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Financial Education for Everyone

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Open a newspaper or switch on the television and the news is the same – the Gross Domestic Product of the United States has seen its largest dip since 1982. In January we saw the single greatest loss of jobs since the early 1970s, and consumer confidence has hit a quarter century low. But what does this all really mean, and how did we get here?

Perhaps like many, you've postponed actually trying to understand the economy. Maybe it's only been recently that you've really wanted to unravel acronyms like GDP or CPI and cast an interested eye towards concepts like mortgage-backed securities and collateralized debt obligations. How exactly are they to blame for this mess we're in? The funny thing about economic literacy is that it seems to vary inversely with the state of the economy itself. That is, when the economy turns down, interest in the economy grows.

So what is "the economy?" What makes it tick? And why should you care? Scottish essayist and historian Thomas Carlyle once called economics "the dismal science," a phrase that rings true for many of us who have been lulled to sleep in front of blackboards thick with supply and demand graphs.

Economics, however, has far more to do with people than it does with graphs and numbers, and once unraveled can actually be a pretty interesting topic. American economist Gary Becker once said that economy was "the art of making the most of life," which actually gets closer to the heart of the matter.

Economics is about scarcity and the choices we make as a result. It's about the fact that there isn't enough to go around – not enough resources, enough time, enough stuff. And because everyone can't have everything they'd like to, we all have to make decisions about how to spend our time and resources so that we get the best use out of them, the most bang for our buck. That's economics.

The idea of scarcity is a basic concept, but one that is key to understanding the economy. Let's say I love black olives, but for some reason – global warming, perhaps – black olives are scarce this year. There are just not enough olives to go around – not enough to make olive bread or Greek salads, not enough for our pizzas.

What then will happen to the price of olives? If enough people want olives, then the price for them will increase. This, for instance, is what happens when oil-producing countries decrease production of oil – because the supply of oil drops while the demand remains high, the price goes up.

Now, suppose you are a farmer who grows figs, but you could just as easily farm olives. You may very well choose to do so as a result of these economic conditions – because you can make more money growing olives. And that's why the economy is more about people than it is about graphs.

One way or another, we're all fig farmers – we're all making decisions daily about what we value, who we want to represent us, and how to best spend our resources. If the economy is essentially the sum of our collective choices, then perhaps we should strive to make the most informed decisions we can. Stay tuned to this space for weekly installments of Economy 101, in which we will unravel economic basics in clear and simple language. No graphs, I promise.


This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.