The Economic Story so Far

We are done with around half the course so far. In trying to understand how the world works, we looked at the world as it exists today through the lens of economics. There are multiple ways of looking at the world — historically, socially, culturally, geographically, scientifically, and so on. Why the focus on economics then? The trivial reason is that economics is the primary tool I have to explain the world.

The less trivial reason is that economics is the singular discipline that comprehensively explains how the world of humans works and why it works this way and not another. The hard sciences do a great job of explaining the world of inanimate matter. Economics explains the way the world of humans works.

Humans have (in measures that no other life form has) the ability to reason, to solve problems that stand in the way of their goals. Humans act, which means that they pursue goals purposefully. They choose various goals and various means to achieve them. The maintained assumption is that they act rationally, meaning that they have a reason for what they do.

That’s the rationality assumption. Humans rationally choose goals and choose what they believe is the best way to achieve them with the means available. Humans economize — try to use the least effort to achieve their goals.

Technology allows humans to get things done. Over the hundreds of thousands of years, humans have discovered ways of doing things. In the distant past, those discoveries and inventions were few and far between. There were very few people, and all were too busy staying alive to have the free time to think about how to improve their lives.

Settled agriculture created surplus. Specialization and division of labor became possible. People could specialize in production of goods and services, and therefore exchange. And the rest — property, markets, money, writing, accounting — followed. More food, more people, more ideas, and more technology.

Stagnation and poverty has been the story of humanity for nearly all its existence for 250,000 years. Only in the last couple of thousand years, escape from grinding poverty became possible. And only in the last couple of centuries did a significant number of people became rich. From a world where 90 percent of the people lived in abject poverty to a world in which less than 9 percent who are in just a bit over 200 years is the most remarkable event in human history.

But the great enrichment also led to the great divergence. Why were some societies able to become rich and some others unable to advance? The simple answer that the rich stole the wealth they enjoy has an intuitive appeal but it is totally wrong.

An individual may enjoy stolen wealth but it is at best temporary. In the past, one band of robbers could manage to live by preying on others. But that world is long over. Stealing wealth does not work any more in a world where material prosperity has more to do with ideas than with physical stuff.

There is no reason for the continue poverty of some societies — except one. That is what we will discuss in the second half of this brief course. The first half had to do with economics. The next half will be about political economy. We ask what is government, what is its role, what are the two distinct ways of organizing society, and so on.

Author: Atanu Dey

Economist.

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