When the industrial revolution was taking place, the methods of extracting resources were primitive compared to today. But they worked just fine because so many resouces were easily accessible. Coal used to simply sit on the surface, and many metals could be taken from surface rocks. Gold could be semi-easily panned in many places around the world (e.g. the California Gold Rush). Oil was abundant and actually leaking to the surface in rich areas.Now imagine that technology failed and humanity lost all of its progress; Humanity is set back to the iron age, 100x worse than the burning of the Library of Alexandria.
There is no way for humanity to recover to the current technological level, because now to get oil or metal or coal, you need to dig so deep into the Earth that humans can't really do it without machines that already use the resources they mine/extract.
Thus, with no stable energy source and no way of ever achieving one, humanity will stagnate and populations will be decimated due to starvation, natural disaster, and/or disease. If we falter even one step, humanity is doomed. There is no redo. No going back to simpler times and then marching forward. This is it: we reach higher and better energy sources or we die in mud huts as a species.
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YouTube audiobook: Basic Economics by Dr. Thomas Sowell:
A citizen's guide to economics for those who want to understand how the economy works but have no interest in jargon or equations
(I highly recommend this book, it makes money and economics simple. I think everyone that uses money should read or listen to this book. Even if you only listen to a few chapters it's worth it)
- The best predictor of economic growth is national IQ
- Public financial trades of US federal politicians
- Comparative advantage
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Creative destruction:
The phenomenon by which a new, innovative product or process must necessarily destroy the old way of doing things.
But the end-consumer is better off.
For example, automobiles displaced horses, but the end-consumer preferred them because they
go faster, can move more people, and poop less. This necessarily displaced horses, horse breeders, some veterinarians, and more.
But it also greatly helped the end-user, and created new jobs like automobile manufacturers, mechanics, and NASCAR.
- The Luddite fallacy: The idea that machines / computers will continue to progres to the point that they can do so many jobs / replace so many workers, that there will be an unemployment problem due to a lack of jobs.
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Opportunity cost
- Parable of the broken window: The false idea that causing destruction (e.g. breaking a window) increase/benefits the economy. It is false because the time/resources spent repairing the window can no longer be used for anything else. E.e. the glass to fix the window may have originally been scheduled to be used on a new car, and the repairman now no longer has time to fix other things.
- Lump of labour fallacy
- Parkinson's law: "Work expands so as to fill the time available for its completion.".
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Related concepts
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Externality:
An indirect cost or benefit to an uninvolved 3rd party that arises due an activity by another.
Said impact is "external" to said activity.
- Negative Externality: E.g. one buys gasoline/petrol from a seller, and then uses it to run their automobile; The resulting air pollution is a negative externality because it negatively impacts those that were "external" to the gasoline/petrol trade (i.e. because it impacts those besides the buyer and seller).
- Positive Externality: E.g. A beekeeper who raises and keeps bees for their honey. A side effect is that the bees will pollinate nearby crops. Assuming that said nearby crops are not all owned by said beekeeper, and assuming that the crop owners are not compensating the beekeeper, then this is a positive externality. Said pollination / benefit is "external" to said beekeeper because said beekeeper does not directly receive all of the impact/benefit.
- Tragedy of the commons: Situations where there is simultaneously both individualized benefits and shared costs (i.e. a partial "negative externality"); Incentivizes bad outcomes. For example, a large shared body of water has many fish, if each fisherman takes a medium quantity of fish then the fish will be able to repopulate and then next season there will again be many fish. But every individual fisherman has the incentive to take a large quantity of fish because he would get all of the benefit (fish to eat/sell), but the cost (reduced fish for next year) is shared. The short-term incentive to each fisherman is contrary to the long-term interest of all fishermen. Another example is the "Prisoner's Dilemma".
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"Rider"" problems
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Free-rider problem:
When people can benefit from a (non-excludable, non-rivalrous)
good/service without paying anything towards it.
Examples:
- If someone builds a lighthouse, all sailors will benefit from its illumination – even if they don’t pay towards its upkeep.
- Cleaning a common kitchen area. It would be good if all roommates contributed to cleaning the kitchen, or at least cleaned up after themselves; But there is a temptation/incentive to leave it for someone else – who will do it and benefit everyone.
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Forced rider:
When people are forced to pay for something that they do not use nor want. Examples:
- Non-interventionists and those against war being forced to pay taxes towards and/or be drafted into a foreign war. (e.g. Americans drafted or taxed towards the Vietnam War)
- Forced insurence: E.g. healthy uninsured individuals being forced via an individual mandate to buy insurence and thus subsidize the healthcare of unhealthy people.
- In a unionized workplace, non-union as well as union members are required to pay dues to the union representing the workplace as a condition of employment.
- In many European countries, every household is required to purchase a television licence regardless of whether they actually watch television.
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Free-rider problem:
When people can benefit from a (non-excludable, non-rivalrous)
good/service without paying anything towards it.
Examples:
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Incentive compatibility
- Dominant-strategy incentive-compatibility: A system where you fare best (or at least not worse) by being truthful, regardless of what the others do. E.g. ranked-voting systems that are used in Maine and Alaska for national elections, and also in Slovenia.
- Bayesian-Nash incentive-compatibility: A system where if all others act truthfully, then it is also best (or at least not worse) for you to be truthful too. E.g. First-past-the-post voting system that is typical in the US. (due to the spoiler effect, nearly all US states are this and not Dominant-strategy)
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Moral hazard:
When an economic actor (e.g. person, business, country) has an incentive to increase its exposure to risk
because it does not bear the full costs of that risk.
E.g. An insured corporation is less averse to risk (i.e. incentivized to take on more risk)
because it knows that its insurance will pay the associated costs.
- Samaritan's dilemma (and in general Criticisms of welfare): When given charity, e.g. at a soup kitchen, a recipient/beneficiary will act in one of two ways: using the charity to improve their situation, or coming to rely on charity as a means of survival.
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Perverse incentive:
An incentive that has an unintended and undesirable result
that is contrary to the intentions of its designers.
- The Great Hanoi Rat Massacre occurred in 1902, in Hanoi, Vietnam. The government created a bounty program that paid a reward for each rat killed. To collect the bounty, people would need to provide the severed tail of a rat. Officials, however, began noticing rats in Hanoi with no tails. The Vietnamese rat catchers would capture rats, sever their tails, then release them back into the sewers so that they could produce more rats.
- In building the first transcontinental railroad in the 1860s, the United States Congress agreed to pay the builders per mile of track laid. As a result, Thomas C. Durant of Union Pacific Railroad lengthened a section of the route forming a bow shape unnecessarily adding miles of track.
- Gun buyback programs are carried out by governments to reduce the quantity of guns in circulation, by purchasing firearms from citizens at a flat rate (and then destroying them). Some residents of areas with gun buyback programs have 3D printed large numbers of crude parts that met the minimum legal definition of a firearm, for the purpose of immediately turning them in for the cash payout. Other residents turn in their old unused firearms for cash to buy new ones.
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Externality:
An indirect cost or benefit to an uninvolved 3rd party that arises due an activity by another.
Said impact is "external" to said activity.
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How banks work:
Both people & businesses store/deposit their currency into a bank for safe-keeping & reduced risk of it being lost, stolen, etc.
These people and businesses are thus called "depositors".
The currency that depositors put into the bank are called "deposits".
The bank promises that the depositor may withdraw these deposits from the bank whenever the depositor demands.
This deposited currency is called "demand deposits" because they are deposits that can be withdrawn on demand.
When one lends currency to someone else, the currency comes from the "lender"(/creditor), and to the "borrower"(/debtor/lendee).
The amount of this currency is called the "principal".
The borrower must pay the principal back to the lender, and also pay extra currency.
This extra currency is called "interest", and it's what motivates the lender to lend (else they typically wouldn't).
The interest amount is calculated using an "interest rate".
This entire ordeal is called a loan.
People & business may also lend currency to banks, for a predetermined amount of time.
Here the person/business is the "lender" and the bank is the "borrower".
The benefit of doing this is that at the end of said time, the bank will pay back the original amount (the "principal"), plus a little extra (the "interest").
These are called "time deposits" because they are currency deposits into the bank that the depositor can't withdrawn for a predetermined amount of time (without a significant financial penalty).
In the US, these are often called "certificates of deposits" ("CD") because the depositor used to get a physical certificate (still can but one must ask for it).
Conversly, banks also lend currency to people & businesses.
In this case, the bank is the lender, and the person/business is the borrower.
Likewise, the principal must be paid back to the lender, plus interest.
Banks work (i.e. make a profit) because they offer both of the above mentioned types of loans (person to bank, and bank to person) at different interest rates.
The interest is greator when the bank is the lender, compared to when the bank is the borrower:- The bank borrows principal (currency) from some people/businesses, and this loan has a lower interest.
- The bank then lends that same principal (currency) to other people/businesses, and this loan has a higher interest rate.
For example, Hans lends $100 to the bank in the form of a CD (certificate of deposit), and the bank promises that in 1 year it will pay Hans back $103 (principal $100 + interest $3).
Then the bank lends $100 to Blake with the promise that in 1 year he will pay the bank back $113 (principal $100 + interest $13).
The bank earns $10. -
Full-reserve banking:
The demand-deposits (not to be confused with time-deposits) that depositors
put/deposit into the bank ("reserves") are kept in the bank.
Typically the bank will charge the depositor a small fee every month/year to pay for the service (security cameras, guards, tellers, vault maintenance, etc).
The depositor can be confident that said demand-deposits are secure. There is no risk of a "bank run".
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Fractional Resevice Banking:
The demand-deposits that depositors put/deposit into the bank, a fraction of it is loaned out
to others (e.g. to people and businesses that want loans / want to borrow).
In this system, typically the bank will not charge the depositor any fee, because the bank wants to attract more depositors, because the bank makes profit loaning it out;
"If you are not paying for something then you are the product".
If many depositors try to withdraw their demand-deposits at the same time (i.e. a "bank run"), the bank won't have all of it, and thus it is at high risk of bankruptcy (which literally means "broken bank").
Banks will attempt to reduce this risk by limiting withdrawls (i.e. reducing the "demand" part of "demand-deposits").
This type of banking is the norm. - List of bank mergers in the US: The concentration of the US banking industry
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How banks work:
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Bretton Woods system: The 1944 Bretton Woods Agreement included the USA, Canada, Western Europe, Australia, and Japan, where the US Government would set 35 US Dollars (USD) as being backed by (convertable to/from) 1 troy ounce of gold (i.e. the USD remains a proxy for gold), and all non-USA countries changed their currencies (e.g. the French franc, the Japense Yen, etc) from being backed by (convertable to/from) gold (i.e. a proxy for gold) to being backed by the US dollar (i.e. they each become a proxy of a proxy of gold).This is just as World War 2 is ending, so it wasn't truly voluntary for Germany, Italy, nor Japan. The Soviet Union attended the negotiations, but refused the system.This ended in 1971 when the USA unilaterally terminated the convertability of USD to gold, thus making the USD, and all of the currencies of the countries that agreed to this system, now backed by...nothing (i.e. "fiat currency").
- ¤: International currency symbol
- Reserve currency
- Dedollarisation (petrodollar)
- Exorbitant privilege: Benefits of one's currency being the international reserve currency. Currently this is the USD held by the US; Though it is decreasing, in part due to the US freezing Russian reserves and ejecting (near completely) Russia from SWIFT.
- Seigniorage: difference between the value of currency, vs the cost to produce & distribute it.
- Currency substitution
- Currency union: 2+ states sharing the same currency. (e.g. The Euro, Liechtenstein uses the Swiss franc, tied together are the Singapore dollar & the Brunei dollar)
- Comparison between Hotelling's law (when it is rational for producers to make their product(s) as similar as possible) vs Product differentiation (when it is rational for producers to make their product(s) stand out)
- Benefits of voluntary giving/helping
- Dutch disease: Causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors. The presumed mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation's currency becomes stronger (appreciates) compared to currencies of other nations (manifest in an exchange rate). This results in the nation's other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive.
- Norwegian paradox: Norway's economic performance is strong despite low R&D investment.
- Jevons' effect: Increases in efficiency of use of a scarce resource (e.g. automobiles becoming more fuel-efficient) may seem like it would lead to less fuel being consumed (because the existing number of automobiles require less fuel to travel the same distances) however it may actually lead to more fuel being used because now traveling the same distance is less expensive, causing existing drivers to drive further distances, and perhaps non-drivers to begin driving / consuming fuel because the cost has become affordable. In conclusion, increases in efficiency of use of a scarce resource may unexpectedly lead to more, not less, of said resource being consumed.
- Business cluster: When interconnected businesses and institutions of a particular field cluster together into the same geographic area to increase productivity. This increases each of the participants competitiveness. E.g. Detroit's automotives, Silicon Valley's technology, Wallstreet's financials, Hollywood's media, Taiwan's semiconductors, DC's politics, Fashion Avenue, London's financials, Napa Valley's wine, etc.
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Organizations
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International financial institutions
- World Bank
- International Monetary Fund (IMF) (2022: US controls 17% of voting power in the IMF)
- World Trade Organization (WTO)
- American
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International financial institutions
- Pareto principle: AKA The 80/20 rule. ~80% of consequences come from ~20% of causes.
- Difference between industry and sector
