What Economics Is
Economics is an exciting field. The economics of old sought to uncover how the world works. It showed, or even proved, that there is a natural order to it. There is structure to the apparent chaos. The economy has something of a life of its own: it has a nature. This means not only that we can study it and learn about its ways, but also that we are not free to tamper with it at will and cannot make it work in ways that we might prefer but that are not in line with its nature. There are “laws” by which the economy works, and they are immutable. Economics over the past three centuries has been about identifying, learning, and understanding those laws.
Core to understanding the economy is recognizing that it is about human actions and interactions. In fact, the economy is people acting and interacting. It is little or nothing else. We tend to think of the economy in terms of resources, machines, businesses, and perhaps jobs. But that is a simplification that is misleading. Those are important, but they are all means to ends. The economy is about using means to attain ends. To put it differently, it is how we act to satisfy our wants, to make us better off. Simply put, the economy is about creating value.
Our means are limited but our wants are not. We must figure out how to make as much as possible with the little we have. If we choose to pursue one end, then we cannot use the same means to pursue other ends as well. In other words, there is always a tradeoff. Every choice we make and every action we take means that we forego what we did not choose. Either you take the car for a drive or you stay at home. You cannot do both at the same time. You can use your money to buy one thing, or to buy another. Or you can save your money for another time. But the same money cannot be used both to buy something and be saved too. Your choice of one thing means you did not and cannot choose the other. By choosing one thing over another, by acting, we rank things’ value to us—we economize. The economy is all of us economizing.
The economy is an unplanned order. It is what emerges when people go about their own business, when we act and interact as we see fit.
The French nineteenth-century economist Frédéric Bastiat captured this in a question: “How does Paris get fed?” Living in a large city, Parisians do not produce food but still have abundant access to it. The important question is how this comes to be. After all, there is no central plan for what types and quantities of foods are to be offered to Parisians and when. There is no one telling farmers when and what to sow, which land to use for each crop, what tools to use or develop, or in what cities, towns, or market squares to sell their produce and at what prices. All of this just happens. The economy is a decentralized and distributed system where all people—farmers and city folk alike—make their own plans and decisions. They do not simply carry out orders from some central command. (1)
The aim of economics is to understand how an economy, in all its shapes and forms, works: the nature and workings of the overall process of people making their own decisions, acting, and interacting as they see fit. The economy lacks both plan and planner. It doesn’t even have a goal. It just is.
But people have goals. They have needs and wants that they strive to satisfy using different means. Some things are provided by nature, but most of them require that people exert effort to produce them. These are the goods and services that satisfy whatever wants we have. Production is core to the economy: it is about providing as many means as possible to satisfy as many highly valued wants as possible.
The Economic Problem
Production is a problem. It is not simply a matter of how many resources are available. There is no constant relationship between input and output. Very often more inputs can produce more outputs, it is true. But with innovations we get more output per input—we increase productivity. This is even more obvious when we talk about the value of the output and not just the quantity. Value is never automatic. One can use a lot of resources to produce something that turns out to be pretty worthless. If I produce a painting, the expected result would be of little value regardless of my effort or how much paint I use. The same canvas and paint used by Vincent van Gogh would create something of much higher value. By placing his signature on my painting it would increase my painting’s value. But my signature on his painting would decrease its value.
The only relationship that exists between inputs and outputs is that inputs must be used to produce outputs. We cannot create something out of nothing.
The economic problem is not production per se but economizing production. It is about the issue that arises because we do not have more resources than we can find uses for. In other words, resources are scarce. So it is incumbent upon us to figure out how our resources can be used to produce the best possible outcome (in value terms). We have become increasingly good at figuring this out, especially in the last few centuries. For thousands of years, we made very little progress, but suddenly, with what is referred to as industrialization, nation after nation began lifting itself out of poverty through breakthroughs in production. The interest in economics coincides with this development.