. It was a part of
. Being someone with a Commerce degree who thinks that how the economy works is a big part of how our current world works, I've come to a fairly detailed understanding of how a lot of the economy works, over the years. So I had answers to most of this guy's questions, and when nobody answered, I felt like I should. Here is a slightly modified version of my answer.
Those are questions with long answers! :P I'll try to keep it short but also correct but also something that increases understanding, but it will probably be long.
Is the economy controlled? No. Not really. But kinda. More on this later.
Is
the economy sustainable? Depends what you mean by sustainable. Short
answer: maybe it can possibly be one day, but some changes in how things are done have to happen first. Currently we're doing
things that will leave future generations screwed.
How is printing money a thing? Long one, I'll get to this later. Short version: Because money is primarily an idea or concept rather than a physical object, and ideas are flexible, so governments can pretty much do what they want with it as long as people will go along.
Who
runs the computer program that says how much money is worth? Nobody.
How much money is worth is decided by people buying and selling money.
In the same way that people who have chickens will accept a certain
number of dollars for a chicken, people who have pounds or euros or
whatever will accept a certain number of dollars for a pound or a euro -
and there are people whose job it is to buy pounds, euros and dollars,
and then sell them to people at a profit, like with chickens. And the
same way that at certain times of the year people eat more chicken so
the price goes up, same deal with currencies - sometimes people want
more of one currency or another, so the price of a currency (the amount
of another currency that you have to pay to get it) goes up or down.
Stock market: A lot could be said about the stock market, but let's see... if there was one thing I wish more people knew, it would be this: You know how you buy more chicken when it goes on sale, and buy less when the price goes up? And you know how people think it's terrible when the stock market crashes? Reframe that last sentence. Think "stocks are going on sale!". Which sucks if you want to sell, but it's great if you want to buy.
Why do we buy more chicken when it goes on sale, but not treat stocks the same? I think it's because people understand what a chicken is and why it's worth money, whereas with stocks they often don't, so they think maybe a stock is like fiat money, it's worth whatever people are willing to pay for it, and if suddenly its price goes to $0, it's worthless, or if it goes to $1 million a share, it's worth that. A chicken is still a chicken, even if if yesterday it cost twice as much - so when the price goes down, people go "I can get this valuable thing for less money now!" and they're happy. And the thing is, a stock is still a stock, too. It still gives you ownership in the same business today as it did yesterday, even if the price today is a lot different.
If you buy stock, what that is is, you're a business owner. Maybe you only get to own 0.00005% of a large business, but technically you can actually go to meetings where they decide things about the business, and you get a vote in proportion to how much of the company's stock you own. And say Apple earns $100 billion (a number I picked out of the air) this year and over the years Apple has sold 100 billion shares. Then the "earnings per share" is $1. This affects how much sane people are willing to pay for that stock. $1 is a good price, because really, Apple makes that much every year. $100 is a bad price, because in order for $100 of value to be generated from your stock at Apple's current rate of earning money, you'd have to wait a hundred years, and maybe something bad happens to Apple over the next century and it stops making $1 per share. Stocks typically sell at a "price to earnings" ratio of between 15 and 25. So... that should help you figure out whether a particular chicken is really on sale or not :).
Most of the money from the $1 of earnings per share is reinvested back into the business each year (they call it "retained earnings"), so you don't get that much of a payout, particularly in young and growing businesses, but more established businesses will pay out some of their earnings to shareholders. That's what a "dividend" is. High dividend stocks are businesses like banks where they're well established and making more money than they know what to do with, which from an investor's perspective is pretty OK really.
Country
debt: You know how you can buy GICs and things at a bank, if you want
your savings to earn interest? Well, those are loans to someone, which
they pay back with interest. Same deal with country debt, except you're
loaning money to the government, to finance their deficit - so
basically, they use the money you give them to build roads and schools
and things, and hopefully that helps the economy to grow which increases
their tax base which allows them to pay off the debt they've
accumulated, the same way a person might take out a loan to finance a
business opportunity or get an education. Not sure which country you're
from, but I do know you can almost certainly go to your local bank and
buy some of your country's debt, and your government will pay you back
sometime later with some amount of interest. Or people in other
countries can buy your county's debt. For example, in the US government
debt is financed by "treasury bills", and the Chinese government has
bought a gazillion of them and would now be very unhappy if the US
economy did poorly and the government couldn't pay back its debts.
Countries even have credit ratings based on how likely they are to pay
back their debt, same as a person has a credit score. I'm not sure if
that answers your questions regarding country debt, but I feel like I've
talked about it enough for now.
Infographic: here. I'll see you in half an hour :)
Now back to the longer questions...
How is printing money a thing, revisited:
Step
1 to answering "how is printing money a thing?" is understanding the
answer to the question "how is money a thing?". And money is a thing
because people are willing to take it in exchange for stuff. Think of it
kind of the same way as, "laws" are a thing because we agree it would
be cool if everyone followed the same rules. We made up a system, and we
all have decided that's how things will be, and on we go. We did that
with laws because having everyone follow the same rules is incredibly helpful when
you want to get stuff done that involves large groups of people. Same
deal with money - it has value because we all (or almost all) agree it has value, and
we made it up because it was useful to do so. It has value to the extent
that if I give you a certain amount of money, you will give me a
certain amount of stuff. And it's useful because finding someone who
both has what I want and wants what I have is hard. If I want a chicken,
maybe someone who has one wants a laptop, but I don't have a spare
laptop, so we're stuck. It's much easier if we use money as a medium of
exchange, because then I use money to buy the chicken plus also some
carrots and a notepad, from the same store, and the person who now has
my money can use it to buy
anything they want. Another thought regarding the value of
money: We don't all have to agree how much a dollar should be worth, for it to be worth something. In fact, to different people, money has different value. Some people are
happy to pay $800 for a puppy, others would find that an insane thing to
do. Some people are incredibly unwilling to pay money for things, other
people have a lot of money and will give up eye-watering amounts of it
for the privilege of wearing shoes with a special picture on them. This
is a partial answer to "who runs the computer program that says how much
one country's money should be worth compared to another?" There is no
computer program. There's just a bunch of people who are willing to give
up certain amounts of money for a given amount of stuff. And say you've
got two currencies, currency A and currency B. If I've got a chicken I
don't want any more, and everyone around me is using currency A, I will
want people to pay me for the chicken in currency A. If someone has some
currency B, maybe I'll take it, but I might want more of currency B
than the person is used to paying for a chicken back home, because to
me, currency B is pretty worthless because nobody will take it for
stuff. So if I wanted to go to that person's home country, I'd want to
buy things in currency B - and before s/he came here, that person ought
to have bought some currency A to pay for the chicken with, from someone
who wants currency B more than I do. And so, seeing an opportunity to
make a profit, someone starts buying currency A and currency B, and then
selling those currencies to other people at a slight markup when they
want to travel places. And how much currency B costs depends on how much
there is of it, and how many people want it, as compared to how much
there is of my currency A, and how many people want that. And the supply
of money can be affected when governments print more or less of it than the
amount that wears out each year, or when the economy changes in size but the amount of currency doesn't change by the same amount (more stuff, same number of dollars --> number of dollars per thing (price, in dollars) goes down, "deflation", for example) or by a couple of other things they can
do, one of which is change the interest rate, which I'll get into
shortly.
Anyway, the
deal with printing money is, it's just a thing that countries (or
rather, governments) have decided they can do, and like with the value of money itself, we've all agreed that those are OK rules to play by. I think they were like
"y'know what would be cool? If all our people used the same money, and
also if when our debt got too high we could print more money and so the
price of each local-dollar in terms of other currency goes down and our
debt is less sucky to pay back (assuming the debt is expressed in
a local currency the government controls - smaller economies often have
to accept debt in foreign currencies). So like, we should set up a
central bank and a mint." In concentration camps and prisons and other
places where there was no country saying "we'll print the money for
you", people used cigarettes and shells and whatnot as currency, and
that works just as well as paper with pictures on it, in terms of being
able to buy chickens without a laptop. Actually there was a time in US
history where banks could print their own money, and it didn't have to
be done by the government. And as long as you figured the bank wasn't
going to go bankrupt, that worked fine.
There's a whole
complicated field of economics around how much money countries should
print to keep their prices stable-ish (governments like to have a little
bit of inflation but not too much because money that goes down a little
bit in value each year encourages people to put their spare money in
banks where it can be loaned out to others rather keeping it in their
socks). Most advanced economies aim for inflation of around 2% per year. The different factors that affect inflation, unemployment, wages, interest rates, etc., is probably another post, but the bottom line is, when labour market conditions are tight (low unemployment) firms compete for workers by offering higher wages. But, if those higher wages aren't matched by increased worker productivity, then that flows through into prices, which means inflation. So if the economy is growing, there's a danger of inflation, and governments will increase interest rates to slow things down a bit. If the economy is not doing really well, governments will lower interest rates to give it a boost, which will also increase the money supply and move inflation towards the 2% target.
Is the economy controlled, revisited:
Like I said, kinda,
but not really. "The economy" in one sense, is just a bunch of people
doing stuff. Like "society" isn't really this one thing, it's just
groups of people and ultimately individuals. And to the extent that it
is possible to understand what people will get up to, and what makes
them do different things, a certain amount of control can be exerted
over the economy. For example, we know if interest rates are high,
people who have money will want to lend it to other people, and people
who might get a loan will think pretty hard about whether they can pay
it back at that interest rate. Whereas if interest rates are low, more
people will want to get a loan and fewer people will be interested in
keeping their money in the bank. In general, more loans get made at a
lower interest rate, and fewer loans get made at a higher interest rate.
Same way more chickens get sold at a lower price, than when the price
goes up - except if the price is below cost, in which case
chicken-makers go out of business and the number of chickens sold goes
down eventually. Since the cost of printing money is pretty near 0, the
demand side (whether people can pay back at a given interest rate)
mostly determines how many loans get made. In one sense, the interest
rate is the price of money (the price of a currency in terms of itself, rather than in terms of another currency as we discussed above.) The interest rate is how much you have to pay someone to
give you their money for a while. When the price (interest rate) goes
up, those who have money are more willing to give it to others (a loan),
and those who want money become less willing to take it. And when the
price of money goes down, the return you have to make (say if you have a
business and you're going to use a loan to invest in the business) in
order to pay off a loan goes down too. So with ridiculously low interest
rates come asset bubbles like the subprime crisis, whereas with higher
interest rates, the only people who will take loans are people who are
going "see, the thing is, I think if I had $1,000 today I could do
something that gave me $1,500 by the time I had to pay back that loan,
so 10% interest is OK". The deal is, when the fundamentals of the
economy (stuff like how productive workers are and how many workers
there are) are not doing well, the government decides it would be better
if there were more loans getting made. Because loans are magical for
the economy, until people have taken on too much debt and then
everything sucks for a while. This is known as "the business cycle", and
governments try to set interest rates to make it so that the business
cycle isn't bumpy and awful, as I touched on in the paragraph above. Here's why loans are magical: because when
someone gets a loan, they spend that money on something, which gives
someone else more money which they put in the bank which means more
money available for loans which means someone else gets a loan which
means more money in the economy which means more money in the bank which
means more loans. This is called the "multiplier effect", and the
effect of giving a loan is similar to the effect of printing money -
more money moving around the economy. So that's one reason why when the
central bank lowers the interest rate, the value of the local currency
goes down the same as it would have done if they'd printed more money.
So:
the economy is a bit controlled when governments use their central
banks to mess with interest rates, or print more money than is taken out
of circulation. That's called "monetary policy", because it controls
the amount of money in the economy. Governments can also exert control
by "fiscal policy" - basically, spending more money without increasing taxes, and issuing bonds
(IOUs, known as treasury bills for the US government, Canada Savings
Bonds in Canada, and other similar things in other countries) to cover
the cost. Basically if lowering interest rates didn't make enough people
want to get a loan, the government can go "I'll have a loan then, at
these nice low interest rates, and build a thing, and that'll give
people jobs for a bit".
But the thing is, the economy is just
people doing things. And people are complicated. If you raise the price
of a chicken, you can't really tell whether people are going to buy less
chicken and more pork, or less chicken and more rice, or less chicken
and more Canada Savings Bonds. So although there are some "policy
levers" that governments can pull to affect things in broad terms,
unless they get really micro-manage-y about prices (which is a
bad
idea, because prices carry a lot of information and the government isn't
good at deciding what the right price for things should be - there's
actually an argument that they shouldn't be deciding what the right
price for money should be, and their efforts to control the interest
rate are counter-productive in the long run) then the government isn't
really in control. Things are always changing - new technologies are
coming into existence, old sources of resources are running out,
cultural factors mean people want different stuff than they used to,
thousands of things are changing all the time and feeding back into each
other. It's like an ecosystem. Maybe, and I mean only
maybe we can
make improvements to an ecosystem by carefully managing some things, but doing so is
complicated and there are lots of unintended side effects, and maybe the
best thing to do is study similar ecosystems in a less disrupted state,
ask what we changed that screwed things up so that now there are only
jellyfish, and then un-change it and let the ecosystem do its thing
unmolested. The same argument applies to the economy. The economy is 7+ billion people thinking about what
different things are worth to them and doing the best they can to
produce stuff that other people want for as low of a cost to themselves
as possible. The amount of information processing that happens when you
take 7 billion people thinking for any amount of time is beyond what any
computer or centralized government could match. So the best we could do
is only a "kinda, but sometimes things go off the rails" sort of
control.
There are some key differences between the economy and an ecosystem, though. One is, in an ecosystem, there are natural checks and balances. Even a top predator doesn't get to eat everything, because there are physical limits to how big and strong and fast a predator can become (and if you want to live by eating small bugs, being big is a disadvantage - there's a natural push to specialization). But because corporations are make-believe, they aren't subject to as many physical limits. And the bigger a corporation gets, the more power it gets, which means it makes it easier for it to grow bigger later, and harder for new entrants to compete. Bad news, and justification for some government interventions. What kind of government interventions make sense is a different post, but the thing is, the "leave things alone or you're likely to screw them up, markets are really powerful decision making mechanisms" argument is valid, but so is the "if you leave things alone they're likely to screw themselves up in defined ways without your help, so you should probably intervene a bit" argument. Ecosystems reach a natural balance with diverse life forms competing and all of them filling specialized niches. Markets reach a natural balance called "monopoly", which is not fun for consumers. Also, corporations' social license to exist comes from the idea that we're all better off if that is allowed to happen. Unlike natural physically embodied life-forms, they don't have any intrinsic right to exist, and the rules they have to play by are the rules people decide would be for the best, not the natural physical laws we all have to live by as life-forms. So... long policy posts could happen later, but I want to end this one by reassuring readers that while I understand the rationale for laissez faire economics, I also understand the rationales for government intervention. When we should step in and start messing with markets is a tricky, tricky problem indeed. 0 is not the right answer, but "as little as possible to achieve desired effects" is.
There is much more I could talk about, but I think that answers the question that was asked (possibly more thoroughly than the asker anticipated :) ).
