ECONOMICS FOR THE UNINITIATED
Many who have not been initiated in the dark arts of economic theory and practice hold the simple belief that economics is really just about money. Although money plays an important part, economics has far greater scope than that.
The easiest way to gain a grasp of the role of economics in human affairs is to start your own business after first assessing its viability and concluding that you have a genuine prospect of succeeding. You can then put your plan into action and watch how economics works in practice.
A warning: many “good” ideas fail to fructify because of the “me” factor: how much money will this make for me? Rather than how will this idea be of benefit to others. This is a crucial judgment because those “others” constitute your market - and the market is always the ultimate arbiter in determining commercial success and failure.
Speaking of which, the essence of commerce is trade - between people, businesses, nations. Every trading transaction involves a purchase and a corresponding sale – and it takes place at a price.
How is that price determined? The uninitiated imagine that the price at which goods and services are traded is determined by (i) the seller; (ii) the buyer; or (iii) negotiation between them.
[It’s important not be taken in by appearances in economics: it may appear that the seller, having taken account of all the (i) direct costs incurred on manufacture, (ii)overheads and (iii) marketing, is ideally placed to determine how much he requires to cover all that, and also to allow for a reasonable profit margin - and hence the price at which he is prepared to sell his product. But in reality only the buyer, the customer, decides how much, if anything, he is willing to pay.
Naturally, as trading involves human action, there may be some haggling over price, but this apparent negotiation should not mask the reality that a deal is clinched only when the customer is prepared to part with his money. If the seller complains that this price will not even cover his costs, he is at liberty to walk away.]
Note that technical innovations, including the internet, do not alter the fundamental principles of trading. In earlier days, buyers and sellers came together in the “market place” – a physical location in the town or village at which, on certain days, wares were displayed, and transactions resulted. The closest modern-day equivalent of the traditional market place is probably the auction-house in which “specialty” items, such as antiques, works of art, racehorses or vintage cars are displayed and closely inspected before bidding commences under the discipline of the auctioneer and his hammer.
Most trading today occurs on the world-wide-web, where offers are advertised, deals are struck, and payments are made via a secure “pay-wall” – a process in which sophisticated software guarantees privacy.
At this point we can introduce the role of money. In many primitive societies the completion of deals relied on exchange of goods or services in a system of barter. You may, for example, require a quantity of flax of a particular quality for producing cloth, but in a system of barter you would need to pay for the flax by offering something of value in return – something that the flax supplier requires and is prepared to accept in order to conclude the deal.
Such a system has much to commend it. Given that the concept of money does not feature, there can be no “inflation” – and no scope for argument over fairness in what is, after all, a “take-it-or-leave-it” trading system. If the provision of services, rather than goods, is involved, there may be some argument over their quality and the standards applied, and degrees of satisfaction will obviously influence reputations in this critical area of human action.