 We talked about four revolutions. We have the Neolithic Revolution, we have the Industrial Revolution and the Second Agricultural Revolution that was largely started by what was known as the Enclosure Movement and then we have the Green Revolution. Now in each of these we found better and better ways to be able to get food and then to be able to produce products. And this meant we had a great deal of trade and an economy. And what is an economy? Well, an economy is the wealth and resources of a country or region, especially in terms of production and consumption. And it comes from two great words, Ecos, which means house and Neiman, which actually means manage. In other words, it's basically how you manage your household. Now there are four economic activities. There is primary, secondary, tertiary and quadrenary. Primary economic activities is the production of raw materials. We're talking about farming, mining, drilling and fishing. Secondary economic activities is when we start taking those raw materials and we start making things, whether it is building homes or making cars or making cell phones. Now tertiary economic activities is when we're doing services. Services are those activities that we're not developing raw materials or we're not building things. Examples of services is people who clean houses, who sell cars, who do business. These are all tertiary economic activities. And then we have the quadrenary economic activities. This is where we're dealing with knowledge. Those are the individuals who are either making knowledge, such as researchers or those who are administering those researches, such as our high tech firms. And generally what we find is the more developed the country is, the more we start moving from primary to those quadrenary services. Now we also have different types of natural resources. We have renewable, non-renewable and inexhaustible energy sources. Renewable resources are those that we can use and be able to make more, whether it's trees or food sources. As long as we do it responsibly, we can be able to continue replanting what we needed and we'll never run out. Now non-renewable resources are those such as fossil fuels, gold and iron, which means there is only one. And for example, for fossil fuels, if you burn it up, we cannot make any more. Now inexhaustible energy sources are those that we will never run out of. These are things such as sunlight, wind and tides. If we can be able to have the technologies to harness these things, we will have energy forever. So those are the basic economic activities and types of resources. Now we're talking about economic systems. There are four major systems. There's traditional economies, command economies, market economies and something known as mixed economies. Now a traditional economy is the oldest. It is the basic. And this is a matter of when we have goods or services traded without the exchanging of money. In other words, this is to barter. This is essentially when you have an item and you decide that I'm going to trade this one item for another item. You know, by the way, barter still exists throughout the world today. However, in the sixth century, the Libyans, these were people who live in what is now western Turkey, created the first coins. Now this was incredibly important because the problem with barter is you're always having to determine is this goat worth this amount of weeds or this wheat and not this much of rice or how this all worked. Coins actually made everything easier because all you had to do is everything you wanted to buy and sell is to ascribe a value of how many coins is it worth. And it is because of coins and currency that we have our modern economic systems. Now what we can do is we can break these up between the economic systems that have the most amount of freedom and those that have the least amount of freedom. And I like freedom. So we're going to start with the one that has the most amount of freedom. And let me introduce you to Adam Smith. He is known as the father of economics. And the reason is because in 1776, he wrote a book that was called the Wealth of Nations. It was largely an argument against something known as mercantilism. Now mercantilism was a type of economic system that existed between the 15th and 18th centuries that was based on the principle that the world's wealth was static. That you only had so much wealth and you could not make any more. This idea of mercantilism meant that European countries would try to accumulate as much wealth as they could and be able to protect that wealth by limiting the imports and the exchange of money to outside. It was a horrible practice and fortunately is no longer practiced. Now Adam Smith had three major things he looked at. First of all, he said that people follow their own informed self-interest. He tells the story of a butcher and a person who's buying meat. He said the butcher has his self-interest to be able to make a profit. However, the person buying the meat has a self-interest as well of being able to get the meat. So the person buying the meat, if the butcher has the prices too high, he's not going to buy the meat and therefore the butcher is not going to have his own self- interest recognized. Likewise, if the butcher sells the man bad meat, well the customer is not going to come back to him again. And because both sides have a self-interest, the consumer and the producer have to work together. Therefore prices and products are determined by the market which Adam Smith called the invisible hand. And because prices are determined by the producer and the seller, the government should have a limited role that is limited largely to establishing a favorable environment. What Adam Smith was describing was the free market system. In the idea of a market economy, wealth can be expanded. You can grow wealth so that everyone is able to partake in success in this system. And key to the market economy is that prices are created through what is known as supply and demand. If you have more demand but less supply, prices go up. If you have less demand but more supply, prices will go down. For example, let me point out the 2020 Bugatti Chiron. It looks pretty great, right? Yeah, it has 1500 horsepower. It has a top speed of almost 105 miles an hour. It can go from 0 to 60 in 2.5 seconds. I want one. The problem is there was only 500 of these made. And because you have a great amount of demand but very little supply, if for you to be able to get into a base model of one of these will cost you nearly $3 million. However, then there is the number two pencil. Now it is really remarkable as well. With a pencil, you can write 45,000 words or you can actually draw a line 35 miles long with it. Now it also has a great demand. In fact, last year demand for pencils went up by 6%. However, there is a great amount of supply. Over one billion pencils are made and sold every year. So because you have a demand but you have a much higher supply, the price is very low. In this case, you can get a pencil for about a nickel. This is an example of supply and demand. Now we also have a term which is known as capitalism. Now many people would basically interchange capitalism with free market as the same word but it is a little bit different. Now capitalism will only occur in a free market and it's based upon the idea that it takes money to make money. Let's say you have a great idea for a wonderful product that you know everyone's going to want. The problem is you don't have money and you're going to need money to be able to buy land to build a factory and you're going to have to purchase materials that you're going to have to build your product with. You're going to have to hire employees. You're going to have to test make test runs of your product and you're going to have to buy advertising. You're going to have to spend a lot of money even before you actually sell a single product. So where do you get the money? Well, it's capitalism. What will happen is you will seek investors to give you money also known as capital. Now in exchange, you're going to give them a share of the company. Now if you have ever seen the show Shark Tank, this is exactly what we're talking about. What we like to do is offer you the $900,000 for the 30% just what you asked for. Now the reason why investors will give you money is because the shareholders are going to be expecting to be able to get a return on their money whether it's dividends or actually seeing the prices of the share going up. Now because you may have lots of different investors, what you will do is you will form a corporation. A corporation is a form of business is created by individuals such as stockholders and shareholders with the purpose of operating for a profit. And who owns corporations? Well about 55% of all Americans own some stock in corporations. So that's the free market system where you have lots of freedom. Let's look at the other side of the spectrum and where we find command economies. Command economies is when production of goods and services is determined by a central government. This is sometimes known as a planned economy. And just like we had Adam Smith who was talking about free market or in the command economy we have a guy by the name of Karl Marx. Now this German along with an Englishman by the name of Frederick Engels wrote what was known as the Communist Manifesto. Now in this book these two gentlemen talk about the struggle they saw between workers and the people in the upper class and they make the argument that labor and not capital is what is most important. And what came out of the ideas of Marx and Engels was the idea of communism. Now communism is when the government owns on behalf of all the people all the property and will make all the decisions concerning the economy. Now in order to run a communist country a totalitarian government had to hold all that political power because just like Adam Smith Karl Marx understood that people had an interest in their own self-interest and it would only be a strong government that would be able to force everyone to share. Now we don't really have any true communist countries in the world today. The closest really comes to be North Korea. Now while we don't have very many communist countries we have a few that are socialist. Now socialist is also a command economy. The difference here is that people can actually own property but the government is still going to control most of the country's means for production and the distribution of goods and we talk about means for production we're going to talk about raw materials factories etc. Now this control can be exercised through several different things. This could be ownership by the government or through regulation or taxation. Now you might be thinking oh like Sweden right? Well what about Sweden? Well Sweden actually isn't a socialist economy it actually has what is known as a mixed economy. We look at the regulations of businesses when Sweden is about that of the United States corporations actually pay a lower taxes in Sweden than they do the United States. So who pays taxes? Well in the United States although corporate taxes are higher 44% of all Americans don't actually pay income taxes but while in Sweden the taxes are not targeted at the wealthy but quite frankly on everyone which allows them to provide services such as health care education and other government services. So what is a mixed economy? Well a mixed economy really is a combination of command and market economies and the reality is most economies are mixed economies. Even the United States government regulations actually prevent us from really having what is known as free trade. So why is the government involved? Well remember even Adam Smith said the government has a limited role but it has a role and that role largely is in infrastructure. Infrastructure is the basic support systems needed to keep an economy going. These are things such as providing power, communication, water, sewage, transportation and education system. In order to pay for these things governments levy a tax. A tax is a mandatory charge that the government puts on its people to be able to pay for these things. There's many different types of taxes. There's income taxes, there's sales taxes, there's actually something called the VAT or VAT which is a value added taxes, we have property taxes, we have state taxes and even tariffs. These are all money that the government's going to take from the economy in order to provide for the infrastructure so they can keep the economy going on. Governments also will have regulations. A regulation is a rule that is issued by the government usually by the executive branch. These regulations usually are to be able to enact laws, to be able to provide safety, transparency and fairness. These include safety regulations of mental wage, pollution, controls, limits on business practices and licensing. And here we have a dilemma that governments throughout the world have. How much of a role should the government have? And what we find is the more the government takes over the less prosperous a country might be, the more economic freedom that the people have, the more prosperity it has for its people. All right, so we've looked at how the agriculture and industrial revolutions changed our world and built the economic systems we have in the world. All right, we'll talk about governmental systems next time. Until then, keep on learning.