Why Study Economics: If you were living in a totalitarian society, there would be little reason for you to make an attempt to understand the economic systems of your country. You would have no voice in selecting the type of system to be used or in solving the broad problems of economic life.


Only curiosity would prompt a study of economics. But you live in a democratic society. Through your votes and your participation in public life, you help determine the policies of your country. You do have a voice in selecting the type of economic system to be used, and in making it work. If you do not understand the advantages of the various systems, you cannot make a reasoned choice among systems. If you prefer one type to another, but only on emotional or intuitive grounds, without any understanding of its operating requirements, you may, in ignorance, support measures that will produce results which you neither intended nor desired. In a democratic society everyone—not just the professional economist—should have some understanding of economics and of the economic system under which he lives.

But doesn’t this understanding come automatically through participation in economic life? It is true that each person participates in economic life, certainly as a consumer, perhaps as a producer, usually as both. Through this participation, each person gains some acquaintance with the workings of one or more parts of the economy. But the economy is made up of many, many parts, and the most important aspect of economic understanding is a knowledge of how the parts fit together, i.e., a knowledge of an economic organization. To understand an economic organization, the forest of economic life, it is necessary to know more than the details of a few of the trees in the forest. For this reason, the average person who wishes to understand economics must supplement his own experiences with a more or less formal study of economics as such.

At the same time that a study of economics is training for citizenship, it can contribute to strictly personal goals as well. Most importantly, it can contribute to your awareness and understanding of the world about you. The person who has studied architecture is more “alive” to the world of form and structure in which he lives than are those of us with untrained perceptions. To the naturalist, a walk in the woods can be a more exciting and perhaps more complete experience than to the person who is largely unaware of the forms and processes of nature. The musician derives a more complex satisfaction from listening to a symphony than the non-musician.

In the same way, an understanding of the forms and processes of an economic organization can make even a reading of the daily paper a more satisfying experience. In other words, an understanding of economics can offer you all of the personal advantages of knowing over not knowing, of understanding over ignorance. If you are possessed of any intellectual curiosity, these advantages alone will compensate you for the time and effort devoted to a study of economics.


Economic life under a private enterprise is not totally unlike economic Me under other forms of economic organization. The famous visitor from Mars would probably have difficulty recognizing that different peoples were working under different economic systems.

Wherever he visited in the Western world he would find men and women going to work in factories, shops, mills and mines, and on farms. He would find them working with complex pieces of machinery, on special tasks, and under the direction of “bosses.” Only by going behind these external activities to the methods used in guiding, motivating, and rewarding the people would he be able to perceive that differences do exist. The external features of economic life common to all modern forms of economic organization are the subject matter of this section.

WANTS. To be human is to want food, clothing, shelter, and other economic goods. Certainly, then, the existence of wants cannot be accepted as a distinguishing feature of private enterprise. Human wants are the mainspring of all economic action, whether that action is to take place under the rules of private enterprise or of a centrally directed economic system.

To be human is also to want more of these economic goods that can be supplied. Thus even the existence of unsatisfied wants is not unique to private enterprise. Neither history nor our knowledge of human nature gives us any reason to believe that any economic system, however efficient, will ever be able to produce enough goods and services to satisfy all the wants of all the people.

RESOURCES. To obtain economic goods, the people of all societies must produce, and to produce is to use resources. The basic resources are everywhere the same: (a) man and (b) nature. These are man’s only weapons against scarcity, and how well he succeeds in satisfying his wants depends on how well he uses these resources.

Economists use the term land to refer to all natural resources in their natural states. When these resources have been processed and delivered to consumers, they become consumer goods. When they have been processed but, instead of being delivered to consumers, are used as instruments in the production of other goods, they become capital goods. The fabricating of nature’s resources into instruments of production—the use of capital goods—is common to all but the most primitive economies. If by capitalism we mean an economic system using capital goods, then even modern communism is a form of capitalism!

Nor is the existence of a class of specialists in collecting and guiding resources for the purpose of production, i.e., the existence of a management group, unique to private enterprise. In all forms of economic organization, some persons must perform the management role, whether as private, profit-seeking businessmen, farmers, etc. or as employees of the State. A boss-worker relationship is inevitable in an economy where large numbers of men must work at a common task.

All the non-management contributions of man to the process of production are identified by the term labor. The four basic resources recognized by economists—land, labor, capital, and management—are common to all modern forms of economic organization.

SPECIALIZATION. Another characteristic feature of modern economic life is specialization. Any group of people who want to attain even reasonable efficiency in producing goods and services must divide the various tasks involved in production among various individuals and regions so that each person and each region is used to the best advantage. Chapter 4 is devoted to a study of this characteristic of modern economies.

MONEY. Specialization involves the exchange of goods and services, and exchange on any but the simplest scale necessarily involves the use of money. Money is defined as anything that is generally accepted in exchange for goods and services. Some of the most important problems that confront a private enterprise economy arise from the use of money, but neither the problems nor the use of money itself is unique to the private enterprise form of economic organization.

THE CIRCULAR FLOW. Whatever the form of economic organization, the basic processes of economic life consist of a circular flow between households and firms. The household is the basic consuming unit in economic life. It is usually centered around the family unit. The firm is the basic producing unit in economic life. It may be a grocery store (privately or publicly owned), a steel mill (again privately or publicly owned), or a farm (“collective” or otherwise).

The distinguishing characteristic of the firm, whatever the form of economic organization, is that it is a collection of resources brought together under a centralized direction for the production of a particular good or goods.

The heart of the circular flow is the movement of resource services (the services of land, labor, capital, and management) from the households to the firms, and the reverse movement of goods and services from the firms to the households.

In any economy employing money, there exists a second circuit, which may be called the monetary circuit. Households in a modern economy do not “barter” their resource services for goods. Rather they exchange them for money and then exchange the money for goods. Thus the monetary circuit consists of a flow of money from the firms to the households, and a reverse flow of money (in the form of payments for goods and services) from the households to the firms. The flow of money income payments from firms to households represents expenses of production from the point of view of the firms and income from the point of view of the households. Similarly, the money payments to firms for goods and services represent the consumption expenditures of households and the gross revenues of the firms.

This circular flow (sometimes known as the “wheel of wealth”) is common to all modern economies; it exists whether resources are publicly or privately owned and whether the decisions that produce the flow are made through a market mechanism or in the offices of a central planning board.