Understanding Economics

Why is economics known as the “dismal science?”

Economics deals with scarcity and how people address that problem.  Scarcity, and doing without, and envy, all form a part of why it is dismal.  No one wants to think about that aspect of life.

We should know a little more so that we can hold reasonable expectations and to sort out opportunities against a real background.

Let’s start with capital.  In economics capital is a fundamental of production.  It could be physical like land, building, or machinery.  It could be skills or intellectual capital.  Things we know how to do.  It could be money, which is merely a store of value from some prior event.

Many people think of money first, but for most of us, skill, energy, enthusiasm and attitude provide us with most of the capital we need to get along.  Time is an important variable here.  You cannot cash in your personal capital as easily as selling an apartment building.

How do people allocate scarce resources, like food or shelter?  Neither is infinite so there must be some way to make the allocation.

In our society allocation is made mostly by selling or renting.  People exchange money capital for something else they want to possess.  Having money is a useful value.

In other societies it is by government edict.  You can get a decent apartment and okay food if you are favoured by the powerful.  Most of these societies have less to distribute because there is so little incentive for anyone to produce.

Some societies are a mixture.

Where does money come from? By exchanging value.  My time and skill for your money.  My money for your steak.  Your money for my used car.  It is an elegant barter system where what you trade does not go bad.

The proper strategy then is:

  1. How much of what the world has to offer that you would like to have.
  2. How to get the right amount of money to acquire those things.  Generally you will need to decide what skills and energy and time and enthusiasm you intend to contribute to the world.
  3. Develop your personal capital.  That never stops.  Few of us come with natural abilities that are sufficient, so we must develop them.  Education, work experience, experimentation and networking can all help.
  4. Be alert for emerging skills, or emerging places, where opportunities are easier to find.

Remember that economics is about allocating scarce resources.  You must decide the ones you want and then provide something to trade for them.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

This entry was posted in Decision Making, Insight to Business, Personal Finance and tagged , , , , , . Bookmark the permalink.

One Response to Understanding Economics

  1. Brian says:

    Sooo…does Economics end at death, or just shift gears to a more relevant model?

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