In Econ 101, they teach economics like it is some kind of "fixed" problem when it is changing all the time. It is a little like farming where every year is different. The weather can be different as well as insects and such. Farmers understand that things change and they have to also change and do different things each year to get a good crop. Not so with Economists. They believe in doing the same thing over and over expecting to get the same results year after year. When I was a kid, my dad used to give me 25 cents and send me off happy all day, but now dads give the kids the keys to the car and they don't seem to be happy. The world and the model are always changing and Economists need to start accepting that. Try this?
After WWII, the economy of the USA really took off. We had plants making all kinds of things and we were able to sell them all over the world for a nice profit. Why was that? Because we were smart and hard workers, right? No! It was because we were the only game in town. All other countries that used to make things was in ruin. They had to buy from us. Prior to WWII, how did things work? Advanced countries imported raw materials from under developed countries and made things out of that raw material and sent it back as "value added" to the same people who sold us the raw material. With this system, if you were one of the more advanced counties, you were on top. But like most things, the situation and the rules change over time. Under developed countries like China, Brazil and India have moved up on the chart and now are no longer just exporting raw materials for us to add value too. They are adding their own value to their raw material and selling to our customers. What does that leave for us? Now we have to really compete and we now find that we can not. Why is that?
We have been used to earning a lot more per hour and now some country like China or India comes along that is willing to work for less and they take the orders away from us. We even get the idea that if we buy their cheaper products too that we can have a higher standard of living without having to really produce anything. Nice idea? The result is that we produce less and buy more and we can do this for a while before it catches up with us. What we did was to spend the money that we had in the bank in the form of our net worth. We went even farther and created "paper" net worth by building bigger and bigger homes and manipulated our domestic housing market to make the prices of the homes go up at over 10% per year over several years. We even had companies that would allow us to borrow against our "paper" net worth or home equity and spend that money too on cheap imported products from China. This was a great deal for China. We were using money that we did not have to buy things from China that we really could not afford. Like any game that is too good to be true, it turns out that it is not "true". Bust.
What caused the American Revolution was the fact that England was buying our raw materials and not letting the Colonies manufacture their own end products. Cotton and wool had to be shipped to England where it was milled into cloth and sold back to the Colonies. It was clear to all that this was a losing proposition for the Colonists so they revolted. This was the way most of the world operated for the past 500 years and now the tables have turned with more and more countries able to make their own products and ship them where ever they want.
Transportation is another big item that has leveled the playing field. Item used to cost a lot more if they were far from where they were mined or made, but not now. It is so cheap to move products around the world that location is not as important as it once was. With the information age that has become even more clear. Information can move at the speed of light and for almost zero cost. Think of that? What we are tending toward is a very level and fair playing field for the economies of the world and we are just one of those players. Unions think they can hold back time by their efforts, but we all know that in the end it will be the low cost producer who wins. The basic charter of the unions is to get more and more for their members and have zero concern about those not in their union or their long term future. In the end all union companies will go bankrupt and that includes school districts and the government if they are unionized. That is the end game and it is coming faster and faster all the time.
Look at the economic life of different products today? The turn over of new products is a type of clock and that clock is ticking faster and faster. Products that used to have a 10 or 20 year life cycle are now down to just a few years. Look at computers and cell phones. How many have you owned in the past 5 years? This means a company can be on top one day and one the bottom the next. Just look around at the companies who were here and who are now gone?
Things change and our Econ 101 has to recognize that change and the increasing rate of change.
