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How an Economy Grows and Why it Crashes?

- Economics Explanation Paper


Government/Civics
Mr. Christopher McAdam-Mantei
Wreynn echten!er"
May #$ %&'(
Witho)t economics the world and society wo)ld !e completely o!literated. *n order to
+)rther a co)ntry,s economy$ the economics need to !e esta!lished in an orderly and e++ective
way. How an Economy Grows and Why it Crashes !y Peter -. .chi++ explains how to create an
e++ective economy that will prosper. /he !oo0 explains the "ood and !ad o+ creatin" an economy
in seventeen 1'23 chapters. /his paper is to "ive details a!o)t the a)thor$ explain the introd)ction
on what an economy is$ and to explain the tho)"hts o+ Peter -. .chi++.
Peter -. .chi++ has a plethora o+ titles. He is a !)siness man$ investment !ro0er$ a)thor
and +inancial commentator. .chi++ o!vio)sly has 0nowled"e on the economy and how it wor0s.
/his !oo0$ How an Economy Grows and Why it Crashes, has a lot o+ tr)e$ real world +acts$ that
may or may not have !een experienced !y .chi++ himsel+. .chi++ received most o+ his +ame !y
predictin" the %&&#-%&&2 collapse o+ the ho)sin" prices in the 4... that wo)ld happen in %&&5$
correctly. /his prediction earned him the tile o+ -r. -oom. He has also r)n +or the 6ep)!lican
4... senate in %&'&. He lost tho)"h. 7)t$ 8as a res)lt o+ his acc)rate +orecasts on the 4... stoc0
mar0et$ economy$ real estate$ the mort"a"e meltdown$ credit cr)nch$ s)!prime de!acle$
commodities$ "old and the dollar$ he is !ecomin" increasin"ly more renowned9 1A!o)t Peter
.chi++3. /his :)ote +rom /he Peter .chi++ .how lists many o+ the economic topics that he has
predicted o+ the years correctly.
Economy is$ 8the mana"ement o+ the reso)rces o+ a comm)nity$ co)ntry$ etc.$ especially
with a view to its prod)ctivity9 1Economy3. 7)t$ accordin" to .chi++$ 8/he simplest de+inition o+
economy is the e++ort to maximi;e the availa!ility o+ limited reso)rces 1and <)st a!o)t every
reso)rce is limited3 to meet as many h)man demands as possi!le9 1.chi++$ ''3. *t is how to ma0e
a co)ntry$ society$ comm)nity$ etc. "row. /hese co)ntries and societies "row thro)"h ma0in"
money and !ein" s)ccess+)l with that money. /he three main types o+ economy are planned
economy$ mar0et economy$ and mixed economy. A planned economy is where there is little
capacity +or development. /his means that the "rowth and investment in the prod)cts is limited.
/hey planned +or the economy to "o so +ar and then reach its !o)ndaries and stop. /he wa"es are
controlled !y the state in controlled economies$ so that means that people will have no
motivation to do their <o! when they cannot "o anywhere in it. Also$ in planned economies$ the
"overnment ma0es s)re that no !)siness has competition either. *n this economy$ the !)sinesses
are more li0ely to prod)ce prod)cts that c)stomers will !)y. *+ c)stomers do not !)y that prod)ct
anymore and the demand +alls$ then the !)siness m)st prod)ce an alternative prod)ct.
A mar0et economy can also !e re+erred to as a +ree economy. *n a mar0et economy$ the
competition is +ree. -ependin" on s)pply and demand o+ the prod)cts$ determines the prices +or
those prod)cts. With this type o+ economy$ the "overnments do not have any in+l)ence on
!)siness activity. =ot many co)ntries today have a tr)e mar0et economy$ !eca)se there can !e
many draw!ac0s with it. /here co)ld !e a possi!le o)t!rea0 in society e:)ality. Also$ i+ there
were to !e an economic crisis in a society with a mar0et economy$ then !an0s and other !i"
!)sinesses wo)ld +ail witho)t the s)pport o+ the "overnment. .o$ this is pro!a!ly the worst type
o+ economy.
*n the mixed economy$ there are parts +rom !oth planned and mar0et economies. *n a
mixed economy the "overnment has vario)s levels o+ control over the economy. *t has a per+ect
com!ination o+ !oth$ mar0et and +ree economies$ o+ the "overnment controllin" and contri!)tin"
reso)rces and also lettin" the society mar0et control the rest o+ the !)sinesses. Most developed
co)ntries s)ch as the 4nited .tates o+ America 14.A3 and the 4nited >in"dom 14>3
demonstrate a mixed economy.
An idea is !orn? .chi++ sets the story as three ")ys startin" o++ with a!sol)tely nothin".
An economy is how a man +i")res o)t how to ma0e the !est o+ his reso)rces. What i+ we only
had o)r hands to exist with- +rom "atherin" or h)ntin" +ood to !)ildin" necessities? 8What 0ind
o+ economy wo)ld we have i+ all machines and tools disappeared?9 1.chi++$ '&3. An economy
wo)ld not exist. 7)t$ yo) !rin" in the tools$ s)ch as the +ish net li0e .chi++ did in chapter one and
the e++orts m)ltiply. 7eca)se one man is willin" to ta0e a ris0 and sacri+ice his time and ener"y$ a
tool or capital was created@ /his capital ena!led an increase in the a!ility to prod)ce what was
necessary. *t is an a"e old :)est to +ind ways o+ creatin" the thin"s people want and need.
=ow a s)rpl)s o+ "oods exists. What can !e done with it? /here is a demand in the
s)rpl)s$ and the :)estion is how to disperse it. /he prod)cer co)ld han" on to his "oods$ !)t how
m)ch can he han" on too. Another option wo)ld !e to personally )se them )p$ !)t that wo)ld not
!ene+it him or others. Ar$ the prod)cer can +i")re o)t a way to may!e reap a !ene+it to his
s)rpl)s. .o$ a "rowth in the economy or what is prod)ced will increase cons)mption. .ome!ody
has to start the economic process and ta0e the +irst ris0. /his person,s !)siness vent)re and
s)ccess will a++ect others aro)nd him.
8/he )se o+ credit is the per+ect example o+ how economic +reedom wor0s to everyone,s
!ene+it9 1.chi++$ %B3. What are the types and )ses +or loans and credits? *deally$ a loan sho)ld
provide !ene+its and not waste availa!le reso)rces. *t is not +air +or an o)tside +orce to ma0e
loans made in reasons that will most li0ely not s)cceed. Especially i+ it is the "overnment$ as
they do not have their own savin"s.
An type o+ loan is cons)mptive. An individ)al wants a loan to )se now and pay !ac0
later. *t will ta0e sacri+ice on the latter end to repay the loan with interest. *t is li0e play now and
pay later. 7)t$ it ta0es m)ch discipline to do this. *t wo)ld !e !etter to sacri+ice now$ save )p$
and play later witho)t ")ilt.
/here is also an emer"ency loan$ tho)"h repayment on this type o+ loan is a ris0. /he
ris0s o+ not ma0in" the loan li0e this are "reater. /here are )s)ally no other options +or an
individ)al in this position and not helpin" co)ld ca)se the individ)al to perish. /hese 0inds o+
loans tend to lessen availa!le prod)ctivity.
Government seems to thin0 it needs to !e a part o+ how savin"s can !e allocated thro)"h
loan ")arantees and tax credits.
8As a res)lt o+ the in+l)ences$ individ)als and !)sinesses may !e more
willin" to apply +or$ and !an0s may !e more willin" to "rant$ certain types
o+ loans. More o+ society,s reso)rces are then directed toward the +avored activity$
whether it !e home !)ildin"$ colle"e attendance$ or solar panel man)+act)rin"9 1.chi++$
C#3.
/his a!ove :)ote is misleadin". Who says "overnment always 0nows what is !est +or the
h)man pop)lation? Private lenders$ on the other hand$ loo0 at the sit)ation more o!<ectively.
8...this lendin" discipline tends to prod)ce healthier companies and a stron"er economy9 1.chi++$
CB3.
When demand overpowers +ear more ris0s are apt to !e ta0en. Ance it is not necessary to
+oc)s on s)rvival$ new ideas are !orn and savin"s can !e increased. 8.avin"s are not <)st a
means to increase one,s a!ility to spend. /hey are an essential !)++er that shields economies
+rom the )nexpected9 1.chi++$ (C3. *n case o+ disaster$ nat)ral or otherwise$ an individ)al can )se
these extra savin"s to re!)ild. /he art o+ savin" is !ecomin" lost in today,s society and
Americans spend way more then they earn. Economists pay attention to how m)ch money is
spent. 7)t$ money saved is a !etter indicator o+ positive economics.
*n o)r a"e o+ "overnment control$ private pro+it-driven companies are also !ecomin" a
lost art. Government control especially o+ p)!lic pro<ects is not always a !ene+it to society and
can lead to !)siness disaster. .chi++ explains this disaster as +ollowsD
8When a "overnment pro<ect experiences cost overr)ns or poor service$ +ree mar0et
discipline does not come to the resc)e. /he "overnment simply raises taxes to +ill the
"ap. *n so doin"$ it wastes societal reso)rces$ and livin" standards drop9 1.chi++$ 5E3.
Another o+ "overnments answer to the economy was the Federal 6eserve$ esta!lished in
'E'C. *t "ave o)t notes that promised to pay the owner "old on demand$ and replaced private
!an0 notes. /his allowed the Federal 6eserve to create an 8elastic money s)pply9 1.chi++$ ''B3.
/his elastic money co)ld increase or decrease dollars !ein" circ)lated dependin" on the
economy. *t was +or the !ene+it o+ price sta!ility !)t !ac0+ired and now allows the "overnment to
spend more than it has. /his +its the sit)ation o)r "overnment is in today.
=ext$ it is wron"ly ass)med that no in+lation exists i+ prices are not "oin" )p. *n+lation
!asically means to expand the money s)pply. People do not spend when there is no money. .o$
there is less demand and one wo)ld ass)me prices wo)ld "o lower. Except when yo) increase
money s)pply which act)ally lowers its val)e. While a recession is happenin" prices need to
drop to help even o)t the economy. /his allows prices to drop eno)"h to allow people to start
spendin" a"ain. *+ prices remain at a hi"h level d)rin" a recession then the economy will not !e
a!le to re!alance.
F)rthermore$ paper money is only worth somethin" i+ some!ody a"rees to ta0e it as
payment. *t is always !etter to sell more then yo) !)y in a co)ntry as well as a!road. /his will
create a stron" economy and money with val)e. All o+ this ma0es the val)e o+ paper money
s)!<ective$ i+ anyone can prod)ce it$ and it can also !ecome worthless.
.pendin" more money then yo) have always ca)ses tro)!le. /his was the case in the
ho)sin" crash that .chi++ predicted in early %&&&,s. Prior to this time the ho)sin" prices increased
with the pace o+ in+lation and the income availa!le to pay +or the home. /his is the optimal
sit)ation. 87)t +rom 'EE2 to %&&B national home prices "ained an asto)ndin" 'E.( percent per
year on avera"e. Aver that time incomes !arely !)d"ed9 1.chi++$ 'E&3. How on earth were
people "oin" to a++ord ho)sin" at this point@ /he answerD Government made credit easy and
cheap. /his cannot "o on inde+initely !eca)se the money wo)ld r)n o)t. When the money did
deplete$ there was only one choice$ recession$ to +ix the economy. 4n+ort)nately the "overnment
did not handle the sit)ation well and contin)ed to enco)ra"e spendin". 8For now$ this process is
<)st creatin" massive p)!lic de!t 1G'.B trillion per year and co)ntin"39 1.chi++$ 'E'3./he only
options to correct this sit)ation are to admit we cannot pay the de!t or contin)e to print money.
Altho)"h$ printin" money is easier$ admittin" ")ilt and solvin" the pro!lem is the !etter
alternative.
*n concl)sion$ economics is a very vital to r)nnin" a co)ntry$ society$ or comm)nity. *+
the is no economy esta!lished then there will !e no pro"ression. An economy is one o+ the main
esta!lishments +or a co)ntry$ comm)nity$ or society to have. /he a)thor who wrote the !oo0
How an Economy Grows and Why it Crashes, clearly has a varied$ experienced !ac0"ro)nd with
economics. Also$ there was "iven the di++erent types o+ economy and an introd)ction to it and a
little s)mmari;ation o+ the !oo0 !y Peter and Andrew .chi++. oo0in" at the world and how
thin"s are happenin" and why prices "o )p and down all have to do with economics. When
prices chan"e and !)sinesses either open or close$ thin0 a!o)t why. Why did that <)st happen?
Was there a +all in the prod)ct that store was sellin"? *s there a need +or the prod)cts that store is
sellin" now? *n short$ witho)t positive$ "rowin" economies c)lt)res will +ail over time. 87)t
remem!er an economy can,t "row !eca)se people spend? people spend !eca)se an economy
"rows9 1.chi++$ %&&3.
6e+erences
HA!o)t Peter .chi++.H /he Peter .chi++ .how. =ox .ol)tions C$ %&'(. We!. %&'(. IhttpJCA
J%FJ%Fwww.schi++radio.comJ%Fp"J%F<spJ%F"eneralJ%F!io.<spJC7<sessionid
JC-EE#-B2&%5&(A%A#7E#5CEC&(-#F%%C&2K.
HEconomy.H -ictionary.com. -ictionary.com$ n.d. We!. %2 Apr. %&'(. IhttpD//
dictionary.re+erence.com/!rowse/economy K.
HFree Mar0et Economy.H -ictionary.com. -ictionary.com$ n.d. We!. %2 Apr. %&'(. IhttpD//
dictionary.re+erence.com/!rowse/+reeJ%7mar0etJ%7economy K.
HPeter .chi++.H Wi0ipedia. Wi0imedia Fo)ndation$ n.d. We!. %2 Apr. %&'(. IhttpD//
en.wi0ipedia.or"/wi0i/PeterL.chi++ K.
.chi++$ Peter -.$ and Andrew M. .chi++. How an Economy Grows and Why It Crashes: A Tale.
Ho!o0en$ =MD Wiley$ %&'&. Print.
H4sin" /echnolo"y to *mprove Economies A Noda+one Case .t)dy.H What *s an Economy?
=.p.$ n.d. We!. %2 Apr. %&'(. IhttpD//!)sinesscasest)dies.co.)0/voda+one/)sin"-
technolo"y-to-improve-economies/what-is-an-economy.htmlOax;;C&5EmP6NxK.
HWhat *s Free Mar0et Economy? -e+inition and Meanin".H 7)siness-ictionary.com. =.p.$ n.d.
We!. %2 Apr. %&'(. IhttpD//www.!)sinessdictionary.com/de+inition/+ree-mar0et-
economy.html K.

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