What Is Economics?

Traditionally, economics is defined as the study of how individuals allocate scarce resources. While this is an accurate description, it is not adequate. Individuals do allocate scarce resources, but in order to do so they must act. Subsequently, if we are to completely understand economics, it is those actions we must endeavor to understand. This is why economics in actuality is the study of human action.

In economics, we take as a given that humans act. One cannot acquire bread without taking action to do so. If we could manifest matter out of nothing, not only would we be defying physics, but we would live in a fictional reality closer to that of Star Trek. Given that within our reality resources are scarce and humans must act in order to thrive, let alone survive, it is those actions with which we must concern ourselves. We discussed the three requirements for human action in Why We Do What We Do. Assuming those requirements are met, the individual will act.

We are not concerned with why they act, as in what are their internal motivations. Why someone values chocolate ice cream over vanilla is not within the realm of economics. The fact that they have a subjective value is. All values within economics are subjective relative to the individual. It does not matter why someone will choose chocolate over vanilla, however, the fact that nine times out of ten they will make that choice is something that falls within the realm of economics. It is an outcome that is quantifiable and it tells us valuable information about the subjective preferences of the individual. We can take these preferences and collectivize them with the preferences of hundreds or thousands of other people and conclude that all things being equal, more people prefer chocolate to vanilla. This is not a value judgement on chocolate or vanilla, however, if you are a grocery store owner, it will indicate that you should stock more chocolate ice cream than vanilla.

All voluntary exchanges necessarily leave both parties better off. This is also a given within economics. It is a given because it logically makes sense that the only way I am going to give you my apple for your orange is because I want your orange more than I do my apple and you want my apple more than you want your orange. There is no other logical conclusion. Could it be that my fruit preferences are indifferent between apples and oranges, but you hate oranges, and because I value your happiness over my own fruit consumption I make the exchange? Certainly, but we are still both better off because of the exchange. You are happier, and I am happier because you are happier.

Humans are funny with their subjective valuations, but they will always act in a way that will result in them increasing their perception of happiness. Will they always be right? Not necessarily, but happiness is the end goal. This is why self-knowledge is so important; the more you know yourself, the more likely you are to be happy. We will discuss economics more in future posts, but for now, this is a good place to start.

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