How does the United States of America's economy function?

Answer 1

That is a question for the ages. Alan Greenspan retired still trying to answer it. If you've a deep interest, I'd suggest reading his book, The Age of Turbulence. He explains his understanding of economics very well and much of it makes sense. His conclusions were that we are in a time of great change in the world economically and it's a whole new game with new rules that we've yet to learn. Sort of like flying by the seat of our pants. Not very encouraging but it is what it is.

However, taking my cue from Adam Smith, the world's first economist, the attributes of an economy are labor, capital, goods and consumers and it's more or less a closed system that is continually growing to survive. First capital invests in supplying a perceived need, then labor is acquired to create the product or service which fills that need, then the consumer (which incidentally includes both the capitalist and the laborer) purchases the products or services which in turn generates profit to create new products and services and a little off the top for oneself.

While simplistic, this is the basis of an economic system. The currency used to facilitate the smooth operation of such a system is mostly handled by bankers who are charged with keeping capital available and flowing, preventing prices from rising too fast, and making sure the economy doesn't tank. Bankers do this by various means including the Federal Reserve monetary policy and other various complex vehicles of investment. As an aside, government does not belong in the marketplace but frequently inserts itself unasked.

Governments tend to implement tariffs, subsidies and other restrictions on trade which generally inhibit the efficient functioning of a free-market economy. Government's sole purpose should be to provide protections for the marketplace such as the protection of property rights, without which an economy could not flourish, and a judicial means of redressing wrongs committed by unscrupulous and incompetent players in the market. These rules are simple: Provide quality at a fair price. Don't cheat, don't lie, don't defraud, don't kill. And the elephant in the room whispers "... or don't get caught."

Given that human beings tend to behave badly a fair part of the time, a fact testified to by the immense body of law we possess, the marketplace is most vulnerable to greed. Morality must be effected in the marketplace by its members through common decency if possible, by law and enforcement if not. This is another protection that can be offered by government but it would be better provided by private sector oversight from within as long as that oversight is not corrupt.

According to Adam Smith and Alan Greenspan, there may be some sort of "invisible hand" that works in an economy that has a natural tendency to correct imbalances of the sort caused by greed or natural disaster. If this is so, than an economy has basic rules as immutable as the laws of the gravity and there may even be a morality that is inherent in those laws. (E.g., if you don't do business fairly you'll eventually fail.)