What is Economics?

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From the Archives : Originally published June 30th, 2002
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Category : Fundamental





"[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:


  1. Evaluation
  2. Production
  3. Saving
  4. Investment
  5. 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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Mike Hewitt is the editor of www.DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies.
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