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We Are All Economists
Small Business Economics and Education
Especially in small businesses, we are all economists. Small business economics is often both misrepresented and misunderstood. In the “real world,” small businesses never operate in isolation and constantly have to juggle multiple (and often conflicting) needs. Because small business owners are operating an enterprise that by definition is “small,” the broader economy can have a disproportionate impact on small businesses. For example, in the recent economic downturn (that probably began between 2004 and 2006), small business owners were at or near the top of the “most-severely-impacted” lists by almost any economic measure you could choose. Business managers have found it necessary to seek alternative business solutions when confronted by a challenging economy.
The difficulty that small businesses have experienced in obtaining routine commercial financing and working capital loans from banks exemplifies several factors needed to understand the “real life” small business economy:
- Small businesses do not always control their own destiny when they are dealing with a bank for financial help.
- Reducing business debt is a prudent goal, and this can be accomplished with several practical strategies.
- In addition to dealing with “Problem Banks” and “Zombie Banks” that are not providing adequate support for small business loans, there are several other recurring problems that small businesses must regularly confront in order to ensure their financial survival.
We Are All Business Economists in the Real World
Whether you are a student wanting to learn more about business and economics or a small business owner trying to help their business survive a tough economy, the discussion here will focus on reality rather than theory. The study of economics can often be too theoretical, but it is also possible to adopt a real world perspective that evaluates common financial problems and practical business solutions.
As you might imagine, it is truly impossible to explain everything about this topic in just one page, so there are two video presentations and three recommended books for those who want to learn more.
“We are all economists - when we work, save for the future, invest, pay taxes and buy our groceries.”
What Happens When There Is Disagreement About the Economy?
Politics and economics do not mix very well. But in a normal political environment, there is eventually some consensus about what is best for the country.
However, in the United States there has been a significant breakdown in how this process works. For example, there are antiquated rules in the U.S. Senate that generally permit a single Senator to prevent issues and individuals (in the case of judicial and executive appointments) from even coming up for a vote. There are also filibuster rules that provide the ability to prevent votes even when a majority of all 100 Senators favor the legislation.
A few isolated individuals have broken the system and now it up to rest of us to clean up the mess. If that scenario sounds familiar, it is a lot like the recent example of a few greedy bankers breaking the financial system and then sending the repair bill to the U.S. taxpayers.
One of the hardest things to find when trying to learn more about economics is a simplified and practical explanation. This is one of the rare books that makes economics understandable while also being fun and educational at the same time. The subtitle is an accurate summary of what this superb book has to offer: Everything You Need to Know About How the Economy Works.
Everyone Has an Opinion About the Economy
- "Ask five economists and you'll get five different answers; six if one went to Harvard." (Edgar R. Fiedler)
- "Economists are people who work with numbers but don't have the personality to be accountants." (Anonymous)
- "Economics is extremely useful as a form of employment for economists." (John Kenneth Galbraith)
- "Henry Ford was right. A prosperous economy requires that workers be able to buy the products that they produce. This is as true in a global economy as a national one." (John J. Sweeney)
- "We have always known that heedless self-interest was bad morals; we now know that it is bad economics." (Franklin D. Roosevelt)
The video shown above provides a concise explanation of the current economy.
The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.— Thomas Sowell
Ethics and Economics Do Not Usually Mix Well
The economic interests of banks are frequently at odds with what is economically best for small businesses. This has become more apparent during the past several years when banks dramatically changed how they operate and many almost went out of business as a result. Taxpayers provided a bank bailout, but commercial loans to small businesses have not returned to normal levels.
What can be done? For starters, small business owners realistically might need to fire their bank and banker.
Here is a quote by B.R. Ambedkar that reflects the sentiment:
"History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them."
The above video is a satirical parody — it is meant to be entertaining while it also explains complicated financial dealings in an understandable fashion. So sit back and be prepared to learn a thing or two while you are also entertained.
One of the most challenging parts of understanding today's business economy involves how much banks have changed. Here is a superb book that explains as well as any single book how banks really operate.
Do Banks Worry About the Economy?
When I hear one banker after another testifying before Congress about what went wrong to cause the banking crisis, it occurs to me that perhaps banks don't really worry that much about the economy. After all, banks operate by a different set of rules than everyone else, so why should they worry about economic downturns? For example, if a financial institution needs more cash it simply gets it overnight from the Federal Reserve at a cost that is literally often zero. Do they ever lend it to anybody at anything approaching what it costs them?
Some of these differences between banks and the rest of us can cause them to crash and burn if the economy decides to take a severe turn as it did several years ago. Many banks were speculating in multiple areas under the premise that everything would be fine as long as volatility stayed within a "normal" range. Then the economy reached out and bit the banks that should have known better. Financial derivatives were one of the riskiest investments that caused banks to need a taxpayer bailout. Now that they have everything under control again, would it surprise you to learn that many of them have resumed their risky ways and have continued their investing activities with derivatives? Perhaps Thomas Jefferson knew what he was talking about when he made the following observation over two hundred years ago:
"Banking establishments are more dangerous than standing armies."
While banks might not worry about the practical economy that impacts all of us, we should indeed be worrying about banking institutions. For example, we all owe it to ourselves to learn why bankers are referred to as "Banksters" by William K. Black in his superb book.
It's a recession when your neighbor loses his job; it's a depression when you lose your own.— Harry Truman
© 2013 Stephen Bush