We are all economists by practice

I had always been a regular reader of this journalist in the local paper and always enjoyed her economic insights to the current events happening in Australia. While I did not finish with an economics degree, somehow I had always adopted an economics view to my life. Maybe it came easily coming from a middle class family living in a developing country where there was a great inequality of wealth. Or its just my nature. But I have arrived at my point in life to conclude having more should not be our goal in life. Enough for my needs. Maybe less so that others can have more. Even to have no need anymore. I don’t know whether we would still need an economist mindset to appreciate this contrarian approach to life. But its good to know about the practice.

A noble pursuit by any measure

Jessica Irvine
Published: July 28, 2012

We are all going to die. Not today – fingers crossed – and probably not tomorrow either. But soon, sooner than you think, we are going to die. Sorry to be so melodramatic, but it’s kind of important.

There are few things that matter more to an economist than the idea of scarcity, of time – did I mention we are all going to die? – and resources, including land, physical capital and labour. Economists owe their existence to scarcity.

Try to imagine a world without scarcity – where time, money and all things exist in endless abundance. Everything would be free. We wouldn’t need jobs because we wouldn’t need income. Fancy spending every day in your undies, slumped on the couch watching TV. No worries, time is endless, so you may as well. Rather spend the day picking diamonds off that diamond tree in your backyard? Go for it. But then again, why bother? Diamonds are free and you’re dripping in them.

No time. No space. No money. You want for nothing. You never die. You’re never lonely, because no one you have ever loved has died. You can do whatever you want, whenever you want, without any regard for your mortality. The need to settle down, have kids, get a job, get a mortgage? Gone.

We could be young forever. To me, it sounds pretty much like heaven.

Unfortunately, the world we inhabit is far from this nirvana. We have only so much income. We are all going to die. So we must make decisions every day, every minute about what ”to do with the time that is given to us”. It is precisely because land, labour and capital are scarce that they have a value. It’s scary to think we’re all going to die, but it’s also, ultimately, what makes life so precious.

It is the job of economists to help us make these decisions about what to do with the valuable time we have. For example, economists are always pointing out our ”opportunity cost”, what we give up when we decide to pursue action A over action B.

Say you choose to spend one hour writing a book. That is one hour you’ll never get back and can’t spend doing other pleasurable things, like catching up with friends. Does the value of spending an hour writing exceed the pleasure you would have gained having dinner with friends? That is the decision you must make.

Economists have another piece of life-changing advice: ignore ”sunk costs”. Just because you spent $20 on a book about economics doesn’t mean you should keep reading if you don’t find it pleasurable.

The American economist Tyler Cowen argues most of us finish too many books, and we should leave more of them half-read. At every minute of the day, you should be thinking about what action will bring you most happiness, in the immediate and long term. (In fact, because studying economics will improve your long-term ability to make better decisions, it’s worth a little upfront investment of time.)

It is the fundamental cruelty of life, or what economists call the ”central economic problem”, that while the supply of stuff – time, money and resources – is limited, our wants and desires are unlimited. Perhaps we could convince ourselves to settle for less, be happy with what we’ve got? Perhaps, but think back to your last pay rise. How quickly did you spend it on a better house, more clothes, meals out? Wants? Infinite.

Plasma TVs, mansions and swimming pools? Limited.

And because things are limited, we also have to sort out, from an economy-wide point of view, who gets what. One way could be to appoint someone, or a group of people, to apportion resources equally. Everyone could get a standard issue car, house, DVD collection, wardrobe and pet. But just as our wants are infinite, so too are they infinitely varied. If $1000 were to fall into your lap, you might want a surfboard; in the same scenario, I might want a bike.

As it happens, I’m good at making surfboards, and you’re good at making bikes. I could try to be content with making myself a surfboard, which I’d never use, or we could come to some sort of arrangement, a trade.

Most economists agree that markets consisting of individuals coming together to make mutually beneficial trades are the most efficient way of allocating resources. An efficient market is one that maximises the consumer’s and the producer’s ”surplus”; that is, the surplus of wellbeing created when I pay less than I would have been willing and able to pay for a bike and you sell it for more than you would strictly need to recoup your costs. Such transactions maximise total wellbeing because I get a bike for less than it would cost me to make (if I could make it at all) and you get to sell me a bike for a marginal gain.

Markets can be disorderly, even chaotic, but they are the predominant way, via the decisions of billions of individuals, that we create the world we see today.

Of course, sometimes it’s not so simple and markets fail to deliver a socially optimal result. Sometimes they fail because individuals in markets aren’t always called to account for the cost of their actions – such as pollution. And even when strictly efficient, markets don’t always deliver a result that most people would judge fair. By enforcing rules and imposing taxes, governments can correct some failures of the market.

They can harness the profit-maximising powers of the market to skim off a bit to help less fortunate members of society – that’s what government budgets are about. They also make strategic investments in public goods – goods the market would otherwise fail to provide – such as education, roads, railways.

At the end of the day, economics is all about humans. You. And me. The decisions we make. And how to make life better. It is a noble pursuit. The reason there are no economists in heaven is simply because they are not needed.

There is no scarcity in heaven, so they’d have nothing to do.

That is not to say many earthly economists won’t pass through the pearly gates. Indeed, as people whose life mission is to help others make better decisions, decisions that will bring happiness, many economists would surely earn themselves a place in heaven. It’s just that there would be no need for their particular skills. In heaven, economists can relax, kick back and enjoy a well-earned break. But until then there is much work for them to do.

This is an edited extract from Zombies, Bananas and Why There Are No Economists in Heaven, published by Allen & Unwin, $24.99.

This story was found at: http://www.smh.com.au/national/a-noble-pursuit-by-any-measure-20120727-22z6x.html

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