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"[Economics] is not about things and tangible material objects;
it is about men, their meanings and actions." (Ludwig von Mises, Human Action)
Most economic texts would define economics as the study of the
"production, distribution, and use of income, wealth, and
commodities."
While it is true that economics is concerned with these things, this
is not a true definition. It implies, for example, that income and
commodities already exist and that they stand apart from wealth. It assumes a
level of development such that distribution is a major concern.
In short, it assumes that people exist at a high level of
sophistication in society, when in fact that very sophistication is the result of fundamental economic principles that apply to
the individual, even if he is alone on an island.
The Case of Robinson Crusoe
Consider Daniel Defoe's character Robinson Crusoe. His actions
demonstrate concretely and clearly the fundamentals of individual economic behavior that lead to the formation of a market economy.
Stranded on an island visited only by cannibalistic savages, Crusoe
first devised a method of acquiring more food than he immediately needed and
storing it so that he could redirect his efforts toward achieving other
necessities.
He then was able to use the time he saved to build shelter, provide
for his defense against the natives, and
manufacture clothing. Then through industry, ingenuity, and management of
time, he simplified the process of acquiring essentials and went on to
produce other luxuries as time allowed.
The Stages of Economic Activity
The keys to the process of increasing his standard of living were:
- Evaluation
- Production
- Saving
- Investment
- Innovation
He evaluated the ends and means available to
him and chose the alternatives that best addressed his needs. The value of each thing that he sought was set by his
judgment according to his perception of what was the most needed, the means
available to obtain it, and what it would cost him to get it relative to the
alternatives. He produced the essentials necessary
for survival and saved enough of them so that he could invest
his energy into developing other products that he needed or desired. The
price he paid at each step was the time and energy he spent according to his
own evaluation of his needs. What he gained on balance in the exchange was
his profit. If he made mistakes, and his efforts
were futile, he suffered a loss.
His actions were a matter of exchange, the
exchange of a less desirable state for a more desirable one. At every step,
he managed his time; he made choices based on the consequences of his options
in the short, intermediate, and long term.
As he became more and more sophisticated through technological
innovation, the cost of essentials (in terms of time and energy spent
to achieve them) diminished and he could afford to spend more of his time in
the pursuit of 'luxuries'.
One important thing to notice here is that saving is a prerequisite
for investment. This is in stark contrast to modern-day pundits who proclaim
that saving takes away from investing and that the economy as a whole
subsequently will suffer. Instead they state that consumption is what drives
the economy. What this fails to acknowledge is that you must first have production, before consumption.
How can you consume something that isn't there?
In Conclusion:
Economics is the study of the instruments, methods, and actions
available to human beings for attaining their goals, and because people are
social creatures, a major emphasis must be on surviving through association
with others. But the fundamental focus must be on the requirements of one
individual standing alone, for a society is simply a collection of
individuals.
Resources:
- Methods of a Wall
Street Master by Victor Sperandeo.
Mike Hewitt
Editor
DollarDaze.org
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