Economics may be a challenging prognosticating social science. But there are some things that aren’t too arcane for basic understanding. It doesn’t take an expert. So, as a public service, I thought I’d share a few basic definitions—with the purpose of helping good citizens feel confident enough to assert their right to decide how they spend the money they earn. (These terms are all defined with a little more depth in the economic section of the Spherical Model website.)
Wealth: the accumulation of the results of labor. It is created with additional labor and innovation, so there is no maximum amount that can be created. Wealth includes both money and material goods and real estate—anything that could be exchanged for value.
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Money: a representative, or symbol, of wealth, to make it easier to exchange. The purpose is to preserve surplus that has been produced. The materials used may have some intrinsic value, but mainly money is of value because people who exchange it agree that it symbolizes units of the results of work. There is an estimated total amount of money in the world, called, M3, which includes currency, bank accounts, certificates representing value (stocks, bonds, etc.), or anything quickly liquidated. It goes up as word wealth goes up. If there is inflation in the type of money used to measure (dollars, for example), then the number could appear to go up even though the actual value (representation of units of labor) has not gone up. I wrote about it in 2011.
Price: the point at which buyer and seller of goods and services agree that both are better off by making an exchange. Price conveys a lot of information, allowing buyers and sellers to decide if an exchange is worthwhile to them. If a seller prices something too high, it will have fewer willing buyers. If a seller prices something too low, there will be more buyers than supply.
Supply and Demand: Supply is the amount of goods available or the availability of a service; demand is the willingness of buyers to exchange money for a good or service. Willingness to make the exchange is determined in large part by price—just as price is determined by an accurate assessment of supply and demand. If there is no interference (government regulation, taxes, tariffs, price setting, etc.), then the interrelationship of supply, demand, and price are clear to the experts—the people involved in making an exchange.
Profit: the amount of money that exceeds the costs the seller put into a good or service; it allows the seller to then count that additional money as pay for labor—or as income.
Capital: represents work above and beyond what is essential, followed by careful use of the surplus toward a good idea, for the purpose of creating even more surplus. Capital itself is always moral—surplus work is an economic and social good.
Free Enterprise (or Free Market): an economy in a society in which choices of what work to do , how to make exchanges, and what to do with earnings are decisions made by the individuals involved in the exchange. The term capitalism is sometimes used. Capitalism is actually a subset—a way of investing and making use of capital, leveraging the power of wealth to put a good idea into action in an attempt to make more wealth. Free enterprise generally means government doesn’t interfere, but only assures that contracts are kept, and wealth is safeguarded from theft. It is a system that leads to prosperity wherever it is tried. But for reasons of power being a greater priority than prosperity, it is seldom tried. The alternative to free enterprise is a controlled economy—with central planners deciding basic economic decisions, like who works in what jobs, how much people get paid, what prices are set, and how money will be spent. Central planning is a form of tyranny that always leads toward poverty rather than prosperity.
If there is nothing else you know about economics, you should at least understand that the person who knows best how you should spend the money you earn—is you.