The Definition of Economics

The Definition of Economics

An excerpt from:

WHAT SHOULD I DO WITH MY MONEY? Economic Insights to Build Wealth Amid Chaos

Available in paperback, kindle, and audiobook wherever books are sold.

If what to do with your money is based on economics, it’s best to know what exactly economics is. Economics is the study of the production, consumption, and transfer of wealth. It is a definition that has been examined formally and informally since the beginning of time, equal parts elementary and mystifying. Each derivative comprises all that mankind relies upon:

1. Production is how everything is made, be it service or product. How did the print get on this page? Where did the watch on your wrist originate? Keep asking who, what, why, when, where, and how the coffee made its way into your mug, and you could write a book on international affairs.
2. Consumption is the use of any such product, service, or resource. What did you pay for this book? Your watch? That cup of coffee? Do you think it was worth it? Where else could your money have gone than toward your latest purchases?
3. Transfer of wealth refers to the connection between producers and consumers. Since nothing costs nothing, and everything costs something, every transaction implies a negotiated compromise. If perfection, 100 percent efficiency, can never exist, does that mean every exchange of wealth results in a winner and loser, or is there a homeostasis eventually making producers and consumers equal beneficiaries?

Understanding these three building blocks of economics is the only way to correctly decide what to do with your money, or else unintended consequences will continue to surprise your plans. So far, economics appears pretty elementary. But just as thunder follows a bolt of lightning, elementary becomes mystifying once curiosity enters the scene. Asking why transforms an ordinary flash and a boom in the sky into a wonder of science. The same holds true in economics. Consuming and producing are no longer boring terms in a book when we ask why we consume and produce. Production and consumption represent unlimited marriages that build the greatest family tree ever recorded. They are each the outcome of the father of economics, Adam Smith’s invisible hand working through a conglomeration of self-interested decisions.

However, it is the third phase of economics that is the game changer. Wealth, and the pursuit of it, answers the question why people do what they do with their money. Pursuit of wealth is the X factor. Wealth finds its etymology in the old English word weal, which refers to a state of well-being. This last definition might provide a new lens to look through when thinking about money. The world is producing and consuming everything imaginable, and it is doing so based on the exchange of well-being.

On July 4, 1776, Thomas Jefferson, assisted by his editors, John Adams and Benjamin Franklin, authored the Declaration of Independence (* The Continental Congress actually declared independence on July 2 and America’s founding document was not signed until August 2, but let’s not disturb the free world’s proudest holiday). Within the declaration, Jefferson famously wrote, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.”

Could the US forefathers have included “wealth” in their declaration, clearly in pursuit of a better and more fair weal than the English crown was allowing? It is interesting that life and liberty are objective, but happiness, the one right not endowed but pursued, is subjective. As Honest Abe once said, “Happiness is a choice.” Viewing the pursuit of wealth like happiness will provide a framework for economics and begin to answer the whys all around us.

Let’s start small. Every individual within a microeconomy produces their craft with an expectation of some valuable result, monetary or otherwise. This result can then be used to finance or barter for some desired consumption. Each of these trades are rooted in motivation for an individual’s pursuit of well-being. Macroeconomics may carry some grandiose appearance of being a higher-level course of study, but it is nothing more than a description of the motives behind a group of microeconomies, their combined priority lists. Now, there are times this can be distorted, times when macroeconomies do not represent their makeup but rather design their makeup, times when a minority rules the majority, but such discourse will be saved for later chapters.

Before investigating how money makes the world go round, there are a couple more economic definitions to grasp. Mankind must produce to then consume, with any gaps being filled through trade, all in reference to the pursuit of well-being. Every free-willed transaction is a form of quid pro quo, meaning “this for that.” Here is where two very confusing terms enter the equation—price and cost. For the rest of this book, remember that these terms are not interchangeable.

Price Versus Cost

When a client hears a strategy for what to do with their money, their first follow-up question is typically, “What’s it going to cost me?” This is when unintended disagreements can arise. The client usually means, “What is the price of your recommended strategy?” The financial advisor is prone to going astray by guessing whether the client meant price or cost. These terms will make perfect sense in a moment, but before going further, bear in mind that households, businesses, and national governments argue and confuse such basic language just the same.

Price is the quantifiable amount paid for something. It is simple, it is scientific, it is indisputable, it is what it is. The United States of America paid X dollars to Russia for Y barrels of oil. The car buyer paid more for a Mercedes instead of getting a Honda. The child paid the work of three mowed lawns for one month of Xbox Live.

It is ordinary for the bystander to ask in any of these scenarios, “Well, how much did it cost?” The United States, the car buyer, or the child would be expected to reply in a certain amount of dollars paid or lawns mowed. But doing so is only sharing the price of consumption for the other party’s production. Little Mikey, the local lawnmower, is ignoring the most important feature in economics—wealth. This is because the worth of money, time, or any other figure is not in its possession, but in its use. The miser in Aesop’s fable loved to stare at his buried gold each day, but it was only until it was stolen that he realized staring at an empty hole was no different. The exchange of wealth has something to do with price, but it has everything to do with cost.

Cost is the value given up for something else of different value. Sadly, for those scientists hoping for a black-and-white outcome, cost is not so quantifiable. It is correct that the cost of Xbox Live was the price of three yards, but if 100 hours of Xbox Live translate to laughter and fun warring over Fortnite with friends, then what a small cost it was. The car buyer may have paid $100,000 for his Mercedes as opposed to $25,000 for a Honda, but while the price was high, a decade of luxurious riding and durability might equate to a great value in the mind of its owner. If the United States pays Russia $90 per barrel of oil for 27 million barrels in a year, the price easily translates to over $2 billion, but the cost of funding an adversarial relationship in geopolitics has many layers of complexity.

In the pursuit of wealth, price is a given, but uncovering cost is what counts. Finding the true cost is where you will find well-being, or a lack thereof. We all know the scene where the old man proudly stomps his boot on the ground and shouts, “This ain’t for sale!” and the cocky buyer replies, “Just wait, everyone has their price.” This exemplifies the disconnect between price and cost in dealmaking. Cost is only an objection in the absence of value; the rub is that value can only be fairly defined by the beholder. This perpetual compromise between the cost one is willing to pay and the value one is willing to give up exists at the core of every chapter ahead. If price were the only value needed to transact, humans would live in a linear world like robots plodding away from one task to the next. This book would be nothing more than a marketplace listing prices of goods sold in various currencies. But price only represents the symbols and letters that fit into the languages of cost. Cost, and the cost of wealth, makes up the gray space in economics that forever challenges the gray matter of humankind.

The relationship that exists between producers and consumers, both striving for well-being, is what guides a fascinating subject known as economic behavior. This subject comprises the psychological, emotional, financial, social, and cultural views of the transfer of wealth. The fact that each individual is unique and has free will means that there is room for harmonious collaboration; not every squirrel is chasing the same nut. But when one party’s pursuit of wealth is not found or satisfied, conflict can arise.