Economics in 140 Characters
2012-06-17
The other day I decided to experiment on Twitter with summarizing my understanding of economics in 140 characters. The best I came up with was: "Resources are limited, value is subjective, trade is natural, choices involve tradeoffs, incentives matter, prices are signals." Here's how I would unpack that brief statement:
-
Resources are limited: It's a fact of nature that most of the things we humans would like to make use of are in limited supply. Implicit in the notion of "resources" is the assumption that production is important in human life, since we need to take action and make things in order to survive and function in the world. The things that enable us to act and produce include raw materials, plants and animals, land, time, fellow collaborators, capital, etc.
-
Value is subjective: The resources that are of value to me might not be the resources that are of value to you, or I might deem some things more or less valuable than you do, for a myriad of reasons: because of my circumstances, my skills, my specialty or line of work, my interests, my available funds, etc. Here I follow the Austrian school of economics in using "subjective" to mean, not arbitrary, but personal or individual.
-
Trade is natural: Humans trade things. We've been doing that since time immemorial, and indeed some anthropologists speculate that our propensity for trade is part of what made us more successful than, say, the Neanderthals. Trade is also natural because value is subjective: if I have an ingot of iron and you have a bushel of wheat but I'm a breadmaker and you're a blacksmith, the wheat is more valuable to me and the iron is more valuable to you so we're likely to work out a deal.
-
Choices involve tradeoffs: There are always tradeoffs: costs and benefits, pluses and minuses, positive and negatives. Those considerations are not always clear from the outside and require knowledge of the particulars of time and place to understand completely; indeed the distinction between what is seen and what is unseen often looms large in such choices.
-
Incentives matter: To induce someone else to make a decision regarding a trade, I need to offer some incentive for them to do so: something that they want more than the thing they already have. That incentive might be money or time or a good or a service, but in all cases it encourages and motivates you to make a deal (the word incentive comes from the Latin incantere: to charm). The flip side is that disincentives matter, too: taxes, fees, penalties and other costs discourage people from doing the action or producing the thing which incurs that cost.
-
Prices are signals: People who know nothing about economics seem to think of prices as utterly arbitrary: set on a whim by a business owner or by a governmental authority (or, in the medieval notion of the "just price", even by god). Yet where markets emerge, prices are information: they provide signals about supply and demand, that is, about the subjective valuations for various limited resources among all the participants in the market. The price at which something can be traded can provide an incentive to action, and result in more or less activity to produce and trade certain resources. The price at which something can be produced and traded (e.g., costs of labor or transportation) can provide a disincentive to action. Roughly speaking, the difference between the price of sale and the cost of sale is income or profit, which itself is a signal to those who might invest surplus funds in an activity or organization or industry.
If you think I've missed some core economic principles along the way or you make your own summary of economics or any other field of knowledge, do let me know!
Peter Saint-Andre > Journal