The Point of Economics

            I was talking about careers with a friend recently and was expounding in much detail about why I love economics so much, why I’m just so thrilled to be able to have it as a major, and why I’ll hopefully be able to be working in that field for a living eventually.  It was a good reminder to hear myself say it out loud too because I think that there is often, especially when doing the analysis of a given reading, chart, or data table at hand, there is a strong potential to get caught up in the numbers, the correlations and causations, and in the causes and effects.  In all that, we sometimes lose the bigger picture, the point and purpose, if you will.  I remember as a kid I used to watch Veggie Tales videos and at the beginning of each show, a white screen would appear and some panning footage of a child would appear on the screen.  Accompanied with suitable background music, these words appeared on the screen: why we do what we do.  So I’d like to take some time now to tell you, from an economist’s perspective, why we do what we do.

            Now I’m sure I’ve defined economics in some blog post in the past, but let me restate it in one sentence, and in the broadest sense.  Economics is the study of the allocation of scarce resources and how they can be directed to give humanity the greatest happiness.  “Economics” comes from the Greek word “oikonomia”, which means “the management of a household”.  Think of that, but applied to a whole region, or even the whole world.  There’s a lot to be learned about the things people do to get resources, to turn them into other products, and to then sell them to others.  There is a mind-boggling number of connections between people all over the world.  Consider this: I am wearing a shirt that was made in El Salvador and pants from China.  I’m writing on a computer that was made in Japan and is running software probably written by someone in California.  Mapping how all these parts of the world got together to give me the experience I’m having right now is beyond the scope of this piece, but mapping the global economy is one insurmountable task where the more we learn the more we realize how little we know, and our awe increases day by day.  But going back to the original question: what is the point of economics?

            Recall that it is the study of resource allocation.  Now we recognize that resources are not always allocated as efficiently as they could be and by extension the maximization of human happiness, is not maximized either (to the extent that it is dependent on material goods).  You would be surprised at how many things stand in the way of efficient resource allocation and the fallacies regarding it that pervade public discourse and governmental policy.  But our work is not only to study the resources, but to understand the people who direct their use. Economics is, in fact, nothing short of an attempt to understand the aspect of human nature related to the choices they make in buying and selling, saving and spending, working and playing.  Let it be known that people are quite complex and an economist’s awe of humanity only grows as he learns more and more.  F.A. Hayek famously said in his Nobel Prize acceptance speech that while we strive to know more and more, we must be aware of our limitations lest we fall into the trap of thinking that we know better than others and can rule over them.  So economists ought to ultimately possess a healthy humbleness.  They ought to realize that the end goal of our work is not to try to dictate the actions of others, but rather to serve them.  The goal economists is to paint a picture of the world and suggest possibilities of what can be done to make people freer, happier, and better off than they would otherwise be without us. The desire to make the world a better place compels us.  That is why we do what we do. 

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Site Changes: Welcome to the Research Portal

Ever wondered what the infant mortality rate of Serbia in the in the 1970s was? Or Pepsi's bottom line? Or the production of coffee in Indonesia for the last few decades? These are all available if you know where to look...and the place to look is the no further than the new research portal which you can find on the right side of the home page. There's enough low-hanging fruit to keep your hunger for knowledge at bay for a lifetime.

The old "Links and Resources" section is now the "Research Portal" and contains a generous helping of links to databases of statistics for all your economic research needs. If there are any notable data sources missing, please comment a link to it and I'll check it out. Enjoy!

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Human Expansion

After a long stint of not posting anything, I wanted to share this flow chart that I made last night. (Click to expand!) Essentially I'm pulling from works by Amartya Sen and Dwight H. Perkins ("Development as Freedom" from the former and "Economics of Development" from the latter.)  My reasoning in creating this, besides to use as a study guide for an exam on economic development that is fast-approaching, was to make something that would help visualize the process of human development, which can admittedly be a somewhat vague concept to grasp. So the middle bubble is the main topic: defining what the flow chart is going to be about, and what development itself is: the expansion of freedoms people enjoy.  We say that societies are progressing when they create an environment wherein the inhabitants are better off, or freer, than they were in the past.  But again, this is a very nebulous concept to grasp and so  In the sub-bubbles are four sections to address: Removal of sources of unfreedom, creation of new freedom, economic growth, and political development. Far from what the structure of the chart might imply, these four categories do not progress in isolation of one another. It is simply an artifact of the program that I used to map this that there aren't a dozen relationship lines connecting various bubbles and sub-bubbles to each other. Most of the concepts are pretty straightforward or can be easily explained though a Google search. I will leave you with this though, a quote our professor gave and explained to the class. "Freedom is of a piece." When there is a tear in fabric, it very obviously hurts the effectiveness of the whole cloth.  Yet when the fabric is whole, it can function beautifully. The same can be said of the various forms of freedom.

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What is the Economy?

Most people have some idea, to a greater or lesser extent, of what the economy is.  However, a lot of confusion exists.  A friend once encouraged me to watch a video on YouTube because it “had to do with economics”.  In reality, it was just a video about “sustainability” and anti-corporatism.  It was an honest mistake, but upon reflecting later, I realized that it might be good to do a post telling what the economy is and is not.

            A long time ago, when civilization was mostly tribal, there was not much of an “economy” as we know it.  People would grow food, hunt food, gather food, and perhaps go to war if they were bored.  At some point, people realized that different people were good at different things.  Some were good at farming, others at making tools, and still others at yet other skills.  This gave rise to what we call the “division of labor”. In a society that operates with a division of labor, people do what they are good at doing and trade with others for what do not do.  A smith would make tools and trade with the farmer for food.  They would both be better off in the end because they were able to procure something that they didn’t have to make themselves and only had to do the one thing that they were good at.  The division of labor gives rise to a social system characterized by specialization and trade.  The extra benefit of specialization is that when a person focuses on one vocation, he is able to acquire more and more skill, as well as innovate in his field.  This is the time in history when we see the first big jumps in technology. 

            Fast forward to a later point in humanity’s history and we see the invention of money.  What is money and why was it made?  There was a need for some medium that could store value permanently.  This need is perhaps most clearly seen in farmers who, in the absence of a method of storing value, could only trade during the times that they had a fresh harvest.  In those times, they had plenty, but the stocks did not last long enough that they could trade for other necessities during the rest of the year.  Another problem with a society based solely on trading is: what if the person you want to buy from does not want the good that you have to offer.  The trade gets even more complicated when attempting to trade something of little value, say corn, for something of great value, a guitar.  What if the guitar is worth a couple thousand ears of corn and the guitar maker won’t trade for it because he does not want to have to deal with carrying around those thousand ears?  Yet there is a rub because guitars by nature cannot be divided into some smaller segment that can be traded for fewer ears.  Money was invented to solve all of these problems.  Whatever form it has taken throughout history, money has shared these characteristics: it holds value permanently, is easily divisible into smaller parts, and is universally (or at least widely) accepted by everyone in a region.  With the creation of money, people were able to specialize even more because they did not have to worry about their product being immediately marketable to an end user.

Ludwig von Mises, author of "Human Action"

            Adam Smith wrote about the growth of a society from specialization and trade in 1776 in his book The Wealth of Nations.  This sparked the Industrial Revolution which saw specialization increase to such an extent that a person’s sole occupation might be the creation of a firing pin of a gun.  Trade expanded too so that each country could take advantage of its own natural resources and the skills of its labor force and trade with other countries for their products.  This is where we get the idea of an “economy”.  An economy is the sum of the resources that are used and the products that are made and the processes by which they are exchanged in a society as well as the actions of the people who participate in them.  Civilization has progressed a long way since the days of hunters and gatherers and has become nuanced enough that no one person or group of individuals can hope to understand it fully, but it does not keep us from trying. Economics at its very core is the study of human action, how people use resources for the betterment of themselves and of humanity. 

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Mind Games: The Role of Advertising in the Competition of the Coca-Cola and Pepsi Companies

This is the term paper that I wrote for a game theory class called "Competition and Strategy". I believe it to be a prime example of my writing and thus thought that it would be good to share here.

Mind Games

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Today's Incentives at Work

            My dad rented a car recently for a business trip and these were the keys.  Now I’ve seen a lot of rental car keys before, but never one with a label right on it that said the replacement cost.  This unusual tag got me to wondering about the role of incentives in everyday life, as I’m sure it would do to any of you.  To start off, think about this, how much does it actually cost to replace a car key?  I highly doubt that it is really 225 dollars.  After a minute of some search research, I discovered that replacement keys for Kias actually cost around 150 dollars, more or less, depending on the locksmith you use.  How much do the materials themselves cost?  There’s no easy way of finding that out, but again, I would suggest it be much less than even 150.  Now, to be fair, a markup is to be expected for the cost of the smith services, but why does the rental car company charge so much?  225 dollars for a key, after all, is a lot of money for a key even if you take into account the trouble the company has to go through to order a new one.

            I submit this explanation for the overpriced key.  No one wants to pay hundreds of dollars for a key and the car company certainly does not want to have to go through the trouble of ordering a new one.  I’m going to cut to the main point here and say that since no one wants to pay or have to deal with getting a new one, the best way to ensure that the keys don’t get lost in the first place is to charge an exorbitant price for its replacement.  The result is that I suspect these car keys don’t get lost very often.  My dad certainly did not lose it.  The effectiveness of this policy is best seen in its absence.  People would probably be much more careless with their keys if it was less.  Case in point: consider that my family has, in the past, lost our house keys fairly often.  These cost less than five dollars to replace.

            Look at the incentives at work here.  If you want to discourage some actions, make it more costly for people to participate in it.  The ramifications of that statement extend far beyond car keys.  Think of carbon taxes for pollution.  Think of prison sentences for various crimes.  The list goes on.  Now I submit that society could not exist in an orderly fashion without these incentive penalty structures.  Imagine what the country would be like with everything from murders that never got punished all the way down to library books that have no reason to ever be returned.   

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