Episode #3: Economic Systems and Macroeconomics, Part 1

For episode 3, Crash Course is going big.  This episode talks about different macroeconomic systems and the proper role of government, all in 10 minutes.  There are a lot of things to unpack in this episode, so this review will consist of multiple parts.

The Factors of Production


There is no better introduction to macroeconomic theory than by talking about control over the factors of production.  Although the term was originated and defined by Adam Smith, Crash Course decided to quote Karl Marx for the same definition: Land, Labor, and Capital.

Free Marketeers might be upset that they attributed it to Marx, but it makes sense.  Communists (and socialists for the most part) are often the ones who use the phrase “Factors/Means of Production,” and if you hear someone mention it in conversation, it’s more likely that they are a Marxist than a devotee of Adam Smith.

A Planned Economy

I got confused with Crash Course’s definition of a fully planned economy and its relation to Communism:


In a planned economy, the government controls the factors of production, and it’s easy to assume that that’s the same thing as communism or socialism, but that’s not quite right.  According to Karl Marx, “The theory of Communism may be summed up in the single sentence: abolition of private property.”

If the State owns all factors of production, and therefore owns all property produced from those factors of production, doesn’t that automatically eliminate private property?  In other words, how does the public control over the means of production not create communism?  What else could it be?

In fact, according to the Wikipedia entry on Communism, Communism is defined by the common ownership of the means of production.  There is not a mention of private property in this definition because the absence of private property is the logical conclusion from the definition.

(However, I would accept that Marx’s Communist society is stateless, so Mr. Clifford’s mention of a government controlling the means of production would not be Communism)

A Free Market Economy

Crash Course gave an excellent definition of a free market economy:


In Free Market or Capitalist Economies, individuals own the factors of production, and the government keeps its nose out of this stuff and adopts a Laissez Faire or hands-off approach to production, commerce and trade.

This is, in my opinion, Crash Course’s best work yet.  They continue:

In Free Market Economies, businesses make things like cars, not to do good for mankind, but because they want to make a profit.  Since consumers, that’s me and you, get to choose which car we want, car producers need to make a car with the right features at the right price.  Economists call this the invisible hand.

This is a great definition of capitalism, and one that emphasizes the consumers’ essential role in the process.  Instead of focusing on a business’s desire for profit (a necessary element, but not what drives market successes and failures), consumers determine the market winners through their own preferences:

Scarce resources will go to the most desired use and they’ll be used efficiently, more or less.  After all if a business is wasteful or inefficient, or makes something that no one wants to buy, then some other business will make a similar product that is either better or cheaper or both.  If there’s no consumer demand for a product, resources wont be wasted producing it.

Businesses could not survive in a free market if they did not provide customers with what they wanted better than the competition.  Crash Course also provides a look at the alternative: a centrally planned economy for consumer goods:

Assume instead that a government agency was in charge of deciding exactly which types of cars and cell phones and shoes to make.  Do you think they could quickly respond to changes in tastes and preferences?  If there was only one government monopoly producing cars, do you think they would be produced efficiently?

We don’t even need to speculate what this would be like because it has already happened.  For example, during the Soviet Occupation in East Germany, automotive manufacturer VEB Sachsenring had a government-created monopoly on automobile production.  Their product was the Trabant, the only car available to East Germans, and often considered one of the worst cars ever built.  On top of this, due to the mismanagement of the factors of production, the waiting list for one of these cars was ten years.

Is there anything that the government must do because free markets won’t?  Come back later for Part 2.

Crash Course Economics – Episode #1 in Review

Episode 1 of Crash Course gave a brief introduction to how the course is designed, who your co-hosts are, and some basic principles and definitions in economics.  There was a mix of good and bad economic conclusions, so let’s dive right in:

How Does Crash Course Define Economics?

Our first co-host, Mr. Clifford, defines economics as “the study of people and choices”.  This is a pretty great definition, especially considering the alternatives.  Depending on his preferred school of economic thought, he could have easily said economics is the study of “classes and prosperity,” “institutions and planning,” or “statistics and predictions”.  Instead, Mr. Clifford went with people and choices which will become important later on when the show gives examples of choices.

The Good

The first example of what a human choice looks like couldn’t be more relatable to the audience: watching a YouTube video. YouTubers compete for your attention, and by proxy, ad revenue.  YouTube content is a serious business as our hosts know, and the popularity of some channels over others will determine the actual wealth of the content creators.

Our second co-host, Adriene, even goes into defining opportunity cost: “the cost of watching this video is the video you’re not watching.”

I would have been satisfied with this explanation, but Adriene goes so far as to give a great example of opportunity cost in having a large military state:

Military spending in the United States is over $600 billion per year.  That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

This statement is pretty profound in one sense, considering that some people and economists continue to write that any kind of government spending is good for the economy regardless of what it is, even if it’s for a fake alien invasion.

What is not mentioned, however, is that the opportunity cost of these aircraft carriers could also be non-government spending in the marketplace.  In other words, if the money spent on aircraft carriers were refunded to taxpayers (or never taken in the first place), people could decide for themselves what they would prefer to spend that money on.  It could be towards their healthcare bills, their kids’ college tuition, or buying consumer goods, any of which might be more important to them than another aircraft carrier.

This is a good example of Bastiat’s broken window argument or “the unseen”, which says that it’s easier to see the stuff paid for (in this case, the aircraft carrier) than that which could have paid for.

The Bad

The YouTube video selection example was a great illustration of the marketplace, but I thought next examples were a little strange.

“But what if I’m watching this at school,” you ask.  “What if I’m forced to watch this?”  Well, you weren’t forced to go to school.  You could ditch, you could drop out, you could move to a country that doesn’t have compulsory education.

Wait, isn’t that a contradiction?  Doesn’t something legally compulsory require coercion or force?  Parents have a legal obligation to send their kids to school, under the threat of significant fines or jail time, sometimes for the student.  It doesn’t matter if school gives you anxiety or you’re being bullied, you still have to go.  And you obviously can’t just move to another country; runaways are sent back to their legal guardians.

This is quite different from choosing which YouTube video to watch.  You don’t get fined or jailed for not watching a YouTube video.  To a child, compulsory education is not the marketplace.

Another problem I had with the videos was a lack of distinction of individual and government action:

Is there a way to ensure there will never be another traffic fatality?  Yes, we can crush all the cars, close the roads, and force everyone to walk.  Do you want to decrease the number of people convicted of murder?  You could decriminalize murder.  You want to end the unethical treatment of elephants? You can kill off the elephants, in an ethical way of course.

Are these questions directed at me?  I can’t do any of these things.

can choose one YouTube video over another, but I cannot choose an alternative road system, legal system, or what other people do with their elephants.

You know driving has risks, that you might get in a car accident, but you still drive.

Adriene has now switched the subject to what I personally decide to take as my transportation method.  The power to choose whether to drive is different from deciding to crush all the cars and force everyone else to walk.  I have control over myself and my actions, but I don’t get to decide how other people act.


I was pleased and entertained by the introductory episode of Crash Course Economics.  The big economic principles it taught are generally unobjectionable, but some of the word selection and examples are either confusing or misleading.  The 10-minute video has a lot more to unpack, and I’ll try to expound on some of the interesting choices of words and implications before the next video comes out.  I’ll also include some thoughts from other economists I’ve asked to contribute to the blog.

Like what I wrote?  Hate what I wrote?  Feel free to comment below.