Developing a Better Intuition for Basic Economics
My first full-length post to help readers intuitively understand basic economics, why they're important, why we study them, and how we can start to think about them.
Welcome
I made an intro post the other night and realized that I just crossed over 11 subscribers earlier today, so before I start writing, I want to personally thank you all for taking interest and showing support. I’ve been long overdue to start writing again, and seeing friends and acquaintances show support, no matter how large or small, is really encouraging.
A message to any new readers or anyone skimming who followed the link - thanks for coming, and I hope you’ll stick around. Take your shoes off, and let me know if you have a preferred martini and I can fix it for you. Also, if you want to see a specific topic discussed, don’t hesitate to send me a note.
Laying the Foundation
Before I dive into any further topics, I want to kick off this Substack account by discussing basic economics and why the topic is so important for each and every one of us to take interest in. Starting off with establishing a basic understanding of economics will be vitally important to many of the future posts I write.
Since my line of work directly involves gathering and analyzing information to help firms improve their finances, brand recognition, and operational efficiencies, I utilize concepts from this field of study every day. Not to mention, I frequently use economic principles in my own personal life to decide how I’ll spend and invest my time, effort, and money wisely. Even if you don’t intend to become a professional economist, accountant, business consultant, or financial analyst, economics can help you devise a rational framework for achieving your ideal lifestyle and goals in a way that adhere to inviolable principles of reality and any constraints you might face.
The goal of this piece is to get my reader to start thinking about economics and how they might use this school of thought to make important decisions, but I want to explain things in such a way that don’t yet involve money or mathematics (sorry money and math - I love you both, and we’ll definitely get around to you on here, just not yet). My belief is that it’s important to establish why something is relevant to someone’s life and the intuition behind it before breaking out into abstract concepts and academic vernacular.
First, let me provide a simple and formal definition of economics - economics is the field of study concerned with how society makes use of scarce resources with alternative use-cases. Personally, I like to replace the term “scarce” with “limited” or “limited access” because for all we know, the universe has potentially has limitless resources that we can harness in potentially limitless ways, and the size of the earth we currently live on is infinitesimal in comparison.
The economy itself is a living, breathing, representation of all of the participating individuals who wake up every day and transact their time, labor, expertise, and ideas - those participants being us. The ideal purpose of an economy, as I’ll define it, is to fulfill the most wants and needs of the most participants possible.
Making Economic Decisions
All right, now that I’ve defined economics and the fundamental role it plays in our lives and society, I want you to think about the following scenarios:
You are stranded on a tiny island in the middle of the ocean. The ocean water stretches as far as the eye can see. Luckily for you, all of the water in the ocean is clean and drinkable. The bad news is that you only have one coconut left to eat before you’re all out of food. Right as you’re about to take your first bite of the coconut, a shady individual rows up to the edge of your island on a raft, scoops up some of the ocean water up in a bottle, and poses the question, “Will you trade me this bottle of clean water for that coconut?” What is your reaction? Are you willing to make this trade?
It’s a Wednesday afternoon, and you’re sitting in your room starting to make important considerations about what your plans will be for Friday night. The friendly neighbors have invited you to their cookout where they’ll be serving hot dogs and soda pop. Suddenly, your phone rings with a notification - it’s your favorite pop singer! They’re offering to fly you out to their show on Friday night, followed by romantic dinner and dessert at the most critically-acclaimed restaurant in town, then rounded off by a high-profile party with some of the most famous personalities in the entertainment industry - the best part is, it’s all on their dime. Which of the two invites are you more likely to accept?
You’re a military medic stationed in a war-torn nation with one last miracle potion that is able to cure wounded ally soldiers from certain death, and you currently have two wounded soldiers who need the cure the survive. Each soldier requires the full portion of the cure to continue living. How do you make the choice for which soldier to give the cure to in order to save their life?
Okay, that does it for these hypothetical scenarios. The first two examples are a little more lighthearted and silly, while the third encompasses a scenario that is actually very serious. The point of posing these scenarios is to force you to work through why you’d arrive at different conclusions where alternative choices are presented, even if you have to make a choice that can be both difficult and morally grey since you only have limited time and resources available.
Let’s add more color to the thought process that might lead you to answers for each prompt:
You’re highly unlikely to trade the coconut for the clean water, but why is that when they’re both necessary for survival? It’s simple - clean water is abundantly available, but the coconut (food) is not. This is an extreme example of what makes something economically valuable. Clean water is a necessity to continue living, and it’d be ridiculous to debate that it isn’t valuable, but its contrasting availability when compared to the single coconut is what gives the coconut higher value in this specific circumstance. If you were in a jungle and surrounded by edible coconuts but could not find clean water, the opposite case would be true - clean water would have high economic value due to its limited nature, and coconuts would have low economic value due to their abundant nature. This is a prime example of how two things can both have substantial practical value, but differing economic value based on their relative availability and accessibility.
This example is pretty silly, but I wanted to use it to show how someone might choose between conflicting options that occur during the same time frame. Sure, the neighbors made a kind offer, but a grill out with hot dogs and soda are far more accessible than a wild night out with your favorite pop singer. You know what, with all of the celebrity news that has been coming out lately, you might just be better off going over to the cookout next door. Either way, this example goes to show an extreme example of how someone might arrive at a decision when given more than one option and time constraints.
This example is actually very serious, and I hope it represents a situation that none of us ever have to be in; however, there are many times in life where we are forced to make extremely difficult decisions between the “lesser of two evils.” If anyone reading has played “Witcher 3: Wild Hunt” which I’d consider to be the greatest video game of all time, the player often has to make very difficult choices that don’t seem to have any happy endings where all parties are satisfied. This is one of the more uncomfortable types of decisions that we have to face in life. If you were to choose which soldier to save, you might consider which one has a better health record, history of outstanding performance, a family, etc. It’s horrible to have to think about things like this, but if you were to give some or none of the cure to either soldier, then you would lose both.
Life is an Ongoing Series of Tradeoffs
Every day, we have to make important decisions about how we will direct our time, energy, and effort to achieve desired outcomes. When presented with various alternatives and limited time and/or resources, we’re forced to make tradeoffs. A few examples of common tradeoffs, both major and minor, to be considered in our lives might look like:
Should I attend college, trade school, join the military, pursue entrepreneurship, play sports, go backpacking, or immediately enter the workforce?
What type of lifestyle do I want to lead?
What outfit will I wear today?
Who I do want to spend my time with?
What kinds of hobbies and personal projects should I pursue?
Should I cook food at home or go to a restaurant tonight?
Should I go out to a party this weekend or stay in and watch a movie?
We all have to make economic decisions based on the perceived benefit of available choices and what we’ll be required to give up in the process of pursuing them.
Since we haven’t discovered a way to live forever or prevent aging, Father Time is the ultimate economic constraint that we’re all up against. I won’t go down the rabbit hole of time in this writeup, but it’s certainly a fascinating concept that I plan to explore more in the future.
In Short
Economics is the study of how a society chooses to allocate resources that its participants have limited access to. Whether we’re acutely aware of it or not, we all make economic choices often, some of which have more important and severe consequences than others.
We are all economists at heart, even if we don’t actively spend much time formally thinking about the subject matter.
To Conclude
If you’ve made it this far, I wholeheartedly appreciate the time you’ve spent reading my first true Substack post, and I hope it had some value to you. I do realize that this might be common sense to some or all of my audience, but I still think it’s important for building this platform up from bedrock and setting the tone for how I’ll communicate. If I’ve done my job here properly, perhaps you’ll walk away from this thinking about the economic choices you make in your own life and their impact, as well as the choices those around you make.
In coming posts, I plan to write about the role of money, prices, investing, risk, gambling, and different economic systems and their implications. I’ll also write about other things such as technology, empathy, generosity, collaboration, competition, entrepreneurship, prosperity, hardship, community, self-interest, and other compelling topics of interest.
And of course, I have to add this as a disclaimer - I am just getting back into writing, so bear with me as I continue to work on my game.
Here’s to more wealth and health,
Jared