In today's society, we do not lack advanced research, but common sense. It can be said that the root cause of many social problems is due to a lack of common sense. Therefore, this article will make it simple from the perspective of economics and share the ten most basic common sense of the economy and society. This common sense may not be profound, but they are essential to understanding the world we live in and making informed decisions.
First, the underlying logic of the economy and society
Since the dawn of human beings, how to make a living has been the primary problem they have faced. It can be said that the history of mankind is a history of how to solve the problem of livelihoods, which still exists today, more than 200 years after the Industrial Revolution. In order to solve the problem of livelihood, people must use various resources and means, but unfortunately, human society is not God's Garden of Eden, and resources are not abundant. The fundamental characteristic of human society is the scarcity of resources and means. This scarcity is not an assumption by economists, but a reality. Scarcity is the starting point of economics, and there can be no economics without scarcity.
Because of scarcity, humanity has to make a choice. And this choice involves three basic questions: 1. What to produce?2. How to produce?3. How to distribute the product?These three issues constitute the well-known resource allocation problem, the purpose of which is to efficiently meet human needs and solve the problem of human livelihood. Before these three questions, there is one more crucial question: who will make these choices?According to how to answer these four questions, the economy and society can be divided into: traditional economy, planned economy, market economy and mixed economy.
Traditional economies are generally societies with relatively backward production efficiency, such as tribal societies. Such an economic system mainly answers these questions through Xi and conventions. A purely planned economy emerged in the last century, and countries represented by the former Soviet Union practiced a planned economy. In this kind of economic system, it is up to the sector to answer all four of the above questions, and the "visible hand" decides everything. However, it turns out that this economic system does not answer these questions, and countries with planned economies are generally mired in shortages, poverty, corruption, and inequality. The pure market economy is a private economy, property is private, the vast majority of choices are made by private individuals, and there is very little intervention in the market. The allocation of resources is done through Smith's "invisible hand". It turns out that the market economy is a very efficient system of resource allocation, and although it also brings inequality, it is an inequality at relatively high income levels. A mixed economy is an economic system that combines a planned economy and a market economy. Especially after the emergence of Keynesianism in 1936, the intervention of the ** sector in the market became more frequent, and this economic system has become the most common economic system in the world today. The only difference is that some countries are more market-oriented, while others are more program-oriented. The most important difference between different economic systems is the ownership of property, and the different ownership systems lead to different people making choices, and the whole system of production, exchange, and distribution is different. Behind this is the difference in the system of creation, transmission and distribution of wealth. Generally speaking, the market economy of private property is the most efficient mechanism for wealth generation and distribution, and the regions with high levels of economic development in the world are all inclined to the market economy without exception.
As shown in the figure above, the closer you are to the left, the closer you are to the planned economy, and the closer to the right, the closer to the market economy. The graph shows the comparison between the 80s of the last century and the beginning of this century. It can be seen that the advanced economies are close to the right, while the relatively backward economies are closer to the left. After the reform and opening up, China has gradually developed in the direction of a market economy, thus achieving decades of rapid economic growth.
The 20th century was a testing ground for the economic system, especially the post-war confrontation between the planned economy and the market economy. The contrast between South Korea and North Korea and East Germany and West Germany is particularly famous. As we all know, the market economy has triumphed. However, the process of understanding these two economic systems has been full of twists and turns, and many people have paid a heavy price when criticizing the market economy. Only a very small number of people adhered to the market economy in difficult situations, such as Mises and Hayek of the Austrian School. Therefore, the first duty as an economist is to defend the market economy. Different economic systems determine different wealth creation and distribution mechanisms, and also determine the scope of power, which is the underlying logic of the economy and society.
2. 10 basic common sense of the economy and society
In the vastness of modern society, I have always believed that what we lack most is not those inscrutable research, but the common sense that runs through our daily lives. It can be said that when it comes to social problems, the crux of most of them is the lack of common sense. The essence of education is not to acquire new knowledge, but to master critical thinking and familiarity with the cornerstone of how society works—common sense. Only on this basis can innovation and creativity become a reality. Common sense, it is like the basic plate of the precision instrument of society, which is indispensable. The following are the 10 most basic common senses in the economy and society:
1. There is no such thing as a free lunch
There is no such thing as a free lunch"This economic proverb is like a bright pearl, shining and widely known. Its origins can be traced back to a number of American bars in the 1870s, which were named after the:"Free lunch"To lure customers, but only if they buy at least one alcoholic drink. Although"Free lunch"The value is higher than the value of a glass of wine, but since the vast majority of customers buy more than one glass of wine each time they visit, the bar is still able to recoup its costs and make a profit.
In 1975, Milton Friedman, an American economist known for advocating laissez-faire capitalism, quoted science fiction ** "Raging Moon" and published a book called "There Is No Free Lunch in the World"."Free lunch"The concept is more widely known. The central idea conveyed by this proverb is that it is impossible to reap benefits without cost. The most fundamental feature of the world we live in is the scarcity of resources, which in turn are used for multiple purposes, which is further exacerbated by the fact that scarcity is further exacerbated. So people need to make choices or trade-offs when making decisions. As long as you make a choice, you have to give up something, and what you give up is called opportunity cost in economics. So there is an opportunity cost to get any benefit. This is probably the most basic common sense for us to survive in society. Forget about that, and it's very easy to get into someone else's setup"It's free"Pitfall. Generally speaking, things that claim to be free are often the most expensive (the opportunity cost is the largest, which amounts to a waste of resources)!
2. The law of diminishing marginal returns
The law of diminishing marginal returns, a common phenomenon in economic society, is also the basic common sense in our lives. In a broad sense, it covers both production and consumption. In the field of production, this law depicts a continuous downward trend in the output per unit of input as a certain element is continuously inputted, once a certain critical point is crossed, when other conditions remain constant. Let's take the example of a gradual decline in the marginal return to capital when labor is stable. This tells us that sustained economic growth cannot be sustained through endless capital accumulation. The other factors also follow this law, implying that there is an optimal harmonious ratio between the various factors of production, and once broken, the production efficiency gradually decreases. In the field of consumption, it is more accurate to say the law of diminishing marginal utility, which indicates that as consumers' consumption of a certain commodity increases, the satisfaction brought to consumers per unit of goods will gradually decrease. In other words, when the demand is satisfied, the consumer's interest in the product may gradually wane, or even become bored. Diminishing marginal returns are a regrettable law for humanity in the field of production. In order to increase productivity, we have had to find new ways to increase investment in innovation and drive economic growth through technological progress. However, in the field of consumption, diminishing marginal utility effectively inhibits human greed, becomes a negative feedback mechanism to prevent excessive consumption of resources, and helps economic systems and ecosystems maintain a certain degree of balance. 3. ** is the transmission mechanism of real information
Milton Friedman, a famous American economist, incisively pointed out in his book "Free Choice" that in organizing economic activities, the ** mechanism is like a clever conductor and plays three core functions:
First of all, ** is like a smart messenger, transmitting all kinds of information. They shuttle through the streets and alleys of the market, transmitting information on supply and demand, cost-effectiveness and other aspects to every economic participant, so that the flow of information nourishes the entire economy like blood.
Second, it provides an incentive to adopt the lowest-cost mode of production, using available resources for the most valuable goals. It is like a wise mentor, guiding producers to pursue profit maximization and consumers to pursue utility maximization, so as to make the most effective use of the resources of the whole society.
Finally, ** determines how much people get from the output, i.e., the distribution of income. It is like a fair referee, distributing income according to everyone's contribution and ability, so that everyone's efforts can be duly rewarded.
These three functions are so closely interrelated that they are like a harmonious whole. There is now a growing recognition that it is wiser to make choices for yourself than for others to make choices for us. However, to make the right choices in economic activities, we need real information, and it is this transmission mechanism of real information.
The real information in the economy is scattered in the minds of each actor, such as the demand information for products is scattered in the minds of each consumer. No single organization can collect all the information, let alone the dynamic nature of it, which makes it more difficult to collect and process. The planners use their own subjective judgment to substitute the real needs of the masses to arrange production and distribution, which is an important reason for the failure of the planned economy.
However, this true information can be reflected in the market** through the market's transactions. This, in turn, provides information to consumers and producers, motivating them to respond correctly until people's needs are met efficiently. In the same way, it also provides real information about each person's qualities and abilities, and puts a price on them, so that those who can afford them can earn a higher level of income, helping to give full play to everyone's talents and make the best use of their talents.
4. Voluntary transactions are beneficial to both parties to the transaction
Adam Smith's central insight in The Wealth of Nations is that voluntary transactions must occur on the premise that both parties believe they will benefit from them. This insight, while simple, is often overlooked, leading to many misunderstandings in economics. For example, people often mistakenly believe that the size of the pie is fixed, and that the benefit of one party necessarily means the loss of the other. To express this insight, two models are used in economics:
1.Ricardian model: This model emphasizes how specialization can improve the welfare of all parties. Before **, the boundaries of production possibilities in each place were limited to production and consumption within itself. However, through the specialized division of labor based on comparative advantage, although the two sides cannot produce outside the border, they can consume outside the border, and this welfare improvement is brought about by voluntary trading.
2.Social welfare model: This model illustrates the benefits of voluntary trading by defining the consumer surplus (the difference between the maximum that the consumer is willing to pay and the actual payment) and the producer surplus (the difference between what the producer actually receives and the minimum that the producer is willing to pay). Stops when the trade reaches an output where the marginal benefit is equal to the marginal cost, and to the left of that output, any transaction gives the consumer a surplus and the producer a surplus.
A free-trade market economy is like a win-win game, and no country has become impoverished because of **. On the contrary, the absence of ** will lead to war. From a historical point of view, human society has moved from war to victory, from a zero-sum game to a win-win game, which is undoubtedly a great progress!
5. The result of the behavior is far more important than the motivation
It's not uncommon to hear people say, "Don't look at what he says." It's about what he does", in fact, this sentence is still missing, that is, "it depends on what the result is". Why are the results important?One of the most important reasons is that the motive is good, but the result is bad, i.e., "good intentions do bad things". For example, there are endless "utopian" ideas in human history: the designers of "utopias" have no bad motives, and the designers put forward the ideal blueprint of "all beings are equal" with the most compassionate feelings of human beings. But almost all utopian practices in history have failed, and they have failed miserably. The closest "utopia" to you is the planned economy that became popular in the world in the last century. Of course, the starting point of the planned economy is also very good, "eliminate the capitalists and create an ideal society in which everyone is equal", and no one can deny the good intentions of this motive, but the countries that practice this blueprint have not found a way to realize it, and the emancipation of human nature has suppressed human nature, and the promotion of equality has created a stricter hierarchy, and the result is as everyone knows. The outcome of the action is far more important than the motive, and the road to hell is often paved with good intentions!
6. The world is full of uncertainty
In his book Risk, Uncertainty, and Profit, economist Frank Knight deftly depicts the subtle difference between risk and uncertainty. He proposes that risk is a quantifiable element, and although we cannot accurately ** the outcome, we can calculate the probability of several outcomes that are most likely to occur. Uncertainty, however, is chaos, and we don't even have enough information to determine the range of possibilities.
The core characteristic of the economic system is uncertainty, which is full of a series of interactive feedback mechanisms, like the butterfly effect, where a small change can lead to a large change in the whole. Today, the complex international and domestic environment has exacerbated this uncertainty. Black swan events have frequently emerged, such as the Sino-US war, the new crown epidemic, the Russia-Ukraine war, the Palestinian-Israeli conflict, etc., which have almost reshaped the pattern of world politics and economy.
In this context, uncertainty becomes undescribeable and unmeasurable, and people naturally cannot ** the future. This leads to an important point: in a world of uncertainty, we can't plan holistically. Large-scale social engineering is doomed to fail because humanity seems so small in the face of great complexity. The main thing we can deal with is the problem of probability, beyond which human reason is currently powerless.
Therefore, we should not put too much faith in human rationality to plan society. Of course, sporadic social engineering is feasible, and the progress of human society is gradually accumulated through these little improvements.
7. Human beings generally have an "animal spirit".
John Maynard Keynes once said, "The market is driven by the animal spirit of man, not by rationality." Looking back at the economic bubbles in history, Keynes's assertion is confirmed. At the heart of the criticism that economists did not foresee the 2008 financial crisis is that mainstream economic models assume that humans are rational and exclude irrational "animal spirits" as exceptions. Naturally, economics based on this model could not ** the advent of the financial crisis.
Perhaps, from a long-term perspective, human behavior shows a rational side, and mainstream economic models have some applicability in this regard. However, in the short term, human behavior is influenced by many factors, and emotional performance far exceeds rationality. Think about it, in real life, many of the big decisions we make are not based on reason, and sometimes just a good night's sleep or a casual remark from someone else changes our decision. Economies are constantly emerging and evolving. Short-term changes can affect long-term trends or even change the direction of the entire development. Therefore, a long-term rational model cannot ** short-term trend changes.
8. A country's wealth depends on its productive capacity
When talking about wealth, we usually define it as the total amount of products and services produced. For most of human history, society was in a state of self-sufficiency, with less division of labor and low production efficiency, so the wealth created was also very limited, and people were basically on the verge of food and clothing. However, it has only begun to emerge in the last 200 years that rapid economic growth has begun.
The traditional economy is a relatively static economy that can easily fall into the "Malthusian trap". In the case of underdeveloped division of labor, immature market and low level of technology, output will naturally be less. However, after the outbreak of the industrial revolution in the 18th century, the human economy began to enter the era of large-scale division of labor and **, and the creation of wealth increased geometrically.
With the increase of wealth, consumption also increases correspondingly, people's living standards continue to improve, and more and more savings. These savings provide more opportunities for future investments in technology, capital, etc., making the future have greater growth potential. Capital increases production efficiency, and industry creates more added value than agriculture.
In fact, the process of industrialization is to turn the luxury goods of the past into commodities that ordinary people can afford to consume now, that is, the process of popularizing luxury goods. The transfer of industry has given countries all over the world the opportunity to industrialization, but all this is based on marketization.
9. Inflation is mostly a monetary phenomenon
Milton Friedman once said, "Inflation is a monetary phenomenon everywhere and at all times". The relationship between over-issuance of money and inflation can probably be explained by the quantity theory of money in economics. The quantity theory of money was first fully elaborated by the Scottish philosopher David Hume (in fact, there were similar ideas before Hume), and then succeeded by the economist Erwin Fisher, and developed by Milton Friedman. This can be expressed by a simple equation: mv=py. where m is the monetary aggregate, which can be expressed as a narrow currency m1;v is the velocity of money, which can be expressed when the currency changes hands at a certain time, such as a year;p stands for the general price level;Y represents the actual level of output.
With a simple full differential transformation, we can get the following equation: m%+ v%, p%+ y%. where m% represents the rate of money growth, v% represents the rate of growth of money circulation, p% represents the growth rate of the general price level, i.e., the inflation rate, and y% represents the real output growth rate, i.e., the economic growth rate. Generally speaking, it can be assumed that the growth rate of money circulation rate and the economic growth rate change roughly synchronously, and the following formula can be obtained: m% p% This formula can be understood as inflation** and the growth of money, that is, the central bank over-issues money to bring inflation. There is ample evidence that this conclusion is explanatory. The inflation caused by the over-issuance of currency leads to the depreciation of the currency in the hands of residents and the decline in purchasing power, which is actually the transfer of residents' wealth to the hands of the residents, so that the wealth of the residents can obtain additional purchasing power, which is essentially a kind of income redistribution. Of course, gaining purchasing power in this way is far more discreet than direct taxation, and it is not easy to cause dissatisfaction.
10. Freedom and dignity are protected by private property.
Lord Acton once said, "Those who oppose the system of private property have few elements of freedom." "It is true that private property is the cornerstone of freedom and dignity. Private property gives individuals the right to choose freely, to make their own decisions about whatever they want to do, as long as they do not violate the law, without regard to the eyes of others, and without dependence on others. In the era of the planned economy, residents without private property had to rely on others for their livelihood. If you look at the history of that era or realistic literary works, you will find that not to mention a village head, but the captain of a small production team can decide the fate of others. What you can do, what you can get, it's all up to him. If you want to do something, you have to go through the back door, and there is little freedom and dignity for the individual. The past may seem far away, but we can look at examples in reality, which abound. For example, the problem of parents' retirement and pension: in order to support the development of future generations, many elderly people give their salary cards to their sons, and then the sons will provide for their old age. It doesn't seem to be a problem, if the son is more filial, this method is also very good, that is, to meet the needs of the elderly, and to harmonize the family relationship. But according to my observation of the real situation, it seems that there are many cases where sons and daughters-in-law are not very filial, and in this case, the old man has to look at the face of his son and daughter-in-law (even if he uses his own pension), and in this case, the old man has no freedom and dignity in life. On the contrary, if you use your pension by yourself, you can spend your old age very decently, you can do what you want, and future generations will respect you more.
3. Economics is only a perspective on the economy and society
John Maynard Keynes once said, "A master of economics needs a unique and multidimensional combination of talents." Not only does he need to excel in multiple areas, but he also needs to make the most of what is scarce. In a way, he should be a mathematician, a historian, a statesman, a philosopher. He needs to think about particular issues from a general perspective, taking into account both the abstract and the concrete. For the future, he needs to study reality with history as a mirror. He must pay attention to all aspects of human nature and institutions. He should be as detached and unfettered as an artist, but sometimes he needs to be down-to-earth like a politician.
He added: "It would be great if an economist could show humility and competence on a par with a dentist." "Economics is only one of the ways through which we look at society, not even the most important. Our perception of society is like that of a blind man touching an elephant, and various disciplines provide us with different perspectives. However, any theory is only a framework for thinking about the problem and should not become a dogma that binds us.