A Bit of Economics — Part 1

This week we will discuss some basic economics. What is economics? It’s the discipline that investigates how we humans go about making a living. Principally the three activities we engage in while making a living are production, consumption and exchange.

We have to produce stuff because we want to consume stuff. Want satisfaction motivates us to produce. Since we all differ in many respects — natural abilities, preferences, training, opportunities, etc. — we select different occupations and produce a variety of goods and services. We specialize to some extent and divide up various tasks. Specialization is a cause and consequence of the division of labor. 

A bit of vocabulary. The output of the production process is a product. In arithmetic when we multiply numbers — they are called factors — we get a product. Similarly we use factors of production — land, labor, capital — and employ some process to ‘multiply’ the factors (that’s technology as we have defined it previously) to get our product. 

This is not quantum mechanics. This is basic common sense. Economics is just codified basic common sense. We all are capable of understanding the basics without breaking a sweat. Problem is that some economists have wandered into the forbidding land of math and delight in making the subject opaque and obscure.

My first course in microeconomics theory was in graduate school. The prescribed textbook was “Microeconomic Theory” (1995) by Mas-Colell, Whinston and Green. I don’t hesitate to admit that it frightened me. Here are two random pages:

I kid you not. This is bad stuff. See this:

Anyhow, I got through that ordeal. It was a good exercise because now the algebra and the calculus doesn’t intimidate me any more. But I wish that academic economists would stop this nonsense already.

Back to our main concern: basic economics. That does not involve anything more than a bit of introspection (what would I do in this or that situation), a bit of logic and a few simple graphs. Some facility with the use of functional notion helps but for the most part, we can get by with just plain natural language.

Economics these days has two major branches: microeconomics and macroeconomics. Macro deals with aggregate variables — GDP, money supply, interest rate, inflation, employment numbers, etc. — and their relationships. It makes claims like “if the interest rate goes this way then the unemployment rate goes that way,” etc. That justifies government intervention in the economy, and the economy goes to hell. It’s Keynesian insanity.

So I steer clear of macro and I advise everyone else to do the same. It’s just a load of bullshit, a lot of “just so” stories that fool people who don’t know the con-game that macro economists and politicians engage in.

On a side-note, I advise people to not read newspapers, and never watch TV news and their idiot talking-heads. As Mark Twain said, “If you don’t read newspapers you are uninformed; if you read them, you are misinformed.”

Fortunately, there are truckloads of great talks on various video platforms and get podcasts by brilliant people. Anyway, let’s move on.

Microeconomics is where the real deal is. It explains how the world works like no other. It is grounded in solid facts about how people act and it builds beautiful, logical explanations of why and how the order we observe in the world emerges from the interactions of millions of humans going about their business.

Microeconomics theory is also called “price theory.” You have to know price theory to understand the world. Sure, if you know the fundamentals of the basic sciences — physics, chemistry, biology — and know a bit about the engineering disciplines, you get a good sense of how the world of stuff works. But without a solid grasp of price theory, you cannot understand how the world of people works.

{Read part 2 here.}


Author: Atanu Dey


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