Welcome to the first week of our “Econ 101” crash course. Together, we’ll read one chapter each week from Core Econ’s “Economy, Society, and Public Policy.” Here’s a link to the free online version of the textbook.
Find links to all the lessons in this Crash Course here. If you aren’t enrolled yet, sign up here to get all these lessons emailed to you!
Don’t worry if you fall behind on the reading. (Let’s admit it, it might be hard!) We’ll make sure to include some of the fundamentals and links to stories and interviews that might help you along. Plus, we’ll hear about what David learned (or relearned) each week.
Let’s begin with Chapter 1, “Capitalism and Democracy.”
Key takeaways
Much of this first chapter covered how capitalism — an economic system characterized by individual rights to property, markets where goods and money can be exchanged and for-profit firms that employ and pay people — gave rise to unprecedented wealth and inequality.
Let’s look at a few charts that illustrate the expansion of both prosperity and inequality.
The first is known as the hockey stick graph, which shows the rapid growth of wealth in the world over the past 1,000 years, as measured by real GDP per capita.
While capitalism may have played a key role, correlation is not causation. Cultural forces and colonial expansion could also have helped drive down poverty worldwide. But, as the next two graphs show, only a few countries have become truly affluent.
☝️ This visualization ranks countries from richest to poorest based on income earned in 1980. The z-axis, which gives the graph its 3D appearance, shows how a country’s income was distributed among the people living there. The per-capita income of the 10% lowest earners in a country is represented by the bar closest to the front and the 10% highest earners are represented by the bar that is farthest away, creating a sort of skyscraper effect.
Fast-forward to 2020, and it’s clear that wealth and inequality have risen based on the number of countries that exhibit wider gaps between their richest and poorest people.
Take the U.S. as an example. In 1980, the wealthiest 10% earned 120 times what the poorest 10% earned in a year. By 2020, the top 10% made 243 times what the bottom 10% made.
Over the past 250 years, many industrial workers, farmers and poor people demanded the right to vote and democratic political systems took hold in many countries. Historically, this had helped inequality decline, and today, capitalism and democracy coexist in many countries, each system influencing the other.
But with inequality, once again, on the rise, here’s a question to ponder: Can democracy, which aspires to distribute political power equally, succeed in highly unequal economies?
According to a 2020 study from the University of Cambridge, public confidence in democracy has been falling, especially in recent years and especially in wealthy, developed democracies like the U.S.
This isn’t the first time that people have lost some of their faith in democracy. In the 1930s, authoritarianism expanded and toppled relatively young democracies throughout Europe. In the U.S., corruption, inequality, business monopolies and unemployment all undermined American confidence in the political system. But democracy prevailed, thanks in part to an organized national conversation about its future.
Under the New Deal, the government held local forums in 500 communities across 43 states, attracting 2.5 million participants. These gatherings, which included 15 minutes of news, a 45-minute lecture and 30 minutes of debate, taught millions of Americans about democracy and gave them a place to talk about it.
Important definitions
- Cause and effect: the relationship between an action or event and the outcome that is produced as a result. Causal statements can help us understand why things happen or devise ways to make something better. But the world is complex, and sometimes it’s difficult to definitively point to one action or event as the sole cause of a specific outcome. So, remember the adage that’s dear to all economists: Correlation is not causation!
- External effect: the impact of a person or group’s action in the form of a benefit or cost to another person or group. An external effect isn’t usually accounted for by the person when deciding to take an action.
- Creative destruction: a process by which entrepreneurs create new markets via improving business processes and deploying new technology. Older markets and firms will go out of business or be “destroyed” if they can’t keep up and can no longer compete. The term was coined by economist Joseph Schumpeter, who said the failure of unprofitable firms was “creative” because it releases labor and capital goods for use in new combinations.
David Brancaccio’s thoughts on Chapter 1
What I found most fascinating: After reading this week’s chapter, I clearly understand why democracies have such a hard time dealing with climate change and the related external effects. Democracies tend to favor short-term national interests over longer-term global interests. Scientists say the carbon dioxide emitted today will affect future generations. Democracies make economic decisions now that affect people who haven’t been born yet and, therefore, don’t vote.
What I want to know more about: I see from the reading that technology has radically dropped the cost of producing light over thousands of years. It used to take hours and hours to chop down a tree and start a campfire. Later, it took less time to render animal fat to make a candle. Now factories can manufacture LED lights in the blink of an eye, freeing up people to do what they’re better at — anything other than making light. In the textbook, this is seen as the kind of efficiency that frees us up to do great things, growing the economy. Yet I know from some of my other work that sometimes energy efficiency frees up time and resources for humans to waste even more energy doing other things. It can be a paradox.