What is Economics?

Much of economic performance is based on expectations. When confidence of consumers, investors and businesses regarding a litany of factors (job stability and growth, housing, market potential, stock growth, purchasing power, currency stability, commodity prices and much more) goes down, it can hurt the economy. When confidence is up, it can help the economy. It often becomes a self-fulfilling prophecy, a prime example being of influential economic and political leaders “talking down” the economy.

How does it work?
How can economics be a science?

Economics is a social science. Various aspects of it can be measured and quantified, but like psychology and sociology, the results are fuzzy, inexact and often unpredictable because of the vast complexity of the systems involved, which involve human society - a very untamed and whimsical beast. Also, like psychology and sociology, theories abound, and they often contradict.

These are in contrast to the hard sciences like physics and chemistry, in which experiments can be recreated with precision and accurately tested and measured.

You are right about belief systems ; people are trying to predict the future based on flawed information. Economics is mostly stories – people like stories – and they need them to gloss over obviously conflicting information. Follow Bloomberg news for a while and you see quite a lot of it. Some of them don’t even try (stocks rallied despite massive amounts of bad news).

For one nice story , read the “Black Swans” book (en.wikipedia.org/wiki/The_Black_Swan_(book) by Nassim Nicholas Taleb, who basically is a smart guy who got lucky (and rich) on wallstreet (he calls it “fuck you money”, where you are allowed to say “fuck you” before you hang up the phone as you are that secure)

His observation: humans are criminally bad at predicting the future and that our entire system of chance is fatally flawed. We are unable to see big events and changes coming ; and often because its impossible to do so (“freak flashfloods wipe out 90% of Australian kangeroo’s”). The only thing we can do is assume the past continues into the future.

A turkey gets fed well for 99 days, and assumes that life is all okidoki. Then suddenly its turkey for dinner. The turkey couldn’t see it coming. That is a “black swan” event.

He also makes a good point that we should more or less give up – and reduce our stress levels. Read the papers and the predictions for Oil are going towards US$ 20 / barrel … all experts were claiming US$ 200 for the next two decades only about 3 months ago.

My $0.02 :wink:

Economics is & are so much more than a social science than most of us will ever know…

pure Economics is pure Politricks by other means,

Who, Gets : What, Where, When, Why.
And How!

“Economics” is the art of predicting the future after it happens and then convincing the gullible to pay you for your expertise.

At the most basic level economics is the study of how to best satisfy unlimited wants with limited resources. Optimization and efficiency research are at the forefront, and are more or less rock solid. Forecasting takes the same theories and tries to guess what the future will be based on what we know about the present. If there is a particularly successful orange season this year we can expect prices to go down, an economist can estimate by how much based on past orange price performance and expected consumer demand.

That being said, in these recent weeks and months when people talk about economics they are usually referring to “the economy”, which in general parlance will be the gross national product of a given country. (GNP is basically the total material output of that country at the consumer level). When people are buying houses and cars, the GNP is up and the economy is good.

Fear can be a big concern, but it is predicable. When someone buys a new car a bunch of people get paid: the salesperson, sales manager, car shipping company, car assembly line workers, the smelter workers that produce the metals that go into the cars etc… But these people don’t just get paid once, each of them can use the money they made to buy cars of their own, paying again up the line. Spending money (even, and especially borrowed money, has a strong multiplicative effect.) If people are afraid of losing their jobs, they are less likely to buy a new car, and everyone up the line suffers, with that suffering being multiplied as well. In the US monetary system the government tries very hard to encourage people to spend spend spend as a way of fixing most economic problems. It can even run the economy at a deficit to keep things moving along. This causes inflation, but it has worked in the past (the great depression of the 30s).

booms and slumps are mostly about the amount of money end consumers spend. a slump happens when people put money in the bank, a boom when they go buy cars. 10k in the bank is still just 10k, but 10k spent on cars can turn into 100k spent on cars through the multiplicative ability of credit based spending.

In economics it’s called the Keynesian economic system. In general the US uses this system, though there is another system used in other countries that focuses on regulating supply rather than stimulating demand. Neither is doing particularly well right now.

Richard

Economics is a nine letter word that rhymes with pricks.

[quote=“rickredline”]At the most basic level economics is the study of how to best satisfy unlimited wants with limited resources. Optimization and efficiency research are at the forefront, and are more or less rock solid. Forecasting takes the same theories and tries to guess what the future will be based on what we know about the present. If there is a particularly successful orange season this year we can expect prices to go down, an economist can estimate by how much based on past orange price performance and expected consumer demand.

That being said, in these recent weeks and months when people talk about economics they are usually referring to “the economy”, which in general parlance will be the gross national product of a given country. (GNP is basically the total material output of that country at the consumer level). When people are buying houses and cars, the GNP is up and the economy is good.

Fear can be a big concern, but it is predicable. When someone buys a new car a bunch of people get paid: the salesperson, sales manager, car shipping company, car assembly line workers, the smelter workers that produce the metals that go into the cars etc… But these people don’t just get paid once, each of them can use the money they made to buy cars of their own, paying again up the line. Spending money (even, and especially borrowed money, has a strong multiplicative effect.) If people are afraid of losing their jobs, they are less likely to buy a new car, and everyone up the line suffers, with that suffering being multiplied as well. In the US monetary system the government tries very hard to encourage people to spend spend spend as a way of fixing most economic problems. It can even run the economy at a deficit to keep things moving along. This causes inflation, but it has worked in the past (the great depression of the 30s).

booms and slumps are mostly about the amount of money end consumers spend. a slump happens when people put money in the bank, a boom when they go buy cars. 10k in the bank is still just 10k, but 10k spent on cars can turn into 100k spent on cars through the multiplicative ability of credit based spending.

In economics it’s called the Keynesian economic system. In general the US uses this system, though there is another system used in other countries that focuses on regulating supply rather than stimulating demand. Neither is doing particularly well right now.

Richard[/quote]Thanks for the serious and detailed answer, Richard.That whole “economic growth” thing seems weird to me too though. How on earth did we end up with a system where the more we consume, the richer we are? In a very simplistic sense, it seems to me that it should be the other way round.

And I’m not a rabid greenie but I do feel there should be some way of factoring in the true longterm cost of the resources we use. How is it that I can buy a little bottle of water brought all the way from Canada for not much more money than a similar bottle of local water? That doesn’t seem right to me.

imagine an island. The island is inhabited by two people, Norty lives in the north, where there are ample fishing grounds but few trees for furniture. Souty lives in the south where there are ample trees for furniture but few fish.

Norty spends 12 hours a day making stools and 4 hours a day fishing.
Souty spends 12 hours a day fishing and 4 hours a day making furniture.

They both have enough fish to eat and both have stools so sit on.

If Norty spends 8 hours a day fishing, and Souty spends 8 hours a day making furniture, they can both have enough fish to eat and have stools.

If Norty spends 16 hours a day fishing and Souty spends 8 hours a day making furniture they can both have enough food to eat, stools, extra food to save, and wood beds to sleep on.

Economics, Trade, Capitalism, Specialization, Consumption. The real world is exactly the same as this, only with more people and more complicated islands. If everyone is working 16 hours in their area of expertise they can maximize their quality of life. A bed to sleep in and extra food to store is better than the alternative. Fear still plays into this system.

If Norty is afraid of sharks and Souty is afraid of getting crushed by trees they will only work 8 hours instead of the full 16, minimizing their risk at the cost of their comfort. They no longer have beds or extra food.

This creates a downward spiral. Neither of them are sleeping in good beds, so they have less productive workdays, and if the weather is too bad for Norty to fish than they will be weak with hunger.

Money can solve this problem. Say they are trading through a third party who is paying them in seashells for their work rather than bartering directly. We’ll call this third party uncle Sam. Sam can make new seashells magically appear, so when Norty and Souty are too afraid to work, he offers to double their pay, which is enough incentive to send them out again, thus rebooting the cycle of work and consumption. Now they are sleeping better and have extra food.

It should be noted that the influx of new seashells into the economy will cause the overall value of seashells to decrease, as now there are more to go around, so each one is worth less. This is classic seashell inflation.


I'm not as much of an expert on bottles of water, but here's two possible reasons:

1.) Economies of Scale.  It costs $10 to make and deliver Taiwan Water.  It costs 20$ to make and deliver Canada Water.  However, while Taiwan Water is only distributed in the Taiwan market, Canada water is produced worldwide.  By producing water in much larger quantities they are able to get their cost down to 15$ per bottle.  it is much easier for a $10 and $15 bottle of water to compete with each other than a $10 and $20

2.) Demand.  7-11 stocks both kinds of water, selling taiwan water for $20 and canada water for $25.  7-11 sells 100 bottles of taiwan water, turning a profit of $1000 |100 (bottles) x {20 (price) - 10 (cost)}|.  7-11 also sells 100 bottles of canada water, turning another profit of $1000 |100 (bottles) x {25 (price) - 15 (cost)}|.  

7-11's job is to adjust prices up and down to maximize the return on the water they sell.  If 7-11 drops the price of Taiwan water from $20 to $15 they end up selling 150 bottles, for a profit of $750 |150 (bottles) x {15 (price) - 10 (cost)}|, the drop in price did not motivate enough people to buy more water, so they actually lost money on the move.

If 7-11 drops the price of canada water from $25 to $20 they sell 500 bottles, for a profit of $1250 |250 (bottles) x {20 (price) - 15 (cost)}|  so they actually make more money on the deal.

Richard

Well, thanks again Richard. I do appreciate your efforts to educate me on the basics of economics. Goodness knows I need it.

But I just don’t think we’re working for fish and furniture any more, not really. Somehow when things became more complicated, the basic connection between amount of work and stockpile of food, etc, got severed. Perhaps it started with the trick of making more shells. I do think it’s all about grabs for power, in the end. Shell-makers are very powerful people. But in the end, even they haven’t been able to control the system they imagined up.

And I do understand economies of scale. I just think it’s somehow wrong that imported water should be so cheap. Perhaps that’s another form of over-borrowing in a way. Enjoying an easy life now, but possibly making things more difficult in the future.

There is an entire subset of economics called the Economics of Sustainability, or Sustainable Development Economics. It focuses on “creating the best possible growth for current peoples and markets without sacrificing the growth of future peoples and markets.” It’s a very exciting field that is seeing some very strong and innovative work in developing countries, but it’s still a bit young as a science, so there are lots of kinks to be worked out.

It is a very interesting field. Shifting from a economy based on continuous growth, to one that serves a shrinking population, albeit one with growing appetite for consumption/quality, poses a number of very difficult challenges.

Interesting:

[quote]The following excerpt represents the crux of the George’s argument and view of political economy.[1]

“Take now… some hard-headed business man, who has no theories, but knows how to make money. Say to him: “Here is a little village; in ten years it will be a great city-in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will in ten years, interest be any higher?” He will tell you, “No!” Will the wages of the common labor be any higher…?” He will tell you, “No the wages of common labor will not be any higher…” “What, then, will be higher?” “Rent, the value of land. Go, get yourself a piece of ground, and hold possession.” And if, under such circumstances, you take his advice, you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon or down a hole in the ground; and without doing one stroke of work, without adding one iota of wealth to the community, in ten years you will be rich! In the new city you may have a luxurious mansion, but among its public buildings wil be an almshouse."[/quote]