The Modern Economics of the USA: The Land of Debt & Demand

[Music] this is the United States of America today the largest most powerful economy to ever exist in history and this is Times Square the focal point of the most powerful city in the most powerful nation on earth outside of its location though it is still very important to take a second look at this landmark and absorb it because it may very well be the best symbol for what drives a modern economy this is the final part of a three-part series on the economy of the United States previously we have explored how the economy of the USA developed from a British colony and into the industrial powerhouse that rose to the position of power that it occupies today which brings us on to America in the 21st century when a lot of people think of powerful economies they will imagine huge factories or shipping ports plentiful farmland or maybe even things like powerful investment banks but in reality all of that revolves around what you see here Time Square earns a spot in the middle of the financial capital of the world because it is basically a giant on a bashful cathedral of company advertising which are one of the two things that the world runs on today debt and demand developed national economies are full of people that don't really need for anything anymore almost everybody living in the United States today has access to a plentiful food shelter drinking water and almost everything that Maslow put on the bottom of his hierarchy of needs of course there are exceptions and things like wealth and equality are huge issues but a perk of being the wealthiest nation in history is that the citizens of the nation tend to be quite wealthy the GDP per capita of the United States is around 65 thousand US dollars which is huge it makes the average citizen of the United States today wealthier than nobilities and royalty not more than two centuries ago which sounds weird I am sure many Americans will argue that they don't feel like royalty when they are deciding between rent and student loan payments they consider this almost anybody at any time in the nation today can get very calorie dense food and even things like processed meats and fruit that would have been the reserve of royal feasts a few hundred years ago people today also have access to information on a level unimaginable - even full-time scholars fifty years ago we also take things like international travel machines that wash and dry our clothes perfectly cook food keep our houses cool and warm at the flip of a switch or whatever entirely for granted these things that are afforded to us has almost expectations today would have been the domain of the gods to people and past civilizations so for them looking forward the United States of America and by extension the Western world would look like a post-scarcity civilization [Music] a post-scarcity civilization is more or less a hypothetical thought experiment that philosophers physicists anthropologists and especially economists like to play around with the idea of normally post-scarcity civilizations our model as some distant future reality where Humanity has exploited the resources of entire galaxies to the point where any material good has such unlimited supply and such limited marginal cost that scarcity or the limitation on any item is said to be non-existent you want 10 bugatti is a private jet a super yacht and a partridge in a pear tree no worries just throw it into your quantum 3d printer and watch as a limitless supply of materials mined from space are turned into perfectly replicated objects in front of your own eyes this is obviously a distant reality for us here in the early stages of the 21st century but it is not too outlandish to imagine with a logical progression of today's technology and it is a really interesting hypothetical the foundation of any economic theory for almost any school of economics is that we have unlimited wants but only limited resources in which to fulfill those wants it's the first thing that they teach you when you walk through the doors of an economics 101 lesson everything is built on top of this idea demand and supply models efficient market hypothesis the constant battle about how to best allocate the limited resources all of it is based on the idea that resources are limited so when we explore the idea of a hypothetical reality without limited resources a lot of our understanding and theories and models kind of break down in a sense or does it you see a post-scarcity civilization is normally a hypothetical where resources are unlimited and economics is based on unlimited wants but only limited resources in which to fulfill those ones which is a bit of a misnomer you see not all wants can be fulfilled by resources the example before of Bugattis and yachts Jetts might be where people first go when they have unlimited resources I mean just look at GTA online hackers and you see a live demonstration of this in practice but this example is also a really great example of the limitation of limitless resources you see plays in GTA that just mod into existence anything their little heart desires will probably get bored of the whole thing quite quickly and that is because resources do not necessarily equal fulfilled wishes this is Maslow's hierarchy of needs we have looked at this model before when we explore the Democratic Republic of the Congo to understand what true poverty meant you see this pyramid here was a model put forward by psychologist Abraham Maslow in his 1943 paper a theory of human motivation and it basically has different levels of needs and wants at the bottom are real basic things physiological needs like air water food shelter sleep the things that are only really denied to the real bottom levels of modern society like grad students all jokes aside though this and the next level up encompass things like security property health all of these things can be satisfied with unlimited resources but beyond that things get a little bit more difficult you see humans take being unsatisfied to an art form so oftentimes it is not enough to just be healthy and alive you need to do human things like have good relationships develop self-esteem and achievements which is exactly where our GTA online hacker fails tremendously but in the real world it explains why the citizens of the wealthiest nation in history are not the happiest people in history you see sure average people today are richer than kings they have better food better shelter more safety from things like famine and pandemics but they don't necessarily have these more introspective needs fulfilled now out of fear of sounding too much a psychology lesson this is how it relates to the economy of the United States the United States is a post-scarcity civilization sure it's not the kind of post-scarcity civilization that theoretical physicists prophesize over where we can snap our fingers and materialize anything but the economy of the United States still affords these same levels of Maslow's pyramid to its citizens as a proper post-scarcity civilization would the United States today and by extension that corporatized monolith that is the world economy is so fantastic at making food and water and houses and clothes that almost nobody in the developed world falls below this level on Maslow's hierarchy of needs which means that our economy is not based on limited resources trying to fulfill unlimited needs but rather creating needs to facilitate resources think back to ancient civilizations their wealth and power was almost directly correlated with how much they could farm the more they could farm the more people they could support and the more power they could wield after that it became how many colonies your nation owns and then for a short while it was all down to how good your manufacturing technology was these days it's how much demand your consumers have things like household spending retail sales figures in consumer demand are synonymous with a healthy and growing economy the wealth of nations has shifted from how much an economy can produce to how much it demands nobody needs a private jet or a super yacht or even a mobile phone that has unlimited access to the greatest repository of knowledge in existence we convince each other that we need these things since the modern age of industrialization demand has become the most important factor in an economy demand is basically a function of the amount of people that are willing and able to buy a good or service at a given price which can be broken down to two parts willingness to purchase something of course depends on the item going back to the hierarchy of needs if it's on these bottom two levels people will purchase it no questions asked I need to pay for food and water and rent that kind of goes without saying you don't really need to convince me there but that new watch or the latest iPhone or a car with 600 horsepower and two seats yeah I'm not going to die without those so it is the job of companies to intertwine the next rungs of the hierarchy of needs into these products if I wear a great suit I might attract a nice partner if I wear a $20,000 Rolex I will be well respected and it will boost my self-esteem and even at the very top level where we are looking at self-actualization it is not unheard of to hear people saying things like one day I will buy a Ferrari as a self actualizing goal something that they actively working towards achieving which is effectively just to purchase the whole process of creating the willingness component of demand is basically marketing and advertising which are very new concepts back in the day people needed rice they paid money and got rice they needed homes they work the fields and they would be accommodated there was very little wiggle room to create any more desire for things because nations were pretty much maxed out with what they could produce but then in the early 1900s companies started realizing that hey we can probably produce more stuff than people will ever need better start convincing them they actually need it another major part of this is how secure people feel if people are confident that their job is stable and their income will continue to increase they are far more likely to be willing to go out and buy something that is probably a little bit more on the irresponsible side okay so that explains the willingness component of demand but what about ability I mean I am willing to buy a Ferrari but I am NOT able to because I don't have enough money so all the marketing in the world is wasted on me to get around this issue there are two basic ways to increase the people's ability to consume and that is increasing their wealth either through giving them a better job or providing lucrative investments or through facilitating demand with credit today debt in the Western world drives demand a vast majority of consumer spending is done on credit cards cars are purchased with car loans and homes or purchase with home loans debt is a given in the modern world which is good and bad great in the sense that it increases people's ability to purchase take the Ferrari example from earlier I have the willingness to purchase a Ferrari I mean they are awesome but I don't have enough money so the whole deal went nowhere and I did not stimulate the economy but say I had good credit I could probably get a 5 year car loan and just make $7,000 a month payments and ruin myself financially but hey you beauty suddenly I actually have demand which means that some little Italian men in modern I still have a job a car salesman and a financial broker get paid a big Commission and the insurance company receives a large premium my ability to make a dumb purchase had knock-on effects throughout the economy in a positive way and this is why demand is so closely measured it's not the demand is special in and of itself it is still of course extremely important that economies are still producing things not only to facilitate the demand but also to create the wealth that is required to create the demand no no the reason that demand is so important is because it is a great measuring tool of how good an economy is going as we have seen a purchase like my brand new Ferrari creates a lot of good in the economy outside of making me very happy as I flex on my friends and pedestrians on the street but demand fueled by debt has consequences you see while my purchase was fantastic and gave a huge boost of cash to people like car salesmen who can go out and spend that money etc etc it also means I am now lumped with a $7,000 a month car payment which means that suddenly I'm probably not gonna go out to my favorite restaurant as much anymore I'm not gonna go out and buy as many new clothes or that new TV because I can't really afford it anymore I made a big purchase decision when times were good but after the fact I needed to tighten my belt which causes demand to fall now on an individual level it is probably not going to make too much of an impact but lots of people tend to do the same thing when people take on lots of debt to get something like a house or a car or an education it means that they are not going to be able to spend as much later on when lots of people do this as groups it causes a peak in the economy where everyone is taking out loans and buying lots and lots of things and then downturns when everybody actually starts paying these loans back with not as much room left to spend as they used to have this is what causes the business cycle the economic booms and downturns they are pretty much all caused by people borrowing and then tightening their build which is directly measured as demand America is a nation of great wealth individual wealth and collective wealth it is a nation that typifies modern economics prosperity is not really determined by industriousness or what the crop yield was like this season but rather how much people are willing and able to borrow and spend in many ways every citizen of a modern developed nation must realize how privileged they are but in the same way it is also juvenile to assume that humans are contented just because they are not on the verge of death understanding demand through the willingness and the ability of people to pay for levels of goods that facilitate different levels of the hierarchy of needs seems like a very abstract concept it blurs the line between a nice respectable study like economics and riffraff like psychology but if you can understand the whole process of an individual making a decision to leading them to making a purchase that then creates well for more people but also impacts their ability to make a decision to purchase something later on well you understand the modern global economy hi guys thanks for watching as always a huge thank you to our new patrons over on patreon your support continues to make this channel possible guys so thank you otherwise if you did enjoy the video please consider liking and subscribing as always we will be hosting a Q&A session live streamed on the second channel linked in the video description do you want to be involved in that come on over there or participate directly by joining our discord server thanks guys bye

Channel: Economics Explained

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Keywords: the economy of united states, the economics of united states, the economy of united states explained, the economics of united states explained, united states economics explained, economics explained united states, united states economy explained, united states economy, united states economy economics explained, economics, united states economics, how united states economy works, usa economics, the economics of the usa, usa economics explained, economics explained

Id: 5B0Sc52jLxg

Length: 17min 45sec (1065 seconds)

Published: Sun Feb 16 2020