What is Economics?

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So I’ve spent the past week helping some of my first-year microeconomics students prepare for their mid-semester test. It’s the first big assessment of a business/commerce degree here and many students are starting to struggle, particularly those who didn’t study econ or advanced maths in high school. Some academics really dislike teaching first-year students and I can understand why – those students aren’t as committed, organised or mature – but I’ve always found it particularly rewarding to teach and reflect on the foundations of the field.

Most people have a reasonably good idea about most business disciplines. They know accounting is a lot of number-crunching, finance involves debt and stocks, that marketing is advertising/distribution. Economics can be a bit of a mystery though; people see economists on the news a lot, but don’t always understand what they’re talking about or why. Often, people also have preconceived ideas about what economists are (or aren’t). I see this problem in my students but I also see it in people who have never studied any economics: there’s a common assumption that we’re mostly interested in profit and how to get there. Which is a bit like saying accountants are interested in addition and subtraction – it’s true but also misleading.

The foundation of economics isn’t about money at all, it’s about resources and the acknowledgement that some of our resources are quite scarce. If you think about your life, there are all sorts of scarce resources – the amount of milk in the fridge, the lifetime mileage you’ll get from your car, how long the ink will last in your pen –but most of the time, these are easily overcome and not worth worrying about. Time and money, however, aren’t easily overcome. You only have a limited amount of each of these resources, and have to be careful how you use them.

This is a problem because there are so many things we would like to do with our time or money, but simply don’t have enough of either to accomplish everything. Even if we had unlimited money – as many people dream about – it doesn’t solve the problem: you would still have a limited amount of time in your life, and would still have to make decisions about what things are most important for you.

Some people would choose to put their time into personal achievements: academic, professional, or sporting success. Some would choose to put their time into a relationship and having a family. Others might choose to serve others, becoming a nurse or a volunteer. But whatever choice they make involves deciding that one pursuit is more important than some others. You might want to be an aid worker in a developing country but also want to be a committed, present parent: it’s hard (perhaps impossible) to be both, and so you need to choose what is most important to you. You need to choose how to use your time and money to do the things that you want to do with your life, the things that will bring you the most satisfaction.

Understanding that people need to make choices is the foundation of economics; it’s this idea that we have limited resources but unlimited things we would like to do, and have to make choices about our priorities.

It’s as true of societies as it is of individuals, except the mix of resources changes: time isn’t as scarce, but there are limit amounts of homes, buildings, cars, equipment, raw resources, food, etc. A society has many, competing demands for how those resources should be used and must make choices about which products are most important or desirable. You can design society so that these questions are answered privately, by individuals and firms (as in a free-market economy), or publicly (as in a command economy) but either way, there needs to be an acknowledgement that we have scarce resources and can’t have everything we would like to have.

In free market societies, firms make the decisions about how to use resources and what to produce, and transform raw resources into products. Some businesses do this well – they have a better understanding of what people want, or can produce these things using fewer resources – and they are able to sell a lot, and make a profit. Other businesses do this poorly, fail to make a profit, and eventually shut down.

Having a lot of good businesses within a society means that scarce resources are being used wisely and individuals are able to acquire the products that enable them to satisfy their goals and desires in life. This satisfaction is the true measure of a society’s wealth, not corporate profits or the amount of stuff people have: we want to create a world where people have the products they need to do what they want to do with their lives.

The fundamental role of economics is studying this process of wealth creation and, hopefully, finding ways to help it along. Sometimes this is by teaching economics – helping people to understand how to make decisions under conditions of scarcity – and other times by advising businesses – helping firms to do better at producing things that people want, using as few resources as possible. Ultimately, our goal is not maximising corporate profits or the bank balances of individuals, but in ensuring resources are used in a way that enables people to do what they want to do in their lives.

And this brings me to something that has been on my mind lately: the ethics of pen reviews. I know some people – whether or not they actually agree with what I have to say – don’t understand why this is important to me. They see sponsored pen reviews as relatively benign, even harmless, but see this level of attention as being potentially harmful. I hope that this post helps to place my concerns into context: I worry about resource allocation in general, I think we could always do better and my research and work is dedicated to achieving that. But I worry sponsored reviews are going to push people into buying things that won’t be as satisfying as they expect – that our resources as a society may be misallocated – unless readers have a clear idea that they may be reading a form of advertising and need to treat it as such.

This is particularly concerning given that the prices of some pens can be quite high and an inappropriate purchase isn’t just going to harm that individual’s wellbeing, it may also push them out of the market and harm our wellbeing as a community. We all play a part in how society uses its scarce resources and I want to ensure that reviewers – all reviewers – are working to guide people towards making the purchases that are the best choice for them, and not the ones that might be the most rewarding for reviewers or firms.