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Economics
or the Gold Watch?
Who
Should Care About Economics?
- Bill Collier
Economics
to most people is something best left to Wall Street or University
Professors. So why should you and I, average work-a-day people care about
this subject? Dentists like to say, “Brush only the teeth you want to
keep”. Let me apply that poignant logic to economics: you should
only care about economics if you want economic success.
If
you would be satisfied with ending up economically strapped by the time
you turn 65, if you are satisfied with receiving the gold watch at
retirement — oops, that was in the golden age of capitalism — then
what follows won’t interest you. On the other hand, if you choose to be
like the upper 5% of all people who end up well off by the time they turn
65, this will interest you greatly.
If
we are going to convince you to care about economics we are going to have
to define economics. What is economics
Economics
is the science of the production of values (e.g. things, services,
and etc. that have “monetary” value or that can be measured in terms
of monetary value), distribution of ownership rights over these values,
and exchanges of these values within the realm of human action. The
values themselves are the object of economics: these values can include
service (time plus knowledge applied to serve another), consumable
products (things we use or employ for our satisfaction), raw materials or
commodities, and capital (things we utilize to produce more “values.
So
then we have the values themselves, the ownership of those values, and
the exchange of those values between people. Others may define economics
differently but for our purposes, and to keep this discussion practical
and useful, we shall stick to this definition
These
values, their ownership, and their exchange are an integral part of your
life. By understanding the values themselves, for instance how to
calculate them and define them, you will have a better understanding of
the worth of what you own and how best to employ it for your
satisfaction.
Cause
and effect in economics
Understanding
the cause and effect relationships, especially in terms of incentives to
perform, of the ownership and distribution of these values will make you
able to create economic relationships which advantage you greatly, make
your efforts more efficient, and give you a competitive edge over others.
By understanding the cause and effect relationships in the exchange
of these values, such as basic human motivation factors and laws of
supply and demand, you will be able to make exchanges which result in
maximizing your investments of time, money, capital, or any other value.
Every
action is the result of a felt lack. I say felt lack instead of simply
because having a need will not make you act, it must be felt lack to lead
to action. On the other hand, one can feel a lack that is not real
but act on it any way. If therefore we are measuring the cause and effect
of action we have to understand that only if the individual feels
a lack, whether a need or want, whether real or imagined, will they take
action. Whenever we feel that we lack, we take action. If we feel no
lack, we take no action.
Economics
is not concerned with all action, only with production,
distribution, and exchanges (or the absence of production, distribution,
and exchanges) of economic values. In other words, to use the terminology
from above, it is concerned with the production of economic values, the
ownership/distribution of economic values, and the exchanging of economic
values. In a national economy we can measure most values in dollar
amounts, but this does not cover ALL forms of production, distribution,
and exchange. Many exchanges do not involve, and cannot be counted in,
dollars.
Economic
exchange
If
we barter or if I buy something from you there has been an economic
exchange. While the motivation for an economic exchange is nearly always
to receive more than we give, all exchange ratios trend towards a 1:1
(cost to the seller: cost to the buyer) figure. They trend towards a 1:1
ratio because eventually the perceived value of the items involved
becomes identical in both the seller’s and the buyer’s eye. Quite
simply if the cost to the seller, or even the perceived cost, is the same
as the perceived minimal value in the eyes pf the buyer an exchange is
unlikely. What makes this ratio uneven, and therefore profitable, is the
value as perceived by the participants.
If
item a is worth 1 unit to you but two units to me and I pay 1.5
units, I think I got a good deal and you think you made a profit. All
exchanges occur when both parties think they are getting more out of the
deal than it is costing them — but only up to the point where
both parties believe they are getting the exact same value in the
exchange. Only coercion or altruism causes us to knowingly give more than
we get.
Why
is this so? We only act on felt lack (this rhymes, but that was not my
intent). I will not knowingly give away something in order to get
something which has the exact same value to me. This would be action
without any positive object in mind. Such action does not voluntarily and
knowingly take place.
I
said that all exchanges are the result of two or more parties thinking
they are getting more out of the deal than it is costing them. The
key here is the word think. You may actually be suffering a loss
because you think you are getting more out of your economic
exchanges than you are paying. What causes us to unknowingly suffer a
loss is our faulty knowledge of economics. When we don’t know what
something is really costing us because we cannot express our costs
in monetary terms we pay more than we even know we’re paying. When we
think we’re getting more than we are getting, we are willing to pay
more than we really should.
Conclusion
This
demonstrates the need to understand economics: to have a more objective
than subjective view of what we need, to understand objectively the value
of what we can produce in exchange for what we want, to understand the
way people perceive value, and to objectively calculate the value of the
things we are buying. The top 5% of retirees, who receive far more than
just a gold watch, succeed because, to begin with, they understand this
type of real economics, the economics of everyday life that so few people
understand and, therefore, profit from.
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