Beginner's Economics

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Miranda is complaining that we can't go buy her favourite enormous cookies, because I told her that we haven't got enough money. Giant cookies are only for a treat.

"Why does everything cost money?!" She asks, annoyed. "I wish everything was free!"

"But it can't be free," I say. "It all has to come from somewhere."

"Can't the store, y'know, just give us cookies?"

"No, the bakery won't just give you cookies. Where do you think the cookies come from?"

"Someone makes them."

"Right. Like we do. Why don't we do some baking and make our own cookies?"

"Nah I don't wanna."

"Would you want to if I gave you money to do it?"

"Yeah! My allowance!"

"There you go. Money is the incentive.

The people at the bakery want to get paid money to make the cookies for you. The only way they can get paid money is if lots of people like us buy the cookies. Even if they are really, really nice, they can't often just give you cookies, because even if they don't get paid, the cookie company still have to buy the flour and the eggs and the sugar and the chocolate and the butter and everything else that goes into the cookies. And they need money for that."

"But eggs are easy. Chickens just lay them. Why does the cookie company have to buy the eggs? Why can't they just get them from chickens? And butter comes from cows."

"But who looks after the chickens? Who feeds them? Or even, who buys the chicken food? And why would they want to look after chickens unless they got paid for it?"

"They could just really like chickens. They could be pets."

"yeah, but they still need money to buy food - and food for themselves and everything else."

"That's rubbish. I wish people would just do things because they are nice."

"It is rubbish, isn't it? You don't always have to use money though. If your friend has cookies and you have icecream, you could just exchange them instead of giving her money for cookies and she giving you money for icecream. Does that make sense?"

"But what could we swap in a shop?"

"That's the problem. Money just makes everything simpler. Think about how complicated it would get if you had to find something that the chicken farmer wanted just to get eggs, then swap something else for some butter, and again for the flour, then you'd have to find something even bigger to swap to get the bakery to make the cookies for you. Instead of finding loads of different things to swap, you just swap money for what you want in the store. The people in the store know that they will sell hundreds of cookies everyday, so they get enough money from the cookie sales to pay the people who work there, and pay for all the ingredients for the cookies, and even pay for the building they do the baking in. Make sense?"

"Yeah, but where does the money come from?"

"You mean our money to buy cookies? That comes from Mummy and Daddy going to work. My job is pretty much like the people in the bakery, except I have to sell lots of coffee. But Daddy sort of sells his labour. Do you know what I mean by that? He doesn't actually make anything to sell. But the company he works for has a lot of different problems to sort out. They solve problems and come up with different ideas to help other people out, and those people give him money for doing it."

"So he gets paid to have ideas? That's COOL."

"Yes it is, but those ideas are all to do with things like where water is going to go if it floods, or where to put oil pipelines or how to build bridges on mud and things like that."

"OK that's boring. Who makes the money?"

"Well, anyone who has a job..."

"No I mean the actual paper money and the coins."

"Oh, it's made in a place called the Royal Mint. Like a big coin-stamping factory. And it's sort of owned by the government."

"So couldn't they just print loads and loads of it and give it to people?"

"well... yeeessss... but then it wouldn't be worth anything. It's called Quantitative Easing, and hyper-inflation. If everyone had loads of money, then everything would get really really expensive, so you'd be paying $1000 for one single cookie or something."

"That doesn't make any sense. I'm bored now. Can I watch TV?"

(phew!) "Yes of course you can!"

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