Most economics texts are very clear about what economies do. Strangely enough, they often fail to identify the goal of that economic activity. Although we certainly want to discuss what economies do, we believe the much more important question is, what is the purpose of economic activity? In other words, in order for us to determine whether our economy is doing a good job, we need to know what the economy is supposed to be doing.

What economies do is allocate resources, where by "resources" we mean all those things that play a role in producing goods and services for consumption. This is the tie that binds all the economies of the world. The economies of capitalistic Hong Kong or communist North Korea both go about the business of directing resources between competing options. Obviously, each society has a very different way to allocate resources (a different economic system). Hong Kong generally relies on prices to allocate resources. In contrast, North Korea generally relies on government planners to allocate resources. Whether by private decisions or government mandates, the bottom line is that resources are allocated to specific uses.

Whether an economy does a good job of allocating resources is another question. In fact, it is the key question. How should an economy allocate resources? How many resources should be directed towards home building, bread baking, food growing, movie making, and clothes producing? How will we know when an economy is doing a good job or a bad job? To answer these questions we need to know what an economy ought to do; what its goal ought to be.

If you'd ask the average politician what the purpose of an economy is, you'd probably get one of three responses. Response Number One: "The purpose of the economy is to create jobs." This is a bad answer. To see why, ask yourself, why do people work? Here's a little thought experiment to help you answer that question. Suppose that starting tomorrow, everybody's wages, salary, and pay went to zero. Who would show up for work? Most people work not because of the intrinsic joy they receive from working, but because they get paid for it. (Economists have a word for jobs that people would do without pay. They call it play.) People want jobs because those jobs give them money, and that money allows them to go out and buy the things they want. People work so they can consume more. Thus, creating jobs is a means to an end. It is not the end itself.

This leads us to Response Number Two: "The purpose of the economy is to increase wages." This is an even worse answer than responding that an economy should create jobs. Suppose that the government outlawed all private sector jobs and placed everybody in jobs producing dumb stuff--things that nobody wanted. However, it compensated them by paying all workers a wage of $1000 an hour (plus paid vacation and time and a half on holidays). That's $40,000 a week! Would this be the kind of economy you'd want to live in? Think about it. While it might be nice to look at your monthly pay check and see that you are making approximately as much money as your favorite professional athlete, you'd have a rude awakening when you went to the local WalMart. There would be nothing there but dumb stuff to buy. Wages are also a means an end--the end of having nice things to buy--and not the end itself.

Response Number Three states, "The purpose of an economy is to increase production." By now you should be able to explain why increasing production is also the wrong purpose for an economy. We care about production only because it is necessary for consumption. Think of it in these terms: if we produced cars, stereos, and hamburgers, but didn't let anybody consume them, society would be no better off. Likewise, if we produced left-handed smoke shifters, square wheels, and Ringo Starr solo albums--i.e., goods that nobody wanted--society would again be no better off. In fact, in both cases we would be worse off because we expended valuable resources to make goods from which no one was able to derive pleasure. It would be like slaving away in the kitchen all day making a pot roast and then discovering your dinner guests were vegetarians. You just wasted a pot roast as well as your time and energy.

We are now ready to state what we think most people, after some thought, would choose as the overriding purpose of an economy. THE PURPOSE OF THE ECONOMY IS TO ALLOCATE RESOURCES IN A WAY WHICH MAXIMIZES SOCIETY'S HAPPINESS. This response probably makes the most sense to you, but we bet you haven't thought about it this way before. The other goals of more jobs, or higher wages, or more production are merely means to an end. The end is greater happiness for consumers.

If we have two economies with the same set of resources, and the citizens of one economy are all miserable, and the citizens of the other economy are all deliriously happy, we can state that the second economy must be doing a better job. Or if people are generally happy now, but resources get reallocated so that people become even happier, then we say that the second allocation is better than the first, and the economy has improved. If any lingering doubts remain about the purpose of an economy, ask yourself this question: If economies don't exist to make people happier, then what good are they?

There's another way of stating the purpose of an economy that will help to show us to how to proceed: THE PURPOSE OF THE ECONOMY IS TO ALLOCATE RESOURCES TO THEIR HIGHEST VALUED USE. If a resource does not go to its most highly valued use, it is wasted and society is made "poorer." Imagine a society in which no one liked liver and onions, but everyone liked burgers and fries. Suppose that initially resources like pots, pans, cattle, and cooks were all directed towards making liver and opinions. Ugggh! What a loss! Think of how much better off that society would be if these resources were reallocated towards producing burgers and fries. While it is true that we would have fewer livers and onions (a lower valued use), we would be more than compensated by additional burgers and fries (a higher valued use). By giving up something we like less in order to gain something we like more, we make ourselves happier, and we do this simply by reallocating resources.

Clearly, if resources are directed to their highest valued use--i.e., the use that produces the most happiness--then society's happiness must be maximized given the resources available. But how is one to know a resource's highest valued use? How can one determine whether the members of a given society will be happier with more shirts and less pants, more public subway systems and fewer private automobiles? How can we ever measure happiness?

These are difficult questions that will lead us to the heart of what economics is all about. But before we proceed, let us recognize one thing. If we have no way of measuring happiness, no way of deciding whether one allocation makes people better off than another, then we have no system for guiding how society should proceed (not to mention that we'd also have a very short book!). To put it bleakly, if we can find no acceptable way of measuring happiness, then economics has nothing to say about how resources should be allocated. We must agree on a standard for comparing different allocations of resources before we can determine whether economies are successfully doing their jobs.