History UsefulNotes / EconomicTheories

As discussed in the UsefulNotes/{{Economics}} article, economic systems exist to allow a society to ''economize'', i.e. allocate their supply of means towards various different ends. The supply of means is scarce because it cannot achieve all these ends. Thus, an economic system is something that provides a method by which these ends are ''prioritized'' and means are directed to fulfilling them.

In 1776, [[http://en.wikipedia.org/wiki/Adam_Smith Adam Smith]] published his magnum opus, ''An Inquiry into the Nature and Causes of the Wealth of Nations'', launching the era of economic theory that is now labeled "classical". The Industrial Revolution was just starting and Smith's theories were seminal in the transition from agricultural economies to industrial economies throughout the Western world. ''The Wealth of Nations'' defined the terms that we use today, such as division of labor, productivity, and free markets. Smith rejected mercantilism, which at the time was the stance that national wealth is defined by how much gold and silver is in the national treasury, and as such, the government should restrict trade among nations in favor of their own industries.

* Prices are set based on the sum total of labor value, rent paid on land, and profit to the capitalist for risking his resources.

!! The Role of Government

In the mid-1800s, various economic theories arose to propose alternatives to the capitalist system -- in particular, the flagrant abuses of labor and the stark inequality of wealth and opportunity seen in capitalist societies. The most significant of these was penned by [[http://en.wikipedia.org/wiki/Karl_Marx Karl Marx]], in ''The Communist Manifesto'' (1848) and ''Das Kapital'' (1867-1894). Marx called for the establishment of a socialism, or economy run for the benefit of laborers rather than the capitalist society he saw as existing for the benefit of producers.

The ultimate outcome of this socialist revolution would be '''Communism''', a classless society wherein the means of production would be collectively owned by all workers, and the products distributed according to each individual's need. "To each according to his need, from each according to his ability." In such a system, there would be no need for money except as a metric for determining the relative value of any given good.

* Marxism-Leninism, practiced in the USSR and spearheaded by the Bolsheviks, envisioned a revolutionary Party that would run the apparatus of production and of state until such time as it was able to hand power over to the masses.
* Maoism, practiced in the People's Republic of China, considered the USSR [[NoTrueScotsman "Revisionist"]] because it seemed too accepting of the possibility of permanent and centralised party control of the state and economy. However, Maoism never articulated a ideologically 'pure' and coherent "Marxist-Leninist" alternative. Maoism ''de facto'' neutered its Soviet-style institutions by devolving power to the district and local level, effectively splitting the country up into hundreds of competing political-economic units.

!! Criticisms

A key example of the truth of this criticism occurred in the collective farms of the U.S.S.R. When workers were granted private plots of land that they could grow food on and sell in markets rather than having all their food seized and redistributed, the productivity of the collective farms increased dramatically.

Another criticism of Marxism is that it offers no coherent path from the socialist worker's revolution to the final Communist worker's paradise. In practice, no system of government based on Marx's theories has ever transitioned to that final stage; they always become mired in authoritarian systems that centralize control of the means of production and refuse to let go. The inherent inefficiencies of the command economy become so great that the system either collapses in a counter-revolution or is forced to adopt capitalist reforms, slowly transitioning towards freer markets.

Around the time of TheGreatDepression, [[http://en.wikipedia.org/wiki/John_Maynard_Keynes John Maynard Keynes]] (1883-1946) proposed revisions to classical theory based on a model of demand as independent from supply, with significantly different rules for how governments should manage monetary and fiscal policy during recessions than during normal times. Keynes' work inspired the New Deal (and similar reforms in Europe) and went on to become the predominant economic theory employed by Western governments through the mid-20th century, until neoclassical theory emerged in the 1970s. Keynes borrowed many concepts from Marx, but insisted that properly regulated markets were superior to fully socialized or state-controlled markets.

Keynes' work also coincided with the global movement away from hard currencies (the gold standard) to fiat currencies, in which governments found themselves needing new economic theories to handle the increased variables in managing a currency not backed by precious metals.

Keynes' core insight was that, rather than being driven by supply as was assumed in classical theory (in particular Say's Law), demand is an independent variable that can trigger recessions if insufficient, even if there is no loss of productive capacity. Thus, governments wishing to mitigate the effects of this type of recession should, contrary to the wisdom of the time, increase public spending to support private incomes until such time as the private sector recovers sufficiently.

!! Core principles

Keynesian theory offers a number of axioms about macroeconomic activity.

!! Supporting principles: Multipliers

Important to Keynes' work is the concept of fiscal multipliers. Put another way, all money is not equal: its value depends on who has it and what they're doing with it. If a person is saving money, that money is not being spent immediately on consumption. Under ordinary circumstances, saved money goes into investment, but under abnormal circumstances, some of that money may instead be held back, in reserve accounts, under mattresses, or what have you. Money not spent is money that does not generate economic activity; therefore it has zero value.

!! Supporting principles: The Paradox of Thrift

"Your spending is my income". Over the entirety of an economy, the total amount spent is equal to the total amount paid in wages and other forms of income. Under ordinary circumstances, some people and businesses will be running surpluses (saving more than spending) at any given time, and others will be running deficits (spending more than saving). In abnormal circumstances, such as a credit crisis, the savers will outnumber the spenders -- debt-ridden consumers will try to pay off their debts, while consumers who have a positive net worth will withhold spending due to fear.

!! Supporting principles: The Function of Public Debt

Under Keynes, public debt is distinguished from private debt in that public debt, created by a sovereign currency issuer, is a tool of economic policy rather than an evil to be avoided. As stated in the UsefulNotes/{{Economics}} article, public debt is a zero-sum game: the amount owed is exactly balanced by the assets represented by those bonds, such that the net wealth of a nation remains the same no matter how much debt it issues. The myth that we are "borrowing from our future" is simply false; the central bank could, at any time, choose to issue currency to repay its debts and zero out the books. This would, however, be highly inflationary.

The key requirement for this rule is that the debt be issued in the nation's own currency. A nation that does not control its currency, or that owes substantial debts in foreign currencies, is subject to debt crises, as has been observed in the Eurozone from 2008-2015 and counting.

Debt serves several functions:

!!! Hyperinflation

* A nation with a functioning production system does not need to borrow from other nations in order to satisfy domestic demand.

!!! Debt panics, or death by interest rates

!! Supporting principles: Sticky Prices, The Zero Lower Bound and the Liquidity Trap

!!! Sticky prices and wages

!!! The liquidity trap

!!! The zero lower bound

There is a concept in Keynesianism called the Natural Rate of Interest (credited to [[http://en.wikipedia.org/wiki/Knut_Wicksell Knut Wicksell]]), which is the interest rate set by the central bank that is consistent with full employment in a growing economy. In normal conditions, that rate is positive; that is, the government may stimulate demand by lowering it and reduce demand by increasing it. In a liquidity trap, however, the natural rate of interest may well become negative, meaning that the desire to save is so great that even zero interest rates are insufficient to break an economy out of stagnation and into growth.

!! Neo-Keynesianism

!! Criticisms

[[/folder]]

[[folder: Behavioural Economics]]

[[https://en.wikipedia.org/wiki/Behavioral_economics Behavioural Economics]] emerged from the field of psychology in the 1980s, and it is a source of great hope for the future of economics. The Original Sin of Neoclassical economics was that even as it criticised Keynesian Economics for not having foundations in microeconomics, its own microeconomic foundations were based upon egregiously incorrect assumptions about human behaviour. Behavioural Economics has instead taken the position that, as in Keynesian Economics, all theory must be based upon empirical evidence.

Behavioural Economics' greatest contribution to the field of economics has been its complete invalidation of Neoclassical Theory's microeconomic foundations - to which Neoclassicists' response has been that this does not matter as long as their theories work in practice (which they also do not). Behavioural Economics' greatest single insight has been that humans are ''predictably irrational'': it is possible to model future human behaviour based upon the observation of past behaviour, since human nature remains constant.

One of the greatest insights of Behavioural Economics has been the revelation that the average person is both relatively easily influenced, and is convinced that they are not easily influenced. This is partly because most of us are unaware of the way our minds work, but largely because on an emotional level we do not like to feel foolish [[IJustWantToBeSpecial or even just average.]] [[{{Irony}} We are actually better at convincing ourselves that we cannot be fooled than we are at not being fooled.]]

!! Criticisms

Behavioural Economics has rightly been criticised for the limited scope of its insights to-date. However, the field has generated a great deal of excitement and is recruiting much young talent to expand its ranks. It is not unrealistic to hope that within our lifetimes, a union of Behavioural and Keynesian Economic theories could produce a unified theory of human economic behaviour. For evidence-based economists, micro- and macro- alike, we live in interesting times.

In 1776, [[http://en.wikipedia.org/wiki/Adam_Smith Adam Smith]] published his magnum opus, ''An Inquiry into the Nature and Causes of the Wealth of Nations'', launching the era of economic theory that is now labeled "classical". The Industrial Revolution was just starting and Smith's theories were seminal in the transition from agricultural economies to industrial economies throughout the Western world. ''The Wealth of Nations'' defined the terms that we use today, such as division of labor, productivity, and free markets. Smith opposed mercantilism: the use of government policy to restrict trade among nations in favor of their own industries.

[[foldercontrol]]

[[folder:The Basics, or Econ 101]]

At the core of all economic theories are models of supply and demand. Expanding from these are the concepts of labor, capital, money, and interest. We'll start with terminology.

!! Core concepts
* '''Good''': A material object that provides some benefit to humans as a result of its inherent physical properties, by satisfying a want or need, or allowing a person or institution to avoid a pain or privation. Goods may be natural or man-made, and may or may not have value. (Air, for example, is a good generally without value.)
* '''Service''': A process that, like a good, provides some benefit to humans as a result of its properties. Goods and services are typically treated interchangeably in economics.
* '''Product''': A good or service created by human activity for consumption, trade, or sale. All products have value (otherwise they would not be produced, or would not be used if they were some 'waste product' created in the production of some other product.)
* '''Producer''': A person or institution that creates or provides a product.
* '''Consumer''': A person or institution that buys a product.
* '''Supply''': The availability of products to be purchased or consumed. This includes all elements involved in bringing products to a consumer: raw materials, production capacity, labor, transportation, warehousing, store space, delivery, and payment.
* '''Demand''': The desire of consumers within an economy for certain products.
* '''Labor''': The human physical and mental effort used in the creation of products.
* '''Capital''': The non-labor resources used in the creation or products. Capital may include equipment, buildings, infrastructure, stocks of raw materials used to produce products, and many other things.

!! Barter, money, and currency
* '''Barter''': A system of trade in which products are exchanged in-kind: that is, if you want to obtain a cow or a shoe shine from a person who offers those products, you have to give them another good or service or combination of goods and services in exchange, such as a bushel of wheat or an item of clothing. Barter systems are inefficient for the following reasons:
** Barter systems require a 'double coincidence' of wants for trading to occur. If Alice desires a product Bob is offering, to obtain it from Bob, Alice must either have a product Bob wants, must convince Bob he can use a product she is offering (that Bob doesn't want) to obtain something he wants, or must try and make an often tedious and unreliable ChainOfDeals to obtain a product Bob wants.
** Barter systems are imprecise. As products are usually indivisible, trades in barter systems usually must be conducted with whole products, forcing traders to often significantly 'round-up' or 'round-down' the value of products.
** Barter systems are mentally laborious. Barter systems generally require each trade to be mentally evaluated for the value of one product against another. For example, a farmer who grows ten kinds of vegetables and wishes to barter them for eggs, milk and cheese must go through the non-trivial effort of considering 'How many eggs is one carrot worth?' 'How much milk is one head of cabbage worth?' every time a trade with different products is proposed.
** Barter systems are physically laborious. Traders in barter systems are generally required to physically carry the goods they wish to trade to the place of exchange.
** Barter systems restrict saving. Many goods decay and lose value over time, particularly the relatively primitive goods which tend to be produced by barter societies. Barter systems therefore offer few ways people can easily protect their wealth for the long term, forcing people to focus on the economic short term and continually produce new wealth so they can continue to survive.

All five of these problems are solved with the introduction of '''Money'''.

* '''Money''': A '''medium of exchange'''. Money is any object or concept of value that is independent of the specific product being traded. Rather than trade a cow for a bushel of wheat, you trade the cow for an agreed-upon amount of money, which the seller may then trade to buy a bushel of wheat or a piece of clothing from someone else. The important elements of money are:
** Money is valued by a community or society. This value may arise from money being physically made from a valuable material such as precious metal, or it may arise from an official guarantee by an authority that money may be exchanged for something of value, or it may arise from a completely implicit and unofficial understanding among people that money will be accepted as payment for products.
** Money is physically convenient. Money is small and light, easy to store or hide, and requires only very minimal physical effort to carry to places of exchange.
** Money is fungible within reasonable limits. A given amount of it is as valuable as any other similar amount, regardless of the specific form that amount takes. $10 in paper money is as good as $10 in a bank account or $10 in coins.
** Money is divisible within reasonable limits. A buyer is not forced to part with more than the price of a product because the seller is unable to make change, except under unusual circumstances. Diamonds make poor money because splitting them is difficult, doing so reduces their total value, and it's impossible to put them back together again.
** Money is durable and not consumable.
** Money is scarce. Money should not be something that any person can create more of at any given time; rather, its manufacture is controlled by an authority. (In modern economies, the central bank of a government.)
* '''Currency''': The specific form that money takes (dollars, pesos, shekels, gold sovereigns).
* '''Commodity currency''': Currency that is exclusively in the form of a valuable good, like gold or silver, or is "backed" by a specific amount of said valuable good. Important to the concept of hard currency is that obtaining more of it is not easy; it must be "mined" or taken from someone else who has it.
* '''Fiat currency''': Currency that is not backed by a valuable good, but is rather created ''ex nihilo'' (from nothing) by an issuer. Important to the concept of fiat currency is that its issuer may freely (within practical limits) create or withdraw it from circulation.
* '''Common currency''': A currency that is used in free trade (that is, it can be accepted immediately without conversion to a different currency) within a particular economic zone. The U.S. is such a zone, with the dollar acting as the common currency for the various states. The Eurozone is also such a zone, with the euro as its common currency.
* '''Monetary base''': The total amount of currency (whether electronic or physical) in an economy. Currency held by the government in its central bank does not count.

!! Wages, income, and debt instruments
* '''Wages''': Money (or products) paid in exchange for labor.
* '''Income''': Money (or products) acquired through wages, selling products, interest, transfer payments, estates, gifts, etc.
* '''Spending''': Money that is used to buy products (including labor).
* '''Savings''': Money that is set aside for future use, usually by depositing it in a bank or buying an investment instrument.
* '''Deposits''': Savings that take the form of a loan to a banking institution.
* '''Investment''': Saved money that is loaned to enable the borrower to purchase capital.
* '''Debt''': Money or products owed to another.
* '''Loan''': A debt incurred with a formal promise of repayment and at a defined interest rate.
* '''Collateral''': An asset that guarantees the value of a loan. If the loan defaults, the creditor seizes the asset.
* '''Principal''': The base amount of money lent, not counting fees and interest.
* '''Interest''': On a loan, the amount in excess of principal paid back to the lender; used as an incentive to lend that money rather than hold it.
* '''Credit''': The total amount of loaned money available for a borrower to access. To purchase something "on credit" is to increase one's debt rather than pay cash for a product.
* '''Default''': To renege on a debt obligation.
* '''Tax''': Money collected by a government that is not in direct payment for a product nor in the form of a bond purchase. Taxes may be used to fund public spending or to pay back public debt.
* '''Asset''': A thing of value that is owned. An asset can be money, debts owed to you, capital, property, or any thing of tangible value.
* '''Liability''': A thing of value that is owed to another entity, which you are obligated to make good on at some point in time. A liability can be a debt that you owe, a tax bill, a bond that you issued, etc.
* '''Net worth''': The sum total of assets and liabilities of any entity.
* '''Liquidity''': The availability of an asset for immediate use as money. A '''liquid asset''' is one that can be converted to money easily (or is itself money). An '''illiquid''' asset is one that cannot readily be converted to money. Money in the common currency where you are is more liquid than money in a different currency.
* '''Bankrupt''': The condition of an entity whose liquid assets are insufficient to pay back its liabilities.
* '''Stock''': A financial instrument issued by a company that represents a share of ownership of that company. Stocks are generally liquid.
* '''Debt instrument''': A unit of debt issued by an entity, with specific rules about how it matures (becomes due for payment) and bears interest. The longer the maturity period, the less liquid a debt instrument is.
* '''Bond''': A debt instrument, denominated in a common currency, that is issued by a business or government entity. Bonds are generally illiquid.
* '''Derivative''': A debt instrument whose value is based on the value of other debt instruments. For example, you may take out a loan on the basis of money you will be paid when a debt that you are holding matures.

!! Macroeconomic concepts
* '''Inflation''': A general increase in prices for products and/or labor. Inflation tends to increase the value of present spending and decrease the value of debt because a given amount of money (spent or owed) will be worth less in the future.
* '''Deflation''': A general decrease in prices for products and/or labor. Deflation tends to decrease the value of present spending and increase the value of debt because a given amount of money (spent or owed) will be worth more in the future.
* '''"Real" money''': Money adjusted for inflation and/or deflation. This concept is used to meaningfully compare economic output, wages, and other measurements over a period of time.
* '''Surplus''': Income in excess of spending. By definition, a surplus is saved. In macroeconomic terms, paying down debt is a form of saving.
* '''Deficit''': Spending in excess of income. A deficit that is not taken from savings is borrowed.
* '''Boom''': A period of above-normal economic output as measured against a general trend.
* '''Recession''': A period of below-normal economic output as measured against a general trend. Formally, a recession is defined as three or more consecutive quarters of below-zero GDP growth.
* '''Depression''': An acute period of intensely poor economic output, characterized by significant social and political disruption.
* '''Stagnation''': A period, often prolonged, when the trend of economic output shows little or no real growth (adjusted for inflation).
* '''Public''': Referring to economic activity undertaken by a governing body or central bank.
* '''Private''': Referring to economic activity undertaken by individuals and businesses within a political entity, except that performed by government.
* '''Trade''': In macroeconomic terms, referring to economic activity occurring between one political entity and another. Example: foreign trade.
* '''Public debt''': The sum total of debt instruments (other than currency) issued by a political entity.
* '''Austerity''': A deliberate, temporary reduction in net spending within a sector of an economy or an economy as a whole. Typically applied mainly to public spending.
* '''Stimulus''': A deliberate, temporary increase in public spending intended to boost economic output.
* '''Economic output''': Often termed '''GDP''', for Gross Domestic Product, this is the sum total of products that a nation as a whole sells, measured in a currency.
** GDP can be expressed as a formula: private spending + public spending + trade income = GDP. Alternatively, private surplus/deficit + public surplus/deficit + trade surplus/deficit = 0.

!! Markets and labor
* '''Productivity''': The amount of useful work done per unit of labor.
* '''Division of Labor''': The idea that workers increase overall productivity by specializing in tasks.
* '''Free markets''': (aka '''laissez-faire''') Markets which are relatively unconstrained by government regulation.
* '''Socialized markets''': Markets which are to some extent operated by government, yet are allowed to set prices based on supply and demand.
* '''Planned economy''': Markets in which both production and prices are controlled by a central authority.

!! Government and Banking
* '''Bank''': An institution that accepts deposits (saved money), pools those deposits, and then loans them to generate interest income.
** '''Central Bank''': A bank, typically government-run, that both issues currency and acts as a depository/lending institution for other banks.
** '''Consumer Bank''': A bank that accepts consumer deposits and provides loans directly to consumers.
** '''Investment Bank''': A bank that uses its deposits to purchase stocks and other non-bond financial instruments.
* '''Regulations''': Rules that a governing body enacts to control private activity. For purposes of this discussion, regulations set limits on the behavior of economic actors such as banks and stock traders.
* '''Shadow Banking''': Used pejoratively to refer to investment banking activity that occurs outside the purview of government regulation.
* '''Debt ceiling''': An arbitrary, typically legislative, limit on a government's ability to issue debt instruments.
* '''Fiscal policy''': Government actions which directly modify economic output, such as increasing or reducing spending or taxes.
* '''Monetary policy''': Government actions which affect the relative value of money or the total amount of currency in circulation, such as adjusting interest rates.

!! Social concepts
* '''Minimum wage''': A wage that a political entity sets as the least that an employer may pay to an employee, usually expressed as an hourly amount.
* '''Living wage''': A dynamically calculated value representing the wage required for an individual or family to maintain a nominal standard of living.
* '''Poverty''': A condition in which an individual or family's income does not allow for purchase of necessities such as food, housing, transportation, etc.
* '''Transfer payment''': A payment made, either in cash or products, to lower-income persons, paid for with taxes on higher-income persons.
* '''Welfare''': Money allocated by a government to increase the income of individuals or families in poverty.
* '''Social Security''': Money allocated by a government to supplement the income of retirees. (Social Security is the colloquial name of this program in the U.S.; other countries may refer to it differently.)

[[/folder]]

** Barter systems require a 'double coincidence' of wants. If Alice desires a product Bob is offering, to obtain it from Bob, Alice must either have a product Bob wants, or must try and make an often tedious and unreliable ChainOfDeals to obtain a product Bob wants.
** Barter systems generally require each trade to be mentally evaluated for the value of one product against another. For example, a farmer who grows ten kinds of vegetables and wishes to barter them for eggs, milk and cheese must go through the non-trivial effort of considering 'How many eggs is one carrot worth?' 'How much milk is one head of cabbage worth?' every time a new trade is proposed.
** Barter systems are imprecise. As products are usually indivisible, trades in barter systems usually must be conducted with whole products, forcing traders to often significantly 'round-up' or 'round-down' the value of products.

* '''Commodity currency''': Currency that is exclusively in the form of a durable good, like gold or silver, or is "backed" by a specific amount of said durable good. Important to the concept of hard currency is that obtaining more of it is not easy; it must be "mined" or taken from someone else who has it.
* '''Fiat currency''': Currency that is not backed by a durable good, but is rather created ''ex nihilo'' (from nothing) by an issuer. Important to the concept of fiat currency is that its issuer may freely (within practical limits) create or withdraw it from circulation.

* '''Good''': A material object that provides some benefit to humans as a result of its physical properties, by satisfying a want or need, or allowing a person or institution to avoid a pain or privation. Goods may be natural or man-made, and may or may not have value. (Air, for example, is a good generally without value.)
* '''Service''': A process that provides some benefit to humans but does not necessarily immediately increase a person's material wealth. Goods and services are typically treated interchangeably in economics.

* '''Capital''': The non-labor resources used in the creation or products. Capital may include equipment, buildings, infrastructure, stocks of raw materials used to produce products, and many other things. Labor is sometimes expressed as "human capital", but for the purposes of this discussion labor and capital will be kept as separate concepts.

** The physical form that the money takes need not have any value in and of itself; its value as a medium of exchange may be completely independent of its value as a material good, if there is any.

** Money is fungible within reasonable limits. A given amount of it is as valuable as any other similar amount, regardless of the specific form that amount takes. $100 in paper money is as good as $100 in a bank account or $100 in coins.

** Money is durable and is not consumable. Food makes poor money because it is eaten or spoils and thus inherently loses its value over time.

* '''Good''': A material object that provides some benefit to humans as a result of its physical properties, by satisfying a want or need, or allowing a person or institution to avoid a pain or privation. Goods may be natural or man-made, and may or may not have value. (Air, for example, is a good without value.)

* '''Barter''': An economic system in which products are exchanged in-kind: that is, if you want to buy a cow or a shoe shine from a person who offers those products, you have to give them another good or service or combination of goods and services in exchange, such as a bushel of wheat or an item of clothing. Barter systems are inefficient because they require each person to have goods or services the other wants, and generally require people who wish to trade to physically carry their goods with them to the place of exchange.

** The physical form that the money takes need not have any tangible value in and of itself; its value as a medium of exchange is independent of its inherent value, if any. You can't eat gold or bake it into bread, nor can you eat or bake dollars or rubles. Gold has industrial and aesthetic value but that's not what gives it its value as money.
** The value of money is guaranteed by the authority that issues it. The U.S. government guarantees that you could give it the dollar you hold and get something of tangible value in return. (In this case, the payment of taxes.)

* '''Free markets''': (aka '''laissez-faire''') Markets which are privately owned and relatively unconstrained by government regulation.

* '''Product''': A good (tangible object) or service (something a person does for another) that has value.

* '''Demand''': The capacity within an economy to purchase and consume products. This includes both the desire to obtain a product (is it something the consumer wants or needs?) and the capability to obtain it (does the consumer have the means to acquire it?).
* '''Labor''': The availability of work to produce, distribute, and sell products.
* '''Capital''': The availability of non-labor resources to produce, distribute, and sell products. Capital may include equipment, buildings, infrastructure, supplies of goods used to produce products, and many other things. Labor is sometimes expressed as "human capital", but for the purposes of this discussion labor and capital will be kept as separate concepts.

* '''Barter''': An economic system in which products are exchanged in-kind: that is, if you want to buy a cow or a shoe shine from a person who offers those products, you have to give them something of immediate value in exchange, such as a bushel of wheat or an item of clothing. Barter systems are inefficient because the seller and buyer may not agree on the value of the things being exchanged or the buyer may not have something the seller wants.

** The value of money is guaranteed by the authority that issues it. The U.S. government guarantees that you could give it the dollar you hold and get something of tangible value in return.
** Money is fungible. A given amount of it is as valuable as any other similar amount, regardless of the specific form that amount takes. $100 in paper money is as good as $100 in a bank account or $100 in coins.

* '''Hard currency''': Currency that is exclusively in the form of a durable good, like gold or silver, or is "backed" by a specific amount of said durable good. Important to the concept of hard currency is that obtaining more of it is not easy; it must be "mined" or taken from someone else who has it.

* '''Money''': Literally, a '''medium of exchange'''. Money is any object or concept of value that is independent of the specific product being traded. Rather than trade a cow for a bushel of wheat, you trade the cow for an agreed-upon amount of money, which the seller may then trade to buy a bushel of wheat or a piece of clothing from someone else. The important elements of money are:
** Money represents a debt, or an IOU. It is the promise of payment in the future. Its value is based on how much of it people are willing to buy or sell a product for. A dollar is a debt instrument of the U.S. government. A gift card from a retailer is a debt instrument of that company, although it's usually denominated in a common currency.

** The value of money is guaranteed by the authority that issues it. Money is literally a debt that the issuer creates, promising redemption in goods and services to anyone who holds it. The U.S. government guarantees that you could give it the dollar you hold and get something of tangible value in return. [[note]]But don't try walking into the Federal Reserve and demanding a car for your $20,000. The Fed would tell you to go to a car dealer. In the case of fiat currencies, the tangible value is defined as "not going to jail for failure to pay taxes"; the government acts as a guarantor, not a producer.[[/note]]

** Money is scarce. Money should not be something that any person can create more of at any given time; rather, it is obtained by doing valuable work. Leaves make poor money because anyone can pluck them from trees; little or no work is required to obtain more. [[note]]Post-scarcity economies, by necessity, must define money differently, but that is not a topic for this article.[[/note]]

* '''Debt instrument''': A unit of debt issued by an entity, with specific rules about how it matures (becomes due for payment) and bears interest. Money is a debt instrument with instant maturity and zero interest. The longer the maturity period, the less liquid a debt instrument is.

* '''Stock''': A debt instrument issued by a company that represents a share of ownership of that company. Stocks are generally illiquid.

In the mid-1800s, various economic theories arose to address the flaws in Smith's classical theory -- in particular, the flagrant abuses of labor and the stark inequality of wealth and opportunity in capitalist societies. The most significant of these was penned by [[http://en.wikipedia.org/wiki/Karl_Marx Karl Marx]], in ''The Communist Manifesto'' (1848) and ''Das Kapital'' (1867-1894). Marx called for the establishment of a socialism, or economy run for the benefit of laborers rather than the benefit of producers.

Marx held that capitalist societies are inherently oppressive and that there is no way to fully redress this situation short of a complete reform/overhaul of the system. Left unchecked, capitalism will always seek to exploit labor and enshrine inequality in systems of class, and will inevitably self-destruct as a result. Marx saw it as the axiomatic outcome of such an event for the '''proletariat''', or the working classes, to rise up and overthrow the '''bourgeoisie''', or capitalist classes, seizing control of the means of production and distributing the goods produced by society fairly and evenly to all members of that society.