My understanding of economics


High prices often confront us. Government is trying to control inflation, which is increasing beyond its desired levels—an ideal of about 2% annually but currently is about 9%. Why do prices increase and why do they drop? Why do things appreciate and increase in value over time? Why do they depreciate? 

Market forces, we are told. The law of supply and demand. As such, a common definition of economics is that it is the sum of all the millions or billions of daily decisions made by humans as to what to produce, consume, sell and buy.

The medium of exchange for these transactions is money in all its forms, whether hard currency or virtual or in kind.

The economist John Maynard Keynes described monetary circulation as the lifeblood of an economy. Like real blood in a real human body, its health and ability to circulate determine how healthy the organism or the economy is.

What is healthy money? It is something backed by value or has intrinsic value (to either or both the seller and buyer) and sound fiscal policy—prudent and productive spending, manageable debt put to good use and good payment history. Conversely, unhealthy money has unstable value and is poorly managed.

Related: Is the Philippine economy ‘backward’?

Blood carries oxygen and nutrients to all parts of the body. When blood goes to the brain, it makes sound planning and sound decision-making possible. When it goes to the skin, it makes our quality of life glow and our appearance attractive.

Thus, the cholesterol blocking our veins and arteries is like the economic obstacles that hinder good monetary circulation. These economic obstacles can be as simple as lack of access to affordable credit and as complicated as the economic system itself, such as full market capitalism with little regard for equitable distribution of wealth. 

Spending power

Good monetary circulation happens when people have spending or purchasing power and the goods and services are there for them to purchase and enjoy. Trading, the exchange of goods and services, is the expression of good production and efficient positioning or deployment of skills that satisfy people’s needs and wants.

Loss of blood or hemorrhaging is like money leaving in huge amounts—capital flight—or not coming in to begin with; no one wants to invest or do business in a country, and the economy becomes weak and anemic. For lack of funding or investment in productive activity, people seek work overseas or turn to crime or lotto or online gambling in the hope of becoming financially sound, a soundness which most lotto winners lose soon enough. We don’t know about the criminals, though, as scammers seem to be thriving.

Inflation is a lot of money in circulation for fewer goods, and therefore prices increase and so the economy has hypertension. The answer is greater efficiency, productivity and distribution, but these are dependent on the environment (think natural calamities), political considerations (think oil), the efficiency of the supply chain (think infrastructure), the quality of human resources (think education), technology (think internet speed), the legal structure (think red tape, labor laws), culture (think lazy people).

In short, there is no short answer to increasing productivity or to finding an optimum level among all the factors that influence productivity.

And when productivity does not improve or trading is not profitable for an extended period, the economy falls into a recession where it needs to be put into some kind of intensive care (such as government intervention) for economies. Problem is, no one is quite sure how bad a recession is and how long it will last until it has actually taken place.

Even professional economists are hard put to accurately predict economic phenomena like business cycles; all they know is it will change. While economic theories and models attempt to explain the real world, the real world upends everything, as shown by financial crises in the past 30 years that hit the most powerful economies. 

Financial mismanagement is very possible when “playing” with money or its derivatives (like speculative buying of financial instruments) in the desire to make more money. It’s like bulking up on steroids and instead becoming vulnerable to health threats, such as when widespread payment defaults happen.

What is worse is when hyperinflation takes place because the government has overprinted hard currency to meet its liabilities but there is no corresponding availability of goods and services, and so the currency practically has no value.

Government plays doctor through its central bank (or blood bank, following the Keynesian metaphor) by infusing money into a sluggish economy and lowering or raising interest rates to help regulate inflation. But the government has become an outsized player in the economy as it has become the biggest employer, the biggest spender and the biggest debtor, so the government needs to strike a balance between regulator and outright intervenor.

3 words

My attempt to teach my son life lessons for fiscal management—he is an economics graduate, by the way—I summed up to him in three words: budget, save, invest. These are essentially the same things we were taught by our grandparents and parents—live within your means, set aside a portion of your income for a rainy day, get property.

But economic decisions, like many human decisions, are not always rational; greed, vanity, profligacy, indolence often win out. I realize that my simple advice for good fiscal management is just as inadequate as the next economic model because the ultimate determinant of economic soundness or unsoundness is the human person (coupled with their environment), very often ruled by emotions, not the rational mind that adds up credits and debits with cold efficiency. Going vegan to achieve optimum health is a worthy goal, just as an efficiently run market economy is, but the nature of human behavior is the monkey wrench that throws things out of whack.

This being so, you need to ask yourself: Is there a higher purpose to all this, to economics? Life is basically economics, and you realize it is only the fun and fulfillment we get in making these decisions, good and bad, that make it worthwhile. 

As my father used to remind me, “We eat to live, not live to eat.”

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