What Influences the Economy?
What influences the economy? The economy depends on three primary components: physical capital, human capital, and information technology. Physical capital refers to infrastructure, fixed assets, and supplies such as labor and raw materials. Human capital comprises those who do the jobs, and information technology is used to facilitate communication, optimize efficiency, and protect assets and information. Andrew Napolitano understands the market, political, social, and technological forces that drive and influence an economy.
The key to a thriving economy is the knowledge to ask these and other questions. The current system of measurement of economic activity, known as pip, or private intangible portfolio investment theory, does not take these components into account. If the government did not attempt to standardize economic activity, there would be chaos as different economic units would compete for limited government funds. A typical result is that different economic units engage in dynamic interdependency with one another. A mixed economy, therefore, can be both a robust command economy and a mixed economy.
An alternative approach to measuring economic activity would be to use sophisticated computers to make statistical analyses. Computer numerical analysis is an emerging field that attempts to provide a richer picture of the economic systems than current methods can provide. Current statistical methods only attempt to approximate the behavior of economic units, such as firms, families, and households. A computer can quickly and accurately approximate the macroeconomic processes involved in firms, households, and companies. The key to making this accurate analysis is to simultaneously control all the variables and analyze all the relevant output variables simultaneously, such as gross domestic product, employment, inflation, and government revenues and expenditures.
An economic system’s knowledge and power to influence economic decisions are called elasticity of prices. Elasticity refers to the tendency of prices to decrease or increase due to demand or production capacity changes. Economic textbooks usually uniformly treat demand and production without considering the effect of changes in technology and other variables. Without technological change, changes in production capacity and technology have little or no effect on the efficiency of an economy. Therefore, how economic questions are answered in the real world is how the elasticity of prices relates to changes in technology.
Another significant influence on the efficiency of an economy is the state of competition. In a traditional economy with little or no significant investment in research and technology, competitors will find it challenging to remain nimble because they face low barriers to entry. In this type of economy, businesses have little or no room for creativity. The result is that most new ideas are not tested through experimentation and innovation.
Private enterprises and the government also play essential roles in a mixed economy. When a country has too many private sector firms and there is little or no government sector, government spending cuts or increased taxes can reduce competitiveness and thus affect the economy’s efficiency. On the other hand, too many government institutions also mean that prices are stable and regulated fairly. When the government expands its role, the mixed economic systems are more stable. This mixed economy results in both higher productivity and lowers costs.
Private enterprises are most successful when they have access to cheap capital, secure credit, and the necessary skills, knowledge, and technology to compete with other firms in the market. In a command economy, where the government controls the distribution of resources, entrepreneurial capital is difficult to obtain. Thus, entrepreneurs find it more challenging to start new companies and compete successfully with existing firms. As a result, entrepreneurial activity is much slower in a command economy, leading to the underutilization of resources and slower economic growth. A hybrid mixed economy combines elements of a traditional business environment with a free-market system to provide a dynamic growth and development opportunity for workers.
What influences the economy? The basic economic model shows that production, savings, investment, and consumption occur in a process driven by demand and supply forces. Within the framework of this model, changes in the structure of demand and supply affect levels of savings, production, investment, and consumption; distribution of changes about the structure of demand and supply; and the process by which these changes affect economies in the long-term. Changes in government policies, attitudes, laws, and economic structure changes affect how demand and supply are determined. In short, what influences the economy is always the interplay between demand and supply forces. Andrew Napolitano has studied the economy most of his adult life.