15 days of Economics
Day 1: My Introduction to Economics
On a personal level, I have chosen to study economics to become a more productive and knowledgeable member of society. I want to be able to make the most of my time by avoiding mistakes and by better understanding the effects of my actions. Additionally, I have an interest in how the world around me works and I aim to get an intuitive understanding of the society I live in.
The study of economics can help me achieve these goals by guiding me to predict the actions of economic entities and the reasons behind those actions. Economics can be broken down into a study of choices; how can we make the most of the resources we have? Microeconomic principals and models can elucidate choices made by economic entities. For example, opportunity cost can explain the actions of profit-maximizing firms such as my local grocery store and why they may stop selling a certain product to make shelf space for another. The understanding of risk and reward can explain why governments spend immense resources on the military in order to minimize the risk of future conflict. A knowledge of inflation and the time value of money can help explain many people’s decision to use credit cards. Even the most mundane and routine actions can be analyzed through microeconomics such as the choice to go to sleep: sleep has the opportunity cost of many hours of work but has the benefit of making the rest of my time more valuable through feeling well resting in a place of sleep-deprived.
On a larger scale, economics can explain large macroeconomic events and trends. For example how the introduction of mortgage bonds changed lenders’ incentives when issuing mortgages and how this lead to the recession in 2008. Macroeconomics also teaches how these events and trends will affect me personally, for instance changing interest rates on loans. How they can affect other people through trends of unemployment and wage growth. And how they alter the world around me through infrastructure and industry. Macroeconomics also guides politics. For example, the benefits and drawbacks of a market economy or welfare. This can make me a more informed voter in the future.
The combined knowledge of microeconomics and macroeconomics will help me plan my actions and be able to fully analyze them. They can also give me the satisfaction of understanding why the global, national, or local economy is the way it is and gives me the knowledge to effectively react.
Day 2: Getting to know the father of Economics
Adam Smith was a Scottish philosopher in the late seventeenth century. He was born in the manufacturing town of Kirkcaldy in 1723. He spent the beginning of his career studying people and their relations with each other on both small and national levels. In 1759 he published the book, “The Theory of Moral Sentiments” which focused largely on sympathy and morality. This laid the underpinnings of explaining people’s actions. This laid the groundwork for Smith’s book, “The Wealth of Nations” which was a watershed moment in the history of economic theory.
The Wealth of Nations, published in 1776, was the culmination of 17 years of notes. Smith laid out key ideas of modern economics such as specialization of labor, competitive labor markets, and effects of government debt as well as analyzing the causes and effects of each. The main idea of the book, however, was answering the question, why are some nations richer than others? (“Of the Different Progress of Opulence in different Nations”).
The book criticized the dominant economic theory at the time, Mercantilism, which advised nations to export more than they imported. Smith instead applied ideas of specialization of labor to the macroeconomic scale calling for the specification of nations. Nowadays we see the specialization of economies greatly across the world.
“The natural advantages which one country has over another in producing particular commodities are sometimes so great, that it is acknowledged by all the world to be in vain to struggle with them. By means of glasses, hotbeds, and hotwalls, very good grapes can be raisedin Scotland, andvery good wine too can be made of them at about thirty times the expence for which at least equally good can be brought from foreign countries.”
The Wealth of Nations Book IV Chapter II
The book also called explains the principals and benefits of capitalism. Smith argues that the pursuit of self-interest, when aggregated, can lead to the general betterment of society. This is explained through Smith’s now-popular image of, the “invisible hand”.
“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
The Wealth of Nations Book IV Chapter II
Smith’s ideas set out the line of thinking for modern economic theory and his ideas about capitalism created the foundation for modern economic policy.
Day 3: T-Shirt economics
Even the most simple of goods have positive and negative externalities all over the world. For every product, it is important to be aware of its production process and the potential human and environmental impacts of those. I will use the example of float glass, a type of flat glass commonly used in windows for houses and cars.
Float glass is created from four main materials:
- Sand is commonly extracted near the production site.
- Dolomite and limestone are mined near the production site however they release a lot of pollution.
- Sodium carbonate is produced from chemical plants mainly in China, The United States, and Europe. This process creates toxic byproducts that are deadly to coral and other aquatic life. These are often released into lakes and the ocean. This is one of the main sources of lake pollution in the world.
Float glass is produced in many areas due to the high risk of transport. However, more specialized, customized float glass is produced in Europe, North America, and the Aisa-Pacific region. Africa and the Middle East are expected to grow the most in float glass production.
The main positive externalities of float glass production, on a macroeconomic scale, are increased tax revenue and falling consumer goods prices. The float glass production facilities are highly automated and generally higher very few, specialized, workers.
