Universal Entrepreneurship

What comes to mind when I say, 'entrepreneur'? The Silicon Valley cowboy, leverage mobile platforms and building social networking utilities? The steel tycoon of the industrial revolution, forging a new path to an industrialized America? Or the engineer whose innovative manufacturing methods revolutionize the way cars are built, bringing them within reach of ordinary Americans? Whatever your conception is, the entrepreneur is quite an exciting individual nowadays. Entrepreneurialism is not a career; it is a culture. But that culture, that emergent order of ideas, doesn't all fit within its dictionary definition. The question is this: do we shed a valuable set of ideas in order to conform to the dictionary, or do we reinvent the entrepreneur?

Jean Baptiste Say coined the term, giving us our classical conception of the entrepreneur as an independent businessman, an "intermediatory between capital and labour." According to Say, the entrepreneur managed his workers and his equipment in order to provide goods and services to the market. So far, so good, right?

But if that's all an entrepreneur is, why does Stanford regularly invite economists, rappers, authors, presidential advisors, and presidents of charities to speak at its "Entrepreneurial Thought Leaders" seminars? If Say's definition was exclusive, how come drug dealers, lawyers, and stock brokers don't  burst into mind when we think 'entrepreneur'? Something is missing.

Maybe we need to reenvision what it means to be an entrepreneur.

The overriding theme of entrepreneurial culture today is innovation. The entrepreneur who follows in someone else’s footsteps, with someone else's business plan, selling someone else's idea, isn't. That's great; innovation drives the economy and the world forward. The creative entrepreneur stretches his mind into the future, dragging it into the present's grasp.
Here's another commonality among entrepreneurs: they start small. Large firms spin off huge subsidiary corporations with hundreds of millions of dollars of initial capital. Entrepreneurs focus a relatively small pool of resources onto a single goal with brilliant intensity. What they create is a scalable start-up, that is, one that can be transformed into a mammoth institution down the road. The great capitalists of America, guys like Jobs, Gates, and Zuckerburg , started as entrepreneurs. They became CEOs, presidents, and chairmen. But CEOs, presidents, and chairman don't operate small, scalable start-ups--they aren't entrepreneurs anymore.

The marriage between innovation and starting small is by no means accidental. If an idea is truly innovative, it's probably risky. It's untested. It would be stupid to dedicate relatively large amounts of resources to what may crash and burn. So the start-up is an experiment; if it burns, you cut your losses and try something else. If it thrives, you attract more resources and grow it into something great--an Apple, a Pixar, or a Facebook.

Now that we've narrowed the entrepreneur to a creative innovator, who starts small, and scales up, we find one thing missing: any mention of profit. The entrepreneur is not restricted to the business world. Why should he be? Why should a creative genius be restricted to pleasing stockholders when the world needs innovation in so many more domains? Suddenly, entrepreneurialism as a way of life opens wide: it grows to encompass every meaningful human endeavor.

Intellectual entrepreneurs like Duncan Black began entire schools of thought ( like Black's Public Choice Theory), outside any preexisting academic disciplines. Others, like Alfred Nobel or Richard Wurman, created new institutions for encouraging, advancing, and disseminating new ideas (the Nobel Prize and the TED conference, respectively).

Evangelical entrepreneurs create innovative ways to spread the Gospel and cultivate spiritual growth. My old church was a start-up; they met in a movie theater, answered texted-in questions during service, and published a weekly webcast to address anything they didn't have time to answer on Sunday. Even outside the church doors, it's hard not to find entrepreneurs at every turn whenever people do God's will. The YMCA & YWCA, the boyscouts, and the small-group phenomenon all meet start-up criteria.

Social entrepreneurs are motivated more by altruism than profit. Some finance poor entrepreneurs, and create trade channels for craftsmen. Others, like George Washington Carver, were inventors--Carver designed hundreds of technologies using agricultural products that wouldn't deplete soil as severely as cotton. He only ever applied for three patents.

Different people. Different passions. Different goals. But innovators, all. Entrepreneurs, all.

Having reenvisioned the entrepreneur, maybe we should seriously consider reenvisioning life itself. We could call the new framework "Universal Entrepreneurship." The idea? Simple--make everything a start-up, and treat life like the playing field where one after another, start-ups are built and sent onto their eventual paths. Why think this way? Because there's no good reason why life has to be lived the way we normally live it. Let's stop pretending that everybody needs a linear, one-track career, or that life has to occur in 'stages,' (college, careers one, two, and three, followed by retirement) like the life cycle of an insect.  

Kids will ask what they should "be" when they group up. Now there's a new answer we can give them--a universal entrepreneur. "Find the things you love, the things you're meant to do, and do them all. Build charities, start companies, invent technologies, and create platforms for people to share ideas." When they ask how they'll be able to do so much, we can tell them to treat their start-ups like legos: discrete units, separately formed, stacked one on top of another to form the composite structure of life. The art of entrepreneurship is to form the lego; the art of life is too stack them together beautifully.

Maybe it's not for everyone. Of course specialization is a great thing. But maybe there's some kid out there, equally passionate about physics and anthropology as he is about ministry and music, who was made for this sort of life. Maybe telling him or her to bottle up half a dozen genuine passions and interest for the sake of a single career is a really terrible idea. Maybe we've already confined dozens of those individuals into our shoddy expectations, without knowing it.

Now, if you were a kid who wanted to do all things awesome in the world, wouldn't that be the coolest thing ever? Wouldn't that motivate you to learn and grow as a person? The more I think about it, the more I suspect that our poorly thought out, half-baked cultural and economic norms have a lot to do with why some kids don't  grow up. Maybe if we gave them better reasons, they would actually grow up with gusto.

The Economy as an Emergent Order

For Jessi and Tim.

You both seem to enjoy studying economics this year. And I am sure you both know how happy this makes me. I'm not just excited because I think econ is cool and I will have more of an opportunity to talk with you guys about it. I'm excited—no, exhilarated—because you're discovering a beautiful field of study, as sublime as it is under-appreciated. But some parts of economics are boring, ugly, and crude. I want to shed some light on why some of it seems so crude, and the rest so elegant. 

The economy is an emergent order. What’s that? An emergent order happens when lots of individual elements cooperate and act in orderly ways, producing phenomena and patterns on a higher level that become realities in themselves, above and apart from the individual elements that comprise them.

We see emergent orders all over. In physics: atoms, motion, and gravity form stars. Stars radiate light, shape galaxies, and supply the energy that enables life to happen—atoms, gasses, and gravity don't. In neuroscience: our memories, emotions, and thoughts are to some extent the emergent order arising out of electricity, chemical reactions, and a finely-crafted architecture of about one quadrillion connections looping all over the brain.

As it relates to economics, one of the most important emergent orders is the market, the arena of buying and selling that determines how much stuff is made and what price it sells at. When millions of people and companies (I'll call them 'firms' from now on) compete for dollars and resources, these lines called supply and demand materialize. They aren't mere abstractions; these entities have real effects on society. The large-scale properties of this emergent order cannot be ascribed to any of its constituent parts (although it is their behaviors which give rise to it).

The economy can be seen as one big emergent order, comprised of smaller emergent orders (such as the market, supply chains, and financing channels). The economist's goal is to understand those properties, and to tease out sometimes nuanced and complicated cause-and-effect relationships between the constituent parts and the emergent whole. People are nuanced, weird, hard-to-understand things, so cause-and-effect relationships can be easily obscured by confusing and irrelevant variables.

Take the relationship between government stimulus spending and economic productivity: there are lots of related and opposing effects of stimulus spending. One is an increase in buying and selling behavior, so firms produce goods for which there wouldn't have been demand otherwise. The other is a diversion of resources away from firms, and toward the government. Firms only survive by extracting as much value as possible from given resources (so they can sell stuff at a profit); government has neither the incentives to be productive nor the mechanisms to know whether it is providing value or draining it (more on that later). These two effects are both real, and both go in opposite directions: one increases productivity while the other diminishes it. So does stimulus spending increase or decrease productivity? Good question. Economists aren't sure yet.

Now, a lot of the conversations you see on CNN and C-SPAN about the economy sound really dumb (to most people, that is; some, such as myself, aren't so disgusted). Pundits talk about inane things like prime rates, home-ownership, the labor participation rate—not the most sublime topics. That's just because the stuff on the news is a particularly tiny subsection of economics: usually the overlap between the financial industry, government policy, and controversial economic theories. Of course that subsection is going to be boring, ugly, and crude. But it's a very, very tiny subsection. The rest is awesome.

Don't Love America (There's a Reason)

Before I start, instead of asking that you just hear me out with an open mind, I merely beg you not to shoot me or throw things at me (but if you must, please choose the latter option).

Life is good, as is love. The sun, beautiful, warm and life-sustaining, is good. The light that comes out of the lamp beside me is good. America, however, is not good.

Goodness is a property that comes from something intrinsically noble and lovely. Life, love, happiness, and justice do not appeal to any higher authority to validate their goodness. They are in and of themselves good.

But a nation? Why on earth would we ascribe it such a label? It's easy to see why, actually. This nation has done some pretty impressive things. A founding document centered on the ideal of inalienable rights is pretty impressive. And who could forget that awesomely epic revolution we fought against a tyrannical Britain?

But it's still absolutely crucial that we don't misunderstand that history to believe that America is somehow good. Here's why.

Many of the things that America has done are good, and we ought rightly to be proud of those virtuous fragments of our heritage. We can rightly take pride in what our country has done right, but the moment we assume that rightness to rub off on the nation itself (which is nothing more than a landmass plus a government) we lose sight of the dark times in our past. We put on shades that bias our view of the past, present, and future.

In other words, it's not only absurdly false, but dangerous. When you view a country in and of itself as inherently noble, you look favorably upon its past transgressions, no matter how grievous. After our treatment of Native Americans in the nineteenth century, both sides' war crimes during the civil war, our terrible discrimination against the Chinese in the industrial revolution, and our mistreatment of blacks throughout the twentieth century, America has serious blood on its hands. I don't hate America for that, but I recognize that those evils happened. When you put on these rose-tinted glasses and look at the past with an "America is beautiful" frame of mind, you will try to scrub those transgressions away. You will rationalize them, try to ignore them, be discomforted by them, repress them, and irrationally deride anyone who acknowledges America's past sins. Your reactionary vitriol will be unappeasable—you'll call the truth-teller an unpatriotic, America-hating liberal before he even has time to blink.

But your view of the past won't matter nearly as much as your view of the present, which is shaped and colored by your view of the past. You won't think twice about the possibility that we may be wrong in any given war or conflict; whether Iraq, Afghanistan, or the war on drugs, America automatically gets the moral free pass. You'll implicitly care more about the lives of U.S. citizens than you will about the lives of foreigners, as if there was some difference in the inherent value of each human life. You'll ignore the hardships that our trade and immigration policies inflict upon the rest of the world, only focusing on how to line American wallets and alleviate American cultural discomforts. You'll close your ears to any possibility of a wrong deed on America's part.

You will, inch by inch, become blind to injustice.

This nationalistically induced blindness lies at the root of much of the world's present and past hardship. The Germans allowed the Nazi atrocity to march forward in one of the most terrible onslaughts of evil in human history, precisely because they believed in their country. The Confederate States of America was largely motivated not only by racism and greed, but the southern nationalistic view that they had to keep pure their southern way of living. Why? Because the "south" was inherently good.

To love one's country is only the collective, political extension of very human sins—pride and self-centeredness. Why should a corrupt, sinful human not extend his pride and egoism to his country? And it is also pervasive into the will and emotions. We feel uncomfortable, at first, detaching ourselves from something we so dearly cherish. It hurts to lay down our pride of the nation, just as much as of the self. But it must be done.

History tells tales of tragedy when this lesson is ignored, and our current political, diplomatic, and economic policies are largely contingent upon the degree to which we can abandon nationalism, and view all humans of all nations as equal. If we cannot get this mindset straightened out, I fear that we have a future awaiting us full of more needless suffering… only because, as a nation, we wanted to feel absolutely great.

It needn't be so.

Dad Gum Gub'mint

"Dad gum gub'mint," he says. His eyes squint and his lips curl into a grimace as he goes on, saying, "Gub'mint's the whole mess. Gittin' too big. Think they can run our whole lives!"

Then he proceeds to rant about [insert government program here]. Everyone thinks he's crazy, and to be honest he probably is. But he has something important in common with the Constitution, but not quite the same. What he has is more like the Declaration of Independence.

First, who is he? He's your crazy old uncle, or that neighbor with all the guns, or the sales clerk at Bass Pro. He might not even be a 'he.' She could be your home-schooled friend who's memorized the constitution and brings up at least of the amendments in every political conversation she has (but she probably prefers the tenth). He or she is whoever distrusts government.

Obviously, what he or she possesses is distrust of government, but how does that compare to the Constitution and the Declaration of Independence? Distrust is a real, legitimate check on the power of government. The Constitution supplies several legal checks, but it cannot supply social norms. Norms are not documents, they cannot be legislated into existence.

The Declaration on the other hand is a little more analogous. The Declaration expressed an idea, served as a tool of moral warfare, and was a morale lifting agent during the Revolutionary War. The idea was governmental distrust in a very blatant form—individuals superior to the state, and the state under threat of revolution by many individuals. The moral warfare was fought as the Declaration gave the country and the world a new set of eyes through which to evaluate the revolution in a positive light. By materializing these ideas into an eloquent statement, the Declaration became a rock upon which the soldiers could base their morale and courage. "What are we fighting for, anyway?" asks the one, to which another responds, "The rights of man! The inalienable rights that God gave us! We are overcoming a tyrannical government, as is our right and duty! Don't you remember our Declaration?" Because the very essence of the Declaration was and idea, it serves almost the very same purpose as the norms I am about to mention. What makes it so powerful is that its force lies in social norms, not legalese.

What is a social norm? It is an idea, shared by the multitude, about what is right, wrong, commonplace or acceptable in a given situation. We shake hands with the right hand. We say, "how are you doing?" when we begin conversations. We don't talk about religion and politics among diverse company (a norm I am known to flout regularly). And we don't trust the government.

We once distrusted government. This distrust is so crucial because it is used to prevent tyranny just as much as our constitutional checks and balances are. Furthermore, when our constitutional checks are violated, as can happen to any legal document, society's norms remain. We've still got the people who say, "No! That government's gotten way too big, and gone way too far!" Judicial, executive, and legislative checks aren't enough; means outside the government are crucial as well.

Those norms are fading away.

Under the false pretense of reason, we are encouraged to separate our emotions entirely from our thoughts. That is not 'reason,' it is lunacy. Government possesses the greatest claim on the use of force. It is dangerous. It is not a simple, harmless institution; it is very able and, as history clearly shows, very willing to go too far.

Americans are now okay with regularly showing government officials an ID. We're fine with filing mind-numbing loads of official paperwork to run a business. We are okay with getting searched and patted down at airports. Where's the distrust? Where's the "back off, I don't want your official nose in my business, my personal life, my home, or my junk"?

There should, regarding government, be a feeling similar to that which motivates you to cross the street when a suspicious-looking character is coming from the opposite direction. This brand of distrust motivates you to lock your doors in a bad neighborhood. It motivates you doubt government's stated intentions and dread its power. There is nothing irrational about that.

Not only is this apathy harmful, but it’s self-propagating. In other words, it's not only the match; it's also the wind which carries the fire. The more people accept government intrusion into their lives, the more their children will. The more they will accept in the future. Acceptance of governmental intrusion into every aspect of our culture, personal lives, and finances is simultaneously its own cause and effect.

So don't marginalize the admittedly crazy redneck who gripes about government day in and day out. Don't make fun of the kid who talks about the constitution non-stop. Give him or her a pat on the back sometime—say, "Thank-you, friend, for standing up for our rights." Then just smile as the rant continues.

Beautiful Imperfection

Markets do not operate like computer programs. They are not cleanly executed, easily monitored, or reliably predicted. Markets are, in a word, sloppy.

In our introductory economic textbooks, we pretend that they are. This lets us simplify and understand the world. Much like a beginning physics student will assume a lack of air friction while studying moving objects, the economics student pretends that prices are nailed to equilibrium points. He pretends that prices for the same good are uniform, and that everybody knows what all the prices are.

But just as the physicist one day recognizes that air resistance can make or break a vehicles performance, the economist sees that market imperfections have serious effects on market outcomes. In fact, market inefficiency is much of what policy-makers are looking at today. They want something to fix, and the economy seems like a perfect candidate.

Here's a cursory list of some of these inefficiencies: Prices are not uniform. Not everyone is aware of competing prices. The same type of goods and services vary enormously in quality. People act (even financially) for emotional reasons. Information (about prices, quality of services, or available alternatives) is not evenly distributed among society.

Economists must look at the systems and institutions by which resources are allocated and determine whether they are promoting the common welfare in terms of efficiency (creating the most, best wealth) and equity (fairness, justice). So is all this acceptable?

Market inefficiencies can help and hurt. When do they hurt? When they fail to enable intelligent people to create technologies and ideas. When they prevent competition from pushing firms to the limits of efficiency and quality. When asymmetrical information prevents consumers from knowing if the companies they patronize are dealing fairly with them.

But I stand by the help these imperfections bring, which redeem them, which make them laudable. The market's evolution is constantly weeding out the bad. We are always becoming better able to efficiently allocate resources. Companies are being forced to act more competitively. The rising economic status of the consumer has made his voice so loud that companies must bend to his or her will. So the bad is fading away… but the imperfections themselves will always remain in some form, for good purpose.

That's because we are humans. We cannot attain anything perfect. Even a perfectly engineered, coordinated system would be subject to human error, and a true market falls short in the same way. Human action, no matter how systemized, has serious limits—thank our biology and the physical state of the universe for that. So what on earth is so great about the imperfections?

Can a computer program change? Can it adjust itself to be fair? No. It is deterministic—what is going to happen is predestined and perfectly efficient (if it's well designed). If a market were that way, the poor would be screwed. Those who possess inferior intelligence levels only by reason of their DNA would be screwed. The smartest people, who could afford the most advanced education would rise to the top of the economic hierarchy which was predetermined before they were even born. The below average in intelligence, who never went to the best schools, who weren't born with trust funds in their names, would remain in mediocrity.

What does this have to do with market imperfection? Everything. If you are average in wealth and intelligence, you can exploit opportunities that no one else has yet exploited. You can target clients with a slightly different product than your competitor offers. Your business won't be automatically crushed by the more efficient megacorporation from different state, and your job won't necessarily be nabbed by an overseas worker who works at a lower cost. All you need is to be more willing to search out the crevices for needs that haven't been met by the more efficient or productive economic agents.

You can view the sloppiness in our economy to be a vice. You can also view every little splotch as an opportunity for some enterprising, determined individual to make his mark on the world by filling the niche no one else had yet claimed. The moment everything becomes hyper-efficient, there is no such thing as opportunity. There is only the brute fact that as a human with intelligence x, stamina y, a personality z will fit into a predestined position in the economic sphere.

Is that justice? No. It is bondage.

I find it remarkable, though. Really, who would have thought that imperfection itself would be one of the most beautiful elements in the spontaneous social order that we call the economy?

Poetry

~Descent

Leaves descending from the branches,

Weeping with a timeless passion,

Because of sufferings that men of ages past have all endured.

Tears descending from their faces,

Men, women, children, of all races,

For the things that men do suffer, and will always suffer for.

Rain descending from the heavens,

Beats down upon the kings and peasants,

Every man alike will feel the sufferings all men endure.
~

About this poem. I believe it is man's place in this world to suffer. Don't mistake me; I am quite the optimist. But facts exist aside from what I feel about the future. No one can or ought to deny that the world is very evil and very cruel.

I don't think a human can live and not suffer, even if his suffering is limited to personal angst. Do not doubt the ferocity of personal angst, of the type that occurs when one asks what is his purpose on life, or what it will come to when he dies. Here, the king suffers along with the peasant. The one may starve, but will be nourished in eternity. The unrest of the other, however, has implications in a world that transcends our own.

Nonetheless, at some level, all humans suffer. This poem merely states that. It has always been; it is; as long as humans live on earth it shall always be.

~ Not Forgotten

Facing forward, looking back,

Time travels but one way,

My heart is locked up in the past,

In a not forgotten day.

Given to a longing gaze,

Blind to that in front of me,

My soul belongs to previous days,

'Twill be so for eternity.

And now I lay me down to sleep,

I pull the covers over my face,

My rest is shallow, my sorrow deep,

Because of not forgotten days.
~

Many of us live in regrets and constraints of the past. They can haunt. Let them go. Let yourself belong to the present, ready for the future, free from the past.

No prison is as cruel as the one forged of imaginary bars, rooted in foundations which no longer exist.

Interest rates, Inflation, and the Fed

The relationship between the Federal Reserve System, interest rates, and inflation is a complicated matter. The actual economics involved is rather simple; the systems and policies, however, are absolutely convoluted. If you can understand this system, you'll basically be at the cream of the crop as far as understanding economics goes.

There are a series of steps to getting interest rates and inflation. You have to be familiar with a few things first.

1: Money Supply and its Modification.

In the United States, we have fiat money. It is redeemable for nothing; it simply exists by decree. That means the government can change the total supply of money by printing it or burning it.

Of course, that's too literal. Our banking system is almost entirely electronic, so money "supplies" can be increased our decreased by artificially increasing the money in an account on the Federal Reserve's computers.

When the government wants to increase or decrease the money supply, it uses Open Market Operations. The Federal Open Market Committee (a department of the Federal Reserve System) buys and sells securities. If it buys them, it prints new money to buy them, which puts fresh new cash in circulation. If it sells them, it takes the money it earns from the sale, and destroys it (e.g., it sells $1000 dollars of securities, then destroys the $1000 it earns). This is what most people think of when they think of inflation: the printing press.

Securities are complicated. If you want, I'll send you another message explaining them, or you could Google them.

2: Reserve Requirements.

What happens when a bank is out of reserve funds? It's clients want their deposits, and there is a bank run. So, the Federal Government requires that banks keep a certain portion of all the money they loan out in reserve at the Federal Reserve. This percentage is typically 10%. If a bank loans out 1 million dollars, it must keep one hundred thousand dollars in reserve at the Federal Reserve.

3: The Federal Funds Rate.

What if a bank doesn't have enough money to meet its reserve requirements? It has to borrow the extra cash from a bank that has more than enough. Bank A is $1000 short of its reserve requirement, so it borrows $1000 from bank B.

That's one option. The other I'll discuss in a minute.

Those two banks privately negotiate the interest rate of the loan. The government doesn't "tell them" what to charge. But, like anything, this interest rate is affected by supply of and the demand for money. Therefore, the supply of money affects what this interest rate will be.

The "federal funds rate" is the average interest rate that banks charge each other for these loans. You take all the loans of such a type which happen, and average the interest rates out over a two-week time period to get the federal funds rate.

4: The Discount Rate

The discount rate is the interest rate that the Federal Reserve that itself charges banks to borrow money to meet their reserve requirements. This rate is usually about 1 percentage point higher than the federal funds rate. This way, banks are able to borrow money to meet their most urgent needs in an absolute emergency, but the interest is a little higher so they generally avoid it. The Fed is a lender of last resort. This provides a security blanket, in case of disruptions in normal affairs which may prevent banks from even loaning to each other, if they are all short of funds.

5: The Federal Funds 'Target' Rate.

This is the "interest rate" you always hear about.

It isn't a rate the government "creates"; rather, it is their "goal" for what the federal funds rate "should" be. They set a range within which they want the interest rate to fall. Right now, that goal is 0-0.25% percent (the government is trying desperately to stimulate economic activity. A word on that in a minute).

The Federal Open Market Committee manipulates the money supply in order to manipulate the actual federal funds rate, in order to make it closer to the target rate.

This is basic supply and demand. An interest rate is the price of money. When the supply of money is increased, the interest rate goes down. When supply is diminished, the interest rate goes up. That's how the open market committee manipulates the federal funds rate without "forcing" it to be a certain rate.

6: Effects on Lending.

This is where cause and effect plays a big role. When a bank has cash, it can either store that cash in the reserve, or loan it out for profit. If the federal funds rate is low, then the bank will lend out lots of money, because it can cheaply borrow all the money needed to meet its reserve requirement. This lowers the interest rates that banks charge consumers and businesses; it makes them more willing to lend money.

When the federal funds rate is expensive, then banks will keep more cash in the reserves by lending less money, because borrowing reserve cash from other banks becomes too expensive. This discourages lending to consumers and businesses.

The discount rate is actually set by the federal reserve, and it plays a similar role, but only in emergencies like bank runs. Because banks can normally secure lower rates from other sources, they disregard the discount rate. When they cannot secure cheaper loans in crises, the discount rate matters.

7: Why Lending Matters.

Lending matters because (according to the economic model the Federal Reserve buys into) it stimulates economic activity. The more money gets loaned out, the more people buy, the more stuff gets built, etc. The more economic activity there is, the higher prices will be. If everyone goes out and starts buying houses, the price of houses will go up, REGARDLESS of the money supply. More on that in a minute.

8: A Word on Inflation.

Inflation simply means that prices are rising. This can be caused by two things:

a) An increase in the money supply. People have more money, so they spend more. To deal with the increased demand, entrepreneurs raise prices. That maximizes their profit and prevents the supply from running out.

b) A general increase in aggregate demand. When, for some reason, the population in general starts to spend much more money much more quickly, prices will rise to deal with the increase in demand.

However, many economists argue that at the root, all inflation is due to changes in the money supply. Milton Friedman famously said that "Inflation is always and everywhere a monetary phenomenon." There is an entire branch of economic thought, monetarism, which is focused on monetary policy.

9: Summary

The Federal Open Market Committee (which is part of the Federal Reserve) creates or destroys money by buying or selling securities, in order to affect the money supply. That IN ITSELF causes inflation.

It manipulates the money supply in order to affect the federal funds rate, which affects how much banks lend.

By affecting how much banks lend, the Federal Reserve affects the economy by either stifling or boosting economic activity.

The amount of economic activity is the more significant element of inflation. It makes prices rise by boosting aggregate demand.

10: You, my friend are now very highly educated about monetary policy.

11: End the fed.