The very mention of the word economics sends some people scrambling for the nearest exit. Boring is most associated with the term, yet few notions have as much influence politically and socially than economics. Revolutions have begun over economic mismanagement, societies have reimaged themselves based on economic theory, and wars have been fought to the ruination of many a nation because of it.

When people think economics, they typically think money, along with the management and generation of it as the true meaning of the term, but that is only part of the story. At its core, economics is the managing of scarce resources for if resources are plenty, there would be no need to manage them at all. Prices, their fluctuation, along with the availability of resources, including money, is the root of what we refer to as economics.

Historically, going all the way back to ancient Mesopotamia, nations and peoples have imagined various ways and invented policy to manage said resources, to the benefit of many and the detriment of some. Even in the ancient Mesopotamian region those who controlled the resource of food—grain distribution—controlled power and influence. In short, one who can influence and control resources can make themselves as powerful as they dare for they control the economics of the situation.

The Chinese were the first to understand what I’ll refer to as corporate economics, the idea of the state deferring their costs to a corporation, allowing the formation of the first joint-stock companies in Tang and Song China.[1] The advantage being the state did not have to fund costly ventures, but rather investors did, offering profit sharing for those involved.

By the 17th century, economic innovations the Dutch brought forth were not only important, but changed the course of human history, implementation of their methods spurring the greatest period of economic growth on earth during that time. The Dutch issued shares which could be purchased, invested, and traded on the Amsterdam stock exchange, allowing joint-stock companies to attract investors and further fund technological development, investment in overseas expeditions to the New World, as well as payout dividends to their investors. It was a different way to earn money, a method not dependent upon the sweat of one’s brow, but intuitive and sometimes lucky investment.[2]

Not to be outdone, the British expanded on the Dutch model becoming the greatest maritime power in the world with an empire wherein the sun never set. What most people don’t realize is the capitalist project was really begun in Italy during the 1100’s where merchants, importing spices from the spice islands[3] became quite wealthy hawking their wares to the rich, becoming rich themselves and in the process, creating an entirely new class of people with wealth that rivaled the old guard, the landed aristocracy in the Venetian region, among others.[4]

The voluntary exchange of goods for money, capitalism, fueled Italian wealth and gave birth to the period known as the Renaissance.[5]

Since the rise of capitalism and the staggering growth of wealth among European nations, governments have sought to control the economic vicissitudes that were the result. While mercantilism, the dominant economic policy for Europe reigned supreme, the need for exploration as well as innovation required more capital than government controlled economic theory could provide. Joint-stock companies provided a way out for the government, allowing private investors to fund operations seeking gold and silver in exchange for government recognition of their finds as well as paying said government a small fee for the issuance of charters granting the stock company control of a discovered area.

The result was not only a boom in exploration, but also a significant economic expansion throughout Europe. This boom did not come without consequences, especially for those who came under the European thumb, but the fact remains the modern world owes much to the great Age of Exploration initiated by the Europeans.[6]

The problem, at least in the realm of economics, is that the more capitalism gained a foothold, the more economic volatility was the result. This does not mean to suggest there was no volatility prior to capitalism’s spread, for famine, government mismanagement of funds and rampant spending were always the hallmark of civilizations. What it does mean to say is such volatility seemed more pronounced mainly because it hit more and more people as the so-called boom and bust cycles of capitalism arrived.

Economies enmeshed in free-market capitalism not only expanded, but contracted at times as all economies do. The contraction, however, seemed more pronounced as more and more people and societies participated without government regulation. These contractions or “corrections” were exacerbated by the continual increase in taxation by the European monarchies placing a further burden on the populace. The result was governments had to exert more control to quell the populace as well as stabilize the economy they made unstable.

Rather than allow market forces to regulate naturally, governments inserted themselves to artificially regulate the economy creating an even greater “up” and “down” period.[7] Essentially, the more government became involved, the more volatile the economy became. The more volatile the economy, the more government officials felt the need to intervene. It was, and is, a vicious cycle, and continues to be even today.

This does not mean to say government should not become involved, for there are instances when government involvement is beneficial. The late Dr. Milton Friedman suggested as much when he said government involvement can be a beneficial thing provided said involvement is used to create and facilitate conditions that spur individual creativity rather than oversight and oppressive regulation.

But, when there is too much government involvement in the form of regulation, over-taxation, and policies put in place that stifle innovation and invention, economic strangulation is the result. Further, when governments attempt to “stimulate” the economy by injecting money into it, the damage becomes worse as inflation is the inevitable result.

Essentially, the more government attempts to regulate and even out the natural troughs and highs, the worse both get. Even worse, when a government program fails, unlike the private sector, another program is created to replace the failed program. In the private sector, the business dies. In short, government involvement in economics generally results in government creep—an enlargement that soon becomes engulfing.

This is where we are now, and it’s only getting worse because the population desires it and politicians are all too willing to comply.

One last item…

There is a lag period in the economic cycle, meaning policies put in place today, or policies removed today, will not take effect immediately. There is always a period of lag, akin to the railroad engine moving, pulling the rail cars with it. They do not move immediately, but lag as it takes time for the train’s accordion-like attachment to catch up. So it is with the economy.

The interesting conundrum of economic conditions is taxation itself. Ironically, and there is empirical evidence to prove tax cuts increase the total amount of money a government takes in rather than the logical notion that there would be less tax revenue. It is simply not the case. The proof of this is a careful study of the Coolidge, Kennedy, Reagan and Bush, Jr. administrations wherein tax rates were lower resulting in greater income for the federal government.[8]

Politicians, especially Presidents, are quick to claim all they did for the economy during their presidency, claiming they “fixed” this or “remedied” that. In most cases, that is simply not true, economic conditions themselves adjusting to the prevailing conditions, provided excessive money is not injected into the system or excessive regulation, as mentioned, stifles innovation and growth. What should be noted are whether said Presidents use their influence to initiate tax cuts, reduce regulations, and help create conditions that foster growth and innovation, the tried-and-true methods of helping create and facilitate a dynamic economy. Anything short of that is little more than hot air.

[1] Approximately 700-1200 A.D., well before the Europeans.

[2] The topic is much more involved, the basics presented here. For further reading, see Naill Ferguson’s work The West and the Rest, Thomas Sowell’s seminal work, Basic Economics, and Fernand Braudel’s work The Wheels of Commerce.

[3] Today, those same islands are located in what we can Indonesia.

[4] There is a historical theory that suggests what we refer to as capitalism has always been around, just packaged differently. The term capitalism is relatively new, coming into common usage around 1850 by Frenchman Louis Blanc.

[5] Of course there are other factors as well such as Florentine banking, the Medici, the Fuggers to name a few.

[6] The same might be said of the conquests of the Roman Empire, The Qin dynasty, as well as the expansion of Islam in prior centuries. Further, despite notions to the contrary, European “imperialism” had positive effects on those regions, a notion conveniently forgotten in the modern day.

[7] There are numerous examples historically with the imposition of protectionist tariffs and trade restrictions such as the British Corn Laws of the 19th century or the New Deal of Franklin Delano Roosevelt.

[8] Dr. Thomas Sowell outlines this in his pamphlet “Trickle Down” economics and Tax Cuts for the Rich”.