Tuesday, January 16, 2007

I Love Economics

from LibertyBob.com

Category: philosophies

I love economics. By economics I mean the study of the efficient use of resources. It’s a really cool science and I recommend that everyone take at least an introductory class or two on the subject.

I know that some of my readers are already students of economics. For the rest of you, I’ll define a couple of things here. You have probably heard the term “macroeconomics”. This is economics on the large scale such as your state/province or nation. The other term is “microeconomics” which is economics on the small scale, such as your home or your employer. A third term of interest is “econometrics” which is simply the math associated with economics. These terms should get you started.

In all honesty, I haven’t made it very far in my economics studies. I have taken only introductory level classes in Microeconomics and Macroeconomics. Sure, I got ‘A’s in both of them, but those two classes do not make me an expert. They just whet my appetite for more. They let me understand quite a bit about why things work. The knowledge gained lets me be concerned at the retirement of Alan Greenspan. Thank you, Dr. Asigbee for being such a good teacher.

When I finish my current degree, I’m going to try to take a class in econometrics. I’m pretty good at math (Calculus is my friend) so I should be able to handle it. Though I won’t have a purely theoretical statistics class by then, I will have taken business statistics. I really want to understand this stuff better. If time and money allow, I may just get a degree in economics.

Before I go further in my studies I would like to posit an idea. See, I come from a science background (sort of). I can see where all these different sciences seem to work the same. This was really driven home when my Chemistry professor talked about how the math for entropy in chemistry is about the same as the math for entropy in economics. The little light bulb popped on above my head.

I remember how waves propagate through a metal plate. If you know what a plate is made of and you know its shape, then you can do math to tell how waves should travel through it. For this discussion, I’ll assume sound waves. To experiment you just have to apply the wave at one point and then measure the waves at other points to see if they match your math.

What’s neat about this is that if there is something hidden in the metal that you can’t see, the waves will be affected by it and you will be able to do new math to analyze the hidden thing. Let’s say there is an air bubble in the middle of the bubble. Sound waves will slow down as they enter the air pocket and bend. This is the same way light bends when it goes through a marble or a fish bowl. That bent light is pretty obvious to our eyes and the bent sound will be pretty obvious to the testing equipment.

After running a few tests, we can calculate the nature of the impurity in the metal with some confidence. The materials analysis folks do this all the time. In this modern day, we science can do some pretty neat stuff that way.

Now comes the economics part. I wonder if we can take an economic system and treat it like a sheet of metal. Can we apply the materials analysis math and science to the study of an economic entity? Let me explain.

Assume that we have a small economic system such as a town that is completely self-sufficient and isolated from everything else. There is no such place, of course, but I’m doing a hypothetical situation and keeping it simple. We are going to assume that this system is ideal; that is to say that they follow all of our understanding of economic rules.

Because we assume this system to be ideal, we can predict the affect of economic events. So, we do our predictions and then observe when these events take place in our system. If things are really perfect, the outcome will be as we predicted and everybody is happy. What happens if the results are not what we predicted?

Like in our metal plate, if things don’t react in a perfect way, we will see it in the result. We need to take the results and model backwards to find the “imperfection”. As we gather more data and combine our results, we get a better understanding of the internal makeup of the system. Once our model of the system is complete we can make more accurate predictions.

But wait, there’s more. If we have a really thorough understanding of the system, then we can make adjustments in an effort to divert or prevent problems. In the metal plate, if we want a wave to go from one side and out a specific point on the other side, we can use our knowledge of the makeup to plan how to do this. The same could happen in our economic system. If we see a problem ahead of time we can make those adjustments needed to avoid those problems.

We already do this to a certain extent in the United States. When the Federal Reserve Board changes interest rates, that is done to maintain stability in our economy. The wide swinging business cycles of the late nineteenth and early twentieth centuries taught us that we need to maintain some control if we are to avoid another Great Depression. From this large example, you can see that it could be useful to make these predictions.

Imagine that you own a company, either a huge multinational conglomerate or a local pet shop; you want to take the actions needed to keep you afloat on the economic seas. One of the best tools you could have is a predictor that can tell you what storms are coming. With advance warning you could know to batten down the hatches or to move elsewhere. This is why economics is so important.

It is likely that my thoughts on the matter are not original. I am just a novice at such things, but a pretty good novice. I know enough to see the benefit of knowing so much more.


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