Exploring Economics: The purpose of economics

Shortly after I finished High school, I had decided to take 1 year to focus entirely on my entrepreneurial journey before university. I was lucky to be participating in a really good French incubator program led by two great economists in Mexico City. My interactions with them made me ask myself if I wanted to follow the engineering or the economics path.

I clearly choosed the engineering path after evaluating how my strengths and situation at that time could optimize to generate the most impact in my goals. Now the scope of my goals has grown, and thus the knowledge that I need to complete them too. Hopefully, a lot of the needed knowledge seems to hold on to “economics”.

Some time ago i heard one of my mentors said “engineers are good at fixing problems but bad at finding them”. In the realm of entrepreneurship and business, understanding economics is an essential pillar of success, providing a conceptual framework to analyze how value is created, exchanged, and distributed within a society. This knowledge equips entrepreneurs with the tools to navigate complexities, seize opportunities, and create enduring value in the ever-evolving landscape of business and innovation.

In this sense, will be sharing part of my notes in this post series. With that said… leeeeets go!

What is “economics”?

Wikipedia gives us this perfect definition:

«Economics focuses on the behavior and interactions of economic agents and how economies work»

Investopedia gives this definition:

«Economics is a social science that focuses on the production, distribution, and consumption of goods and services»

The University of Buffalo says:

«Economics is the study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society»

If we try to summarize previous definitions into one we could say:

«Economics examines the behavior and interactions of economic agents, focusing on the production, distribution, and consumption of goods and services in the context of scarcity»

OK, notice these keywords from our previous definition are needed to have economics:

  • “Economics agents”: Entities engaged in economic activity (buying, selling, production, distribution, consumption, resource management, influencing capital).
  • “Scarcity”: Denote the relative availability of production inputs or the decrease in the supply of a resource or product relative to demand over time.

Let’s conduct a binary permutation analysis using scarcity and economic agents as key variables to assess their impact on market dynamics and economic relevance through the logical technique of Reductio ad absurdum:

  • Zero market dynamics occurs.
  • Economics becomes irrelevant.
  • Resources are abundant.
  • 01
  • Zero market dynamics occurs.
  • Economics becomes irrelevant.
  • Scarcity becomes a useless concept.
  • 10
  • Market dynamics occurs.
  • Economic agents have no constraints on resources.
  • No need for allocation or distribution of resources.
  • 11
  • Current economics.
  • The 3rd permutation (10) highlights an interesting behavior in market dynamics and shows the opportunity of a potential disruption in markets transitioning into that phase: the shift in power dynamics governing resource allocation (either centralized or decentralized) can lead to the emergence of new economic agents, new forms of interaction, and ultimately, the creation of entirely new sub-markets branching off from the original one.

    For example, the current wave of technological advancements – like digitalization, automation, and AI – has the potential to catalyze an era of post-scarcity for many industries. This could fundamentally reshape economic landscapes, with existing economic agents potentially being readjusted and/or new ones emerging, regardless of whether these agents are human or intelligent machines, having market dynamics operations mainly based on the relationships and interactions between the resource allocation agents and not solely on traditional scarcity. Even in a post-scarcity scenario, some limitations might exist, requiring efficient allocation mechanisms dictated by social agreements/rules rather than physical/natural constraints.

    The digital entertainment industry exemplifies the potential impact of technological advancements on resource scarcity. Before the internet and streaming platforms, consumers were limited by broadcasting companies and physical media. They could only access content broadcasted at specific times or purchased as CDs or DVDs. However, the rise of digital entertainment shattered these constraints. New economic agents, like digital creators, influencers, and streaming platforms, emerged alongside advertisers. This disrupted the old system dominated by broadcasters and studios. Content production, consumption, and distribution have been fundamentally reshaped, leading to entirely new interactions between these new players.

    The Soul of economics

    Economics serves as a crucial tool for navigating the complexities of our social system, particularly in the face of resource scarcity and ever-expanding human desires, with the goal of promoting human development and a more prosperous future.

    We can say the soul of economics is to guide us to build a civilization that elevates us so far above the knowledge, consumption and energy levels of the base environment of the earth, serving as the scaffolding upon which civilizations ascend beyond the confines of the natural world, guiding humanity towards the zenith of development paving a prosperous future.

    Examining historical economic systems can provide valuable insights into how economies have evolved over time. For example, feudalism offers a glimpse into a relatively straightforward system characterized by self-sufficient manors, each producing a substantial portion of its own goods and services. Trade existed, but on a limited scale, often involving specialized regions that provided specific resources or goods needed for overall production.

    In contrast, capitalist economies operate with a highly distributed production system. Production is no longer concentrated in individual manors but rather dispersed across a vast network of businesses and individuals. Similarly, income is also distributed – wages, salaries, profits, and investments flow throughout the system, creating a complex web of interdependencies.

    The shift around the network of production and distribution within a capitalist system versus feudalism represents a significative change, ranging from the number of actors involved, the variety of goods and services produced, and the constant flow of resources and income… making it far more complex than the self-contained model of feudalism by allowing greater resource allocation, production and meeting of human needs/desires and thus requiring a deeper understanding of economic principles and dynamics.

    Economic systems

    Economic systems are the fundamental structures that societies/goverments use to organize and allocate resources across a geographic region or country to produce, distribute, and consume goods and services. It’s like the operating system of an economy, guiding how resources are allocated and decisions are made.

    There are various types of economic systems, each with its own set of rules, incentives, and outcomes. Let’s break down them:

    • Hunter-Gatherer Economy: This was the earliest economic system based on hunting wild animals and gathering edible plants/foods. There was little to no concept of ownership or property rights.

      • Nomadic groups constantly moved to find new food sources.
      • No permanent settlements or shelters.
      • Economic activities were hunting, fishing, foraging.
      • Very little surplus production or trade beyond the local tribe/group.
      • Egalitarian social structure with no social stratification.
    • Pastoral Economy: This emerged with the domestication of animals like cattle, sheep, etc. Pastoral societies were nomadic, basing their economy on herding domesticated livestock.

      • Followed seasonal grazing patterns for herds.
      • Use of portable tents/shelters rather than permanent settlements.
      • Economic activities centered around animal husbandry.
      • Some barter trade of animals and animal products.
      • Social hierarchies started to emerge between wealthy herders and others.
    • Subsistence Agriculture: Economy As humans transitioned to settled farming, subsistence agriculture became the economic system where basic crops/foods were produced to meet the needs of the local population.

      • Development of first permanent villages and simple farming tools.
      • Main crops were grains like wheat, rice, etc. and some vegetables.
      • Very little surplus or trade beyond village/community needs.
      • Start of food storage techniques like granaries.
      • More divisions of labor within communities.
    • Slave Economy: Prominent in ancient societies like Greece, Rome, and parts of Africa/Americas. The main economic activities relied on slave labor owned by elite classes.

      • Slaves seen as human property with no rights, freedoms or pay.
      • Allow concentration of labor for large projects and plantations.
      • Trade emerged to facilitate movement of slaves between regions.
      • Economic output determined by sizes of slave labor forces.
      • Stark divide between aristocratic slave-owners and enslaved masses.
    • Feudalism: The predominant economic system in medieval Europe based on self-sufficient agricultural estates called manors controlled by nobility.

      • Manors had a strict hierarchical system of lords, vassals and peasant serfs.
      • Serfs were bound to land and required to labor on the lord’s fields.
      • Lords granted fiefs/land to vassals in exchange for military service.
      • Very limited trade between manors except for specialized goods.
      • Social status based strictly on birthright rather than capital ownership.
    • Mercantilism: This was a pre-capitalist economic policy pursued by European nation-states from the 16th-18th centuries.

      • Aimed to promote national economic self-sufficiency and exports.
      • Use of protectionist policies like tariffs and import bans.
      • State-granted monopolies to companies engaged in foreign trade.
      • Colonization of new territories to secure sources of raw materials.
      • Economic development tied to accumulation of gold/bullion reserves.
    • Capitalism: A market-based economic system with private ownership of capital and property rights as the core principles.

      • Economic decisions driven by the pursuit of profit in free markets.
      • Emergence of wage labor, where people sell their labor for compensation.
      • Encourages entrepreneurship, innovation and economic growth.
      • Capital accumulation through reinvestment of profits into more production.
      • High levels of trade, investment flows across national/global markets.
      • Social mobility possible through acquisition of capital and wealth.
    • Socialism*: This economic system advocates for social ownership and administration of the means of production.Central planning by the state to manage the distribution of resources/goods.

      • Aims to achieve an equal distribution of wealth and economic outcomes.
      • Little to no private property rights over capital and means of production.
      • Production organized to directly meet societal needs over profit motives.
      • Varying degrees of socialism from liberal market models to full state control.
    • Communism: An economic/political system envisioned as a classless society based on Marxist theories.

      • State controls all means of production, distribution, and economic output.
      • No personal private property - all wealth is communally owned.
      • Centralized command economy planned by the communist party.
      • Aims for common ownership of property and total abolition of social classes.
      • Authoritarian control to enforce the dictatorship of the proletariat.
    • Mixed Economies: Most modern economies blend elements of market capitalism and state economic management.

      • Allow private property rights and market forces to drive production/consumption.
      • But also have state regulation, public services, social safety nets.
      • Varying degrees of government economic involvement in different sectors.
      • Aims to combine economic efficiency of capitalism with policies for equity.
      • Most developed nations have this mixed economic approach currently.

    Imagine stepping back in time, exploring the diverse tapestry of human economic systems that have shaped civilizations. Each system shapes the incentives, dynamics, and outcomes of societies in profound ways. They tell us a story of how societies organized themselves, allocated resources, and interacted with one another. From the simplicity of hunter-gatherer economies to the complexities of modern mixed economies, these systems reflect not just economic transactions but also power dynamics, social structures, and cultural values that are a testament of human adaptability and innovation across history.

    The interconnected nature of today’s economy, fueled by globalization and digital connectivity, introduces new complexities and opportunities. Supply chains span continents, financial markets operate globally, and digital platforms enable cross-border trade and investment at unprecedented scales.

    Globalization brings benefits such as access to diverse markets, economies of scale, and international collaboration. Yet, it also presents challenges like geopolitical tensions, regulatory harmonization, and economic inequalities that require thoughtful strategies and cooperative efforts to address.

    Today, mixed economies blend elements of capitalism, socialism, and state intervention. They strive to harness the dynamism of market forces while mitigating inequality and ensuring social welfare. This delicate balance between economic efficiency and social equity remains a central theme in contemporary economic discourse, confront fundamental questions about human nature, governance, and progress. The interplay between individual agency and collective responsibility continues to shape our economic narratives, urging us to navigate complexities with foresight, pragmatism, and a commitment to inclusive prosperity.

    Effective economic systems rely on robust policy frameworks and governance structures to foster innovation, manage risks, and promote inclusive growth.However, the balance between regulatory oversight and fostering innovation is a delicate one. Excessive regulation can stifle entrepreneurship and hinder economic dynamism, while inadequate regulation may lead to market failures, exploitation, and systemic risks.

    Looking ahead, the convergence of emerging technologies like artificial intelligence, blockchain, and biotech presents new frontiers and opportunities for economic systems. How societies navigate the equitable distribution of benefits from these innovations, ethical considerations and privacy concerns will shape the future of economies globally.