Do not read if you don’t care about economics and how economics influences your wallet


This post is all about economics. I came across some blog posts, and I saw many economic concepts passing by but they didn’t click, and it was having heard about it but not appropriately applied. I firmly am in favour of knowing at least the basics of economics and how it influences political policies. Precisely those policies you feel in your wallet, or not. So, you can vote the right people in office with the correct arguments!

Actually, a big thank you to Todd Matthews. His energy in his post persuades me to write this post. I wanted to write this post already much longer, but, it was through his not wholly understanding of concepts that I am writing now. So, Todd, this one is for you! and for everyone else who is interested of course. I hope you will learn something from it.

Before I really start a little disclaimer. This is an article that I primarily write out of my head with some resources. It’s not an article that is properly referenced, and thus you cannot use it for education or other publications. <—- me trying to be serious (did it work?).

Why I know about economics? Because I studied it. Well, I haven’t done an economic study as such, but in the MSc, I am doing economics play a big part because I need to know these fundamentals for economic valuation of projects and programs.

Anyway, it’s not about me but about creating a proper understanding for you!

Back to school guys and gals!

What does even ‘economics’ mean?

When we hear about economics, we often think about money and the distribution of money. That’s not far from the truth, only, economics is much more than the physical money you have in your hands. Economics means scarcity, or better, the study between scarcity and choice.

On this planet there are things in abundance – the air we breathe is an excellent example of that. There is enough for everyone all the time, so there is no competition in that, thus also no monetary value. POKE don’t yawn yet!

Oil, that dirty, ancient, fossil crap we dig up, is scarce. At some point it will run out, or, it will be forbidden to be used. Thus it comes with a price tag on it.

When you’d talk to economists, they often refer to scarcity as opportunity costs, and that simply means making a choice with the highest value with the money you have.

Huh? What?

Let me explain: with your very last $20, what do you do? Do you either put fuel in the car or buy groceries? You cannot do both. So, what do you value most? That what you didn’t choose is foregone and you cannot spend money on the alternative choice anymore.

The resources we generally have, or what we can spend money on is landlabour and capital.

  • Either we use land for farming, or we build a house, but not both – what’s more beneficial?
    • What about this one! A tropical rainforest with all the cute animals that kill and slay and and and other cute animals, or clear that land for a soy field with crappy GMO food and all?
  • Either we are technologically advanced, and we employ few people, or we employ many people to do the same job using less technology.
    • Hey you, Stop&Shop (a USA grocery store) I can put my groceries in the bags myself thanks! (oh but it does give employment to those kids.. hmmm….)
  • How do we invest our capital? In a quick bitcoin fix or a stable long-term growth? What is more important?

Already now we can see that there are many questions and many decisions to be made! Interesting, right? What do you do with that scarce money on your bank account? Hmmm…..

Anyway, moving on!

What is supply and demand, and, why bother about it?

Yeah! Good question!

Let’s take the USA as an example: Who in their right minds wants to live in Utah? Not many people! Who wants to live in NYC – Manhattan? EVERYONE! Well.. not entirely true but you understand the difference.

There are many more people who want something from NYC thus that city is high in demand, but as the city is limited in land – the supply of land is very low – because the ocean on the east and south, NJ on the west and the rest of NY to the north. Thus housing prices go up, in fact, everything prices go up! I will come back to that later as housing prices have a thing to it.

Another example, the demand for diamonds is higher than its supply. Hence diamonds are so expensive. If there were an abundance of diamonds, then the price would drop significantly. Or, bitcoins! There aren’t many of them, and late 2017 everyone wanted to have them, and the price went up! But then a month later it crashed because people didn’t want them that much anyway…

When supply and demand meet and nothing changes? That’s called an equilibrium (more about that later)

Diminishing returns

A small one, but IMPORTANT! which next sections will show. Diminishing returns indicate that when you’re fed up with something it loses its value. One pair of shoes, yeey baby yeah! I got them! The second pair, yessss lovely! I can use them too on a different occasion! But after the 100th pair of shoes? Then you won’t chip in $500 to get them. Then $20 shoes at the Wall Mart is good enough!

Or, you’d gratefully pay $10 for a yummy hamburger with everything on it, but after the 4th you probably won’t, unless you get a discount of $5 and then it’s interesting as for that amount you’d buy. But hold on! Coming back to this soon!

History, baby! Yes! Read this too!

Because only through understanding history you will understand today! Some fundamental concepts that we hear now on the news were born there so, pay attention!

Classical economics

Quickly, we go back before the industrial revolution. Then church and state were there same, the USA didn’t really exist yet, all was on steam power, and the windmills in “Holland” (it’s the Netherlands you dummy) were rotating as never before.

Also, the ownership and wealth were with the elite, with the church and kings and queens and princesses and princes and governors and and and but. not with the ordinary people. They were poor as hell.

Thus Adam Smith, somewhere in the late 18th century, had an epiphany! Let’s separate church and state and let the capital multiply through….. supply and demand!

IMPORTANT!! The ownership of the supplier, manufacturer, was private and not state or church! With innovation, new technology, new things could be produced, new demand and new supply which drives up the price and more wealth are created.

Thus, there also was the division of labour – people working in factories and people specialising and engineering the factories and of course the bosses controlling the factory and getting the cash.

Tadaaaaaa!!! (early) capitalism was born!

That also means that there is a shift in who has – the capitalists or the bosses of the factories and the have-nots – the workers who get underpaid. Which was solved later with labour laws in part. But hang on, also to this I will come back later on.

Neoclassical economics

Right! Moving on to almost today!

Neoclassical economics is not just a stand alone. It is a category of tools and models (bbbboooorrrriiingggggg won’t explain them). Some things are OUTMOST IMPORTANT to understand! I do explain them here!

Neoclassical economics:

  • Look at the margin. I build a wall, with one person more I build it faster, thus the profit is more as I build more walls together than alone. But, if I add 5 more people on the same wall, we are going to fight, and we lose money. So, I only will add more employers when the profit is higher with than without him/her.
    Remember the diminishing returns? That’s here! Exactly this!

    • You will buy something at the right price with the right amount, think hamburger, and, you will produce something at the right price, think about the wall example
  • So, we are putting a value to all we utilise, or the utilities. You won’t buy sneakers if you are not satisfied with the price you pay.
  • Thus, factories seek the balance, equilibrium, between how much they produce and how much you buy. It is not in the factory’s interest to produce sneakers at a price you cannot afford, right?
  • And the whole bunch can be mathematically expressed.

Perfect competition

The above ONLY can be possible in PERFECT COMPETITION, but! That is a utopia, but still, the assumptions are widely used by economist TODAY, and these assumptions influence YOUR MONEY

Why?

Let me explain!

The most important assumptions economists are making is:

  • You and I behave rationally. We never ever would buy or make something if we don’t maximise our utility/satisfaction or generate maximum profit
  • We have stable preferences we don’t change opinion or brand or whatever.
  • We always have perfect information. They assume we know everything about all the cars, totally inside out, when we are going to buy cars.
  • We are with so many people buying, and there are so many individual people producing, so, nobody can influence prices at all. We take the current market price, and there is no monopoly
  • Lastly, it is easy to start producing, and it is easy to stop producing too.

All the above assumptions never ever ever ever are true. They all are false! There are commercials all over all the time, so we do not have perfect information. We don’t have stable preferences, we don’t behave rationally, and monopolies are disturbing small producers entering the markets.

The list of assumptions is longer, but they are, in my opinion, less significant.
What is important to know is that, in the mathematical calculations, many things aren’t considered. At all. Not.

What is not considered:

  • Institutions, culture, technology, wealth distribution, pollution, education, governments, etc, etc, etc,
  • When one thing in the above list changes, they assume that all the rest of the list does not change either.

So the basis of economic predictions, forecasts, growth or not, or explaining why the economy grows or not is very weak. In my opinion, that weak so we cannot put any value on it and every fart an economist makes can either make or break an economy!

Neoliberal economics

Ouch! That dirty word. N.e.o.l.i.b.e.r.a.l. ouch ouch ouch. What does it actually mean?

It means this:

They do not give a shit about any government, thus also not about you because you voted for that same government. Neoliberal economics gives a big F You to you!

They say that everything is an individual choice and that everything a government does is interfering in the market. So everyone else but you cannot decide what is best for you. Barf.

That is very different than neoclassic economics in which the state does play a role. Governments are a part of the economy as they participate in it, employ people, sells service and looks after the total welfare of the people.

Neoliberal does not. They want to have a small government, and if something goes wrong with an individual? Seek it yourself you stupid! Then you should have worked harder/better/smarter! Neoclassic would say, oi.. sorry that something is not well, here, a helping hand, be well and then repay me in kind.

In neoliberal economics many things all over the world got privatised, electrical companies, power plants, education, postal services, banks, airlines, oil revenue, you name it. The state is Satan, they cannot control, they cannot manage, they cannot exploit workers paying them the bare minimum as the free market can.

Also, goodbye social protection! No more government spending and also no private company who wants to take over, except insurance and those prices are also extraordinary high with a super lack of coverage.

Free market

A little thing about it. As the world now is dominated by the neoliberal ideology, there is also the concept of free market. That means the removal of all financial borders and burdens. No taxation and low cost of moving money. Thus, USA started to outsource production to China! It is much cheaper to produce in China, ship it to the USA and sell it in the USA for USA prices but with Chinese exploitative labour! Bye USA jobs!

Now it is so much integrated that even if all jobs and production go back to the USA the economy also will stop because the cost of production is too high! Unless, we go back to neoclassical economics, have a truer perfect competition, split up all the major corporations into small units in which no single company can influence prices.

In the USA are only a couple of phone companies, well, I am sure they can offer their services at a lower price with a higher service! If there is enough competition!

So… hmmm…

End of part one

I already explained many things about economics. This was telling the driving forces behind the economics, namely, land, labour and capital. It clarified different concepts regarding scarcity and margin. The more you have of one thing the less value it gets, and the more resources in production the less profitable it gets in the end.

The history of economics and economic views were also mentioned, and I hope this gave clarity about the difference regarding neoclassic and neoliberal economics and why, I think, neoliberal economics is totally wrong.

In the next part, I will write more about macroeconomics and fiscal policy, as in the difference between them and what it means to you. Furthermore, I will go deeper in welfare economics and what it means for a country.

Catch you later!

Any thoughts? Please do share!

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 )

w

Connecting to %s