- 1 Introduction
- 2 Currency and the Division of Labor
- 3 Wealth and Capital
- 4 The Invisible Hand: Market Pricing and Efficient Allocation
- 5 The Used Book Market Can Boost the Demand for New Books
- 6 The Tragedy of the Commons: Property Rights and Incentives
- 7 Compliments and Substitutes: Was it Marketting Power that lead to Microsoft's Dominance?
- 8 Immigration and Malaysia's Experiment
Our word for economy came from word roots that mean literally "household management." Today the word refers to all goods and services that an entire community produces. But there's another way in which we use the word-- for example in the phrase "it's more economical for me to ride my bike." This more common usage typically refers to either saving money or time. We claim is that these uses of the term are identical: At heart, economics is the study concerned with the proper allocation of limited resources.
Wether you support socialism, capitalism, anarcho-syndicalism, or self-sustaining tribal communities you cannot get around the need for an economy: unless we can live off an ecology so suited to us that whatever we want can be plucked from the trees we'll have to make decisions about how to allocate the resources available to us to best suit our needs. Political issues arise when people have different ideas as to what really is "best" for our needs, and who decides, and what groups should be given what resources.
Currency and the Division of Labor
Many people naturally think of money after hearing the word economics, but our primary concern in this book is not with money, nor is the field of economics primarily concerned with money. However, as an example of the allocation of goods, currency systems are a good place to start, as most people easily understand the advantages of having a currency.
The use of currencies in society to enable efficient trade is a relatively old idea and has evolved over many centuries: currencies are a human invention that wasn't ever planned nor designed. Instead, it was something that came into use through accident, much like the spoken languages we use. That currencies are so useful explains why they have survived through many different forms and that their adoption has spread.
Money is useful because it creates a universal trading "good" that can be used to purchase almost anything that is tradable, whether it's a food item that might spoil in a couple of days, a sturdy home appliance, clothes that are just the right size, or payment to a neighbor's teenager for mowing your lawn. If we received payment in fruit, this would be excessively less useful for us, because we would either have to consume the fruit, or trade it for something else, before it over-ripened. Instead of playing a scavenger hunt where we trade fruit for spices, spices for blenders, and blenders for jogging suits, we can directly go to sellers of jogging suits and pay with money.
In some sense, money doesn't really exist: It's just something backed up by our government as suitable for payments of debts between people, or public or private entities. In the United States, the dollar is only legal tender for debts that are already owed: For example, it's legal for a bus system to accept payment only in non-dollar tokens, or for a hair stylist to only accept payment in massage. The legal tender aspect of the dollar only comes in when it's for a debt already owed: If the hair stylist gives you a hair cut anyway but you back out on the massage deal, she can take you to court, but the court would allow you to pay in dollars instead. It's requirements like this that give the dollar its legitimacy and thus culture accepts this form of wealth, even though it doesn't exist.
Not every time is using currency actually the most efficient means of trade. For example, you might have a home recording system that is high quality, but you can't sell it for enough dollars to get the used car you want, while your friend is ready to start a band and just got a new car as a gift. It might be more efficient for the two of you to trade the recording system and his old car rather than sell them to a wider market (which would require advertising) or a middleman (who would charge a fee for the service). Nevertheless, when it comes to goods that spoil or services that can only be experienced once (like getting a haircut) it's usually better to use some form of currency as a means of later acquiring specific wealth. Further, it can be rare to find perfect trades so easily.
[TODO: stuff on the division of labor: allows more productive people to do X instead of everyone needing to do it, and that implies economies of scale]
Wealth and Capital
Now that we've got the topic of money out of the way, we can actually start talking about wealth. Wealth is simply something that is valuable to someone. There are many different kinds of wealth: the natural resources of the earth, and the great sunset views, are a type of wealth that exists without human creation. In fact, human creation can actually ruin some of this natural wealth by making views or skies less pleasant to look at through pollution or intrusive construction.
Other forms of wealth are created by taking raw materials of a lesser value and transforming them into goods that are more valuable. For example, you might not think much of a hunk of metal and plastic given to you, although you might value a portable audio player made of the same materials. Still other forms of wealth are a little more abstract: the biological diversity of the world is wealth that is a means of taking sunlight that pours onto the earth (something we get for free), molecules from the air and trace elements from the soil and uses photosynthesis to turn them into something that nourishes our bodies (for example, the wealth of the DNA encoded in seeds that, when planted, turn into tomato plants). Other abstract forms of wealth include the works of Shakespeare and folk songs: the simple arraignment of words or tones is something that is valuable to us. A world with 8 billion DVDs of a single Adam Sandler film isn't worth as much as a world with only 1 billion DVDs but which include all of the works of Hitchcock, Kubrick, Kieslowski, and even Mr. Sandler.
Yet another form of wealth is a contract: contracts may be broken, but the legal enforcement behind contracts make them valuable and are something that people want to buy. For example, a band might be interested in buying a contract that lets them perform at a venue on a given night, even though the sheet of paper itself has very little value, and even though the contract doesn't provide for contingencies if the venue burned down before the play date. Sometimes what's valuable to us only has a high probability, but not a certainty, of being useful to us.
We now consider wealth's relationship to capital. First, think of an acre of forest: it has some trees, some rocks and minerals, and some areas with high hay grass. Now suppose a hard working woman named Alice comes to this acre and makes some tools from the rocks and trees and starts cutting down the high hay to make usable lawn, cuts down only as much trees as needed to make a two-bedroom home, and then starts to make bedding and musical instruments with the remaining resources. Even though it started with the same resources, the acre now is worth more than it was before. (Or, at least, it's worth more to Alice.) There are actually two kinds of wealth in this story: the value of the natural resources, and the higher degree of wealth they became. and the wealth inside of Alice's head. Alice's wealth is known by economists as human capital.
The term capital simply means the "means of production." While Alice's arms and legs were also part of the means of production, none of the wealth would have been produced were it not for her human capital. Alice then created further capital by making the tools that she used to cut and build more things. When she gets around to building a weaving loom, she'll have even more capital.
We refer to some business as being capital intensive when they require large amounts of capital to be run. For example, starting your own printing press business requires an enormous investment in machinery and the infrastructure required to store, run, and maintain it. Other businesses, such as being a real estate agent, only require modest office space, licenses, and a car. It is important to understand the role capital plays in an economy, because capital is how we can create more wealth.
Over time, innovation has made it so that we are more productive at creating more wealth. For example, 200 years ago the majority of the population worked as farmers. We have become so much more effective at farming, primarily through gains from the industrial revolution, that a small minority of the population are farmers today. The industrial revolution, and now the information age, has shrunk the amount of hard labor required. Some people still have back breaking work, but our advances in technology have freed up many more people to have service-based jobs.
To some, a service-based job doesn't feel as "real" as a manufacturing job: i.e., one that creates a good that can be traded. But given that most of the US economy is based on service jobs, it's hard to say they aren't useful. Service jobs are much more than just office administration, and waiting on tables. Service jobs are held by teachers, coaches or other trainers; all forms of entertainers, including athletes, actors, commedians, disc jockeys, and musicians; lawyers and paralegals; health professionals, healers, veterinarians and massage therapists; software developers and hardware designers; architects; translators; tourist guides; clerks and other retailers; all managers; food service workers; taxi cab drivers, and bus drivers; and day care workers. The list could go on, but the short message is that people providing services to other people is something people find to be very valuable.
we'll return later to Marxism and capitalism, but the key point here is that Marxism and capitalism primarily disagree as to who should own capital and how it should be organized.
The Invisible Hand: Market Pricing and Efficient Allocation
The Used Book Market Can Boost the Demand for New Books