Economics: Fact or Fiction

An earlier discussion entitled ‘The Evolution of Economics’ attempted to provide a very basic introduction to economics in terms of some of its various ideological foundations and models of operation . However, more emphasis was possibly put on the wider issues surrounding the future dependency on global resources, see Growing Storm, which then made reference to other predictive models describing the future of the global economy.

These earlier discussions recognised that today’s global economy does not operate in a vacuum, divorced from other human activities and, as such, the reader may wish to also make reference to other discussions entitled The Scope for Political Evolution plus Population and Resources and finally Human Evolution.

While these latter discussions may not be seen as directly connected to present-day economics, they may possibly provide some insights to the direction of travel and of the many factors that may influence the development of a globalised economy in the future. Of course, the accuracy of any predictive model stretching out into the future has to be questioned, such that it is recognised that any prediction can only rest on probability not certainty. However, in the process of trying to come to some basic understanding of economic theory, there appears to be much criticism of present-day economic models and their ability to predict any of the ‘boom and bust’ cycles, even from the perspective of a few months, let alone years. Therefore, this second discussion of economics will be more focused on the criticism of today’s accepted economic theory and why it might actually be contributing to another global crises, which may have very negative repercussions on the majority of the world’s population. However, we shall start by introducing some of the fundamental terms used to described the workings of any economy, which can then be used to construct a more descriptive model of the ‘dynamics‘ within the economy at large.

  • Economy : From a financial perspective, the state of a country or region is often defined in terms of its production and consumption of goods and services plus the amount of currency in circulation, which might be initially quantified in terms of the sum total of all its transactions.

  • Transaction : Beyond the basic idea of barter, a transaction can be introduced in terms of a buyer giving money, currency or credit to a seller in return for some valued asset, i.e. goods, service or commodity. Today, many of these transactions are grouped into specific market types.

  • Asset : In the current context, an asset is simply something that has value, e.g. goods, services or commodity, which might be exchanged or traded.   

  • Money: In this discussion, money will be initially described as something that is distinct from a fiat currency in that it retains some notion of intrinsic value. From a historical perspective we might equate money to coinage in gold or silver.

  • Currency: Is a promissory note, i.e. an IOU, issued by a nation-state that promises to pay the bearer a certain amount. Initially, this IOU came with a redemption promise to exchange the currency note back into gold or silver coinage, although this promise no longer applies in most nation-states.

  • Credit : Allows one party to obtain an asset from another party in advance of needing to or even necessarily being able to immediately reimburse the other party, which then usually involves some additional payment by way of interest.  

  • Deficit: In financial terms, a deficit is created when expenditure exceeds income.

  • Debt: Is a amount owed to all creditors, although we should defined two specific classes of debt, i.e. public and private. Public debt is the accumulation of a deficit between what the government takes in by way of various tax revenues and the amount of money it spends year-on-year. Private debt is defined as the amount of money that an individual owes to all financial institutions, i.e. both credit card debt and mortgage loans. See The Growth of Debt for more details.

While we will need to add to this initial vocabulary, it is believed to be sufficient to start the discussion, although we possibly need to table a question around one other term:

What is the definition of wealth?

In economic terms, wealth is a measure of the value of all the assets of worth owned by a person, community, company or nation-state, although some care might be needed if the value of the assets is calculated on the basis of a specific fiat currency.  While noting this caveat, wealth is said to be determined by assessing the ‘current market value’ of all physical and intangible assets owned, then subtracting all debts. The term ‘current market value’ has been highlighted because few physical or intangible assets have ‘durable’ value over long periods of time. With this somewhat materialistic definition in mind, we shall proceed to consider some of the historic background that may lead us to question the direction that modern economic theory is leading us.