📢 Now in English!
My article “Grasping the economy as a simple system” is now available in English for a wider audience.
In my post, I explain how the economy can be viewed as a simple, structured mechanism, rather than a chaotic tangle of abstract concepts. By examining how a bakery, a farm, and a factory interrelate, we start to perceive the economy as a complex web of real-world interactions, all interconnected through exchange.
This perspective helps to:
– Recognize the economy as a system built on everyday exchanges of labor, goods, and money
– Understand how your company and your role fit into a larger value chain
– Shift from “it’s complicated” to “here’s how it works”
👇 If you read only Ukrainian, you can explore the full post here:
🔗 https://lnkd.in/dVwVvSGD 😊
1. WHAT IS THE ECONOMY?
Is there anything in the world that cannot be called a system? If your answer is “no,” you’re right. Let’s imagine a system made up of interconnected elements. For example, let’s say the central element of this system is a bakery — a business whose main activity is baking bread.
Another element of the system is the consumer who pays money to buy the bread. For instance, this consumer is someone who works as an economist at a factory, helping to improve its cost management system, and receives a salary for that.
The factory is also an element of the system. Its main activity is producing combine harvesters. Its customer is a private farm that buys these machines, uses them to harvest crops, and then sells the harvested goods to the bakery.
This is just a small fragment of the economy, illustrating countless internal exchange processes — from the bakery to the private farm. In fact, all economic activity boils down to the concept of exchange. We produce a product, receive money for it, and spend that money on other goods and services — going to the hairdresser, cinema, or buying clothes. But all of this is also someone’s labor, isn’t it? If you agree, you’ve already begun to understand what the economy really is.
2. HOW IS YOUR (CHOSEN) COMPANY CONNECTED TO THE ECONOMY?
Each individual business is also a system where exchanges take place. Within each such system, employees participate in internal exchange processes. A marketer studies the market; an economist creates a production plan based on the marketer’s analysis; an HR specialist hires staff and develops a professional training program to implement that plan. As a result, a product (or service) is created to meet specific consumer needs. Consumers buy it, and the money received is distributed among the participants in the process — employees, managers, and owners. The income each participant receives depends on how valuable the company’s product is to consumers.
So, the number of exchange processes in a country depends on the number of exchanges within each individual business. That means, to grow the economy, we must increase the exchange activity inside every company — by creating more value.
3. WHAT MAKES AN ECONOMY “HEALTHY”?
When we talk about a “healthy” economy, we usually mean the number and volume of exchanges per unit of time. The more exchanges that take place among individuals, companies, and government institutions, the wealthier we are.
However, several key factors support the growth of these exchanges:
A healthy economy requires a strong legal foundation that upholds property rights and ensures contract enforcement. Clear and binding rules build trust and confidence among economic actors, encouraging them to exchange freely and securely.
A healthy economy also needs competitive markets, where prices reflect the dynamics of supply and demand. Competition ensures efficient resource allocation, boosts productivity, and drives innovation.
Financial institutions, especially banks, facilitate exchanges by providing access to credit and financial services. These intermediaries ensure smooth money flows between savers and borrowers, supporting investment and economic growth.
Exchange depends on access to transparent information. Participants must have relevant knowledge about products, prices, and market conditions. This transparency enables informed decisions and fair competition.
A healthy economy encourages specialization and division of labor, which increases productivity. Specialization allows individuals and firms to focus on producing goods and services where they have a comparative advantage. Exchange happens when different parties trade these specialized goods or services, leading to more efficient resource use.
In a healthy economy, exchanges are voluntary. Buyers and sellers freely engage in mutually beneficial transactions, based on preferences and needs.
A healthy economy also extends beyond national borders. Global trade enables countries to benefit from specialization and access a wider variety of goods and services. International exchanges support economic growth, raise living standards, and strengthen cooperation.
That said, the concept of a “healthy” economy may vary depending on different theories and perspectives. The factors listed above represent widely accepted principles that support a well-functioning economy, though their application may differ depending on the system and context.
4. WHAT HAPPENS TO AN ECONOMIC SYSTEM DURING A CRISIS?
During a crisis, exchange processes slow down. People start earning and spending less, and as a result — everyone becomes somewhat poorer.
Here are the main reasons why exchange processes decline in times of crisis:
Economic downturns often reduce consumer demand. People become more conservative in their spending, prioritizing essential goods and services. This lowers transaction volume and slows down the economy.
Crises can cause a shortage of financial resources. Banks and lenders may tighten credit policies, making it harder to access funds. This lack of capital hinders both transactions and investment activity.
Crises may disrupt supply chains — globally and locally. Natural disasters, political instability, or emergencies can impact production, transport, and distribution. These disruptions delay the flow of goods and services, impeding exchanges.
There is also heightened uncertainty about the future. Businesses become cautious and may postpone decisions or investments. Uncertainty reduces consumer and investor confidence, further slowing exchange.
Crises evoke fear, anxiety, and insecurity. People may avoid financial risk and delay decisions, further decreasing participation in exchanges.
Governments often introduce emergency measures to stabilize the economy. While necessary, these can affect how quickly and effectively exchanges occur.
To recover from a crisis, we must accelerate or restart exchange processes as quickly as possible. Over time, this leads to higher earnings, more consumption, and an overall improvement in well-being.
#EconomicsMadeSimple #OlhaPizhuk #PublicPolicy #CivicLiteracy #EconomicThinking
