Folks, this is the beginning of a monthly economics series we are starting on out blog, We believe that a foundational understanding of how the market works is an important part of good citizenship and good governance and we are thrilled to have one of our alumni who work in this field providing us a monthly column. If you have any specific economic questions you want Peter to explain please send them in via our contact form and we will send them along to Peter. – Joel Grewe
I’m a big believer in defining your terms. So, before talking about economic principles, it’s important to understand the context in which they operate. As I’ve said before, the term “economy” gets thrown around a lot, but nobody seems capable of nailing it down.
Many definitions you can find online break the unspoken rule of using the term in the definition – something that makes them less useful in general, and also gets on my nerves. At the very least, the definition that will serve as the foundation for future discussion should be useful. So here it is, as best as I can manage, in Layman’s Terms:
Def: Economy – A system where consumers, producers, and regulators participate in the exchange and allocation of scarce resources with alternative uses.
Analyzing each participant’s decisions and their effects is economics in basic terms (see more detailed definitions here). Economies come in different shapes, sizes, and flavors. Even if two systems were identical in terms of population, demographics, and natural resources, they are characterized by the decisions of their participants.
Consumers want things.1
Producers make things.
Regulators make rules about things.
East Berlin’s economy, for example, was markedly different than West Berlin due to the actions of regulators, specifically. Economies can center on goods, where producers choose to specialize in a particular gizmo. Consumer power can range from weak to very powerful across different economies due to the strength of their currency or other resources exchanged for goods/services. A middle school cafeteria is an economy, but so is the European continent.
The term “economy” is fairly broad and takes many forms. Even so, practicing economics will require the same toolkit no matter the size, character, or time period of the economy being analyzed.
What’s the difference between a market and an economy?
Let’s return to the example of the middle school cafeteria (or cafetorium, if you were lucky like me): There are abundant options for trading lunch items, meaning there are several avenues you could pursue as a kid who wants something better than what mom packed. There is the Gushers market, the Chips Ahoy market, the coveted bag-of-chips market, etc.
Maybe you offer your humble Ritz cheese and crackers pack (do they still make those?) in exchange for other goodies. Because you only have one treat to trade, you can only engage one market at a time. Still, you are just one consumer navigating the markets that compose the larger cafeteria economy.
Large economies can be dizzying since markets are simultaneous – think of all the snack trades happening at the same time! Economists usually choose to analyze one market at a time to reduce complexity. Simultaneous trades may result in your ideal snack being traded away to someone else. The truth is that the world is much bigger than the things we want. A comforting thought, to some of us.
While an economy can center around one market, a market can’t capture the aggregate detail of an entire economy. It is one piece, one facet we choose to focus on, but it does not tell the entire story.
The problem I’ve been having while writing this blog is that the more precise I try to be, the more details get brought in, demanding further explanation. When you’re a nerd about something, tangents abound. It can be hard to stay focused.
In the interest of writing about economics in plain language, the definitions above will have to suffice. Information should be useful. Sometimes, to make a thing useful, you have to simplify it. In the future, I will expand on these groups as the context demands. For now, it’s enough to know that an economy captures the interactions of these three groups.
1Note: Economists don’t really believe in “needs”. Everything we desire is a want, and some wants are stronger than others. You “need” water to survive? No, you simply want water badly enough to supersede your other wants.
Editor’s Note: This article was originally published on Peter Layman’s Substack and is republished here with permission. Visit the Layman’s Tax Substack to read more articles and subscribe for updates.
