What is Economics?
Economics is the study of how societies and individuals organize their wants, needs, and resources to satisfy the first two. It’s a broad subject that covers everything from class warfare to international trade treaties. In this post I’ll be focusing on those topics that directly relate to personal finance. I’ll also touch on history, microeconomics (the study of small economies – households), macroeconomics (the study of large economies – countries), and a little bit about how economists think. The more you know about economics, the better you can make financial decisions for yourself!
Economic Myths: What Are They?
There are many myths about economics out there in our world today. As with any other topic, there are good myths and bad myths. A good myth encourages people to gain knowledge through research or discussion whereas a bad myth does just the opposite by providing no opportunity for further learning or understanding.. Below is an example of an economic myth: “The stock market always goes up.” Notice that it contains no information as to why or when it might go down; it simply states what has happened in the past which may not be true in the future. The distribution of disease is a good example of the stock market. One year you may have many cases of disease but the next year could be very different. Be wary when you hear someone state that “it’s always like this” or “it’s never like that”. There are plenty of economic myths out there, and I’ll discuss a few more below.
The Economy is a Self-Correcting System
This is one of my favorite myths because it sounds so smart! The economy, according to this myth, will always self-correct; meaning if demand falls due to higher than expected inflation then prices will fall and businesses will produce more goods in order to sell them at lower prices…eventually increasing demand again. This myth sounds great because it suggests that we can just sit back and relax – everything will work itself out in the end! Right? Wrong! The economy simply does not self-correct in this way; it sometimes has to be helped by macroeconomic policy. In other words, what happens on Wall Street doesn’t necessarily stay on Wall Street (see 2008). Myths concerning economics can be dangerous; they have led our country into many lousy situations over the years which only recently have we been able to dig ourselves out of (i.e. the Great Depression). Be aware of these myths and be sure to check your facts before believing anything you hear.
Wealth is Always Fixed in the Long Run
This myth has two key concepts that need to be examined: wealth and the long run. First, we need to define wealth. Wealth is what you own minus what you owe (i.e. your net worth). The second part of this myth is what the term “long-run” really means. To economists, the long run is much longer than it sounds to the general public. The long-run can last for months, years, or even decades. What does this mean? It means that you are almost guaranteed to be either richer or poorer in the long run! If you become a millionaire today and spend all of your money over time (i.e. decades) then when you are done spending your money you will have no wealth left – no matter how much more money you make in the future! This is an important concept that many people don’t understand; if they did then they might save more while they’re young so as to avoid ending up destitute later in life (see video below for example).
The economy is complicated and full of interesting concepts. I tried to discuss a few of the most popular economic myths and facts in this post. I hope it helps people understand some of the concepts that are discussed by economists on a regular basis. If you enjoyed this post please consider sharing it with your friends or family members! It only takes a second, and your friends may also find it interesting! Thanks for reading!