Why Economics?

A lot of my posts of late have been on economics and related topics.  One might ask why I spend so much time on it.  It’s a technical field with a lot of complexity and a lot of disagreement even among professionals in the field (try to get Paul Krugman and the late Milton Friedman–both Nobel laureates in the field of economics–to agree on pretty much anything regarding economic policy).  Yet despite that, people in the US are asked on a regular basis–through the mechanism of election of representatives–to make decisions on economic policy affecting the nation and the world.

People don’t, as a general rule, decide which candidate to vote for based on their positions on topics in electronics, on neurosurgery, on aerospace engineering (what most people actually mean when they say “rocket science”).  Nope.  They do, however, make such decisions based on those candidates’ positions on economic policy.  This despite the fact that most people really don’t understand even basic economics and so are easily swayed by economic fallacies that sound good but all too often have the exact opposite results of those predicted. (This is my reason for calling economics “the dismal science.”)

And so, here I am, trying in my small way to help correct that.  A voice of one crying in the wilderness. (And, hopefully, I’ll get to keep my head.)

That said, let me go into a couple of real basics here.  The first is what is economics.  People often think it has something to do with money and, while money is part of it, it’s only a small part.  A definition that does a reasonably good job of describing economics is:

Economics is the study of cause and effect relationships in the allocation of scarce resources that have alternate uses.

And to that I would add “and for which there are substitutes.”

Let’s look at that.  First scarcity.  That, really, is the first law of economics.  Indeed, without scarcity you don’t have economics.  So what is scarcity?  Scarcity simply means that there’s never enough of anything for everyone who wants it.  Consider what that means.  Middle class Americans (of which I am one) are among the most affluent people in all of history.  Even poverty in the modern United States would be the wealth of Midas in the past of living memory. And yet people complain about how much they don’t have, about what a struggle it is to get by (with those two cars, and that central air conditioning and heat, and the smart phone individually having more computing power than even existed in the world not all that long ago, and their internet connections and…).  Because what they want is more than what they have.

Alternative uses is another important factor.  Iron can be used to produce automobiles, the frames of skyscrapers, butter knives, and paper clips.  A tree can be left as is or turned into paper, the frame of a house, cabinetry, or toothpicks.  Petroleum can be refined into gasoline for cars, fuel oil for producing electricity or heating homes, plastics, or fertilizer and medicines.  Even human resources.  A person can be occupied digging ditches, growing crops, assembling cars, or performing neurosurgery.

And any one use of a particular resource renders that resource no longer immediately available for the other uses.  So any economic system has to determine how much of each of the vast number of resources exist:  how much steel is used to make cars, how much to make paper clips; how many people performing neurosurgery, how many digging ditches.  And so on.

I can illustrate substitution in a simple way.  When I’m hungry I can eat a steak.  I like steak.  One of my favorite things to eat, steak.  But if, for whatever reason, I can’t eat steak this time, I can eat chicken or pork or rattlesnake for that matter (I have got to try rattlesnake).  Or, if I must, vegetables.  These other items are substitutes for steak.  In industry, I might use steel as a structural material, or I might use aluminum.  The choice is driven by a number of things, including cost.

There are literally billions of decisions being made every day on how scarce resources with alternative uses and substitutes will be allocated:  how much steel here, how much wood there, how much aluminum over there; how many people employed in this mill, how many in that factory, how many in the hospital over there.

But through all of that, one thing remains constant:  what people (as a group) want is always more than what is available.  Sure, some individuals might be entirely content with what they have and cannot even imagine wanting more, those individuals are rare birds indeed.  As a group wants exceeding resources is very much a law of nature.  And when you increase the resources and make more available?  Wants simply grow to fill and exceed the new level of resources.  Few people a hundred years ago might have thought that the wealth of the wealthiest man in the world could fail to satisfy any possible cupidity and yet, we’re there now and have been for a long time and still people’s wants exceed their grasp.  And there show no signs that will change in the foreseeable future, or ever.

This law of scarcity is, thus, as firmly fixed and unbreakable a law of economics as are the laws of thermodynamics in physics.

Thus, anyone saying that they can grant you everything you want is either dishonest or deluded.  Take your pick.  And that a system fails to provide everything everyone wants, that people want things they can’t get, does not mean it’s a failure.

What you need to look at is what systems do the best job of providing the wants that people have–what systems are most efficient at allocating scarce resources with alternative uses and substitutes toward providing the wants of the whole of the people.

As I have pointed out on this blog elsewhere, and no doubt will again, the reigning champion in that respect remains a system of voluntary exchanges controlled by prices determined by market forces as opposed to dictation by some central planners.

In short, free market capitalism.

Advertisements

5 thoughts on “Why Economics?”

  1. I’d add a refinement to your description of scarcity. The way you have framed it – as people collectively always wanting more than they have – suggests a motive (or a value judgment about how people behave) that isn’t necessary and thus clouds the analysis. It’s not that they want more than they have (although most do) it’s that resources truly aren’t unlimited. Even renewable resources like trees, still require investment (of time, or money, or effort, etc.) to renew them once used. Scarcity is therefore fundamental to nature and not the consequence of people’s greed. In my view, scarcity is better understood in connection with the concept of price. To achieve this simply, you could append the phrase ” . . . assuming it is free” to the end of your statement: “But through all of that, one thing remains constant: what people (as a group) want is always more than what is available.” Because that is the whole point: if you say that the price of a diamond is free (or any other arbitrarily low amount – $1/carat, etc.) the demand (the amount that will collectively be wanted by people as a group) would exceed the amount of diamonds available.

    Ignoring this aspect and suggesting that scarcity results from people wanting more than they have suggests that scarcity could be “solved” by people just being more enlightened or more fair minded – exactly the project of the central planners that you (properly, in my view) reject. But it’s not true. Scarcity is fundamental which is what makes the laws of economics non-optional.

    1. Ultimate limits are rarely the factor determining economic scarcity. Consider, iron. There are limits of “proven aluminum ore reserves” globally, however, those reserves are based on what is currently economically viable to extract. Technology exists to extract aluminum from common minerals like feldspar. They’re not economically viable but could be, in principle, if the demand rose sufficiently. Likewise with other material resources.

      Oil reserves today are actually higher than they were back in the “energy crisis” of the early to mid 70’s. This is because, due to both the rise in prices for oil and improvements in extraction technology we include things like oil shale and tar sands that weren’t even counted back then because they were “unrecoverable.”

      So, while ultimate limits exist, generally speaking they are not the cause of economic scarcity either now or any time in the foreseeable future (and quite a bit into the unforeseeable future, I expect).

      For the very long term, people talk about a “post scarcity society.” Yet, even with the eventual routine access to space that I fully expect some time in the future, and development into a Kardashev type II (full use of all the resources of the entire solar system) wants would still exceed grasp. Go beyond the solar system to a type III and, again, wants will exceed grasp, not so long as humans remain human.

      1. The principles of Economics can be quite simple. The consequences of applying those principles, not so much. Consider an increase in the money supply (discussed in some detail in Milton Friedman’s “Free to Choose”–I’ll put a link below). More money relative to the output of the economy means higher prices. That’s the simple answer from supply and demand (a greater supply of money means people will trade more of it for other things that have not similarly increased in supply). However, the process can be quite a bit more complicated. When the money supply first hits, people and institutions use it to buy more stuff. Friedman’s example was people buying more pencils. The sellers of pencils, seeing the increased demand, order more from their supplies, who order more from their manufacturers, who order more materials like, say, wood. However, since this isn’t a relative increase in demand, people buying more pencils and fewer pens, or people buying more wood pencils and less wood baseball bats (or whatever), it’s an across the board increase. That leads to the suppliers of materials seeing an overall increase in demand for their materials. This leads to them increasing capacity which involves hiring more people, possibly adding equipment and so forth, and this leads to an increase in cost of those materials, which works its way back down the chain to a higher price on the pencils.

        All of that takes time and the first step, people and institutions using that money to buy stuff, is a spurt of economic activity that looks like economic growth–and thus that first step acts to validate the Keynesians out there–but then the price increase, what people commonly think of with the term “inflation”, hits swallowing up that growth.

        Politically, this can be very attractive. You get more buying and selling going on making the economy look good but when the bad effects come later, you can point the finger of blame to someone else (“greedy businessmen” or “the one percent” are popular choices for that).

        It’s what Thomas Sowell is wont to call “not thinking beyond stage one.”

        Free to Choose, by Milton Friedman:

  2. Ah, Paullie “The Beard” Krugman. I have read that over time, he will contradict himself. Other times, he ‘s just flat WRONG. As in, if Trump is elected, the economy won’t recover (or words tending toward that conclusion.)

  3. To paraphrase Robert J Ringer, back in the late 1970s: “Never trust an economist who can’t give you a simple answer. He has some other (personal) purpose in mind.” […”axe to grind”… ?]

    I have been telling people for years that Economics is simple:
    1) The Market is a natural phenomenon, caused by the fact that we own things — starting with our own bodies.
    2) Money (whatever it happens to be at present) is a commodity: create more of it, and each piece is worth less.

    I love the fundamental simplicity inherent in the Price Mechanism: *absolutely everything knowable* is included in the price of a thing (whether a ball-point pen or a giant luxury yacht). And it is literally impossible to gather that information in a timely manner for the guidance of a State Committee which would then direct Industry!
    That conumdrum has been the downfall of each and every attempt to Order the Economy around, throughout history….

    I have maintained, parenthetically, that Hitler’s Reich would have collapsed in perhaps 20 years, if they had decided to leave the ‘Lebensraum’ scheme for later; the German economy was almost as sclerotic as that of the Soviet Union (though the USSR had more natural resources). After looting Half of Poland, France, and Yugoslavia, they would have had to get by with what was on-hand locally….

    … and “…eventually you run out of Other Peoples’ money” …

    Also curiously: according to The Maisky Diaries, Stalin wanted a classic Great Powers conference in early 1941, to arrange some sort of truce– then ‘Barbarossa’ started, and that was *that* !

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s