Given that this is an economy blog, it seems the headline is, at least, challenging. After all, economists are held in high regard, as the experts in the scientific field of economy. They have all those complex formulas to explain, predict and plan the economy, haven’t they? They have after all studied the field, act as counselors for the governments, tell us what’s wrong and give us advice in troubling times where the complexity of economic events become overwhelming, do they?
This is not an academic journal, so it would be off the mark to argue about all those „scientific“ claims made by most economists. One of my former co-workers, a Scotsmen, once told me the phrase that “common sense is not very common.” I have to agree. So, this article is based on common sense and how it helps to understand economy.
Since most of us have too much to do to get the daily chores done and to make a living, we have little time to spend understanding fancy phrases and economic babble. And if I had the choice to watch, say Jon Stewart, or read John Maynard Keynes, in my spare time, I would sure switch on the TV and throw the “General Theory” into the bin. Guessing that most of my fellow citizens would do the same, it is no wonder, that economic science rests in an ivory tower guarded by a huge army consisting of terms and phrases that the “common” man does not even know how to spell let alone knows what they really mean. You remember the story of the emperors clothes?
Mind, I am not saying that economy is useless. In fact is is much to important to leave it to the scholars in the ivory towers. Economics is about the essence of our lives and therefor “essential” to all of us. I promise I will try to keep fancy words at a minimum, and where I use them I will explain them.
Well than, let me start with some explanations. Economics as a term is derived from ancient Greek oikonomia – which basically means the rules of the household as oikos is the house and nomos means law. Because we all live in households, and all have, at least some, rules how to run it, we all are engaged in economics. In short, economics is your and my everyday struggle to survive. No need for fancy phrases here so far.
The first question that comes to my mind when I consider this would be, why do I have to struggle to survive anyway? I mean, wouldn’t it be cool to survive without any effort? Indeed, that would be cool. Yet, we as humans have a lot of empirical (another fancy word meaning “by collecting historical data”) evidence that we can not survive by doing nothing. Men has always dreamed about such an environment and we call it paradise. Alas, reality looks different. Question is, what keeps us from being in paradise? Ok, I don’t mean the angel with the sword. There are two things that keep us from the kind of paradise described above. First, scarcity and second uncertainty about the future. Think of all the basic ingredients a human being needs to survive. Air to breath, food to eat, water(well that would be very basic) to drink and, given the absence of a natural fur, shelter.
If you are still with me (which means probably that Jon Stewart is not on the program yet) I ask my next question. Which things of the list above are scarce? Well air is not, unless you are a scuba diver trapped in a wreck 30 feet below the surface of the Atlantic with a half empty bottle of air. Food is sure scarce, even if you have a well equipped fridge with bulks of your favorite Alfredo style Lasagna. The same goes for beverages. While there is no need to search for ways to get air, you can just breath, you need to find ways to get food and drink, and shelter. You have to spend time to get those vital things (unless you still live with your parents that is).
Good, we now know that some stuff we need is scarce and we have to do something to get it. But, why do we have to do something at all? Because, we do not know the future. If we would know everything that will happen in the future, we would not act at all. If I was hungry, and knew that in 2 minutes a roasted chicken would fly into my mouth, why bother to think about going out to hunt? Yet, I am pretty uncertain this would happen ever. Omniscience (well, remember my promise about fancy words), which means to know everything of the past and the future, would prevent us from doing things. Or, to say it in another way, we only act because we are uncertain about the future.
Now, what is action? Action is what we do to achieve our goals. What we do is using means we have at hand, or think we have at hand, to get us closer to the goal we desire to achieve. Wew, starts getting complicated, doesn’t it?
Let me give you an example. If you are hungry, and you are not a masochist, you probably have the desire to feel full, as hunger is a painful feeling. Now, we know that probably not much roasted chicken fly through your kitchen within the next minutes. But, you know there is some bread, tuna, salad and mayonnaise there of which you could produce (hey you are a producer) a tuna sandwich, eat it and fight that painful hunger. So homo economicus, that is you, starts acting. You take your means – bread, tuna, salad, mayonnaise and your skills in preparing those yummy sandwiches of yours- and employ them to make that great product which will be consumed by you and, hopefully, brings you the desired satisfaction -feeling full.
You just encountered one of the economic rules (remember economics means rules of the household) “Humans act, that is they purposefully employ means, to achieve what they desire”.
We have already scratched the surface of another rule when we talked about the difference between air and the other vital things. It is the rule of subjective value. Subjective means, that it is always you, or more accurate, the individual, that gives value to an item. Air has no value to you, as you do not have to act (that is purposeful employing means to achieve ends) to get it. It is abundant in a normal environment. Remember the scuba diver (he is still trapped in that wreck)? To him air is pretty valuable, don’t you think? He probably would put a lot of effort into getting more. To him air is a good.
Another important rule we have here. Goods are things that have a value to individual humans. For something to be a good, it must be a means that an individual can use to achieve what he/she desires and it must be scarce. Bottom line, whether something is a good or not, depends on its usability for individual men. Another word for usability is utility.
Before I close this first short excursion to “common sense” economics another example tho show that something is a good only, if it has a utility for individuals.
Oil was the pest of every piece of land until only a hundred years ago. Whenever a farmer encountered those black, ugly, stinking springs on his land he was probably going to curse, even if he was a puritan(not meant offensive). Oil was not only worth nothing, yes it has been used in ancient warfare to ignite enemy ships, but this was long forgotten, oil was seen as bad luck if you had it on your property. Why? Because no one had any use for it until a guy named Rockefeller showed up and invented a way to make stuff called kerosene out of it. Now Kerosene was pretty useful. You could use it in lamps (can you imagine to have only daylight, how boring nights, especially in winter, must have been…uhm), and some people even experimented with it to build engines that might one day drive coaches without the need for horses which would be called cars or automobiles(which is a bad name because they do not drive by themselves as the name suggests).
All of a sudden, a good rose out of a totally useless thing like oil. And today, we tend to believe, with good reason, that our civilization might fall, if oil vanished.
Economics is not about complex equations in an ivory tower, but about human ingenuity to transfer the natural resources man finds into something useful.