Wealth, Cost and Price

This is required reading for the 2nd online session of Jan 22nd.

In the following, we continue to add to our vocabulary. In the ultimate analysis, it’s all about learning the meaning of words, and then using words to reason about the world. 

First wealth. Then the transformation of natural stuff into wealth by using energy and technology. Then cost and price of stuff. 

In the end, we will note that the cost (and therefore the price) of everything is decreasing all the time. The question we have is this:

What is the one exception to this decreasing cost trend?

Wealth

Wealth is a broad category of material objects. We will use the word to denote all things that people find useful and/or value. Note that people are intimately identified with wealth in the sense that only people — not non-human animals — create wealth and are the evaluating entities. Continue reading “Wealth, Cost and Price”

Hockey Stick of Human Prosperity

In the first session of this course, we noted that human prosperity is really recent in historical terms — only around 250 years old. It is an important point for us to understand since it explains a lot about what the world is like today, we should spend some time understanding it well. Here are a couple of brief videos.

The first is by the brilliant economic historian Deirdre McCloskey. I have immense respect for her. About her, the wiki says she is “the Distinguished Professor of Economics, History, English, and Communication at the University of Illinois at Chicago. She is also adjunct professor of Philosophy and Classics …”

Turn on close captioning (the CC button) in case you have difficulty following her speech. (Reason for her peculiar sounding voice is botched vocal cord surgery.)

The next video also addresses the same point. About the video:

“Professor Don Boudreaux explores the question economists have been asking since the era of Adam Smith — what creates wealth? On a timeline of human history, the recent rise in standards of living resembles a hockey stick — flatlining for all of human history and then skyrocketing in just the last few centuries. Without specialization and trade, our ancient ancestors only consumed what they could make themselves. How can specialization and trade help explain the astonishing growth of productivity and output in such a short amount of time—after millennia of famine, low life expectancy, and incurable disease?”

For those who are interested in more advanced understanding of the subject, here are two papers for your reference, both by Art Carden and Deirdre McCloskey.

NOTE: The videos are required viewing but the papers are merely suggested reading and not required for the beginner student.

Reading Assignment #2

For the 2nd session of our online meeting on Friday 22nd at 9 PM IST, this is the reading assignment. Click this link to open pdf file in a new tab, or right click to save file. The document is around 2,850 words long. The nominal reading time is 45 minutes.

Please have your questions and comments ready for class time. Talk to you on Friday.

I will publish additional material tomorrow.

Update: I have published additional reading material here.

Jan 15th Session Recordings

The recordings of our first Zoom online session of Jan 15th are here.

Click to download the following:

If you need to review the session, or have missed the first session, this may be useful for you. Please feel free to ask questions in the comments below.

UPDATE: The links above were not quite what I had on mind. They required permission. I have changed them so that they don’t need permission.

Why Economics

A bit of history. The systematic study of economics starts with the publication of a book in the year 1776. Adam Smith is the celebrated father of modern economics. He was one of the greatest minds of what is known as the Scottish Enlightenment. About 250 years ago he wrote a book titled “An Inquiry into the Nature and Causes of the Wealth of Nations.”

At that time, there was no discipline called “economics.” It was called “political economy” which was a part of “moral philosophy.” Adam Smith was a moral philosopher. In that tradition, economists have been called “the worldly philosophers.”

This course is not directly about economics. So why this chatter about economics? This course aims to introduce the subject of how the world works. A great deal of how the world works is explained by economics.

Let me stress that. Economics explains some aspects of how the world works. It doesn’t seek to explain all aspects of the world. The world is far too big and far too complex for any one discipline to explain it all.

Economics explains an important part, as you will eventually see. Learning how the world works is a rewarding exercise. You get answers to some questions that may have puzzled you. But there’s more. You will learn answers to questions that you didn’t even have.

Here I am going to make a bold claim. It is this: Most people don’t know how the world works. But it’s worse than that. What most people believe they know about how the world works is actually wrong.

How do I know that? I know that from personal experience. Only after I began learning economics did I realize that much of what I thought to be true was actually false.

The one important thing that a study of economics does is that it makes you less wrong. I think there’s utility in being less wrong. Because if we are wrong, people who know better will think we are stupid when in fact we are just ignorant. Stupidity cannot be cured but ignorance can be easily fixed.

But we are ignorant of a vast number of disciplines. So why this focus on economics?

Fact is that economics is different from other domains in one particular sense. People have preconceived notions about economic matters but not in other matters.

A person who has never studied quantum mechanics (or evolutionary genetics or whatever) does not hold wrong ideas about quantum mechanics (or evolutionary genetics or whatever.) Why? Because he simply does not hold any ideas about any specialized subjects outside his expertise.

But everyone has some ideas of how the world works. And nearly all of those ideas are related to economics. And they are generally wrong — unless of course one has studied the subject. Our naïve intuition (common sense) is a very, very poor guide when it comes to understanding how the world works. 

Economics helps us develop our common sense. In fact it is fair to say that all the fundamental truths of economics are nothing but common sense. Fortunately, we all have the mental capacity to get a very strong grasp of those fundamental truths. This is not true of quantum mechanics. Most of us — including yours truly — are just not capable of understanding QM even if we were taught by the great Richard Feynman. (Video of Feynman talking about QM.)

To understand how the world works, we have to exercise our common sense muscles. That involves looking at the world through different sets of “optical instruments” (if you would pardon the mixed metaphors.)

Normally we just use our unaided eyesight to examine the world, so to speak. But sometimes you have to use a microscope and look at tiny details; and sometimes you have to use a wide-angle lens to capture the big picture. Then you combine the microscope view (or ground level view) with the wide angle view (or 40 thousand feet view) to understand a bit of how the world works.

Among other things, this course will introduce a set of tools that will help us understand how the world works. Here’s a hammer, here’s a saw, here’s a screw driver, here’s a tape measure, here’s a spirit level, here’s a circular saw. Here’s how to use those. Practice using them and soon enough you will be able to construct something that’s useful and elegant.

So too this is just an introduction to a few tools on how to think about the world, and a bit of demonstration of how to use them. You’ll be surprised how elegant the product is.

How this class works

This class (or course, if you will) works this way. First, you read or watch the assigned material before the class and make sure that you understand it. I will indicate the nominal time it should take to go over the class material offline. This is an average time that an average college-educated student should take. Depending on the person, the actual time may vary somewhat. That’s the homework portion of this class.

The online sessions will be audio only. When needed, I will have slides that I will share from my desktop. During the online session, which will be exactly for an hour, starting precisely on the hour, we will review the assigned material briefly for about the first 30 minutes or so.

For the rest of the hour we will discuss the topics introduced, and address all questions. This is the interactive portion of the online engagement. It is going to be a small group — about two dozen at most — and so we will be able to entertain all questions.

All subsequent discussions relating to the online hour will be on this blog in the comments to posts titled “Discussions on Session #x” which will be posted on Saturdays.

I expect that the audio of the online sessions will be recorded and available in the archives. Please note that at the top of the right hand column of this blog has a button marked “Follow.” By following this blog via email, you will get push notification of all posts in your inbox. I will avoid sending out email notifications.

If you have any questions or concerns, please use the comment section of this post. Also remember to download zoom on your computer, laptop, phone, etc.

This post is in the “Housekeeping” category.

Different Rules, Different Countries

In the previous post, I asked:

… what is the one factor that clearly distinguishes countries regardless of any other factors that may or may not be similar?

That one factor that distinguishes countries[1] apart is a set of rules that are–through some mechanism–created, enforced and followed within the various geographical boundaries that define it spatially. They include informal (norms) and formal (laws and legislation) rules that have evolved, and are generally stable, over time.

The set of high-level rules is the constitution of a country. Among other things, it lays down the rules on how rules are to made and by whom, and which rules are valid and which not. In the ultimate analysis, different constitutions define different countries.

Let’s take the example of Germany. Germany today is one country and one nation. It used to be one country and one nation before the end of the 2nd world war in 1945. Then it was divided into two countries — East Germany and West Germany — but it was still one nation. Then the two countries unified in 1990 and became one country, and of course one nation. 

Another example is Korea. For a very long time it used to be one country and one nation. Now it is two countries, North and South Korea but it is still one nation. One of them is quite rich and the other is extremely poor.

The norms and rules people follow define who they are. These can be religious and cultural norms that have evolved over time, or they can be deliberately constructed as legislation and imposed on people. The rules demarcate different countries. 

After Germany was divided up post-1945, the Western part got capitalist rules and the Eastern part got socialist/communist rules. In a matter of a couple of decades, the West became more prosperous than the East. 

The same story can be told about Korea. 

Examining something and noting its features is empirical work. Facts is what we have from empirical work. Coming up with explanations about why the facts are what they are is analytical work. Analysis leads to theory — a set of statements that explain a group of facts.

So here’s the theory: the differences in the different levels of prosperity among countries has something to do with differences in the rules that countries follow.

Germans in East Germany did not differ from those in West Germany. They had the same history, geography, culture, language, religion, music, literature, cuisine, etc etc. Yet in a matter of a few decades they were in two distinct countries enjoying two distinct levels of prosperity.

Think about that.

One reference that you will find useful in this context is my blog post Building Don’t Matter, Intentions Do. 

NOTES:

[1] Here I am implicitly distinguishing between two distinction notions: country and nation. There are countries such as India, US, China, Germany, Vietnam. It is possible to have more than one nation included in a country, or one nation spread over more than one country.

Anyway, the world is organized into countries. The oldest countries have existed a long time. Here are some:

  • France (CE 843)
  • Austria (CE 976)
  • Hungary (CE 1001)
  • Portugal (CE 1143)
  • Mongolia (CE 1206)
  • Thailand (CE 1238)
  • Andorra (CE 1278)
  • Switzerland (CE 1291)
  • Iran (CE 1501)
    [Source: ThoughtCo.]

Note that India does not show up in the list. Why? Because India became a country quite late in the history of people who lived in the geographical area we call India today. The Indian civilization has been around for thousands of years but the country known as India is just a few hundred years old. 

 

The First Question: Why do Countries Differ?

We know that all people are different. Each of us differs in quite significant ways from others of our kind. We are all human beings of course but still we are all distinctly different in various ways — in our physical and mental endowments, in our preferences, in our abilities, and so on. There’s variation among us even when we’re part of the same family, not to mention others in our society or the world at large.

What distinguishes us from others of our kind is our nature which boils down to our genes, and also to our nurture. Even siblings differ among themselves because their genetic inheritances differ. That is the basic explanation of why we are all different: we don’t have the same nature and don’t get the same nurture.

So also countries differ from one another. Different countries have different histories, different cultures, different geographies, different endowments of resources, different climatic conditions, etc. And most importantly for our purposes, we note that countries differ in their level of prosperity.

Not all countries are rich. Some are quite rich and others are desperately poor in comparison.

Here’s the question. If we agree that countries differ in their prosperity, what is the one factor that clearly distinguishes countries regardless of any other factors that may or may not be similar?

Meaning, even if you do take into account all other factors — geography, history, culture, climate, endowments — into account and yet you find difference in prosperity between two countries, what is that factor?

I would like you to ponder this question. If you have an answer, please post it in the comments below. We will discuss this question in the course.