What makes an economy grow and what is its secret? Most people think the inner workings, or the economy itself, are too complicated or difficult for the average person. While it is true that an economic system is complex because so many things are interconnected, the economic principles that are applied to those interactions can be understood quite easily. Let’s take the simple example of an economy. Let’s imagine a village consisting of five people:there would be a butcher (a cutler), a stonemason (a blacksmith), and a miner.
What makes an economy grow and what is its secret? It seems that many people believe the inner workings, or complexity, of an economic system are too complicated to understand for the average person. While it is true that an economic system is complex because so many things interact simultaneously, the economic principles that are applied to these interactions can be understood quite easily. Let’s take the simple example of an economy. Let’s imagine a village consisting of five people: there would be a butcher (a cutler), a stonemason (a blacksmith), and a miner.
Let’s suppose the butcher starts off with $100 and four of his colleagues are totally broke. When he’s cutting meat, the butcher notices the knives starting to wear and becomes disoriented. He asks his cutler to make him new sets for his $100. The cutler accepts and begins to work. As the cutler starts sharpening the knives, he notices how his grindstone cracks. He asks the stonemason for $100 and gives it to him. While he’s chiseling away at the blades, he realizes how much he could benefit from a new set of chisels. The blacksmith offers $100 and he makes one. Before the blacksmith is able to start to build the chisel he needs to replenish his iron mine supply. He asks the miner if he can give him another ton of iron ore for $100.
After a long day of hard work, the miner decided to have a good dinner with us. He goes to the blacksmith to drop the iron ore and then stops by the butcher to get $100 worth a steak.
The blacksmith then creates the chisel that will be used by the mason. Notice how the $100 is returned in the hands to the butcher. Everybody else still has no cash. It appears that the economy has the same size as it used to be. The economy still has $100 in cash. The butcher is equipped with a new set knives, and the cutler with a brand new grindstone. The mason also has a brand new chisel. Meanwhile, the blacksmith holds the remainder of the ore. Finally, miner has some great steaks.
Even though the total value of all physical dollars has remained stable, it has been able to grow in value. Real economic growth happens when an economy is valued. Growth does not happen by simply adding more money to it. As an example, suppose everyone suddenly received a huge pile of money. Soon enough, money would be scarce and everyone wouldn’t want it. Inevitably people would offer more money in order to trade. At that point, both wages and prices will have risen simultaneously; only numbers will have changed. However, the true value has not yet been established. The only reason we use money to make our lives easier is because of its convenience. While you may not be interested in what the other guy is offering, he still pays you in money. The money we receive is a kind of IOU (I owe to you), which can be passed from one person or another. When you find the right thing, you will pass it on. It’s possible to envision an economy that does not have a currency, where people trade product-for-product.
An economy like this could still grow despite the lack of currency. It is the value gained from trade that makes it possible. This economy didn’t grow from money being exchanged. It grew through the creation of products. It grew from the cutler making the knives for a butcher. It grew up in the stone cutter’s mason. It grew after the blacksmith made a mason’s chisel. It grew while the miner dug the ore. Then, finally, it grew as the miner’s butcher cooked delicious steaks. The trade of goods and services, which is what creates an economy, is the key to improving it.
It’s not complicated. Employing people is much easier than it looks. This will result in more employment and thus more economic growth. Not only do politicians often pretend to care about us and want our best interests, but many others are only concerned with their own self-interest.
