LIFE IS a divine gift to us and so are other conditions that help us live it. When we are born, the life span, whatever it is, is given and is exogenous, though unknown. The family, the place, the surroundings and the socio-economic conditions with which we get linked at the time of our birth are also given and, as such, are exogenous, but known. Much, therefore, depends on how best we live our lives, given these exogenous (both unknown and known) factors. In fact, living life is more of an economic problem rather than biological, in the usual sense of scarcity and allocation. The word economy comes from the Greek word for ‘one who manages a household’. In fact, households and economic systems have much in common.
Both of these are guided by ten basic principles. These are briefly mentioned below:
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It is about the allocation of scare resources;
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Most of the households and economic system quite often face many tradeoffs;
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The concept of opportunity cost is also important. Its basic connotation is that the cost of something is what you give up to get it. This exercise is always there, no matter what you do. It differs from money and real cost. It arises from tradeoffs in the sense that making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of some action is not very obvious as it might first appear. In fact, it is concealed and is not highly visible;
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We must also see how to use marginal reasoning when making decisions. In fact, rational people think at the margin. Marginal changes are small incremental adjustments to a plan of action;
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We must also consider how incentives affect people’s behaviour because rational agents respond to incentives. Decisions are made by comparing costs and benefits. Their behaviour may change when costs and benefits change;
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We must also see why trade among people or nations can be good for everyone. This falls in the area of macro economics.
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We must also discuss why markets are a good way to organise an economic activity. In this context, different markets are inter-linked either through income or prices or both. An economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods (tangible) and services (intangible). It is also true that when the markets fail due to several reasons, governments can sometimes eliminate the deformities and improve the market outcomes;
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We must also know how the whole economy functions? In other words, we must also learn what determines some basic trends in the economy (like those of trade cycles, economic growth and equity indices, recession and upheavals in the overall economy). All these issues also fall in the periphery of macroeconomics. We must not forget that the overall standard of living or the well-being of the society depends on its ability to produce the required goods and services. The crucial point in this context is the productivity: the quantity of goods and services produced from each hour of a worker’s time;
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We must also focus our attention on the fact that prices rise when the supply of money increases. Supply of money equals the quantity of money multiplied by the velocity of circulation of money. In other words, we must bother about what is termed as the inflationary pressure, as happened all over the world during 2008, which continues even now in many countries.
It should also be remembered that society faces a short-run tradeoff between inflation and unemployment. Higher is the inflation rate, higher becomes the unemployment rate. This problem has to be tackled effectively through monetary and fiscal policies. This is well shown by the Phillips curve.
The above principles surely give us a taste of what economics is all about. As students of economics, we must master these insights, but there is one serious constraint that is generated by the ‘role of the state’, which is considered as an ‘exogenous’ variable in the so-called conventional economics. But when we enter in the area of the ‘New Political Economy’, this variable becomes an ‘endogenous’ variable. It is then that the economic prescriptions as recommended by the economists become policy-oriented and percepts of economics become fully applicable.
But despite the constraint as mentioned above, we may conclude this brief write-up by saying that there is an economic way of thinking and thus, an economic way of life, which is not only scientifically sound in terms of association-causation, fallacy of composition and ceteris paribus assumptions but also religiously truthful in terms of standard economic theories, prescriptions and predictions that determine our individual and collective behaviour in different circumstances and scenarios to make us happy and to place us in that blissful state for which all humanity always aspires.
We must also be aware of the following:
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See how economists apply the methods of science;
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Consider how assumptions and models can shed light in the world;
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Learn two simple models: The Circular Flow and the Production Possibility Frontier
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Learn the difference between positive (what it is?) and normative (what it should be?) economics; -
Examine the role of economists in policy formulation; and
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Consider why economists sometimes disagree with one another.
It is heartening to note that over the years, economics has gone beyond its conventional frontiers. It is now a universal and infinite science.
