A simple enough post. Here’s how Thomas Carlyle defined economics in 1849 : “Economics is dreary, desolate and indeed quite distressing, what we might call by way of eminence, the dismal science.”
Why then should we even be interested in it? Joan Robinson, another prominent economist in the 1930s and 1940s said that one has to learn economics in order to avoid being deceived by economists ($800bn bailout, TARP anyone?). Herbert Stein, another economist said ” Economists don’t know very much. Other people, including the politicians who make economic decisions, know even less about economics than the economists do.
So, what is economics? Let me start with what it’s not. Economics is not a quantitative crystal ball – you cannot forecast the future with it. It’s not possible to predict when the stock market will rise or fall or when a business cycle is about to become recessive. Expecting the science of economics to predict the future is like asking anthropologists to predict the next stage of evolution.
An economy is influenced by politics, technology, weather, natural resources, business climate, strength of its financial system and many other factors. I would venture that the science of economics provides us with a structure and tools to help us think about the problems and issues that society faces and enable us to answer those questions.
Economics is about understanding the supply-demand dynamic. If supply is less than demand, this is a situation where human wants exceed the means to satisfy those wants. Such a situation is called scarcity. Society always wants more of everything; more heath care, more roads, more cars etc. The planet has a finite amount of resources to meet those wants which means that decisions have to be made as to what is to be manufactured to address scarcity
To make a decision, one needs access to natural (and human) resources and make decisions about what’s produced and when and how. When more than one interested party is keen to obtain the same resources, the possibility of conflict looms.
How is conflict resolved here? Four ways :
- Market forces : The most capable and highest bidder wins.
- Government fiat : The government decides on who’s going to do it.
- Gifts : The right to produce is gifted to another party by the owner.
- Violence : Pistols and sabres at dawn, please.
Here’s the shocker : Economics does not deal with these subjective(normative) questions. Economics is a structure and a structure cannot make value-based judgments. It’s like asking a supercomputer to solve the cold war.
BUT, unfortunately, questions on economic policy tend to be non-objective like should income tax levels be reduced? Or should corporations be taxed more? It’s important to understand that a non-normative or objective statement is factual and can be verified by facts. A normative statement is open for discussion but does not have supportive facts.
Economics aims to explain how economies work and economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science
Economists always state that if society needs something, they have to find ways to pay for it. They’re pretty much a pragmatic lot and offer solutions. For e.g. If you want someone to recycle, the economists suggest that you offer a 5 cent return for every item recycled or if you need more money to maintain roads, then the economist suggest that you increase taxes.
These guys also believe that prices are a result of supply and demand dynamics. They also look at every situation from an angle of opportunity costs i.e. what are the other ways this asset could derive more benefit to someone and if so, what is that person potentially losing by not using the asset in its most utilitarian role?
I’ll conclude this post with a quote from John Maynard Keynes who stated. “A good economist is a mathematician, historian, statesman & philosopher. He must study the present in light of the past for the purposes of the future. ”
Hope this post was succinct enough. I’ll be penning more articles on economics and welcome feedback on the same. Thanks!
