Financial Freedom: The Economy
I don’t know about you, but I often wish for a much simpler lifestyle…
So I was surprised to learn that economics has to do with the study of human behavior. Here I am wishing that I could get away from the ‘rat race’…only to find out that each one of us helps create the ‘rat race’!
Now for me to live successfully in a hut somewhere on a mountain, I’m going to need to buy clothing and toiletries from the town. I can try growing vegetables, and exchange these for the clothing and toiletries, but somehow I don’t think it would quite work out the way I’d want.
From time immemorial, man has realized that he needs to make ‘stuff’ that other people want or need. It also doesn’t help that I grow tomatoes and try to exchange these with the guy next door who wants carrots – not tomatoes!
To overcome this sort of problem, groups of people joined up together in order to produce the right type of goods in the right amounts. This is where ‘supply and demand’ comes from.
There are basically three economic systems:
In this system I grow tomatoes and barter with my next-door neighbor who grows carrots.
Another name for this system is communism. All economic decisions are made by small group of people on behalf of the people. Usually the basic needs of the majority are ignored by the minority in charge. It often feels as if we are moving towards this type of system in South Africa, doesn’t it?
In a free-market economy, the consumer’s needs and wants are placed first via forces of supply and demand. Ideally, the government is limited to defending the country and maintaining law and order. The problem comes in with essential services like fixing streetlights. Suppliers want to produce items for which there is a high demand, with customers who are willing to pay for these items. This is why our government is not limited to defending the country only. In reality, we as South Africans, live in a ‘mixed capitalism’ system.
So how does our economy work?
It helps to see our economy is the flow of goods and services between producers and consumers.
The producers manufacture goods or provide services for the consumer. In exchange for these goods or services they receive payment from the consumer. In order to produce these goods, or provide these services, the producers need to offer labor opportunities to these very same consumers.
The consumers purchase these goods or services from the producer. In order to pay for these goods and services they need an income. The consumers earn an income by laboring for these producers in exchange for a salary.
The problem comes in when these consumers wish to purchase goods or services from other producers. In order to earn more income they have two options: find a better paying job, or Go out on strike!
In South Africa, the popular solution is to strike. The problem with this solution is that the producer simply passes on the cost to the consumer. This is all very well and fine with expensive, high ticket items where the consumer is willing to pay a premium… But inflation in the cost of basic necessities will eventually give rise to political turmoil – never mind the loss of jobs as producers explore other avenues for production.
We can also see that there are two main markets at work in the economy:
The market for goods and services, and the labor market.
So there you have it…