In every stage of my formal schooling – from high school to college to graduate school – I took courses in economics. Yet with all that education I struggled 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 was at a loss. Until a few years ago when Ray Dalio came to my rescue.
Dalio is the founder of the “world’s richest and strangest hedge fund” and #48 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 at least half a dozen times over the past three years 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 an 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 (I’m not completely convinced by his solution to the problem of deleveraging) but I think it’s one of the most useful explanations currently in circulation.