By (Written July 2019)
What is Economics?
When I inform people that I’m an Economics major, they often ask me what I think of the stock market or what they should invest their money in. I have to correct them by explaining that, while some economists predict markets, or advise people on their finances, Economics as a whole is concerned with different principles – fundamental truths that serve as a foundation for a belief system or chain of reasoning.
On this website, I am going to try to stray from pushing any political narratives about which economic system is “the best,” and instead look at the set of economic principles that every single economist, from Karl Marx to Milton Friedman, must abide by. But first, a sound definition of economics and markets must be given.
Lionel Robbins gave the best definition of economics when he said, “Economics is the study of scarce resources which have alternative uses.”
This definition brings us to the most critical concept in all of economics – scarcity. In economic terms, scarcity is the unassailable truth that we live in a world of unlimited wants constrained by limited resources. In other words, every single human wants to consume more, and their consumption leads to a further desire to consume (consumption is thus born out of consumption), i.e., unlimited wants. This isn’t necessarily a bad thing, for it drives humanity to innovate and continue to strive for ways to make our current civilizations more productive, thus raising the standard of living standard for all who inhabit them.
But what does it mean to have “alternative uses”? This is simply another way of stating that resources have different uses. To illustrate, think of oil – it can be used to power cars, factories, or even used to make plastic. But which use leaves the consumers better off? It wouldn’t be good to use oil to produce an endless amount of plastic while people have nothing to fuel their cars!
This is often referred to as opportunity cost – the next best alternative given up after each choice. In our example, the opportunity cost of producing plastic was all of the fuel that could have been produced. With this in mind, think about the age-old economist adage that there is no such thing as a free lunch. Even if you are served lunch at no monetary cost to you, and it is catered straight to you by someone else, you still give up your time while consuming the food. To phrase it differently, the opportunity cost of you reading this article is the time you could have spent doing something else. Yes, that’s right; your time is a resource! And a valuable one at that! The beauty of economics is that it can help us to answer the question of how different types of resources should be allocated, and in what amounts.
Before moving on, we must consider what Thomas Sowell meant when he stated, “There are no solutions, only trade-offs.” He was speaking in an economic context and meant that it is not possible to please every single person with the choices made in economics, but we can look at the trade-offs (opportunity cost) and decide if each economic choice is worth pursuing. Under this statement is the assumption that Economics is based on a utilitarian ethical system – it is meant to bring the largest amount of material gain to the largest amount of people. Do not confuse this with thinking that economic systems are themselves ethical systems; economic systems are only vehicles in which the well-being of people can be advanced (or hindered). We must remember, therefore, that economic systems are not in-themselves evil or just, and that it is our job as moral agents to analyze the implications of different economic systems and choices.
Efficiency
Economists are always talking about efficiency, but what is it, and why does it matter? First of all, there are two main types of efficiency that economists are concerned about – allocative efficiency and productive efficiency.
Allocative Efficiency: Your mom tells you that you have to take your brother to school the following week. The thought of this fills you with dread because you’ll have to wake up at 6:30 AM when you think that you’d be better off if you could sleep instead. This is allocative efficiency – whether resources (your time) are being allocated in a way that is most beneficial to parties involved.
A historical example can be seen if we look at the Soviet Union. When the Soviet Government controlled their economy during the 20th century, it was typical for large amounts of resources or goods to pile up in warehouses rotting away while people starved in the streets. Moleskins (to make belts) are just one example. The government raised the prices of the good, causing a surge production and then in supply but because this was a commanded decision, no increased spike in demand occurred. A surplus ensued, and people had no use for the goods. In short, the resources were allocated inefficiently, since the labor could have been used for more productive jobs such as farming. This happened with all sorts of goods, from food to heavy machinery.
Productive Efficiency: This is more technical, and is concerned with whether or not goods are being produced at their lowest possible average total cost. For example, you walk into the apple store and look at the prices of the latest iPhone – $1000. But the next day, President Trump enacts a new tariff of 10% on Chinese goods that are used to make the iPhone software. In response, Apple is forced to pay more for the goods and will either absorb it in the form of reduced wages for employees, decreased revenues (and less money for R&D), or pass it onto the consumer (you) in the way of an additional $150 to the price of an iPhone. Thus, we can see that the tariff is blocking Apple from producing the iPhone at its lowest possible average total cost, which results in inefficiency and an additional cost to you, that cost being both the goods that could have been purchased with that money, and the additional economic benefits that the $150 would have provided to other businesses.
Efficiency is important because we live in a world of scarce resources. If there are inefficiencies in resource use, then the resources are not being allocated in a way that will allow the maximum number of people to obtain the greatest amount of material gain. This results in a lower standard of living for the population as a whole, and the longer the inefficiency persists, the lower the standard of living becomes. Conversely, efficiency allows our scarce resources to allocated in such a way that maximizes the well-being of all parties involved.
How to Think Like an Economist
Professional economists use high-level mathematics and statistical tools to help make decisions and study economic policies, and I know some people may be put off by this fact since number crunching isn’t everyone’s forte, but thankfully basic economic skills are relatively easy to develop and don’t require math! The most concise summary of how to train your mind to think as an economist comes in Henry Hazlitt’s book Economics in One Lesson.
He states,” The art of economics consists not merely looking at the immediate consequences but at the longer effects of any given policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Tracing out the full effects of decisions – this is the crux of all economic analysis, whether it be theoretical or mathematical. The good news is that this single lesson can be applied to get a general sense of economic impacts without the use of math. Take my example above regarding the iPhone, I didn’t use any math, but I was able to trace out causes and effects of a [not so] hypothetical policy enacted by the President. You may be thinking that it is difficult or seemingly impossible to trace out all the consequences of economic activity, but that doesn’t mean you shouldn’t try. History has shown us the consequences of not performing this critical analysis, and we have paid the price. Rent control laws, subsidies, guaranteed loans, all things which I will discuss in due time, have been imposed with ignorance of their effects in the long run, and on all groups. The results have been disastrous.
Especially with the 2020 presidential election closing in, what we need are people who are willing to sit down and perform the noble action of peering past the superfluous nonsense that so many of our government officials and fellow citizens spout. No matter your political leaning, take the time to analyze the policies of the candidates before casting your ballot; we have the power to shape the society, the well-being of our families, and the future itself, but it starts with fully thinking through the consequences of economic [and non-economic] actions.
Works Cited
Hazlitt, Henry. Economics in One Lesson: Fiftieth Anniversary Edition. Laissez-Faire Books, 1996.
Shmelev, Nikolai, et al. The Turning Point: Revitalizing the Soviet Economy. I.B. Tauris & Co Ltd, 1990.
Sowell, Thomas. Basic Economics: a Common Sense Guide to the Economy. Basic Books, 2015.
The Reluctant Philosopher 