Guest article: Economics...

As we struggle through the last exams of term, I thought that leaving the 'biology bubble' for a while could be a good idea... so I have invited Miguel Faria e Castro, a promising economics student at the faculty of Economics, Universidade Nova de Lisboa (New University of Lisbon) to bring a bit of fresh air to the blog...

When the invitation to write an article for this blog first came, I felt that anything written by an Economics student would feel a bit out of place. It happens, however (and most fortunately, in my own personal opinion) that Economic Science is not restricted to, as some people think, heavy statistical paperwork and impossible mathematical models with two thousand variables. A wide, varied field, it incorporates a lot of knowledge from other scientific subjects, namely psychology, sociology, physics – even biology!

It is not my intention to bore you with sophisticated technical terms or theories which are able to explain whether you opt for a cup of tea or a chocolate bar under the right conditions. That is why I have decided, in this brief article, to give you a first glance at what really is economic science.

Curiously, the term “Economics” comes from a very picturesque Greek expression: Oikosnomos, or, in plain English, “how to take care of your house”. Coined somewhere in the ideological turmoil of the 18^th century, it came as a brief, yet clear, reference to the founding pillar of the entire science, the concept of scarcity: How can I satisfy my endless needs with the limited resources that are available to me? This is commonly known as the fundamental problem of economics, this is the problem that more or less 6 billion people face every day, at every moment.

Everything gets more complicated when we notice that not only people have different interests and, therefore, different needs, but also different qualities and quantities of resources available to themselves. This was what Adam Smith, a late 18^th century Scottish philosopher who is commonly recognised as the first modern economist, attempted to analyse when working in his great (quite literally, three volumes of 1,000 pages each) work: The Wealth of Nations. Basically, the entire work was a defence of two fundamental economic theories, and I am almost sure you have already heard of at least one of them somewhere: The Invisible Hand, and The Division of Labour. While the former states that each individual, while attempting to prosecute his own self-interest will ultimately contribute to the society’s greater good (or, “after all, being greedy is not that bad”), the latter is based on the principle that certain countries appear to have a natural advantage on the performance of certain tasks over others, and that the entire world would gain if each country focused on what it’s good at. Another founding father of economics, the British David Ricardo would further develop this theory, by proving, with a simple mathematical example that it would be better for both countries if Portugal only produced wine and England textiles, rather than having them producing both resources. Look in wikipedia for “Comparative Advantage” and you’ll learn a neat trick with which to impress your friends (this last part sounds quite nerd, but we were actually told it by a professor).

As with every science, new theories on how to better satisfy people’s needs appeared. The so-called Classics, which I have just mentioned, tended to follow a very liberal orientation. Throughout the 19^th and 20^th centuries, economics, initially seen as a weird mixture of politics, law, philosophy and mathematics, increasingly became a matter of interest for politicians – the rise of Marxism as a political ideology only happened because Karl Marx had launched the theoretical basis for his own economic principles (usually called Marxian economics, as to avoid any embarrassing confusions). Until the 20’s, economic science focused almost exclusively on the behaviour of those who produced every day’s goods and those who bought it – Consumer and Producer Theory, the basis for what is today known as Microeconomics (it studied the individual behaviour of economic agents). In 1929, however, with the Great Depression, the Western “Civilised” World was hit, for the first time in History, with widespread inflation and unemployment. Two occurrences which, as the economists of that time conceded could barely be explained by the tools that they were using.

This is where another great mind enters. An Englishman named John Maynard Keynes – a brilliant thinker (the philosopher Bertrand Russell once said that Keynes was the most intelligent man he had ever met) and fierce investor who would publish his thoughts on what had happened during the Great Depression in the United States of America and the rest of the world. His work led to the creation of an entirely new field – macroeconomics, or the study of the aggregate behaviour of all economic agents (and now the State plays a special role…) when faced with certain circumstances and conditions. Keynes was the first to identify the fact that a phenomenon such as inflation (which is, by the way, the continuous and generalised rise in the price level or, in English, the occurrence thanks to which things are much more expensive today than they were when your parents were eighteen) could never be explained by studying what an individual consumer does or a single firm does not do. Only by studying the economy as a whole, can we grasp the real magnitude of such an event. A recurring joke about economists tells you that one of the advantages of being one is that, when you are in the unemployment line, you will at least understand why you are there. Thank Mr Keynes for enlightening you on that. But enough of history.

A common misconception is that economics only deals with money. Money is, as surprising as it may seem, a very small part of this grand show. Do you eat money? Do you drink money? Do you drive money? The answer is no – money is merely the means for you to get whatever you need. This is where we get at another important concept – the Classical Dichotomy, which basically states that real, not nominal, variable are important. What is the difference? Imagine you are a happy German with a monthly income of €5,000. Then, there’s that Polish guy who makes only €5 a day. It happens, however, that an apple in Germany costs €1,000 , while the Poles can eat them for €0,5 each. Which means that, nominally, you earn €5,000. But your real wage is 5 apples, while the Pole earns 20 apples a month. His real income is four times yours, even though you nominally earn a thousand times more. Interesting, eh?