Economics Explained Using a Simple Graph

For most people, economics usually comes across as a hot mess of equations, graphs, acronyms and talking heads. Which is why over the years I have striven to simplify things, to make economics understandable for almost everyone.

Almost, because as the lonely one-star rating for my book stated:

“It is a little hard to understand for me. I guess it is not for everyone. With that title, I was hoping that it would be easy to grasp the concept. Unfortunately, that is not the case.”

Thank you, Becky, for your honest feedback. I will try harder.

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Yes, I am quite aware that right after acknowledging that economic graphs can be difficult to grasp, I am presenting you with yet another one. But in my defense, it is a simple hand-drawn graph. Hand-drawn because try as might, I could not convince ChatGPT to draw this for me. It spiraled out of control with fantastic higher N-dimensional graphs.

OK, so what does this so-called simple graph represent? Glad you asked, because it represents the impact that every individual has on the economy over the span of their lifetime. The horizontal axis is the average person’s life span, while the vertical axis represents the amount of economic wealth created or consumed per capita, where green indicates wealth created, and red represents wealth consumed.

Most accept that the primary goal of any economy is to improve the standard of living over time. I contend that this can only occur if, on average, over time the green area exceeds the red area. i.e., more economic wealth is created than consumed per capita, allowing for the advancement of science, etc.

Given that at a minimum we require food and shelter, it is assumed that everyone consumes some amount of economic wealth every day, some more than others. Meaning that at a minimum, the net creation of economic wealth must exceed this constant consumption of wealth. And to go beyond substance living, exceed it by a lot.

The left red section of the graph reflects childhood, where it makes sense that the raising and education of children is a necessary economic drain on society. Every one of us owes an economic debt to society by the time we become an adult.

The middle green section reflects our productive adult years, when we are generally healthy and employed, economically contributing to society, and more than making up for the wealth that everyone constantly consumes.

The final red section reflects that as people age, they tend to work less and require increasing amounts of medical care.

Fair enough, but what can we learn from this simple, hand-drawn graph?

At any given time, for a given economy, we cannot determine whether net economic wealth is being created or consumed, whether the green area exceeds the red, or vice versa. But in the long run this will be exhibited by whether the standard of living improved or diminished. Excessive persistent inflation, or excessive levels of emigration also strongly suggests that the red has exceeded the green for some time. Advances in science and technology strongly suggest that the green has won the day.

What can be done to maximize economic wealth creation, to maximize the green and minimize the red?

How can the green area be made larger?

• Minimize unemployment. The more adults at work, the better. Note that the raising of children is employment.
• Ensure that every job is productive, i.e. building products or providing services of actual value.
• Work more years.
• Working more hours per day.
• Work more efficiently by adopting new tools.
• Minimize government compensation to healthy adults who are not working.
• Minimize the number or healthy adults that are incarcerated.

Overall, it has been historically proven over and over that a decentralized economy based on capitalism, free markets, private property laws and law and order, combined with a fair and efficient government, will maximize this green area.

This I explain in much detail in my book.

How can the left red area be made smaller?

• Start working at an earlier age, and no, I am not encouraging child labor as that would be immoral. I am referring to the fact that far too many young adults waste precious years procuring college degrees of minimal value when many well-paying trade jobs remain unfilled.
• Have less children. While this will help in the short-term, the long-term consequences, as China will soon discover, will be economically challenging and unsustainable. Not recommended.

How can the right red area be made smaller?

• Work longer. Adult life expectancy has increased by about 20 years since Social Security was created. Most of us are still capable of working full-time at age 62, and beyond.
• Make healthcare as efficient as possible. Easier said than done, but more transparency in the cost of procedures and medication would be a step in the right direction.
• Encourage a healthy lifestyle. While we will all eventually experience an increase in health-related problems as we age, it is preferable that this not occur during our productive adult years.

Using this graph as a tool, we can now start to understand the impact of various economic phenomenon’s such as:

• An aging demographic: A relative increase in the right red section. Needs to be compensated for with a larger green area, meaning a more productive economy.
• More efficient productivity thanks to new technology: An increase in the green section.
• More efficient education: A decrease in the left red section, an increase in the green section.
• An overly centralized, less efficient economy: A decrease in the green section. (as explained in my book).
• The impact of the Covid shutdowns: All bad, a decrease in the green section, accompanied by an increase in both red sections.

Simple!