Introducing economics.

By Abi Tyas Tunggal 4 March 2018 4 min read

Outline:

  • Economics is the study of allocating our finante resources most efficiently amongst everybody;
  • Adam Smith introduced 'the invisible hand' theory in 1776;
  • Humans are incentivised by self interest, which ultimately can benefit everybody.

Some people want to make you think economics is difficult. We're not those people, we think it can be simple.

More than anything, we think about economics as a way of thinking, and by knowing a little bit of economics, you can save yourself a lot of trouble later down the track.

At Spaceship, we like to think of the economy as a machine, and at its most fundamental, a simple machine. We started writing our Economics 101 series in the hope that we'd create a simple, practical approach to getting your head around economics.

Our goal for you, by the end of this series, is to be able to start learning on your own. That said, don't blindly believe in what we're saying, take the time to assess the value of our words for yourself.

Why study economics?

Economics is becoming increasingly important to our globalised, financialised, and maybe soon thanks to blockchain(s), tokenised world.

The economy is built on the back of billions of tiny decisions, guided by incentives. Incentives that link together personal finance, business and trade.

This means economists think about individual choices, borrowing and lending, production and consumption, trade and markets, employment and unemployment, asset pricing, taxation, and more.

That's why it's often hard to get a grasp of what economics is. We want you to think about it as the study of rational human behaviour, and how decisions affect the allocation of scarce resources.

Or in other words, how we decide what we need (or want) to live, with our limited budgets.

We'll be looking at questions like, how do we get what we need, why do some people get more than others, and who decides what is made?

Each day, we face the same problem: How do I decide how to fulfil my endless wants and needs with limited resources (often money)? We make choices about what we buy, what we don't buy, and how much we save for the future. As you know, these are hard decisions to make.

So, most of us spend money on necessities like rent, electricity, clothing, and food. Then we take the rest and divide it into various buckets: Movies, savings, and buying a new iPhone.

Economists study the choices we make, and try to understand why we might want to spend money on a new TV when we really should have used that money to pay off our credit card. They want to know whether you'd still buy a daily cup of coffee if the price was $5, not $3.

The underlying essence of economics is trying to understand how people, companies, and nations behave.

Adam Smith and the invisible hand

1776 was a good year for great ideas. Adam Smith published The Wealth of Nations [1] , which many believe gave birth to economics.

The Wealth of Nations may still be the best account of the foundations of market economics. Smith raised, and often answered questions like: Why do classical economists believe free trade is good for everyone? What happens to jobs when machines are invented? And what does productivity actually mean?

Complex ideas, no doubt, but Smith was able to make them understandable, even to the non-economists for the first time.

What most of us know Smith for is his argument that working for your own self-interest creates a stable and good society, through the mechanism he dubbed the invisible hand.

"Every individual necessarily labors to render the annual revenue of the society as great as he can ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention ... By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Smith wasn't the first to write about economics, but his work is the most famous of the early texts, and it shows us how capitalism worked, and what that meant for producers, workers, and consumers in the capitalist system.

Economics and mathematics

In 1890, Alfred Marshall penned The Principles of Economics [2] and defined economics as "one side the study of wealth; and on the other, and more important side, a part of the study of man."

What came next was the push toward legitimising economics as a science. This meant mathematics began creeping into economics, and the layman economists begun creeping out.

It also meant that economists had to accept a number of strong assumptions that were needed to make mathematical models work. The biggest assumption is that humans always act rationally to fulfil their individual self-interests.

This school of economics is known as neoclassical economics, where firms exist to maximise profits and markets are efficient. You'll soon learn that there are many, many schools of economics, that often don't agree with each other.

In the recent years, we've seen behavioural economics rise up in defiance of the rational man.

That said, we'll tend to focus on neoclassical economics because, despite assumptions, it remains a useful way to think about the world.


  1. The Wealth of Nations, 1776. Adam Smith. [PDF] ↩︎

  2. Principles of Economics, 1890. Alfred Marshall. [PDF] ↩︎

Introducing economics.