Category: Understanding Economics

Economic Principles and Immunity from Silly Ideas

A reasonable way to think about any subject — science, engineering, technology, economics, etc etc — is to base the analysis on fundamental principles. It’s like using maths, starting with axioms and logically deriving theorems that can then be said to be true within that axiomatic system. If you know the underlying bits, you can work out the rest yourself — or rely on the work of others who have worked out the maths.

We know that there are fundamental principles, whether we know them or not. Some people do know, and they use that knowledge to make stuff that we find useful. I know precious little fluid dynamics but I know that those who design airplanes understand fluid mechanics, and I fly around in airplanes that are the result of various people’s understanding of various different scientific principles or truths.

Economics also has discovered certain “truths”. These relate to property, division of labor, exchange and subjective theory of value. These ideas are not generally known by people, and understandably so. They don’t need to. They get by very well without knowing them, thank you very much.
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Understanding Economics is Easy

In the previous post “Economics and Physics” I briefly explored why the basic explanations of physics are hard to understand and why the basic explanations of economics are easy to understand. Physics is called a “hard science”. I believe it is hard in the sense that advances in physics are made by supremely intelligent people and even comprehending them requires a good deal of training and intelligence.

Physics is also hard in that it is not some soft and squishy, namby-pamby whatever goes kind of nonsense, unlike in some other intellectual enterprises where people just make up stuff as they go along.

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Economics and Physics

Physics is Not Logical

Twinkle, twinkle, little star, I finally know what you really are

Nobel Prize winning New Zealand physicist Ernest Rutherford (1871 – 1937) is reported to have claimed that “all science is either physics or stamp collecting.” He evidently meant that physics is the only real science and everything else that goes under that label is just a collection of facts.

The wiki’s definition of science as “a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe” serves our purposes. Physics is the über-science because it alone provides the ultimate foundation for all explanations related to what the natural world is about.

What makes physics not merely a heap of facts — what distinguishes it from stamp collecting — is that it is organized knowledge. The organization of knowledge is achieved through what are called “theories”. Theories are conjectures (hypotheses) about the nature, structure or working of some aspect of nature. Theories in physics are conjectures about what the physical world is and how it functions. Continue reading “Economics and Physics”

On Competition and Markets

From a broad philosophical perspective, competition is encoded in the basic DNA of the universe. At every level of analysis, competing forces seek domination. At the largest inanimate scales, gravitational and electromagnetic forces constantly compete in stars. At the smallest scales, inside an atom, nuclear and electromagnetic force compete. In the biological world, living things compete all the time. It’s a constant battle between and among botanical and zoological species. Humans, as part of the animal world, are past masters of the game. We, like all other living organisms, are all descendants of ancestors who were successful in that competition at least long enough to have survived to reproduce.
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Minimum Wages — Follow up

Markets work, in general. That’s like saying, people are healthy in general. But people do fall sick. Similarly, occasionally markets fail. That’s when you need intervention, not otherwise. But it cannot be any random intervention. The treatment has to fit the etiology of the disease. So also, market intervention has to be specific to the kind of failure the market suffers from. We must therefore first be sure why the market failed and only then try to fix it. If legislating a minimum wage is the solution, we need to ask what the market failure is.
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Minimum Wages

In response to my two earlier posts on “Understanding Economics” and its followup, the matter of minimum wages has come up in the comments. Some ideas have the peculiar characteristic that they appear to be good at first glance but lose much of their shine upon closer inspection. Minimum wages is one fine example of that set.
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Understanding Economics

A while ago a non-economist friend who had read my book “Transforming India” said that as he did not understand economics would I write a book explaining some of the basic concepts of economics? It would be a “prequel” to the “Transforming India” book. That sounded like a good idea and over the last couple of months, I have spent some time on such a book. The working title is “Understanding Economics.” Not the most brilliant title but that will change to something more attractive by the time it is ready for publication.
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The distinction between Rights and Freedoms.

Now for the important matter of the distinction between rights and freedoms. Of late, there has been a proliferation of rights. There’s the right to information, right to employment, right to food, right to education, and so on. Somehow people start thinking that the expansion of rights enhances freedom but in fact it is the opposite: the expansion of rights actually reduces our freedom.
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What is Economics?

On twitter, I got into a bit of back and forth with two people about economics. In 140 characters, one cannot have a real argument. Instead it is just a series of assertions. One gentleman came down heavily against the idea that economics studies human behavior. It’s all about money, he seems to think. Another person got angry at the claim that “markets work” because, as he pointed out, they fail. I responded, tongue in cheek, “Planes don’t fly. They crash. They kill people and are worthless for transportation.” That set him off a bit more. C’est la vie.
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