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| The realist sees the evil in all of us which is the Devil and the real world which is Hell. |
| The idealist sees the good in all of us which is God and the ideal world which is Heaven. |
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| The Economic Process Real wealth doesn't happen by itself |
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| Our lives as individuals and as a nation is made up of the economic, the socio-political and the cultural. In addition, the individual may, if she/he chooses, develop her/his own spiritual life. The economic is put first, not because eating is the most important thing a person does, but because unless she/he eats she/he is not free to do much else. In the same way, unless society produces wealth, it is not free to make progress in other directions because it cannot afford to do this. The economic process can produce material well-being and material well-being only. Anything else must be separately fostered. The individual must decide how much she/he will contribute to each part of her/his own life and her/his society's life. She/he must also contribute to her/his society's decisions about the uses it will make of its wealth. When each individual chooses to accept these responsibilities, true civilization can begin. The economic process is on our type of market economy or capitalism. [In theory a socialist model is as efficient as a capitalist model, but neither exists in the real world.] _________________________ Introduction - Economics has been defined in many different ways, but the main concern of economics is the creation and distribution of real wealth. It is therefore necessary to distinguish clearly between money and real wealth. Real wealth is goods and services, things which are of material value to us: first, the things which make life possible -- food, clothing, shelter -- and beyond that, the things which make life pleasant and comfortable. Money is not value. You cannot eat a peso bill, but money represents value. It stores value and it is a way of exchanging value. A peso bill represents the value of the food you can buy with it, and if you do not need the food now, the simplest way to store its value is to keep that value in the form of the peso bill until you need it. When you need it, you simply exchange the peso bill for the food. There would be no point in creating money if it would not buy anything, and we cannot distribute what we have not got. So if we want people to have plenty of goods and services, what we must create is real wealth. Real wealth does not happen by itself. It is the production of people. It happens only as a result of human activity. The basic circular flow of the economic process As its name implies, the diagram represents the economic process in its simplest form. It offers a first insight into the kinds of human activity that are necessary to produce and distribute real wealth. On the right-hand side is written PUBLIC of which we are all members, and on the left-hand side is written BUSINESS SECTOR where in our type of economy, most goods and services are produced. Three things are necessary to produce real wealth. The economic terms for them are land (that is, natural resources), labour (human resources) and capital (including human capital). These three are called the factors of production. Today, in one form or another these factors belong to the people. And if they are to produce goods and services, then these three factors must flow from the PUBLIC to the BUSINESS SECTOR. This is represented on the diagram on the left-hand side of the inner and upper arrows. Once the BUSINESS SECTOR has turned the factors of production into goods and services they must flow back from the BUSINESS SECTOR to the PUBLIC. This is represented on the diagram on the inner and lower arrows. This inner circle represents the flows that are necessary to produce and distribute real wealth. The BUSINESS SECTOR pays the PUBLIC for the factors of production which it uses. This is represented on the diagram on the left-hand side of the outer and upper arrow. Money paid for the use of land is called rent; for labour, wages; and for capital, interest. Money paid to people in the form of rent, wages and interests is called income -- the money we have to spend. We spend it buying the goods and services we have helped to produce. This is represented on the diagram, on the outer and lower arrow. The outer circle represents the flow of money which accompanies and makes faster and more efficient the flow of real wealth. Without money people would have to barter. If you sold your labour you might be paid with a cow, and if you wanted a basket of camote (sweet potato) or a kilo of rice, making change would be difficult. The organizing principle in our type of market economy is risk taking and decision making. It is the businessperson who decides what goods and services will be produced with the factors of production. In making this decision she/he takes a risk. If she/he produces goods and services that you and I will not buy she/he suffers a loss; if she/he produces goods and services we want to buy, she/he makes profit. Together with the use of the factors of production there flows from certain members of the PUBLIC into the BUSINESS SECTOR the ability to take risks and make decisions. In return there flows back from the BUSINESS SECTOR to the PUBLIC another form of money income which we call profit. We can learn a good deal from this first idea of what the economic process is and how it works. We can see at once that the economic process depends on us as producers. The goods and services we need and want do not exist until we have helped to produce them. And the more each of us is prepared to contribute to production, the more goods and services there will be for our use and the wealthier we will be. Since everyone needs some goods and services to stay alive, we can also see that the economic process depends on all of us as consumers. Just how much it depends on us as consumers is emphasized by the organizing principle of our type of economic process. Since the businessperson must please the customer if she/he has to stay in business, the buying decisions which we make as consumers affect the ultimate decision as to how our economic resources will be used. Moreover, which goods and services are being produced affect what kinds of jobs are available, so the way we spend our money helps to determine how much we can earn. To sum up, this basic circular flow explains why for our economic well-being we all depend on one another. See Batanes and Production. |
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