Acton Institute Powerblog

How Does the Economy Actually Work?

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In every stage of my formal schooling – from high school to college to graduate school – I’ve taken courses in economics. Yet with all that education I still struggle to understand a seemingly simple question: How does the economy actually work?

Sure, I can still draw supply and demand curves or give the equation for GDP (Y = C + I + G + (X − M)). But when it comes to picturing a reasonably functional model of how it all fits together, I’m at a loss. Fortunately, Ray Dalio has come to my rescue.

Dalio is the founder of the “world’s richest and strangest hedge fund” and #31 on Forbes list of richest people in America. But more importantly (at least for our purposes), Dalio is also the creator and narrator of the 30-minute video, “How the Economic Machine Works.”

Dalio’s video is one of the best explanations of economics I’ve ever seen. I’ve watched it twice already and highly recommend setting aside half an hour to watch this entire video.

Caveats and Disclaimer

Ronald Reagan once said that an economist is someone who sees something that works in practice and wonders if it would work in theory. Many of us nerdy non-economists tend to think the same way, confusing the prescriptive (how things should be) for the normative (how things are).

Some people may quibble and say that the video is flawed because the explanation relies on the federal reserve and central banking. This is like saying a description of the American transportation system is inadequate because it doesn’t account for how much better we’d all be if we drove electric cars. While that may be true, it doesn’t change the fact that most people drive cars that run on gas.

Similarly, the U.S. economy currently doesn’t measure up to some Distributionist or Austrian or any other economic ideal. But we still need to know how it works in its current state of being, however flawed it may be. In my opinion, Dalio’s video does an excellent job of explaining how the economy works as things are right now. It’s not perfect (it relies on a few too many Keynesian assumptions for my taste) but I think it’s one of the most useful explanations currently in circulation.

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).


  • Brian Watson

    Joe, I’m a fan of your writing, mostly over at The Gospel Coalition. Are there any other books on economics that you recommend? Perhaps a top-five list?

  • Gods of Ruin

    This is a great video that covers almost everything, but fails to recognize the cost of inflation (why is hyperinflation bad and who does it affect the most), and also sees money as wealth. He said it at the end that productivity is the real goal and that’s the point. Wealth is productivity, not money. All the credit and debt cycle nonsense is just fireworks and government’s attempt to stop the cycle is just making the inevitable down side much much worse.

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  • Michael Abrahams

    This is a great video which got a lot of attention on Wall Street blogs when it came out. Dalio’s contribution is his recognition of the key role played by debt in the business cycle. This is something obvious to any business person, or consumer for that matter, who ever borrowed money but deemed irrelevant in mainstream economic analysis. It is no wonder only a handful of economists saw the 2008 crisis coming. In his clear presentation, Dalio also reverses the conventional art of economics which we described when I was in grad school as the art of making the simple complex.