My father taught first year business economics, among other things.  As a result I was exposed to some great explanations about the economy as a young boy.

It was not until I was much older that I really appreciated my dad’s simple grounded explanations of what can be quite complex topics.  They set a foundation which has served me well through my adult years.

Among other things, I learned why stealing a ten cent chocolate bar from the local drug store hurt the economy.  Understanding the economic basis of theft, not just the moral imperative is quite a powerful lesson.   More on this in a future post but today I am going to focus on and my personal favorite, “The shoemaker’s story”

What is it?

The basic principle behind economic cycles can be easily understood through the shoemakers story.

The shoemaker made a variety of shoes in his factory.  Over time, with consideration to the quality, workmanship and styling of his shoes, people with money to spend and desire to buy sales increase.   As the demand goes up the shoe maker hires more workers for his factory and pays them from the increasing revenue of his ongoing shoe sales.  In turn the new employees  now have more money to spend so among other things they buy more shoes.  As they buy more shoes the shoemaker hires more workers as his sales continue to climb and in turn the new workers buy more shoes and so on.  During this period prices often rise with the increased demand. More people are employed making shoes, so more people can afford to buy more shoes.   This is the inflationary upward cycle.

Now unfortunately our shoemaker (paying close attention to trends) has most of his stock in red shoes.  This is unfortunate because the government is changing and the new ruler hates the color red.  Sales drop.  So our friend the shoemaker has no choice and lays off a worker.  This worker is now buying less shoes, so shoes sales continues to drop, and the shoemakers lays off more workers who in turn buy less shoes and so on.  This is the downward cycle, typically a recession.

What’s the point?

This is somewhat of a simplification of how modern economies rise and fall, and certainly there are many factors influencing the rise and and fall of the economic cycles (far beyond a liking for red shoes or not).   However, my dad’s simple tale of the shoemaker does set a context and helps to understand the basic principles and logic behind our national economic cycles.

These ideas can be used as building blocks to other concepts (which I will explore in future posts) like government management of the economy (probably an oxymoron at best) or why and how of inflation/ deflation, supply and demand influences and other cool topics.