What is the Economy?

The way “the economy” is discussed in our modern day has led to widespread misunderstanding about what “the economy” actually is. In the following, I will briefly share what it is, what it is not, and where the conversation about the economy has gone awry.

What it is:

The term “the economy” is used to describe the innumerable exchanges between people. The large majority of those exchanges take place between business organizations each composed of individuals who have chosen to come together in producing and exchanging goods and services. There are certainly a substantial number of businesses in any given city. The US Census Bureau estimates that as of 2007 there were a total of 24,600 business firms in the city of Pittsburgh alone (the city in which I reside and am very proud of). When aggregated to the state level of Pennsylvania, the number grows to a staggering 981,000 firms. Within a single firm, there are many decisions made by individuals at every level in the hierarchy. The firm itself is a complex nexus in which innumerable decisions are made by employees that influence the business itself, the business’s customers and the suppliers of the business. There are approximately 1 million businesses in Pennsylvania alone. The complexity involved in the interrelation of businesses on a city, state and national level is increasingly immense.

What it is not:

“The economy” is not and should not be considered some abstract entity constrained to a few aggregate statistics such as GDP and employment rates. Understanding this is absolutely essential for any sort of meaningful discussion about the economy. Our public discourse about the economy is terribly oversimplified and thus misleading. Cable news programs time and time again discuss the economy without any recognition of its complexity. These programs almost always assume that decisions can be quickly made by a group of people (most often government politicians) that will produce desirable employment rates and prices. Yet in reality those rates and prices are the result of the innumerable decisions made within and between individuals. The economy is not something that can be simply “fixed”. Beyond that, who is anyone to easily ascertain whether the economy is “broken” or not?

To be clear, it is certainly possible for one to learn about the economy and intelligently describe its condition on a national level. There would be little reason to be an economist if not. It is impossible, however, to give any intelligent analysis of the economy without first appreciating it for the complex nexus of human exchange that it is. That is something all economists, regardless of their ideological differences, should agree on.

My hope is that the next time you hear someone talk about “the economy” (which most likely will be in the next few minutes considering an election is a month away), you will have a greater appreciation for what that term means. Ask the person you are in conversation with, “what is the economy?”. We must begin to think more deeply about the subject. What better way to start than by defining our terms? I don’t foresee cable news doing these things anytime soon. That does not have to dictate your conversations. I hope it will not.

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