Economics after the mid-1980's has become a subject of vital importance. Students today actually want to learn about economic problems. Prior to the mid-80's, there was little mention—and little understanding—of such things as ravaging inflation, high interest rates, fear of recession or the collapse of entire industries. None of these pressing issues of our time were acute until just a few years ago.

Today, what we want is a general understanding of the economic system under which we live. We expect this understanding to encompass a large enough range of matters so as to illuminate the problems facing us today, and to prepare us for the unexpected problems we will actually encounter tomorrow. Remember that economics is essentially the study of a process we find in all human societies—"the economic problem" is simply the process of providing for the material well-being of society.

The Father of Economics—Adam Smith
"Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal, by its gestures and natural cries, to signify to another, ‘this is mine, that's yours; I am willing to give this for that.’"
- Wealth of Nations

It wasn't until 1776, writing about "a certain propensity in human nature," that Adam Smith first placed the act of "exchange" at the very center of his scheme of economic life. There can never be a doubt that exchange—buying and selling—lies at the very heart of a market society such as he described.

For the first six thousand years of civilization, human societies could be described as either traditional or authoritarian. Wealth was generally the reward for political, military or religious power or status, not for economic activity. The French Revolution in 1790 marked a major turning point: a son could enter a field of work different from his father's, and the "free market" was born.

The emergence of capitalism, with its central wage labor relationship, signalled much more than a change in ruling classes from aristocrats to capitalists. It signalled a new meaning for wealth: as commodities-for-sale, not as objects-for-display. Unlike the pyramids, cathedrals and edifices of previous societies, the wealth of capitalism had no status until it was "realized" in the marketplace. This necessity for sale introduced a new note of urgency, a nervous intensity, into economic life. Capitalism was more than just a change in social institutions—it was a completely new economic system.

In The Wealth of Nations, Adam Smith was the first to present a comprehensive and systematic theory of economics. His growth model—what he called the "desire for betterment"—we recognize as the capitalist's drive to maximize income; or, in the language of business, "the profit motive." But, how does this desire for betterment stimulate economic growth?

As capitalists seek to increase income, they invest in machinery and equipment. As a result of the machines and equipment, their labor force produces more. Because of increased production, society's output grows. Thus, the desire for betterment impels manufacturers to expand their businesses in order to increase profits, and economic growth occurs as a result.

The Accumulation of Personal Wealth
For individuals, the "desire for betterment" begins with the satisfaction of the basic human needs of air, fire, water, food and reproduction. Only after these needs and priorities of life are met can we begin to concentrate on the accumulation of personal wealth. It wasn't until over one hundred and fifty years after Smith defined economic theory—around 1960—that our society reached a level where these needs were met for virtually everyone. Only then did we begin to see signs of average citizens beginning to accumulate wealth (i.e., assets above the satisfaction of basic human needs).

The accumulation of personal wealth is a journey toward financial freedom. We define financial freedom as the accumulation of sufficient assets to allow us to do what we want, when we want, and how we want to do it. The road map for that journey lies in understanding the dynamic of your own individual life cycle and the wealth cycle. For more information on the wealth cycle, see "Jerry's Corner" in the August, 1992 edition of Financial Advisory.

No matter what stage in the life or wealth cycle you find yourself, it is never too late to plan for financial well-being. The key lies in proper money management. The moment you exert your power over money by making the first move saving you take the first step toward financial freedom. Then, money will become your servant on the road to financial success.

An Economics Primer

Select Additional Articles from Jerry's Corner The Investment Way of Life Four Cornerstones of Success Excuses... More Excuses The Wealth Cycle Investment & the Wealth Cycle An Economics Primer The Life Cycle Creating A Saving Culture Entrepreneurialism A Fortune in Your Hands Look to the Pros - Introduction - Part I - Insurance - Part II - Stock Broker - Part III - Real Estate - Part IV - Attorney - Part V - CPA The Priorities of Life - Introduction - Part I - Health - Part II - Career - Part III - Relationship - Part IV - Home Elements of Investment - Introduction - Part I - Risk - Part II - Management - Part III - Flexibility - Part IV - Liquidity - Part V - Cash Flow - Part VI - Rate of Return - Part VII - Appreciation - Part VIII - Leverage - Part IX - Taxes

Moorman and Company, an accounting and personal financial management firm based in Palo Alto, serves the San Francisco Bay Area, Peninsula, and Silicon Valley from Hillsborough to Saratoga-Los Gatos, including Atherton, Menlo Park, Los Altos, Los Altos Hills, and Cupertino.