To understand how something works we necessarily need to resort to and understand abstractions. Abstractions are high-level mental constructs that are expressed in language, and therefore the need for precise definitions of works used. Learning how things work requires learning vocabulary.
So far we have introduced a bunch of vocabulary such as wealth, science, technology, energy, information, knowledge, etc. It will only become clear why these, and other concepts we will introduce as we go along, are necessary for understanding how the world works.
For now, let’s examine some abstractions to illustrate their utility. High level abstractions make sense only if one understands the underlying less abstract notions.
As a computer science student I learned that at the highest level of abstraction a computer is a device that executes a program (also known as an algorithm) that performs some task.
The modern digital computer is a general purpose machine. It can be programmed to guide a commercial jetliner or play chess or create graphics of explosions for a movie or whatever. General purpose machines are distinguished from special purpose machines such as a toaster oven or an automobile which do only one special task.
Fun fact: Alan Turing (1912 – 1954) is the father of the modern computer, with important refinements by John von Neumann (1903 – 1957).
A computer “runs” or executes a program. That’s an abstract statement. Computer science answers the question “What’s a program?” with another abstraction that a program is a state to state mapping. What’s a state? A state is a name to value mapping. That’s all there is to it. But it makes no sense to someone who has not studied the subject.
Another favorite example of an abstraction that I like (I am a mechanical engineer after all) relates to engines. An internal combustion engine transforms chemical energy into mechanical energy by using a working fluid (air) and fuel (some petroleum derivatives such as gasoline or diesel.) In contrast to that, a steam engine is an external combustion device that uses steam as the working fluid.
The average person doesn’t really need to know the details of the science of thermodynamics (physicists do that) nor the complex design of heat engines (engineers do that.) We don’t even need to know how and why they work. We just use them because they do what we want them to do.
Similarly, we don’t really need to know how the world works. It works well enough even if we don’t know how or why, thank you. Only if we are curious to know how it works should we put in the required effort.
The fortunate thing about the world today is that it has never been so easy to find answers to any question one has. With just a few clicks, you can get a reasonably good answer. The problem is that it is not so easy to figure out which is the best answer. Through trial and error one converges to some approximation of a correct answer.
With that preamble, let’s get back to our topic.
At the highest level of abstraction — the world a very complex system — is quite easy to understand. Part of that natural world is the artificial world of human beings. Artificial here means “the product of intentional human manufacture, rather than occurring naturally through processes not involving or requiring human activity.” (wiki)
There are ~7.7 billion humans on earth. Every human is a general purpose machine. And every human is unique in their mental and physical endowments, and in terms of their preferences and tastes. This diversity of humans allows three related things: division of labor, specialization and division of knowledge.
We specialize. Depending on one’s innate talents, preferences, and the opportunities available, one can acquire the skills of a carpenter or a physicist or a dancer or whatever. By specializing, we become more productive. By being more productive, we can produce more. We exchange what we produce for things we don’t produce but would like to consume.
The important bit is this: specialization increases the amount produced, and therefore allows increased production relative to what would have been produced if specialization (or in other words, division of labor) were not possible or prevented.
Fun fact: Most of us don’t consume what we produce and don’t produce what we consume. Exchange bridges the gap. Therefore whatever facilitates exchange leads to greater welfare.
Markets is where exchange takes place. It’s an abstraction. Market exchange range from the simple act of one child exchanging a comic book for a candy with a friend, to those trading complex derivatives in stock exchanges.
Not all exchanges happen in markets. Exchanges within a family don’t involve markets. Similarly, exchanges internal to the firm are done outside a market. Why that is so is a fascinating question.
We will continue to introduce more vocabulary as we go along. In the following weeks of this course, among other things, we will explore the following:
- Division of labor
- Division of knowledge
- Voluntary exchange
- Free markets
- Private and public goods
- Technology and ideas
This is mainly an exploration of ideas. Which way this goes depends on what interests the participants. We jointly determine what we do in this enterprise. So feel free to make suggestions and ask questions. Most of all, engage in the discussion.