The Economic System Works Like A Simple Machine With A Pivot ( Money )
The economic system works like a simple machine with a pivot (money) around which it revolves. To appreciate the functioning of the economy, one needs to analyze the behavior of each economic agent or individual. Understanding of each individual decision making process is essential in unravelling the mystery surrounding the success or failure of an economy.
Adam smith in his famous book “the wealth of nations” opines that if every individual is allowed to maximize his own selfish interest, the interest of the society as a whole will be maximized. This assertion will come to dominate the classical thinking for centuries. The micro interest of society are aggregated at the macro level to reflect the collective welfare of the society.
Individuals are constantly interacting among themselves in what I called “economic magnet” (transaction)
The economy moves by the attracting force of this magnet. The rate of growth, development or otherwise depends on the direction, pattern and composition of the economic exchanges
Every individual, government and government agencies and those individuals to which transaction decision are made for and on their behalf influences this pattern of exchanges in the economy
With well developed economies like japan, china, US etc, this transaction pattern moves in a circular flow direction with every linkage filled by more than proportionate injection.
The forces around the economic magnet create both income and expenditure