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The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Henry Hazlitt
Economics in One Lesson

Economic Systems

Introduction

Markets, whether subject to intervention or not, do not operate in isolation. Each market consists of a system that makes up a component of a network of ever larger systems culminating in what we might refer to as the world economy. We cannot, however, understand any economy as a unit. We must always keep the network, interconnected, nature of economies in mind.

In this section we will examine the systemic nature of markets. We will explain why all of us must play the role of participants and can never be effective controllers of the systems we refer to as economies.

Complex Markets

Markets, although fundamentally very simple, contain many interconnections and multiple feedback loops. This makes them extremely complex and sometimes difficult understand. In this section we will examine the complexity of markets.

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Economic System Models

As complex adaptive systems markets do not lend themselves to mathematical models — in spite of the practice of many economic practitioners. If one is careful about the variables used, however, simple models can prove useful in demonstrating economic theory.

In this section, I have developed some models of the simple economy for the purpose of demonstrating some fundamental interactions in economic systems.

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A Pricing Model

When people make exchanges based on their individual subjective preferences the create an objective indicator of those relative preferences in the form of prices — the ratio of what is given relative to what is received. Those objective prices provide a way for economic actors to make calculations regarding the allocation of resources.

This link takes you to a model I have constructed that shows the relationship between direct exchange prices and money prices.

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Ludwig von Mises

Lugwig von Mises
The father of modern Austrian School of Economics.