Through the Lens of Economics

August 2023 ‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒ 5 minute read


Economics is much more than the study of economies or even money. At its core, economics is the study of scarcity and value. But, the thing is, scarcity and value can be found just about everywhere, in just about everything. So, couldn't economics, with all its theories and frameworks, be used as a lens through which to view... everything?

No harm in trying.


The Laws of Supply and Demand

The Laws of Supply and Demand describes a relationship between value, supply and demand. Basically, scarcity (low supply, high demand) creates value, while abundance (high supply, low demand) diminishes value. This explains why a one-of-a-kind stamp with the king’s rear end is much more valuable than your run-of-the-mill stamp with just the king’s head. Generally in economics the term 'value' refers only to monetary value. But what if it didn't?

For a basic example, consider compliments. If someone deals out compliments left, right and center, the value of each compliment is going to be fairly meaningless – abundance reduces value. Meanwhile, if someone who has never said a good word about you in their life goes and compliments you, its value is going to be far greater – scarcity creates value. The same goes for insults. And swearing. And etiquette. Any words which carry weight or 'value' to them, the laws of supply and demand are in play, whether you like it or not.1One slight caveat is that the idea of value here is in reality only perceived value, a currency only used only within a small, select group of people.

Okay, what else has value then? Try human experience. Food is most enjoyed not when you are full, but when you are starving. Water is most enjoyed not when you are hydrated, but when you are thirsty. Sleep is most enjoyed not when you are wide awake, but when you are exhausted. In every instance it is the scarcity of the experience which makes it so valuable.

To consider this point further, say you are served your favourite meal once a month - this meal has value to you. But what happens when you are served this meal every night? Too much supply reduces value... Suddenly your favourite meal doesn’t seem so valuable anymore.

In every instance, relative scarcity is the thing which creates value. So there.


Factor Endowment

Factor endowment refers to the types and quantities of resources a country is endowed with. These include land (natural resources like minerals, forests and fields), labour (a skilled and educated workforce) and capital (useful stuff like factories, buildings and equipment).

Incidentally, if you replace 'country' with 'human being', the concept still stands. Much like a country, an individual can be endowed with genetics (like land endowed with resources), training (like educating a labour force), or an inheritance (like capital goods).

Also, in the same way that countries specialise in and trade using the factors they are endowed with, so too do human specialise in a particular niche and trade their services with the rest of the world.


Asymmetric Information

Asymmetric information is the idea that sellers have more information than buyers. This explains why we go to the doctor, or hire an architect, or consult any trained specialist.

The downside of this is when sellers abuse their informational advantage to unfairly charge the buyer. For example, consider a house seller who doesn't tell a potential buyer that their house is riddled with termites.

To take this idea further it has to be applied not only economic transactions but other types of transactions.

Take social transactions. If you know something about someone (whether their name or their secrets), you hold value over them.1Everyone values the person that knows their name more than the person that doesn't The trick is knowing things which everybody else doesn't.

Here's another example: regifting. If the birthday boy or girl knew that their gift had been regifted, they wouldn't value it as much.

Basically, asymmetric information just means ignorance is bliss.


Law of Diminishing Returns

The Law of Diminishing Returns describes how as resources are invested to increase yield, exponentially more resources are required as the process progresses. For example, one unit of fertiliser may increase yield by 10%. But to increase yield by another 10%, two units are required. Then, to increase yield by a further 10%, four units are required. And on and on it goes.

This idea is similar to the Third Law of Thermodynamics - as energy is required to cool substances, exponentially more energy is required to reach temperatures close to absolute zero. This in turn is incidentally similar to achieving speeds near the speed of light - as energy is required to create velocity, exponentially more energy is required to reach the speed of light. For all three of these principles, an infinite amount of energy/resources is required to reach an 'optimum' value.

Interestingly, this idea is also true for the amount of effort we can apply to something. One day of work may make a project 10% better. But to make it better by another 10%, two more days of work are required. Then, to make it better by a further 10%, another four more days of work are required. And on and on it goes.

In this case, the unattainable value is perfection.


Tragedy of the Commons

The Tragedy of the Commons describes how common resources available to everyone can be overused and destroyed - basically, when everyone spoils it for everyone. Overfishing, pollution and traffic are all prime examples.

But while economics only considers the tragedy of the commons in terms of economic resources, there are evidently many other applications. As a resource available to virtually everybody, the internet in its entirety undoubtably experiences the tragedy of the commons - think clickbait, trolls, scams, information pollution, ads, etc. The same occurs even to a service like Wikipedia; however, much like park maintenance workers keeping parks clean, those who maintain Wikipedia are able to reduce the effect of this principle.

Basically, unless it is maintained, anything freely available for everyone to use will inevitably be spoilt.





In summary:

By no means is this an exhaustive list; in reality there are plenty more economic principles and plenty more contexts to which they can all be applied. Principles like the ones I have considered here are tools. Though these tools may be particularly suited to one particular job, that doesn't mean you can't use them in other ways. Ways that they've never been used for before. Ways that do the things no-one's ever seen before.

For tools to be useful, first you have to use them. So... use them.



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