What is the Government?

We all have some conception of what the “government” is and consequently what we think the government should do. In the next session we are going to focus on this. What or who is the government and what function each of us expects it to do? This is an important question not in some abstract sense but it matters in the way the world works.

Each one of us is part of various collectives. The range is from our nuclear families to neighborhoods to the big nation states. How we in the collective think about the nature and role of the state matters enormously.

Do reflect on this question — What’s the nature of the state and what is its role? — and we will have a discussion the next time.

Price Control

It’s really very natural that if the price for something is high, the poor would not be able to afford it. And if that something also happens to be a necessity and not a luxury, it makes sense for someone to make sure that the price is made low. The question then is who is that entity, and how will that entity succeed in lowering that price.

Please think about that and if you would put a comment to this post. I would also like to point to an old blog post of mine: The Unbearable Silliness of Controlling Prices from December 2014.

Technology and Productivity

One of the core concepts that we have discussed is the role of technology in human progress. We invent and discover — through directed search but very frequently accidentally — ways to getting things done more efficiently. As more people spend more time figuring out cheaper processes of producing stuff, and also producing new sorts of stuff, we end up with the modern world.

This is just one of those random videos on YouTube which illustrate the point above. I’m not sure if it will play for you, though. It could be behind a pay wall. If it is, let me know in the comments and I will figure out a way for you to watch it.

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. Continue reading “The Economic Story so Far”

Knowledge of Economics

In this very short course the attempt is to introduce a few basic economics concepts. As is true of all practical and academic disciplines, a deep study of economics requires a lifetime. But the good news is that knowing the really fundamental bits has very high return on investment. The investment is a few hours of study and reflection, and the return is a better appreciation of the magic of our world. That investment is forthcoming only if there is an interest in understanding the world.

I think part of the misery that humans suffer is entirely the consequence of plain ignorance and stupidity. Ignorance leads people to do things that increase suffering. Individual ignorance has externalities — not only the person suffers but he makes others suffer too. And when there is a lot of ignorance in a population, that society ends up suffering.

However, I have made it clear previously that one can live a perfectly good and enjoyable life without knowing anything about how the world actually works. One can be totally ignorant about basic facts of the world and still cause no harm to themselves or others.

But the problem is that in general if a sufficiently large segment of the population believes in wrong ideas, they’ll end up making stupid demands and that leads to bad policies and to misery all around.

Examples of policies: minimum wage laws, rent control, anti-discrimination laws, licensing laws,  etc. These policies are demanded by ignorant voters and imposed on society by self-seeking politicians and bureaucrats.

Among the worst things that a country can have is a big government. Big government happens because people want the government to be big. People are like Dr Frankenstein and they create the monster that is big government.

That is why we should be afraid of having too many ignorant people in any society that is democratically run. Democracy and ignorance is a dangerous combination.

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In the next online session, we will discuss a number of related concepts.

        • The Water Diamond Paradox
        • The Marginal Revolution
        • Subjective Theory of Value
        • Comparative Advantage

Homework? Watch this brief presentation.

A Bit of Economics — Part 5

{Read part 4 here.}

In the previous bit, we briefly discussed prices. Prices are important because without prices we will be incapable of economic calculations. Prices guide us to choose the best among alternative courses of action. Imagine going to a store in which there are no prices — just stuff that we pick up and at the checkout they charge some random amount for it. We have to know prices before we buy.

Firms face the same problem.

We will use the word “firms” to mean small (mom and pop stores, little hole in the wall joints), medium (a car dealership, a garbage collection service) and large businesses (corporations like Toyota, Apple and Google.)

What do firms do? They buy or hire inputs — materials, labor, technology, capital — and produce various goods and services. That involves costs and they have to use prices to guide what to produce and how. Should they make it in-house or would it be cheaper to buy from some other supplier? Continue reading “A Bit of Economics — Part 5”

A Bit of Economics — Part 4

{Read part 3 here.}

People produce and consume stuff. Division of labor and specialization require that they consume what they haven’t produced and produce what they don’t intend to consume. The bridge between production and consumption is the opportunity to exchange or trade. Trades happen in markets.

People are constantly being guided in their production and consumption decisions by prices. Prices convey information to all market participants. The price of a good — be it cars or carrots — tells us something about the world. The amount we buy depends on the price, and our willingness and our ability to pay for it. Continue reading “A Bit of Economics — Part 4”

A Bit of Economics — Part 3

{Read part 2 here.}

In ordinary speech we do not distinguish between “demand” and “quantity demanded.” We just say something like, “The demand for apples has gone up” to mean that more apples are being bought by people. But in economics, there is a clear and important distinction. When we say “demand has increased” we mean the relationship between prices and quantities has changed, and that people are willing to buy more than before at various prices.

In economics, demand and supply simply designates the relationship between quantities and prices. We demand specific quantities, not abstract relationships. So when we say “the quantity demanded” we are talking not about some abstract function but quantity of stuff.

If someone were to say, “the quantity demanded has gone up”, we could conclude that the price has fallen because we know that quantity demanded increases when the price falls. But that’s only true in case the demand — the relationship between prices and quantities — has not changed. Continue reading “A Bit of Economics — Part 3”

A Bit of Economics — Part 2

{Read part 1 here.}

The basics of price theory (microeconomics) are simple. First the law of demand. We know without being instructed that when the price of something falls, we tend to buy more of that.

At the grocery store, I may buy donuts at $5 a dozen but may not buy if they were $6 a dozen. At some price, I would not buy donuts, if the price drops, I will buy more and more up to some point. That’s my individual demand for donuts. But other people may buy at $6 and some others may not buy even at $5.

If you aggregate all those individual buying decisions, you notice a pattern: the store sells more when the price is low than when it is high. That’s the aggregate demand function which emerges out of the sum of various individual demand functions. Continue reading “A Bit of Economics — Part 2”

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.  Continue reading “A Bit of Economics — Part 1”