Last Updated on November 2, 2020
When I meet people and tell them my background in economics, I get a wide range of reactions and often some strange looks. What I have yet to have happen is for someone to ask me, “What is economics?” I really wish they would, because how most people would define economics is quite a bit different than the actual meaning of the term. In this post, we will show that the ideas of economics are not confined to money and apply to every area of life, and how a basic understanding of economic principles can benefit one tremendously in ways beyond financially.
Table of Contents
Misconception of What Economics is About
When we set out to define economics we are immediately confronted with widespread and often times massive misunderstanding of what the term means. When most people hear the word “economics,” their minds immediately jump to thoughts of budgeting, raising money, running a successful business, or winning big in the stock market. This is forgivable given how the word has come to be used in society. In fact, the electronic dictionary on my computer defines economics as “the branch of knowledge concerned with the production, consumption, and transfer of wealth.” That is frankly a shallow definition of economics.
While a knowledge of economics is beneficial in all these areas, the laws and principles of the subject go well beyond an association with money and finances. Not only can the lessons of economics be applied to every aspect of life, they are very much at work virtually every second of every day, whether or not individuals understand what is happening.
Sadly, the value a person can gain by studying economic theory can easily be missed if one spends much time keeping up with the news. We live in a time where politicians with economic degrees routinely speak nonsense, and journalists are awarded Nobel Prizes for Economics for political reasons (even though they have been proven wrong about almost everything they have written for the last 20 years). Perhaps even worse, every time there is a release of any economic data, the first paragraph of every news article seems to include the phrase “economists were surprised.”
It is easy to reach a conclusion that economics is impossible to understand or that it is just a guessing game. This is far from the truth! Don’t be fooled by elected officials trying to buy votes, political pundits masquerading as economic journalists, or economists who are pressured into making predictions without having the necessary data, turning what they say into a guess and unfortunately making many of them look incompetent. While higher level economics comes with great complexity and requires much knowledge and skill, basic economics can be grasped with rational thinking. In fact, in many ways the fundamentals of economics are rather intuitive.
Economics Definition
Economics is about examining cause and effect relationships. Perhaps the best and most succinct definition of economics was set forth by 20th-century British economist Lionel Robbins, from the London School of Economics. Baron Robbins said the field of economics can be summed up as “the study of the use of scarce resources which have alternative uses.” A lot is jammed into Robbins’ short phrase. Let’s briefly unpack it, beginning with some background on how the English word came to be.
Economics is the study of the use of scarce resources which have alternative uses.
Lionel Robbins
The English word economics comes from the Greek οἰκονομία (transliterated as oikonomia). This is a compound word from οἶκος, meaning house, and νόμος, meaning law or rule. So in essence, the root of the English term economics means the management, oversight, and administration of a household. This isn’t confined to one’s own place of dwelling, and includes watching over affairs entrusted to us. For instance, when the term οἰκονομία is translated from the Greek manuscripts behind the New Testament into English, it is often rendered as stewardship, meaning watching over the resources that are under one’s care.
The next part of our definition provided by Baron Robbins that needs to be examined is the term “scarce resources.” The entire concept of economics exists because scarcity exists. In truth, economics are always at play in everything because scarcity always exists in everything. But what is scarcity?
Scarcity vs Shortage
The terms scarcity and shortage are fairly synonymous in everyday speech, but in the language of economics the two words have important distinctions.
- Scarcity: Insufficient physical supply to satisfy the desires of society as a whole
- Shortage: Lack created by more demand than supply at a given price
While these descriptions might still appear to be very similar, there is a key difference to note pertaining to our economics definition. In brief, shortages are resultant from price, and are temporary. They come and go with changes in production, price, or governmental policy. On the other hand, scarcity always exists because there will never be enough to fulfill everyone’s collective desire for any given item, whether it be material or immaterial.
The ideas of economics are not confined to money and apply to every area of life, and a basic understanding of economic principles can benefit one tremendously in ways beyond financially.
Even though scarcity always exists, the level of scarcity can fluctuate. There will never be enough homes to satisfy the collective desires of all humans on earth (some people would want to own a million homes themselves), so there will forever be a housing scarcity. However, the housing scarcity can increase or lessen based on factors such as the proportion of homes to the population.
Shortages (and surpluses) are tied to the price of a given resource, not to its scarcity. A resource can move from being in a shortage to a surplus, or vice versa, without there being a change in relatively supply.
What causes a shortage?
Shortages occur when there are disruptions in supply or spikes in demand. This can be caused by many things, including forces of nature such as a hurricane, rapid changes in consumption, mistakes by companies in a supply chain, or by government interference into the free market.
Unfortunately, society’s lack of knowledge of the role of prices gives ammunition to politicians to buy votes by feeding on that ignorance, and government enacts “consumer protection” laws that only lead to higher prices for even less supply.
Ordinarily in a free market system, spikes in demand would be quickly met by an increase in production. This is because as demand begins to outstrip supply, prices increase, which leads to more profit being available and thus a rush to fulfill the demand while prices are elevated. Unfortunately, society’s lack of knowledge of the role of prices gives ammunition to politicians to buy votes by feeding on that ignorance, and government enacts “consumer protection” laws that only lead to higher prices for even less supply. This is why we can’t find toilet paper during a pandemic, rent-controlled housing leads to fewer available places to live, and resource-rich states such as California run out of water and have rolling blackouts. In time we will deal with each of these in separate posts.
What causes scarcity?
Scarcity, on the other hand, occurs naturally because one, we live in a finite world; and two, no matter what resource we point to, there is always someone who wants more. That is not to say that the actions of mankind cannot create greater supply or less demand, thus impacting the amount of a resource available. However, society will never be able to satiate all the desires of all its citizens. If somehow a way were discovered to give every human being on earth one trillion dollars (ignoring the devastating inflation and lack of productivity that would cause for a the purposes of this example), there would still be at least one person out there who would want a trillion and one dollars.
In short, the causes of scarcity can be summed up in two phrases:
- There is a limited natural supply of all resources
- All resources have alternative uses
We tie the field of economics in with scarcity, and say that it applies to every area of life, because no resource in this world is unlimited. There is even a finite supply of oxygen in the atmosphere and water molecules in earth’s rivers, lakes, and oceans. It is important to understand that when we speak of scarce resources that we are not necessarily implying that we are in danger of running out of those resources.
Economics Concerns the Allocation of Resources
It is in the alternative uses of these scarce resources that we reach the crux of Baron Robbins definition above. Not only are there no truly unlimited resources, but every resource can be used in more than one way. Take wood for example. You can use lumber to erect a house, build a table, make a piano, carve a baseball bat, burn it as firewood, or in a seemingly endless list of other ways. When you use wood to build a table, that means there is less wood available to make baseball bats, thereby limiting the supply of Louisville Sluggers. Without the proper allocation of lumber, there might be 25 million pianos sitting around but not enough homes for a nation’s people to dwell in.
How in the world can anything this complex be handled efficiently? Fortunately, in a free market this allocation happens automatically via the vehicle of prices. Sadly, regardless of how hard some nations try, there is no individual nor bureaucracy with enough knowledge to allocate resources effectively. This is why resource-rich nations (and some states in the United States) are often the poorest, or have comparatively high poverty rates. Whether it comes from a quest for power or a genuine desire to do good, controlled economies always hurt society at large.
How in the world can anything this complex be handled efficiently? Fortunately, in a free market this allocation happens automatically via the vehicle of prices.
Every emergency room and most specialty doctor offices have a triage nurse on the clock at all times. It is the job of these nurses to evaluate the needs of patients and place them into groups based on urgency. Those who require immediate attention are placed ahead of those who aren’t in as serious condition and those who are serious but are likely unable to be helped. Triage must take place because hospitals and physicians have scarce resources; in other words, they cannot see everyone at all times. This is economics in action.
Final Thoughts
As we have engaged in defining economics, I have attempted to stress that the concepts of economics go way beyond mere finances. We economize everything, and if we were to contemplate for a moment we would realize that our use of language reflects this truth. We spend money and save money, but we also spend time and save time on a daily basis. Likewise, there are periods we wish to save energy and those we must spend more energy than usual.
What is economics? As an area of knowledge, it is the study of how resources are allocated. Personally, in the end and applied at its most basic level, economics is about making the most out of everything that is under our stewardship. That is, economics is concerned with allocating all resources at our disposal and using them wisely. The field of economics, then, examines the issues that affect the allocation of resources, and how the allocation of resources impacts society as a whole.
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