Archive for the ‘1. Intro to Economics?’ Category

Effective value

Posted: April 8, 2014 in 1. Intro to Economics?

Effectiveness
As previously stated economics is largely concerned with efficiency, however the ability of a good or service to satisfy a want directly impacts efficiency. While a good or service may be able to be produced very cheaply if it doesn’t satisfy a want it is ultimately a waste of resources (inefficient). Therefore economics must be understood in terms of both effectiveness and efficiency.

Value
You have heard it said that “One man’s trash is another man’s treasure.” This saying emphasises the fact that different people can value the same thing very differently. A good that satisfies a want can be seen as valuable.

Capitalism recognises that self-interested individuals value things differently. To achieve a coordinated outcome between individuals capitalism uses markets to allocate resources efficiently and effectively. This is achieved through the use of prices and competition.

My next post will discuss the link between individual value and prices. It will also discuss how prices and competition are used to produce an efficient outcome in markets.

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Capitalism is the dominant economic system today. While there are countries that are still controlled by communist governments their economies are in transition to capitalist (mixed market) systems. While both systems provide mechanisms for distributing resources and satisfying wants they do it in very different ways.

In short, capitalism is marked by private ownership of resources and the use of competitive markets and self-interested individuals to create an efficient allocation of resources. Individuals acting out of self-interest will direct resources in markets to produce an efficient and effective outcome. Markets where there is strong competition will produce a least cost (efficient) allocation of resources in production.

Capitalism and communism are considered to be at opposite ends of the spectrum, especially considering that communism presents the strongest criticism of capitalism.

Communism is marked by the ideal that humans are basically good, however this goodness is suppressed by social structures (feudal, capitalist, etc).  By removing these structures all things would be commonly held (public ownership) for the common good, decisions of what to produce and how much are determined by the central government.

Communism was never thought of as a system that existed in isolation. It was envisaged as the final step in the evolution of human social structures. A final stable (ideal) human system where humans could realise their full potential (goodness). Capitalism is seen as inherently unstable, containing the seeds of its own destruction. A system built on promoting the self-interest of individuals would only seek to alienate people from one another and devalue any community that exists. Just as capitalism had evolved from former structures the ultimate future of capitalism lay in communism.

It becomes clear that the ideal of the inherent goodness of humanity and the ultimate perfection of human societal structures in the present age is at odds with Christian doctrine. Seeking perfection of human community apart from Christ and the persistence of sin in the present age is against the core message of the Bible. It is this fundamental misunderstanding of human nature that caused the fall of communism.

In my next post I will begin discussing capitalism more fully.

Whether you like it or not you are impacted by and participate in economic decisions on a daily basis. Whenever you purchase or sell anything you are participating in an economy. Also most of the decisions made by governments today are underpinned by economic thinking and analysis.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
John Maynard Keynes, The General Theory of Employment, Interest and Money

Economics is a powerful tool that can be used by and profoundly impacts individuals, businesses and countries.  Elections can be won or lost on economic issues.  A political party’s ability to demonstrate that they are better at managing the economy can be the deciding factor in democratic elections.

It is the responsibility of each individual to understand and engage with economic issues on a daily basis.  However economic issues and theory are complex, largely because economic systems are human systems, and are primarily concerned with the interactions between individuals.

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
F.A. Hayek, The Fatal Conceit

There are 2 sayings that emphasise the complexity of economics and its application:

  1. If you ask 5 economists a question you will get 6 different answers; and
  2. The answer to many economic question is “It depends.”

While economics can be complex it can be understood. Keep asking questions and testing everything. I hope to present basic economic theory in an accessible/usable way. I will discuss issues associated with the whole economy and the interactions between individuals. In my next post I will begin discussing the dominant economic systems.

The purpose of this new series of posts is to provide Christians with a sound basis for understanding economics in the present age and the age to come. This should help to dispel many of the misconceptions and misrepresentations of economic theory and its application today.

What is Economics?
Despite the wide-reaching application of economics to almost every area of life it is primarily concerned with solving one seemingly simple problem that arrises from 2 simple assertions:
1. Mankind has a finite resources available to it.
2. Humans have an unlimited number of wants and desires (including needs).

Therefore the problem economics seeks to answer is:

How do you satisfy the unlimited wants of mankind using the limited resources available?

This means, at its core, economics is primarily concerned with efficiency. Therefore economics is concerned with organising society for the purpose of efficiently directing resources to satisfy the wants of individuals and groups. For thousands of years practical philosophers have proposed various solutions to this problem. Seeking to determine which human wants and desires should be satisfied, i.e. what and how much should be produced?

3 Simple facts
There are 3 simple facts that need to be stated before continuing:
1. Economic systems are human systems, primarily concerned with human interactions.
2. Current economic theory does not have an ethical system built into it. This needs to be added by the society in which it operates.
3. Neither capitalism nor communism (2 dominant economic systems) are inherently Christian.

Keep these facts in mind when reading future posts in this thread.