Economy

An economy (from Greek oikonomia "management of a household") is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given country.

For example, the `creator economy`_, `gig economy`_.

Production is any activity that creates value.

Contents

1   Substance

One classical breakdown of economic activity three sectors:

  1. Primary - Involves the retrieval and production of raw materials, such as corn, coal, wood, and iron.

2   Production

Everything in existence, at least initially, has to be either grown or mined.

2.1   Mining

Adam Smith wrote this description in The Wealth of Nations:

Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater part of the people who engage in them, there is none perhaps more perfectly ruinous than the search after new … mines. …. Projects of mining, instead of replacing the capital employed in them, …. commonly absorb both capital and profit. (Smith 1976 [1776], p. 562)

3   Growth

The two major contributors to the growth of an economy are technology and trade_. (And population growth/immigration?)

An individual laborer is more productive when he or she can more efficiently turn resources into valuable goods and services.

Growing economies turn less into more faster.

There are only a handful of ways to increase real productivity:

4   Political economy

Examples:

5   Study

Economics is the study of how society allocates its scarce resources. Economics is a branch of social science.

`David Friedman`_ likes to define economics as "the approach to understanding human behavior which starts from the assumption that individuals have objectives and tend to choose the correct way to achieve them". [3] Economics assumes individuals have objectives. [3] This definition makes me think economics reduces to `game theory`_.

5.1   Microeconomics

Microeconomics is the study of the behavior of households and firms, whose collective decisions determine how resources are allocated in a free market economy

Microeconomics uses models which are a simplified representation of reality. They can be tested empirically using real world data. These models make a number of simplifying assumptions from which it is possible to deduce how individuals and firms are expected to behave. This may include the idea that all individuals behave in an economically rational manner, that information is widely and listlessly available and that prices adjust quickly. [4]

5.2   Macroeconomics

Macroeconomics is ...

5.3   Cryptoeconomics

Cryptoeconomics is the study of economic interaction in adversarial environments. Cryptoeconomics combines cryptography and economics to create robust decentralized peer-to-peer networks. Satoshi Nakamoto created the field when he created Bitcoin in 2009. (Not sure that's true.)

5.4   Behavioral economics

Behavioral economics was founded by Daniel Kahneman and Amon Tversky. Additional major work was done by Richard Thaler, for which he was awarded the Nobel Prize in Economics Science in 2017.

Hallmark anomalies include loss aversion, mental accounting, endowment affect, availability bias. Few are new, and show up as ancient wisdom. Thus behavioral economics is a sort of renaissance. [2]

Journal of Political Economy, essay on Behavioral Economics. Nearly got fully underway at the University of Chicago 100 years ago but didn't catch on. UChicago House journal were celebrating their 125st anniversary. They asked faculty member to write short essays on their fields. One of the articles ,in 1918, by John Maurice Clark he wrote the economist should integrate psychology rather than coming up with their own. Economic was behavioral historically. Smith and Keynes were. Keynes, in the general theory, wrote a chapter on it. Until WWII, economics was implicitly behavioral. Then were was a mathematical revolution led by Paul Samuelson and Kenneth Arrow. Samuelson was UChicago grad, thesis wrote "foundations of economic analysis". Starting with that economists got started formalizing economics. Easiest way to do that is to describe behavior as an optimization problem. [2]

6   Properties

6.1   Distribution of wealth

Economists use two main metrics to compare the wealth distribution of economics: the Lorenz curve and the Gini coefficient.

The Lorenz curve is a graph showing the proportion of overall icnome or wealth assumed by the bottom x% of people. If the wealth was distributed equally, the graph would show a 45 degree line. The amount the curve bends below the 45 degree line shows the extent of wealth inequality.

The Gini coefficient quantities the difference in equality between two economies. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality where everyone has the same income, and 1 corresponds with perfect inequality where one person has all the income and every else has zero income. The United States has a Gini coefficient of 0.41.


Gini Coefficient
A measure of inequality of a distribution. A Gini coefficient of 0 corresponds to precise equality whereas a Gini coefficient of 1 corresponds to a state of total inequality.

6.2   Economic freedom

Economic freedom is a measure of how easy it is for members of a society to participate in the economy. It has a number of factors, such as how easy it is to start a business, whether property rights are enforced, free trade with other nations, regulation of labor and business, and stability of currency.

Economic freedom correlates with a number of positive outcomes in society, for instance, literacy, life expectancy, environmental protection, and corruption.

6.3   Economic mobility

Economic mobility is the ability of an individual, family or some other group to improve (or lower) their economic status -- usually measured in income.

6.4   Size

The size of an economy is often measured by gross domestic product.

6.4.1   Gross domestic product

Gross domestic product is a measure of the total goods and services produced in a country which is then divided by the country's population.

GDP has some issues. For example, GDP goes up if pollution increases because then the pollution needs to be cleaned. Additionally, GDP goes down if you marry your housekeeper, because the paid labor becomes unpaid.

The "banking problem" refers to the problem of how to account for banking activities in GDP. In the past, this only included fees, but recently was split into financial intermediation and risk taking.


GDP per capita measures average income, but that is not the same as the disposable income.

Disposable income is the amount of wages or salaries, profit, rent, interest and transfer payments from the government (such as unemployment or disability benefits) or from others (for example, gifts) received over a given period such as a year, minus any transfers the individual made to others (including taxes paid to the government).

Disposable income is thought to be a good measure of living standards because it is the maximum amount of food, housing, clothing and other goods and services that the person can buy without having to borrow—that is, without going into debt or selling possessions.

Disposable income is an imperfect measure of well-being. It leaves out:

  • The quality of our social and physical environment such as friendships and clean air.
  • The amount of free time we have to relax or spend time with friends and family.
  • Goods and services that we do not buy, such as healthcare and education, if they are provided by a government.
  • Goods and services that are produced within the household, such as meals or childcare (predominantly provided by women).

When we’re part of a group of people (a nation for example, or an ethnic group) is the average disposable income a good measure of how well off the group is? Consider a group in which each person initially has a disposable income of $5,000 a month, and imagine that, with no change in prices, income has risen for every individual in the group. Then we would say that average or typical wellbeing had risen.

But now think about a different comparison. In a second group, the monthly disposable income of half the people is $10,000. The other half has just $500 to spend every month. The average income in the second group ($5,250) is higher than in the first (which was $5,000 before incomes rose). But would we say that the second group’s wellbeing is greater than that of the first group, in which everyone has $5,000 a month? The additional income in the second group is unlikely to matter much to the rich people, but the poor half would think their poverty was a serious deprivation.

Absolute income matters for wellbeing, but we also know from research that people care about their relative position in the income distribution. They report lower wellbeing if they find they earn less than others in their group.

GDP includes the goods and services produced by the government, such as schooling, national defence, and law enforcement. They contribute to wellbeing but are not included in disposable income. In this respect, GDP per capita is a better measure of living standards than disposable income.

But government services are difficult to value, even more so than services such as haircuts and yoga lessons. For goods and services that people buy we take their price as a rough measure of their value (if you valued the haircut less than its price, you would have just let your hair grow). But the goods and services produced by government are typically not sold, and the only measure of their value to us is how much it cost to produce them.

The gaps between what we mean by wellbeing, and what GDP per capita measures, should make us cautious about the literal use of GDP per capita to measure how well off people are. But when the changes over time or differences among countries in this indicator are great, GDP per capita is undoubtedly telling us something about the differences in the availability of goods and services.

7   History

Roughly, economic history can be divided into four parts: mercantilism, physiocrats, classical, and neoclassical.

https://en.wikipedia.org/wiki/Schools_of_economic_thought

7.1   Agriculture

The invention of agriculture shifted scarcity from food to land. Industrialization in turn, shifted scarcity from land to capital. Now digital technologies are shifting scarcity from capital to attention.

7.2   Temple economy

A temple economy is ..

7.3   Mercantilism

Mercantilism was an economic system, dominant between 1500 and 1750, that promoted government regulation in order to build up state power and weaken foreign adversaries. (Mercantilism essentially believed trade was a `zero-sum game`_.) Universal features include accumulating bullion by running a trade surplus with other states, and high tariffs, especially on manufactured goods.

The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain. Smith saw the English merchant Thomas Mun (1571 -- 1641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Foreign Trade (1664), which Smith considered the archetype or manifesto of the movement.

Mercantilism rests on three assumptions:

  1. There is a finite amount of wealth in the world
  2. A nation can only grow rich at the expense of others
  3. Therefore, a nation should try to achieve and maintain a favorable trade balance, exporting more than it imports

Colonies help with this.

The Austrian lawyer and schollar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantislims comprehensively:

  • That every inch of a country's soil be utilized for agriculture, mining, or manufacturing.
  • All raw materials found in a country should be used in domestic manufacture, since finished goods have a higher value than raw materials
  • A large, working population should be encouraged
  • All export of gold and silver should be prohibited and all domestic money be kept in circulation
  • That all imports of foreign goods should be discouraged as much as possible
  • Where certain import are indispensable they should be obtained first hand, in exchange for other domestic good instead of gold and silver
  • As much as possible, imports should be confined to raw materials that can be finished
  • These opportunities should be constantly sought for selling a country's surplus to manufactures to foreigners for gold and silver
  • That no important should be allow if such goods are sufficient supplied at home

7.4   Classicial economics

Main ideas:.

  • Price reveals value
  • No class struggle. Rent is monopoly power.

7.6   Game Theory

John Nash proved mathematically the 1755 theory of Swiss philosopher Jean-Jacques Rousseau that when parties collaborate, the overall size of the pie almost always expands, so each party gets more than it could get alone. For example, a `stag hunt`_. Today, smart competitors collaborate whenever they can.

8   Notable contributors

8.1   Adam Smith

Adam Smith was a Scottish philosopher and economist. He is often credited as the father of modern economics. Smith is most famous for publishing "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776).

Smith used the term "free market" to refer to a market free from rent, not government intervention.

Adam Smith thought of Moral Sentiment as his masterpiece, and the Wealth of nation as an explanation of some obvious facets of corn pricing, labor, and trade.

8.2   David Ricardo

David Ricardo was a British political economist. He made his fortune as a stockbroker betting on the `Battle of Waterloo`_, and later became a Member of Parliament_. He is sometimes ranked as the second as the second most influential economic thinker of the eighteenth century, behind Adam Smith.

Ricardo became interested in economics after reading The Wealth of Nations by Adam Smith in 1796. He wrote his first economics article at age 37.

Contributions:

  • His most famous work is his "Principle of Political Economy and Taxation" in which he advanced a `labor theory of value`_ and the Law of Rent.
  • He also developed the idea of comparative advantage. Ricard recognized that comparative advantage only applies when certain conditions are met.

8.3   Ronald Coase

Ronald Coase was a British economist.

Contributions:

8.4   Karl Marx

Karl Marx was a German philosopher. He advocated for communism_.

8.5   John Maynard Keynes

John Maynard Keynes was an English economist. Keynes contributed to macroeconomics.

9   Classification

Economies are classified by how they are organized. See economic system.

9.1   Barter economy

Barter economies are cumbersome precisely because they require this double coincidence of wants before any bilateral trade proceeds. For this reason, throughout history, whenever the number of transactions (and ‘assets’) grew in number, one of those assets soon emerged as a numéraire – a basic form of money that is. Once the numéraire acquired currency, suddenly the prerequisite of some double coincidence of wants vanished and people could trade anything for the numéraire–asset which they could then use in order to buy whatever else tickled their fancy. In short, as economies grew in sophistication, they ‘monetised’ and ceased functioning on the basis of barter. This is why never in history have we witnessed truly sophisticated barter economies. [1]

The idea of an equilibrium sprang up, like most scientific ideas, from physics. Suppose that you see a rock rolling down a mountain. Can you predict its path? Or, equivalently, can you predict its final resting point? If you can, then you have a pretty decent idea of its actual path. Well, this ‘resting point’ is what we mean by equilibrium: the point at which some ‘system’ will reach a resting place; a place in which there will be no tendency to carry on ‘moving’. [1]

To complicate things a little, both in Nature and in some economy, an equilibrium can be either static or dynamic. A static equilibrium means no change. The ‘system’ under study is in complete standstill. Like the rock that stopped rolling. A dynamic equilibrium, by contrast, entails movement but of the sort that is eminently predictable, periodic. For example, the Earth’s orbit around the Sun (while neither the Earth or the Sun are stationary, the Earth’s orbit is). Or the demand for toys which, predictably, peaks before Christmas, every Christmas. [1]

10   Exchange rates

If a good exchanges at a rate of X:Y in one location and you want to sell it for a small profit, you can sell it at X+1:Y+1 for a small profit. If you sell it for X+2:Y+2 you'll make even more- the higher the added item, the more profit you'll make.

Say we do X+1:Y+1. In order to make a profit as the person running the exchange, you can sell for X+1:Y+1 and buy at 2X:2Y+1 to make 1Y in profit per 2X exchanged. For example, say you can exchange 8 iron ores exchange for 9 iron ingots and a foreign city can only exchange 8 iron ores for 8 iron ingots. If you wanted to make this exchange available to them and still make a profit, you could sell 10 iron ingots for 9 iron ores (giving the buyer 1 profit, and yourself 1/8 ingot in profit). Then to automate this exchange, you can let other traders who access your original exchange buy 18 iron ores for 17 ingots, giving them a 1/8 ingot profit. Then every time 18 iron ores are both bought and sold, you make 1/8 ingot profit for no labor.

If you wanted to split the value in half so the buyer and seller get 1 ingot each, you could sell 17 ingots for 16 ores (1 ingot profit) and sell 32 ores for 35 ingots (1 ingot profit for trader, you keep 1 ingot profit). So basically, after 32 ores are bought and sold, ingot buyer get 2 ingots in profit, broker gets 1 ingot, and ingot seller get 1 ingot. However, this situation is less desirable since ores are less liquid and the higher price to to the ingot buyer will decrease demand.

Naunet:

Sell 1 iron ingot for 16 coal ore. Sell 1 iron ingot for 16 coal ore. Sell 24 coal ore for 2 iron ingot.

Sell 1 iron ingot for 15 coal ore. Sell 1 iron ingot for 15 coal ore. Sell 29 coal ore for 2 iron ingot. -> 1 coal profit

9 iron ore : 10 iron ingots 9 iron ore = 2.25 diamonds = 128 + 16 (144) coal 14.4. coal ore : 1 iron ingot

Nanete:

Sell 1 iron ingot for 13 coal. Sell 1 iron ingot for 13 coal. Sell 25 coal for 1 iron ingot. (1 coal profit)

Tjikko:

Sell 11 coal ore for 1 iron ingot. Sell 1 iron ingot or 12 coal.

Is this good for Aurora? Start with 24 coal ore. Sell for 2 iron ingot in Tjikko. Sell for 25 coal in Aurora. (1 coal profit.)

Is this good for Concordia? Start with 2 iron ingots. Sell for 25 coal in Aurora. Sell for 2 iron ingots in Concordia. (1 coal profit.)

Sell 16 coal ore 1 diamond.

Trader in Tjikko starts with 10 iron ingot. Sells for 240 coal in Naunet. Sells for 20 iron ingot in Tjikko.

Since in either scenario the broker profits on volume, the broker should choose a rate to maximize trade.

11   Further reading

12   References

[1](1, 2, 3) http://blogs.valvesoftware.com/economics/arbitrage-and-equilibrium-in-the-team-fortress-2-economy/
[2](1, 2) Stephen Dubner, Richard Thaler. July 11, 2018. Freakonomics Radio. People aren't Dumb, the World is Hard.
[3](1, 2) David Friedman. 1984. The Economics of War. http://www.daviddfriedman.com/Academic/economic_of_war/the_economics_of_war.htm
[4]Michael Ball. The Economics of Commerical Property Markets.

For trade to happen we need two things:

  1. Scarcity. It must be hard, or impossible to satisfy everyone's wants.
  2. It must be cheaper to trade than to gather material's alone

Second-level:

  1. Comparative advantage/Specialization. Otherwise each society can provide for itself. (This is possible via geography, capital.)
  2. Cheap logistics. Cost of finding someone to trade with and meeting with them cannot be higher than the cost of gathering that good yourself.

static/images/expenditure_per_person_in_the_UK_1688_and_2014.jpg

Wage appreciation, or lack thereof, does not tell us everything we need to know about our standard of living. Wages often fail to capture changes that come from competition and technological breakthroughs.

One—much underutilized—way in which we can get a sense of the improvements in our standard of living is to look at the number of hours an average employee needs to work in order to buy commonly used items. When cost is measured in terms of hours worked, almost everything in 2015 is “on sale” when compared to the same product in 1979.

For example, Sears sold a 1.3 cubic foot microwave for $400. In 2015, Walmart sold the same size microwave for $60. In 1979, an average worker earned $6.57 an hour (61 hours of labor). In 2015, the average worker earns $21.08 an hour (3 hours of labor).

Another example: In 1979, Sear sold a 13 cubic foot refrigerator for $490 (75 hours of labor). In 2015, Walmart sold the same size refrigerator for $747 (36 hours of labor).

Ford start mass-producing the Model T in 1913. The price was $550. At an average hourly wage of $0.20, it would have taken 2,750 hours of work to buy a Model T in 1913. In 2013, Fiesta was Ford's most basic car. It sold for about $14,000 in 2013 dollars. At an average hourly wage of $28, it would have taken about 500 hours of work to buy a new Fiesta in 2013.


MBA applications rise when observed market opportunities fall and fall when expected market opportunities rise (because it's less important).