By George Young
Money. Inflation. GDP. Supply. Demand - Boring.
From a surface level, economics deals with big and important topics about how countries handle their finances. So, what does it have to do with everyday people like me? Why should I care about international trade or interest rates? I’m not a banker or a politician.
Unlike finance or accounting, economics isn’t a tool but a social science. Economists observe a system that has evolved naturally over thousands of years to understand what is going on in the human world and create models to replicate these situations. It delves so much deeper than macro trends in an economy. In fact, macro economics, the study of large economic systems - like a country, is the end of a very long chain of connections that economists deal with. Economics is the study of choice and how individuals make decisions given a scarce number of resources. Economics is a child of philosophy whose study goes beyond money that seeks to understand how individuals form a set of values from which they act in the world. How does one decide how to live their life? The answer lies in the value structure they use to navigate society.
Economists create models in which different individuals with different values interact to form an equilibrium outcome. This can be financial, political, item-based…the list goes on. Some people want money, some want a family life and governments set rules and provide incentives to achieve this. All these agents interact together to actualise a constantly changing reality. Adam Smith, the father of economics, called this the ‘Invisible Hand’ of the market, a silent force that leads to outcomes between individuals. German philosopher Hegel called it the ‘World Spirit’ but I guess we could just call it society. Regardless of name, economics helps us to understand this ‘force’ and point us into a positive future direction. Economics is really just another lens through which we can view the human experience.
What are some examples of economics in our daily lives, you ask? A core concept in economics is that of opportunity cost in which every action we take implies another action we could have taken, but we miss out on. There are only 24 hours in a day and we each have to choose how to use them. You could go to work for money in the near future, study at university for money in the distant future, or use that time for leisure and instant enjoyment. The way we choose to spend our limited time is dependent on the ‘utility’ or gratification we receive over different time spans. Some people are more patient while others can’t wait but we all have different budgets that we are confined to.
Now imagine millions of people all undergoing the same dilemma as they live their lives. All their work, study and leisure can combine to form an economy! Suddenly terms such as nominal interest rates and CPI become far less abstract. It’s about people, not politics. And everyone has their own effect on the economy. With an understanding of how individuals act, economics is a useful tool for us to approach complex problems like human trafficking, ambulance ramping, illegal marriages, government corruption and poverty. How come Hungry Jack’s, McDonald’s and KFC all open right next to each other? We’ve got a model for that. A truck driver in South Africa needs more money to support his family so he pays bribes to government officials to overload his truck: this causes the roads to wear down faster and now everyone is at risk. We’ve got a model for that one too. How do drug cartels operate and what can we do to stop the spread of opioids? There's a model out there for that too.
This year we want to explore the vast array of applications economics has in store for everyday people like you and me. So look out for our EconDit articles, and in the meantime: reflect on what drives you to make your decisions and how they affect other people. We’re all part of one big system.
Remember, economics is about people and choices - not just money.
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