Description
The Economics You Need
Economics studies how people behave and interact in order to improve their well-being in an environment characterised by scarcity. While economics as a field of study dates only to the eighteenth century, humankind has always been confronted with economic problems, as long as labour has been necessary for survival and the supply of resources has been smaller than the demand for them. Over the long course of human development, we have made huge progress, by learning to make the right choices, to cooperate, and to take advantage of our talents and intuitions in order to produce increasingly large amounts of goods and services. As a result, we have been remarkably successful in alleviating the scarcity constraint, avoiding starvation, and enhancing both our life-expectancy and our well-being.
Certainly, this development has not always been a smooth process. Many mistakes have been committed, especially when groups of individuals have resorted to fraud and violence to force other individuals to go against their preferences and their beliefs, or when looting has been more profitable than working. Yet, it is indisputable that most people today enjoy standards of living that would have been unimaginable even one or two centuries ago.
It is also true that interest in economic matters has increased significantly among all layers of the population in recent years. Why has this happened? On the one hand, our ambitions have risen: we expect our living standards to increase steadily, and we are interested in knowing how to make these expectations come true. On the other hand, we become increasingly concerned when we suffer setbacks, and when we feel we have fallen victim to economic mismanagement and are missing opportunities. More generally, we have come to appreciate that the fight against scarcity is not just a matter of happenstance and good luck. Humankind is by no means condemned to stagnation or even disaster, should the natural resources at its disposal be depleted. Rather, we are now aware that alleviating scarcity depends on our ability to avoid wastages, and to create new wealth through technological progress and entrepreneurship.
Since the eighteenth century, we also have learned that human behaviour in the presence of scarcity follows fairly regular patterns which can be studied and explained, and the consequences of which go beyond what the uneducated observer might at first glance perceive. Certainly, the economic interactions in which most people engage today are considerably more complicated than those in which the average individual engaged in the eighteenth century, yet the insights inherited from the founders of modern economics remain valuable. Loyal to this early heritage, our purpose is to investigate and help the reader to understand the key categories of economic actions, in all of their complexity: savings, consumption, production, competition, regulation, money, specialisation, currency trade, and booms and busts. As the reader will see, economic actions can be explained by individuals’ efforts to improve their conditions, and the process through which they strive to reach their goals has always been a matter of opportunity costs, a synonym for exchange driven by choice.
The purpose of The Economics You Need is to guide the reader through this journey into the world of economic thinking, a world which can appear complicated, but which need not be hopelessly complex. With the aim of untangling some of these complexities, we have done our best to keep our story simple, but not simplistic. This explains why the reader will find no maths and no footnotes, and only a few straightforward figures. Thus, no previous technical skills are required to understand the ideas developed in these pages. Since we have preferred to give priority to the fundamental concepts and mechanisms that characterise the economic mental framework, we have made use of simple examples to illustrate the passages that are less intuitive. Hence, we have avoided lengthy references to the complex situations that characterise the real world, situations that would have forced us to engage in lengthy digressions, and that would have certainly necessitated risky forays into other disciplines. Likewise, we have also decided to avoid the debates regarding the goals and nature of economic policy-making, because these debates lie beyond economics, strictly speaking. In other words, this book will help the reader learn how economists think and what kind of tools they use. Evaluating the merits of choice and the desirability of the results is clearly important, but it is an entirely different exercise, and should not be confused with economics. Economics explains and is a value-free science.
The lessons in this book will also train the reader to resist a variety of common temptations. He or she will learn that economics is not an exact science, and that economists have no magic wands. When mechanics or scientific formulae are applied to human interaction, disaster can easily follow. Thus, prudence is in order: a good economist is one who uses common sense, asks the appropriate questions, realises that many phenomena are too complex to be explained by the right equation or the right model, and thus, that he must be open to the suggestions offered by other disciplines – history, psychology, philosophy and political science. Moreover, he will also recognise that human beings are neither clones nor angels, and that when unfettered human interaction fails to provide a desirable answer to an economic problem, resorting to government intervention is not necessarily the best solution. Policy-makers are also human beings: they are fallible, they respond to the incentives generated by the world of politics, and sometimes they are less altruistic than might be desirable.
That said, our efforts to clarify and simplify economic processes have not come at the cost of rigour. Although economics is not a hard science, its essence is logical consistency and its arguments depend upon precise usage of terminology, because ambiguity leads to confusion and contributes to blurring the essence of the concepts. Rigour is therefore necessary, in terms of content and of organisation. With regard to content, our quest for rigour explains why we offer the reader a method that can be applied more or less systematically. With regard to organisation, rigour means, for example, that the analysis of price formation must be preceded by the study of demand and supply; and that the origin and nature of the business cycle is unintelligible without previous knowledge of how individuals can act rationally and yet fall victim to systematic mistakes. Thus, our chapters follow a traditional sequence: after an introduction to some preliminary methodological issues, we deal with consumers’ behaviour and the world of production (Chapters 2–4); we then move on to studying the interaction between consumers and producers in Chapter 5 (market structure), the features of government action in Chapters 6 and 7 (taxation, regulation and money), and we conclude by examining the interaction among different countries (international trade and exchange rates) and the long-run picture (growth, poverty and crises).
The Economics You Need offers an agile and easy-to-read account of what economics is and of how problems should be framed following the economic way of reasoning; our inquiry into these matters is enriched by offering the reader provocative thinking and new insights into current and relatively well-known topics. It is hoped that it will provide readers with a deep enough knowledge of the key economic concepts and issues that they will be able to analyse the world around them with more discerning eyes, reframing ideas and debates within a consistent economic perspective and eventually forming their own visions.