The principles of economics can be illustrated by the tale of a not-so-mythical country. Its history comprises three eras: life gets better, life stays the same, and life gets worse.
Life Gets Better
1. Self-sufficient individuals, families, and clans (economic units) produce their own goods and services.
2. Specialization and barter lead to greater output of all goods and services, which aren't distributed equally because the distribution of resources (including intelligence, competence, and ambition) isn't equal. Some economic units are relatively rich; some are relatively poor.
3. Simple accounting through coins and tallies saves time and promotes greater output, to the benefit of all economic units.
4. Investments in new technology (capital) yield more and/or better and/or newer products and services, to the benefit of all economic units (though the investors reap additional rewards for their foresight and the risks they take when they invest).
5. Credit (borrowing to finance consumption and or investment) enable consumers to ride out bad times and producers to increase their investments in new capital.
6. Population growth yields more economic units, whose efforts -- as they become skilled (through education and training by their elders) -- cause per capita income to rise.
Life Stays the Same
7. Economic units band together in common defense against criminals and foreign marauders. They select one of their own for the job of Sentinel, and share in the cost of his sustenance. Though the cost of keeping a sentinel reduces their incomes, they consider the resulting protection and peace of mind worth it.
8. The Sentinel diligently performs his mission, year after year, for decades. The economic units of the country continue to pay willingly for his sustenance. The country prospers.
Life Gets Worse
9. A drought descends on the country. It isn't the first drought, but it's the worst one the country has experienced. Crops wither and game animals die before they can be taken for food. Many economic units survive the drought because they had emergency stores of food. Others suffer hunger, which makes them less able to fend for themselves and exposes them to the ravages of disease. Death becomes more common and begins to strike young as well as old. The toll of hunger, disease, and death is greater among the poorer economic units.
10. Before the drought ends, as it will in time, the Sentinel (responding to the pleas of the poor and the guilt-ridden rich), and ignoring the arguments of those who understand the country's economy, begins to impose taxes on those with high incomes and give the money to those with low incomes. That the Sentinel isn't authorized to redistribute income is another argument he disdains, for he has become addicted to power and seizes an opportunity to expand it.
11. Bit by bit, the Sentinel assumes greater control over economic activity -- indeed over the lives of those he was hired to protect. He creates new schemes for transferring income from the richer economic units to the poorer ones, which grow increasingly dependent on the Sentinel. He even creates schemes for taxing all economic units and bestowing special benefits on selected economic units, so that the units receiving the special benefits think they are getting something for nothing. More of the rich decide to support the Sentinel, as they come to see that they can use his power to gain special benefits for themselves. Others continue to support him because they believe that they are better off because of the special benefits he bestows on them. Still others arise and mature without having known life without the all-powerful Sentinel; they assume that the Sentinel has always been and always will be the arbiter of their economic fate.
12. Lonely voices try to explain that almost everyone is worse off because of the Sentinel's meddling in their affairs. Those lonely voices explain logically that the Sentinel has assumed powers that aren't rightly his, that the country would have recovered from the great drought without the Sentinel's help, that the Sentinel's activities actually diminish the country's wealth and income by stifling commerce and discouraging thrift and initiative, and that the Sentinel's actions discourage private acts of charity toward those who are truly incapable of caring for themselves.
13. The lonely voices are ignored, for the lonely voices are drowned by the clamor of those who are dependent on the Sentinel, those who cannot understand how the Sentinel makes them worse off, those for whom the Sentinel has become a totem, and those who simply want the Sentinel to tell others how to run their lives.
14. The mythical country nevertheless survives and thrives because even the Sentinel cannot rob it of its resources or blunt the drive and inventiveness of its economic units. Will it ever thrive to the extent of its potential? That's unlikely. Will it ever stop thriving and go into a long and perhaps irreversible decline, as have other nations that vested too much power in their Sentinels? It might happen.