excessively once the competitor went bankrupt and folded.

Destructive behavior is destructive because (surprise!) it destroys rather than creates. From a purely economic viewpoint, assault, even including rape and murder, is destructive to the economy, because it destroys a person, and damages those connected to the person. As this is about economics, I’ll leave out the visceral/emotional and moral/ethical side of those things for now. Every type of destructive economic behavior decreases the total amount of wealth in the economy, theft by (in effect) removing the value of something that someone has created or purchased by taking it from them without paying them, Arson and vandalism just destroy property outright.

Now that I’ve defined constructive and destructive economic behavior, it’s important to note that humans will engage in all of these activities regardless of what the government does, or even if the government did not exist (true anarchy). The above listed are also not counting *government* action upon the economy.

Now, obviously, as the most powerful body in a society, the way the government interacts with the economy is going to be pretty critical, and heavily influence economic activity. One of the extremely important things to stress here, is that due to the above-described human nature, people will engage in all of the above activity without government interference.

This means that people will provide services, farm food, manufacture goods and homes, all without the government prompting them to. This is a crucial thing to be aware of, as it means that it is not necessary for the government to interfere with such things. Also note that ‘beneficial’ is not the same thing as ‘necessary.’

So, obviously, with all of these things in mind, the objective of the government’s involvement with the economy would be to discourage destructive behavior, and possibly encourage constructive behavior, right?

Well, the question then becomes what can the government do to accomplish these ends?

Dealing with Theft, Vandalism, Arson, and Assault, is all fairly straightforward, as is dealing with their specific forms (robbery, fraud, defacing or destruction of property, murder, rape, etc.). Make laws prohibiting such behavior, and employ law-enforcement officers to do what the job title says, enforce them.

Dealing with destructive business practices is a bit trickier, because the evidence isn’t as obvious (burnt property, dead or damaged bodies, as opposed to impoverished people), but with some discernment, it can be done.

So, now that we’ve established that the government is going to be doing something, how does it fund itself? There are really only three possible answers, taxes (taking money from internal economic activity either from income or sales), tariffs and duties (taking money from economic activity crossing the nation’s borders), or what essentially amounts to piracy, beating up other nations and taking their stuff. I don’t think anyone is going to argue that that is an ethical choice, so we’re going to discard it out of hand.

All of this said, there are other responsibilities the government has than internal law-enforcement, things that any government capable of maintaining national integrity must do, those being international relations, and national defense. These things also cost money, so now your government needs a larger budget, all of which must come from taxes, duties, and tariffs.

These days, most nations use a balance of the three, mostly weighted towards internal taxation. Some very few nations, like the USA, have an immense wealth of national resources, and also an immense variety of national resources, that would allow the nation, if it truly wished, to be entirely self-sufficient, but by and large nations wishing to maintain a modern economy must engage in international trade for the variety of resources involved, so it is best not to discourage trade by holding too many duties and tariffs.

So at this point, you are funding your law enforcement, international diplomacy, and national defense (including all branches of the military, as well as intelligence organizations such as the CIA or MI6), mostly via taxation.

Well, what effect does taxation have on the economy then? Simple, it impoverishes it. Anyone you tax will have less wealth, and any particular industry or activity that you tax, will begin to cost more. If the service or product costs more, people will tend to buy less of it, a lower quality version of it, or if it is simply too essential, will have to buy less of something else instead. So, whenever you implement a tax, your economy becomes poorer. Unfortunately, the basic three services of government are essential to maintaining a lawful and at least somewhat safe society, so you have to pay for these services. This is why some people refer to government as a ‘neccessary evil,’ because if people did not commit evil acts, there would be no need for government, at least government as we know it.

So, now we have defined some of the fundaments of the human psyche, how they affect economic behavior, positive and negative economic behavior, and how government can inhibit negative (destructive) economic behavior. Now that all of this is established, let’s look into how the government can encourage positive (constructive) economic behavior.

First, and most importantly, all government spending is first paid for by the economy. Liquid cash is taxed directly from the economy, debt is paid for either by the nation’s citizens (in forms such as treasury bonds), or by foreign nations, to where it must be repaid later, and printing new money causes inflation. All money spent by a nation’s government is taken, either before or after, from its citizens. This means that the government cannot magically add money to the economy, only move it from one section of the economy to another.

A problem with the government doing that, however, is that someone has to actually do the moving. This means passing laws defining how it will be done, hiring people to collect the money and distribute it. That means that some of the money they are collecting has to go to pay these people, and that ultimately, they are taking more out of the economy than they are putting in, and devaluing the economy on the whole.

This means that if the government decides that it is going to run education, it will do it at a higher base cost than a private education institution, because the institution has to pay only for itself, whereas the government, at an absolute minimum, pays for the laws about the educational system to be passed, the taxes to be collected, then for the tax money to be distributed to the various schools.

This is also true when the government decides to involve itself in any other business, such as health care, welfare (which is basically government mandated charity), utilities, or anything else.

To further clarify things, when your taxes pay for law enforcement, diplomatic relations, and the military, you are paying for a safe and lawful society, this is a service you are paying for. When your taxes pay for anything else, they are paying for something the private sector could do instead, and do cheaper.

All of this means, that before you even get into the issue of personal freedom, competence of the people in government determining how businesses should run, and corruption, the government is already a worse option.

In sum total, this means that what the government can do to encourage economic growth, is stay out of the way. Depending on how you want to look at things, you could view effective and efficient law enforcement as encouraging economic growth, because it means that people won’t have the fruits of their labor stolen from them.

Now, this is looking at things from a purely economic standpoint. This does not touch into the ethical considerations of how to deal with poverty within a nation. The ethics of having the government redistribute wealth to the poor through taxation, via welfare, nationalized health care, and government-run education, is not what I’m addressing here. I am purely addressing the issue of the fundaments of economics.