ELEN4019
WEEK 6: Introduction to Economics
Dr Martin Bekker
{Below follow my personal recording notes – these are not required readings, and is only uploaded
as a curtesy, in case you want to follow along. Please do not distribute this in any way.}
1. Economics’ link with politics
Political Science, as you saw, generally tries to describe systems of governance, and systematically
describe their inner workings. It can be pretty dry stuff – looking at voting systems or constitutional
safeguards for the separation of powers. Important, to be sure, but dry.
Political science, then, has little to do with the practice politics – the project-management that is
government – and that is why people who study political science do not become politicians. Lawyers
tend to become politicians. Trade unionists. Sometimes military men.
Anyway, because of political science’s focus on describing, it generally does not advocate for
policies. Differently put, as an academic discipline, it is not very prescriptive (of course, adherents of
ideologies are prescriptive, they are the subject of the study, not the students themselves).
Another reason for political science’s hesitancy for prescriptive content is, I think, because there are
not many explicit assumptions that operate in the field. In fact, I’d say there is generally only one
assumption (about human nature, or how humans tend to act) that politics hold dear. It is the
statement by Lord Acton, a British politician, I think, and he said this “Power tends to corrupt, and
absolute power tends to corrupt absolutely”. In other words, the likelihood of your being corrupted
is related to how much power you are given. And this of course is why, when there are prescriptions,
they are that terms in office ought to be limited, or that power ought to be separated – i.e. that no
one should be given unlimited power.
[Correction – there are of course other assumptions that are held by communities of scholars, such
as the tendency for liberal democracies not to go to war with each other. But these are not
universally held]
Economics is different. It is, in one sense, life in motion. Yes, man (read: humans) is, as Plato said, “a
political animal”, but we are very much also an economic animal too. Plus, I would say, economics
has more to teach us about human life than does politics. For what it’s worth, I’ve spent much more
time studying politics than economics.
One example I can give you is the study of wars – if you want to understand why just about any war
is fought, the question is (at the very least) one of economics – who wants want. But wait, I’m
getting ahead of myself. Let’s take a deep breath, and dive in. Welcome to week 6.
2. Introduction to Economics
Perhaps, the first thing you need to know about economics is that it is easy to understand. One of
my favourite economists insist that 95% of economics is common sense – although it is sometimes
made to look difficult with the use of jargon (and mathematical equations, which scares a lot of
people – luckily, not you). Just like any other profession that involves technical competence –
plumbing, medicine, yes engineering – economists use words that look intimidating from the
outside, and they probably like the fact that others think they are doing difficult things.
Also, while people readily express their opinions about other topics related to the social sciences –
politics, governance, the war in the Ukraine, gay rights, racial inequality, I could go on, heck, people
have opinions on how vaccines are made when they do not grasp the very basics of pharmacology –
but most people are at least a little intimidated by economics. I’d say that few people would sit in
the hair salon or barbershop, or stand around the barbeque, and talk about the merits of importsubstitution, or the future of the Euro, or inequality in Asia, in the way that politics and sociology are
often casually discussed.
But these issues – even these exact ones I mentions just now – have a huge effect on your life and
will do so, whether you take interest in it or not. This itself is a problem – people just do not know
just how they are affected by the economy. They think that other things – politics, for example –
drive changes. To them, I remind you of the little plaque that sat on Bill Clinton’s desk while he
served as president in the US, to remind him of getting his priorities right: “it’s the economy, stupid”.
I’m not saying he had his priorities right, mind.
The other reason people might sometimes be intimidated by economics is because economists
pretend to be “more scientific” than they are. You might call it “physics envy”, the drive for social
scientist to want to sound like those in the natural sciences. But understanding the economic
doesn’t require weapons-grade math, instead, the challenge is that, in many cases – there isn’t just
one right answer to an economic problem (or to a social problem that we want to solve by economic
interventions). This means that economics comes with all sorts of caveats, exclusions, and ‘holdings
things constant’ when they talk.
Because of the unpredictability of the subjects of the field (not least because humans have their own
free will, unlike chemical elements or physical objects), economists constantly fail to predict realworld developments, even in areas on which they focus.
So, “An economist is a man who states the obvious in terms of the incomprehensible” Alfred Knopf –
that deals with the love for jargon among economists.
And “An economist is an expert who will know tomorrow why the things he predicted yesterday
didn't happen today.” Laurence J. Peter – that deals with their poor prediction powers.
Still, the point is that if economics is really important, which it is, and it cannot be left to the
economists only, which it shouldn’t, then it behoves us, ordinary people, to learn some economics,
or at least get to know the lay of the land.
That fits us well, right? As you now know by now, we approach the social sciences as a way of
developing your critical faculties, for you to better understand how the world is put together, and to
demystify the arguments in the social sciences. Some of them, at least. So our aim is to lift the hood
on the fields, not to build any engines from scratch.
3. What do people do all day
So I’m risking infuriating economists (please don’t show them this), including my wife, who is a real
economist: I’m going to say that pretty much all we need to look at to understand economics is the
first two pages of Richard Scarry’s great “What do people do all day” children’s book from 1968. You
can see that I’m the father of a toddler, yes? Let’s read it.
<perhaps you want to go to https://books4children.pl/en/what-do-people-do-all-day-specialedition-2/ click on the sample picture, and scroll right until you reach “Everyone is a worker” >
Roles, Production, Trade, Exchange (or transitions of money for goods, serves or financial assets),
Specialisation, Savings, Investment, Technological improvements, Goods and Services, Money,
Consumption, Specialisation – it’s all there, and more.
Economics: A study of people in the ordinary business of life. It enquires how he gets his income and
how he uses it. Thus, it is on the one side, a study of wealth, and on the other and more important
side, a study of people – Alfred Marsh.
4. Defining economics
What it is: Economics is the study of people and choices
What it is not: Economics not the study of money, or of getting rich, or the stock market. Nor is it a
simple machine (but if you want to see it explained as if it were a simple machine, watch Ray Dalio’s
‘The economic machine’ video of YouTube - https://www.youtube.com/watch?v=PHe0bXAIuk0)
Economics is the study of people and choices, thus:
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Economics is the government deciding about whether to spend during a recession, and
whether this will boost the overall wealth of people
Economics is a company deciding to market a new product in Gauteng or, instead, in KZN
Economics is you, deciding to work for the state or the private sector
Economics is the government, concerned about climate change, deciding whether they
should increase engine fuel efficiency requirements, or increase the cost of petrol, and
Economics is a mother deciding between food for her baby or a new hairstyle
Again: Economics is the study of people and choices
We can conduct this study at two levels:
Microeconomics – the study of individual actors. Allocations of scarce resources. Don’t have infinite
amount of. Prices, markets. Bottom-up questions. Formally: “the study of the interactions of buyers
and sellers in the markets for particular goods and services”.
Macroeconomics – the study of the economy in aggregate. Regulate, deregulate. Tax? Top down
questions. Formally: “the study of aggregates and the overall commercial output and health of
nations; includes the analysis of factors such as unemployment, inflation, economic growth and
interest rates”.
5. Assumptions
We’re finally at the discipline’s assumptions. As I said in the introduction – economics (and
economists) make predictions (and even offer recommendations) because they are rooted in
assumptions about how the world works, and how humans work. Let me give you the basic five
assumptions.
1. Scarcity – People have limited resources and unlimited wants. Is there enough gold to satisfy
everyone in the world’s desire for all the gold they could ever want? No. But this is also true
for many other things (not just gold, also goldfish!) – our needs, and certainly our desires,
are massive, maybe even infinite, but resources in our households, and on earth, are limited.
The word economist use for this is scarcity. Economics is based on the idea of scarcity – and
maybe we wouldn’t need for this field if there wasn’t a thing such as scarcity. Brief example
about caviar – scarce, not free. Labour as a resource – scarce. Water resources – becoming
scarce.
2. Cost – Everything has a cost. This is obvious for buying things. Factors go into making things,
or rendering services. From feminism we’re learned that even something like “caring” has a
cost. But we should also think about something called “opportunity cost”. So, if I go and take
a walk, that means I cannot also, at the same time, program in the lab. So I choose the one,
and “pay the price” of all the other things that I cannot to (actually, economists would say
the value of the next best alternative is the opportunity cost). Similarly, there’s a cost to
watching this video – and it’s the cost of the video you’re not watching (maybe you can say
that, even if you are paying nothing, you are paying with your time, and what else you might
have done in the time). You could be watching Indiana Jones, but instead you’re watching
me (or listening to music). So, there’s an important concept basked into this assumption Opportunity cost – the thing you are giving up to do by doing something else. Ok, so
everything has a cost (or just about everything – there are very very few free goods, like air),
and when we say “cost” we should include “opportunity cost”.
3. Incentives – people make decisions based on their own evaluation of good and bad
outcomes (we make calculations / we think about what would be best for us when we make
decisions). This also means that (as part of this assumption), humans are, at least to some
degree, rational (so that they can do calculations about what will bring about good things,
and that they do want good things to happen to them). Incentives are “internal motivators”
that explain people’s choices. Why are you listening to this recording – because of incentives
– you want to do well in this class (and maybe, fingers crossed, you actually even find some
of this interesting). But you will not listen to this if there were no incentives. We can find
incentives for anything you ever do – what you do is responding to incentives (be they
instincts and natural drives, desires or calculations about desired outcomes). Thereby,
economists (in government) adjust government policies based on theories, supported by
data, and led by an understanding of incentives. Having the right incentives are key, but they
can be very hard to figure out. Example: studying for an exam. Example: the social grant in
South Africa. Example: baboons in the Cape. The minor point: when you mess up the
incentives, the policy is not going to work. The main point: economists assume that we
respond to incentives.
4. Things (goods and services) we use (consume) have to be made (produced). I think this
needs less explanation.
5. Efficiency is gained through specialisation (The Adam Smith Example: 1 worker 20 pins, 10
workers 48 000 pins in a day).
Those are the assumptions. Now, if these assumptions are true, then we need a way to evaluate our
costs, to get the most from your resources – and that’s economics. That’s it. Done. The end. (Insert
smiley face here).
6. Factors of production
Just as there are limited assumptions, from which you can build a picture of the world (as
economists do), there are also limited ‘factors of production’. In fact, there are only four.
“Factors of production” is again just a strange way to say “the things that go into making
something”. And what are the “somethings”, well they might be a good (the clothes you are wearing
right now) or a service (I’m teaching you right now, that is a service. If I fixed cars, or have haircuts,
that would be service). So the point here: if you want outputs – you need inputs.
The four types of inputs, or factors of production are:
land (natural resources – include water, air, energy), labour, capital (tools, machines, so on), and
entrepreneurship (skills to combine the first three factors, think of it as knowledge, or expertise,
more than ‘risk taking’).
We might also say that, in the case of good, the outputs can either be capital good (tools to make
other goods), or consumption goods (things we will use).
[Sidenote: some would say that apart from goods and services, there another class of things –
financial assets, but I would leave that debate aside. Money, by the way, is (for our purposes) merely
a symbol of what others in your society owe you, or your claim on particular amounts of society’s
resources.]
Now you’re got a working definition of the field, its key assumptions, and the factors of production.
We’re making good progress. Let’s take a look how thing have come to be the way they are – let’s
take a look at the developing of the ‘mode of production’ or the history of economic systems.
7. History of economic systems
For a very accessible and well-written introduction to the history of economics, I’d say go for pages
47-106 in “Economics, a user’s guide” by Ha-Joon Chang.
My own notes:
Feudalism
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When it refers to Europe, it talks about the years 1000 and 1300, but it can also refer to the
system of land tenure elsewhere (even here!). Consider how Setswana tribes operated, and
note the parallels. Also, don’t be fooled, there are several remnants of Feudalism in Europe
today (The “Abolition of the feudal tenure act” - Scotland 2000 - and I think the island of
Sark, which is a British island, is still a fief.)
So, in simple terms, under Feudalism, most land belonged to a royal of sorts – like a king (or
a “kgosi”, say).
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Next, the king parcels out lands to prominent people – “lords”, “dikgosana” (this was in
exchange for military and political support). The lords rule AND give justice (so no separation
of powers yet). Strong parallels everywhere.
Maybe these lords parcelled out land to lesser lords (so that there might be a few layers or
levels or royalty, again, in the Setswana equivalent you might have a kgosi, then dikrosana,
then lower levels, so a kgotla, a kgoro, a kutle, each being smaller unit).
The point is, at the end, non-nobility (ordinary people, or “peasants”, in Europe) is assigned
land (which was called a “fief” in England, just good old lefatshe in Setswana). People get a
measure of land tenure, by virtue of a chain that links to royalty.
Peasants had to return “labour service” (which is also called ‘rent’) or some form of tribute.
Again, while the details vary wildly, some version of this operated pretty much everywhere,
in some form of another (the Mafisa-system is one example of how this worked in Setswana
communities – sadly, we do not have time to go into that here). The point is ordinary people
were required to pay taxes or tribute or coinage or a percentage of agricultural produce (this
last example being the most common).
Three reasons why this faded in Europe (keeping things very general)
1. Kings grew less reliant on their lords to provide soldiers (turning to professional paid soldiers)
2. Labour became more valuable. Kings lost control of the middle and lower ranks. Pandemic
(the black death, in the case of Europe) meant that there were fewer workers.
3. Land became less valuable. Urbanisation and the rise of a middle class – people began moving
off the land, and into towns and cities. So moving from 99% rural to 80% rural. This was a big
change.
Permitting some vast simplification, our next stop is Mercantilism (loosely, from the 1400s to
the late 1700s). With some people in Western Europe (especially France and Britain) now loosed
from their serfdom (or not working the lands for their lords), relocating to towns and cities,
some of these new urbanites (but we’re talking a think slither of the population), moved beyond
mere trading and banking, and into different kinds of investing.
• Now trade was going on everywhere (here as well, although ours is badly documented.
Again, I’d love to tell you all the details, but now’s not the time). Still, the idea of
borrowing money to make something, sell it, pay the money back and keep the profit,
especially related to international trade, well that really took root in China, the Middle
East, and the real heart of it was in Western Europe.
• To gloss, in one sentence, over something that can easily be (and sometimes is) a
lifetime of study, Mercantilism is an economic policy that is designed to maximize the
exports and minimize the imports for an economy, promoting imperialism, colonialism,
tariffs and subsidies on traded goods to achieve that goal.
• One of the things to come out of it was the invention of the joint-stock company (in
England). Here, the aim was to raise more money, spread the risk – allowing for greater
international trade (and killing and enslaving of people not just locally, but everywhere).
Some people got very rich, yo.
• Let me explain this better – let’s say that it's really bad if you lose a boat that you put all
your money in (as a rich investor, right?) – but if you lost one-tenth of ten boats, well,
that's not so bad. Your risk is managed. This is but one example of the inventions at the
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time that led to the development of a middle class (a very tiny small elite), more
migration to cities and another exit from agriculture (due to jobs in towns).
Since I’m oversimplifying so wildly here, I might add that in England there was a civil war
– and among the outcomes were more freedom to ordinary people, and less powers to
the king and nobility (including the removal of some complicated licences, royal
monopolies, so on). But there were many other historical changes (that, given time, we
can link to trade and technological developments), leading to more efficient agriculture,
, more food, better nutrition, more products, greater wealth.
{If moved this up, don’t be confused} There are also other specific historically processes
that took place in Britain, such as the ‘process of enclosure’ whereby landlords
'reclaimed' and privatised fields that for centuries had been held in common by multiple
tenants (this increased agricultural productivity (and impoverishing tenant farmers, who
lost their livelihoods and now had to work a lot harder, as labour, to make ends meet),
and was also great (awful) training for the colonial process. This has the effect of
increasing productivity, because taking common lands and putting it into private
ownership meant that people had in today’s language, to really hustle for their
livelihoods.
Some countries now moved from 80% rural to roughly 50% rural, in some cases less.
Now, when factories started up, there were plenty of workers around, in concentrated
areas.
And that brings us up to the start of capitalism
Industrial capitalism was something altogether different, in scale and in practice – that just
Merchants finding new ways to make money.
We should also acknowledge that the industrial revolution took place – that is the transition to new
manufacturing processes – which saw the emergence of factories, from about 1760 onwards. This
transition included going from hand production methods to machines, new chemical manufacturing
and iron production processes, the increasing use of steam power and water power, the
development of machine tools and the rise of the mechanized factory system. This meant that
efficiency suddenly skyrocketed, and so did the amount of goods available (at much, much cheaper
prices). The Industrial Revolution also led to an unprecedented rise in the rate of population growth.
[Sidenote: Of course, capitalism hit our (SA) shores with via the process of colonisation. It’s
interesting to think that colonisers were generally sent as employees – Consider the roles of the
Dutch East Indian Company, and later the British Southern African company. Anyway, those are the
roots of capitalism. Since then, we’ve seen capitalism merge into modern capitalism (the nature of
which is still the topic of hot debate) but it’s good enough for us to have gotten a feel for the
changes so far.]
Can we have a definition of industrial capitalism? Ok fine – Here’s Joyce Appleby: “An economic
system that relies on investment of capital in machines and technology that are used to increase
production of marketable goods". And modern capitalism? Yes! Here’s Wikipedia (no kidding – do as
I say, not as I do): “An economic system based on the private ownership of the means of production
and their operation for profit”.
We should also realise that capitalism is an economic system, but it's also a cultural system – let me
explain. Capitalism is a cultural system, rooted in the need for private investors to turn a profit. So
the real change (away from the feudal days) was not just in how production changed, but how
thinking had to change! Those who became the winners of the game has to identify opportunities,
take risks, invest in unseen things, and constantly innovate (to beat the competition). Another
reframing that was part of this new way of thinking was that people were actually 'consumers' and
producers', and that this was/is (to the capitalist way of seeing the world) a good thing. If people
desire to consume, there is a market to produce things, and these are the gears of economic growth.
{there’s an audio break around here}
Now we said that capitalism brought unprecedented development and wealth to the world. But, of
course, it was spurred by the owners of the factories and industry findings ways to maximise profits,
to extract the maximum labour from workers – so we have to admit some massive downsides - long
hours (work schedules typically sixteen hours per day, six days per week), low wages, miserable
working conditions, child labour (only in 1933 did Britain adopt legislation restricting the use of
children under 14 in employment).
[Sidenote: The International Labour Organisation estimate roughly 100 million children aged 5-11
are still required to work in a way that is child labour in the word today.]
Our point – capitalism took hold, but working conditions were awful. Hours were extremely long. Th
work could be dangerous. Children had to work. There were no holidays and little pay. One way in
which workers responded to these conditions was to organise into labour unions. Another response,
and related to this, was in the realm of ideas – queue socialism.
Socialism started in France – both revolutionary and utopian socialism. Guys like Comte de Saint
Simon and Charles Fourier (not related to Fast Fourier transform, don’t ask). They realised also that
we weren't always rational actors, but also that our economic systems are things that have been
made – not natural – and so they can be (and ought to be ) changed. There was a chap named Blaqui
who had the idea of communism (and, I think, coined the term), criticising capitalism for its inherent
exploitation. And then we get a minor figure you probably haven't heard about - it's Kate Moss, I
mean Karl Marx.
Marx was a philosopher and historian (but also one of the great classical economists, along with
Adam Smith, Ricardo, and Malthus. So his great work, Das Kapital, sets out to explain the world of
the 19th century in historical and philosophical terms.
Marx's thinking was deep and dense, so we'll look at a few of his ideas, but not all.
First, he admired capitalism for what it was able to achieve – the development, the wealth (for
some). But he also saw the inequality, and the exploitation – and had the idea that capitalism will
pass away, just as feudalism and mercantilism before. And that the thing that it will give way to will
be mad-made, like the other systems before. Moreover, we ought to make the new system better
that previous systems, it must be fair to ordinary people – in his own words – “philosophers have
hitherto only interpreted the world in various ways; the point is to change it".
So, let’s recap another of his ideas – class struggle. Marx believed classes (that is, the very rich, on
the one side, and ordinary people, on the other) don't only struggle to make history, but the struggle
is what makes classes into themselves. Through conflict, classes develop a sense of who they are,
who their enemies are, and without this conflict, there is no 'class consciousness".
Classes – as a reminder – is the idea of economic communities, and is understood as essentially the
capitalists (the very rich) who owns most of the factors of production (land and capital), and the
workers (how just have their labour to sell). Thus, there is a tension, a “struggle” (this how Marx
phrased it) between capitalists, who want labour at the lowest possible price (i.e. to exploit workers
to the maximum, so they themselves can maximise the outputs of their factories and thus for their
own profits), while labourers wanted to be paid as much as possible, under great working
conditions, for their work.
Under this frame of reference, production – by which we mean the work of making things and
providing services – is what gives life meaning (to Marx). Marx also believed, that, by nature, we
humans are social animals, that want to work together, collaborate, and that we are more efficient
when we do (and when we share resources).
Adding all these factors together, it makes sense that Marx's criticism of capitalism is that it replaces
this egalitarian collaboration with competition, and conflict – and thus that capitalism is not natural
at all, and of course that, in the long run, that it is bad for people (of course, today, we add that it is
bad for the environment).
Here lies the rub – just as we cannot but take capitalism very seriously, this is why we should take
Marxism seriously today (despite how badly it has been implemented in every single case): The idea
of protecting the collective interest remains powerful and important.
Finally, as I already intimated, Marx believed that just as Capitalism replaced Feudalism (via
Mercantilism), so Socialism will replace capitalism, globally. Now, as you well know, that hasn't
happened. We see today that capitalism has won out, so to speak (think about Fukuyama and 'the
end of history', right?). Many people will say that the benefits from continued innovation imply that
capitalism's victory is a good thing. I mean, not Greta Thunberg, I mean Patrice Motsepe.
Finally though on this development (for now). Where would we say we are today? Well, we (most
countries) generally use socialist principles, to regulate free markets. We see progressive taxation,
subsidised education and, if we are lucky, state healthcare.
8. Positive and Normative statements
We said that economists are prone to slip into not only predictions, where famously, they provide
respectability to astrologers – but that they also make policy recommendations. Our national
treasury, for example, is staffed by several ([I’m legally obliged to say] very smart) economists.
Did you say they make recommendations? Yes, they do, and this, of course means that they trade in
evaluative statements, or, in language we have used before in our course, “oughts”. When
Economists talk about this, they distinguish between what they call positive statements and
normative statements. We are not phased, since we’ve seen this movie before: they are just the “is”
and “ought” we’ve grown familiar with over the past month or so.
When thinking whether a statement is normative or not, it is handy to remember how we broke
down a moral claim into its sub-components (using the principles we learned from the introduction
to logic). We said that there is at least one factual premise and one moral (or normative) premise
lurking in the background. One consideration that you might want to add is whether a statement can
be tested for veracity. If it can be tested, it is positive, if it cannot be tested, well, that’s opinion or
ideology speaking, in other words, it’s normative.
Let me show you.
So, what would you say about each one – positive or normative?
- paying people who aren’t working, even though they could work, is wrong and unfair N
- programmes like welfare reduce the incentive for people to work P
- Raising taxes on the wealthy to pay for government programs grows the economy P
- Raising taxes on the wealthy slows economics growth
P
- The government should raise taxes on the wealthy to pay for helping the poor N
- If the government spends money during a recession, this will boost the overall wealth of people P
- A company should launch their new product in Gauteng , because it was more people N
- It is better for the poor if the state invests in the private sector than in the public sector P
- The government should increase requirements for fuel efficiency of engines if they want to fight
climate change
N
{That’s it for now. Good for you for hanging in there.}
9. Bonus: Three basic definition recaps
Economics is the study of is the study of people and choices, of how individuals and societies choose
to allocate scarce resources, why they choose to allocate them that way, and the consequences of
those decisions.
Scarcity is sometimes considered the basic problem of economics. Resources are scarce because we
live in a world in which humans’ wants are infinite but the land, labour, and capital required to
satisfy those wants are limited. This conflict between society’s unlimited wants and our limited
resources means choices must be made when deciding how to allocate scarce resources.
Incentives are the rewards or punishments associated with a possible action; agents make decisions
based on incentives. This implies a measure of rational decision making , whereby an economic
agent is “rational” if they use all available information to choose an action that makes them as well
off as possible; economic models tend to assume that agents are rational.