Monday, December 14, 2009

Generation Gap

People try to put us down
Just because we get around
Things they do look awful cold
I hope I die before I get old
--The Who

I'm not sure we can remind ourselves too many times about the basic economic problem we face. Income, although it's measured in dollars, constitutes a certain quantity of economic resources earned thru labor or effort. We might chop a cord of wood, for example, and sell it for $30. That $30 reflects an amount of economic resources equivalent to that cord of wood we labored to produce.

Our problem then becomes what to do with those $30 worth of resources. We have two basic options. We can consume them, thereby elevating our standard of living today. Or we can save them--i.e., we forego consumption today, which compromises present day standard of living in order to add to our standard of living in the future.

What if we want to elevate our present-day standard of living beyond our income of resources? Then we have to find individuals who have saved some income and are willing to lend their saved resources to us. They may be willing to do this if we promise to pay them back with some extra resources (often termed 'interest') along with their original principal in the future.

The longer we elevate our present-day standard of living beyond our incomes, the greater the chance that we will have to settle for a lower standard of living in the future. This is because we will need to allocate more of our future income of economic resources towards paying off debts to others. Essentially, we have borrowed resources from the future to live in the present.

If we reach a point where we are incapable of paying off our debts, then this means that resources are lost to the future.

This is what is meant when it is suggested that our current behavior threatens the livelihood of future generations.

Keep thinking this basic situation thru until you get it. Once it sinks in, then you will need no 'experts' to tell you what the problem is.

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