How Does “the Economy” Work, Anyway?

This past winter, I wrote a post: “What is ‘the Economy,’ Anyway?” I was growing tired of hearing people talking about “the economy” being bad. Don’t get me wrong, people can talk about whatever they like, but in the context of the economy, I felt that the idea that folks saying it’s bad is a bit of a misnomer. And not because the economy is bad, but because it’s not always clear what someone means when they say that the economy is bad.

A couple of days ago, Ray Dalio, who “lords over the world’s richest hedge fund firm,” came out with a video that explains, ‘how the economy works.’ It’s 30 minutes long, but it’s animated, so hopefully it can keep your attention for the whole thing. Also, given what appears to be its intent (inform average citizens about how the economy works), it certainly seems easy to understand. Even if you don’t have a basic understanding of some economic terminology (assets, liabilities, productivity, cycles, recession, etc.), you’ll probably still be able to understand what Dalio’s saying.

Usually, I’d say, ‘if you have the time, you’ll want to see this.’ In this case, I’d advise you make time to watch this video. Even if you think that there’s some ulterior motive from Dalio, the basic information he’s offering about how the economy works is quite compelling. His reputation precedes him. As Steven Perlberg from Business Insider wrote, “when the man talks about markets, people usually listen.”

Dalio in his own words:

The economy works like a simple machine.

But many people don’t understand it— or they don’t agree on how it works — and this has led to a lot of needless economic suffering.

I feel a deep sense of responsibility to share my simple but practical economic template. Though it’s unconventional, it has helped me to anticipate and sidestep the global financial crisis, and has worked well for me for over 30 years.