Why Do We Need Economics at All?
Or, why economic thinking took centuries longer than natural sciences to take off
👋 Hey there! My name is Abhishek. Welcome to a new edition of The Sunday Wisdom! This is the best way to learn new things with the least amount of effort.
It’s a collection of weekly explorations and inquiries into many curiosities, such as business, human nature, society, and life’s big questions. My primary goal is to give you some new perspective to think about things.
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I need to make a confession.
When I started writing online a couple of years back, I made it a point to write only for myself. If anyone reads what I write, and finds it useful, that’s a bonus — but that’s never the main goal.
I like the idea of having an audience because it makes me accountable. One of the main reasons I decided to turn on the paywall a year back was to make sure I deliver quality content. The stakes are higher when people are paying to read you.
I make it a point to read on a variety of topics. More than treating this hobby (which takes upto 2–3 hours of my day) as a means to an end, i.e., learning something new, I’m trying to cultivate this as a hobby of reading for its own sake. It’s not utilitarian but, I’m beginning to realise, it is much more fulfilling this way.
The other day someone asked why do I make it a point to read every week. I didn’t have a good answer at that moment (I just said that I like the idea of being a person who is wellread; which is true, but isn’t the complete truth). After giving it some more thought, I realised that a big part of the reason I read is because I have a small audience, some of them paying, to whom I have to deliver every week. And I cannot deliver, i.e. write good stuff, if I don’t read, or don’t think.
Mind you…I still write for myself, but having an audience, even though tiny, helps me improve my craft every week, keeps me motivated to write every week, and gives me the opportunity to focus on continuous learning every week.
So…even though I keep on saying that I write only for myself, I must admit that I couldn’t have done it consistently if there was no audience.
So…thank you! ♥️
Enough talk! On to this week’s essay. It’s about 1,850 words. I borrowed the key idea from former Greek Minister of Finance Yanis Varoufakis’ beautifully written and extremely accessible book on economics, Talking to My Daughter.
Q: Was economic thinking not important before the advent of economics?
Economic questions have always occupied the minds of intellectuals since the dawn of civilisation. The ancient Greeks, especially Aristotle, have written on matters which we can easily identify as ‘economic’.
Yet, while subjects such as physics, chemistry, botany, and mathematics have been flourishing since the fourteenth century, genuine economic thinking does not take off until four centuries later. Why?
Also, unlike the first western economists such as Adam Smith (1723–1790), none of the ancient philosophers ever deliberated over an overarching economic theory on how society works as a whole. Why?
Not only that. The oldest European universities, dating back to the twelfth century, started with the liberal arts (grammar, logic, rhetoric, arithmetic, geometry, music, etc.), law, medicine, and theology. Physics, astronomy, chemistry (all known as natural philosophy back then) were introduced after the sixteenth century. But economics took two or three centuries longer to get introduced. There was no discipline called ‘economics’ until 1890s. Why?
Did the Romans not care about their economy? Were the Elizabethans unaware of the importance of economic might? Was pre-revolution France uninterested in economic matters? In other words, was economic thinking not important in the past?
Today, let’s talk about economics. More precisely, let’s try to understand why there was no room for economics in the past, how societies worked before the advent of modern economics, and what might have transpired that lead to the conceptualisation of an economic theory in the first place.
Crudely put, economics studies the allocation of scarce productive resources (such as land, workers, machines) to different productive activities (such as factories, offices, farms, labour, machinery) whose purpose is to generate commodities that will satisfy consumers’ needs. In simpler words, economics is the science of allocation of scarce resources.
While it is unthinkable to say something sensible about the state of a society today (such as the distribution of income, opportunities, and power) without delving into matters that are specifically economic, the same cannot be said when it comes to earlier societies.
What I’m really trying to say is that the distribution of social power and wealth in seventeenth century and earlier societies can easily be understood without any sort of economic explanation.
For example, in medieval times the success of the Spanish merchants in Latin American markets can be explained adequately by pointing out the military presence and power of the Spanish conquistadors on that continent. Similarly, the success of English and Dutch traders can make sense in terms of the domination of important sea routes by the English and Dutch navies.
Now, try this same type of sans-economic explanation to describe why Chinese companies are so successful at selling mobile phones in India. Unlike medieval successes, modern commercial triumphs (and disasters) have to be narrated in terms of purely economic concepts such as price sensitivity, production costs, quality control, demand and supply, etc.
Modern economics can be described as the story of the creation of goods for the purpose of selling or exchanging. Such goods are called commodities. The ingredients necessary to produce such commodities are known as factors of production, which fall under three main categories: Land, Labour, and Capital (capital as ‘means of production’, the tools and machinery necessary in the production process; not capital as money).
Now, in order to produce commodities for consumers, a company needs to mix some land with some human labour and, preferably, with some machinery.
And where does a company get access to these? It gets them at the same place you and I buy all sorts of things, i.e., the marketplace.
In a marketplace (both online and offline), there are estate agents selling or renting lands (the land market), there are job portals for hired labour (the labour market), and then there’s a well-developed market for machinery, computers, etc. (the capital market).
So basically, both the input the the output in the process of production are commodities which are traded in various markets. This actually means, the process of production (in an office or a factory) generates commodities required by consumers (goods and services) by utilising commodities required by companies (land, labour, and capital).
Armed with this new understanding, economics can also be described as the science of how markets determine the value, price, and allocation of these scarce commodities (as a result of competition between buyers and sellers) in a consumer society which always wants more of them.
Now, if you give it some thought, you would see that this description would be completely out of place in ancient Greece, imperial Rome, feudal France, and modern North Korea. Even though production and exchange of goods and services are as old as humans, it is easy to forget how different pre-industrial societies were from ours. Even though the factors of production (land, labour, and capital) have always existed, they did not exist in the way they do today, not as fully-fledged commodities.
Let’s start with land. Of course there was land, but land as a commodity (whose very purpose is to be traded) did not exist back in the day. Until a few centuries ago there was no established market for land deciding who owned which plot of land and how much someone had to pay to get it.
In ancient times, when the powerful wanted more land, they did not contact a real estate agent. Instead, they formed an army and started a war of conquest. Under those circumstances, no one had any strong need for an economic analysis of land-ownership.
In the feudal era (9th–15th Century), the lords owned whole estates (including the peasants living in them) and usually considered the sale of inherited land shameful.
Even though property rights were passed on to the lords by kings and queens as reward for political services, the only role land played was reflecting the power and political status of the landlords, nothing more.
In short, land was not a commodity whose price was determined by the level of demand it generated from prospective owners who wanted to buy it so that they could generate profit in some market (such as the agriculture or the real estate market).
The same applies to labour. Of course there was always labour, and plenty of it too. The pyramids could not have been built without the rivers of sweat and blood of countless Egyptian workers. And while Plato was chilling out with his disciples in his Academe, exploring the distinction between perceived and ideal reality, it was the slaves who were doing all the work.
Nevertheless, the labour of slaves and peasants was not a commodity. Even though a lot of people greatly enjoyed its output, this labour wasn’t something that could be bought by some employer at a price (such as a monthly salary) determined in accordance to its productivity and the demand for its output, as it is done today.
In feudal Europe, for example, those unfortunate enough to have been born peasants cultivated the same land generation after generation producing harvests in the hope that the landlord would allow them to keep a portion of it.
To understand how much of their harvest they were allowed to keep, modern economic thinking would have been irrelevant. Because, the distribution of the harvest between lord and peasant was a political matter (and not an economic matter) that depended on factors such as the lord’s greed and his fear of a peasant revolt, the relations between the political centre (kings and queens) and the regional powers (the lords), the threat of a foreign invasion, and so on.
By contrast, if we want to explain today the wages of farm labour in Europe, or India, or even a shiekhdom like Qatar, we cannot rely on purely political notions. Instead, we need to ask questions about the market value of agricultural products, the productivity of the farm labourers, their alternative employment prospects, etc.
In brief, today we need an economic approach that would have been impossible to conceive in a feudal world in which the lord simply collected a portion of the harvest from the peasantry.
The third factor of production, capital, was in its infancy. Just like land and labour, capital also existed since Palaeolithic times in the form of tools, ploughs, etc., even if its presence in production was minuscule by comparison to how crucial it is today (think of industrial robots, computers, production lines, etc.).
However, what is crucial is that capital again did not exist as a commodity. In ancient times, capital was produced mostly by slaves for their masters. In feudal estates, tools were produced locally, often at the estates themselves.
Thus, it is impossible to think of the utilisation of capital in a modern economist’s terms, that is, as a scarce commodity which the competitive market would allocate to its best possible use. Again, we find that modern economics’ conception of capital would have been irrelevant in the seventeenth century and before.
Lastly, even markets and trades were not what they are now. When merchants arrived in a medieval town, they brought with them some spices, some fancy clothing, a few luxury items. But their volume was microscopic as a proportion of all the goods consumed in the area.
Let us not forget that back then, when the peasants and villagers wanted something they did not go to the shops to get it. They made it themselves.
Moreover, there was no competition since it was unlikely that there would be more than one merchant selling the same type of good in the same area. And when they were, the authorities ensured that there would be no price competition between them.
In larger towns, the artisans and the merchants would belong to associations whose main function was, partly, to prevent competition at all costs. You see back then, in startling contrast to today, profit-driven competition had a bad name. It was thought of as a disorganiser of trade!
And just as within European villages and towns, there was negligible economic competition between sea-faring merchants. When merchants did clash against one another, the matter was not resolved, as it is done today, via negotiation. Clashes were resolved by political or military means.
In conclusion, with limited trade in mostly luxury goods (which was a tiny proportion of overall production), with precious little economic competition, with uncommodified land, labour, and capital, these societies could be adequately understood without any economics.
Yes, they did feature markets, but prices weren’t determined by demand and supply. In other words, they were not market societies. Economic thinking was not possible (or even necessary) because anything that had to do with ‘allocation of scare resources’ was taken care of by social and political policies or military forces instead.
Economic thinking took so long to flourish because there was little room for it in pre-industrial social structures. We had to wait until those structures were swept away by the capitalist industrial revolution before economics became possible.
Today I Learned
The frontal cortex is the part of the brain that is responsible for cognitive functions such as planning, decision-making, and problem-solving. It is located in the front of the brain, just behind the forehead.
Interestingly, the brain region that takes the longest to fully mature is the frontal cortex — not going fully online until the mid-twenties.
This has two screamingly important implications. First, no part of the adult brain is more shaped by adolescence than the frontal cortex. Second, nothing about adolescence can be understood outside the context of delayed frontocortical maturation.
By adolescence, the limbic system (a group of brain structures that are involved in emotional regulation, memory formation, and the formation of motivation and reward pathways), the autonomic system (part of the peripheral nervous system that regulates the involuntary functions of the body, such as heart rate, digestion, and breathing), and the endocrine system (a network of glands that secrete hormones into the bloodstream to regulate various bodily functions such as growth and development, metabolism, and reproduction) are going full blast while the frontal cortex is still working out the assembly instructions.
This is why adolescents are so frustrating, great, asinine, impulsive, inspiring, destructive, self-destructive, selfless, selfish, impossible, and world changing.
Think about this — adolescence and early adulthood are the times when someone is most likely to kill, be killed, leave home forever, invent an art form, help overthrow a dictator, ethnically cleanse a village, devote themselves to the needy, become addicted, marry outside their group, transform physics, have hideous fashion taste, break their neck recreationally, commit their life to God, mug an old lady, or be convinced that all of history has converged to make this moment the most consequential, the most fraught with peril and promise, the most demanding that they get involved and make a difference.
In other words, it’s the time of life of maximal risk taking, novelty seeking, and affiliation with peers. All because of tha immature frontal cortex.
Timeless Insight
Personal financial success is all relative measured against the amount of effort you put into it and the expectations you set for yourself. Both are different for everyone.
What seems trivial to you might be the most important thing in the world to someone else, especially if you are at different stages in life. while low interest rates are great for young borrowers, they are disastrous for retirees needing fixed income.
We’re all coming from a different place with different perspectives, which explains why so many equally smart people disagree with each other. When you find something crazy and ask yourself “Why is this happening?” the answer is usually, “because someone with a different perspective thinks it should.”
What I’m Reading
Judgment is not a synonym for thinking, and making accurate judgments is not a synonym for having good judgment.
— Daniel Kahneman et al, Noise: A Flaw in Human Judgment
Tiny Thought
There’s a world of difference between insisting on someone’s doing something and establishing an atmosphere in which that person can grow into wanting to do it.
Before You Go…
Thanks so much for reading! Send me ideas, questions, reading recs. You can write to abhishek@coffeeandjunk.com, reply to this email, or use the comments.
Until next Sunday,
Abhishek 👋