An introduction to classical economics, Doomed to antiquity?   no comments

Posted at 3:54 pm in Economics,Sociology

This week, I have begun to investigate the economic component of the independent disciplinary review; the main text I used for this was “Economics” by Parkin, Powell and Matthews. The authors describe economics as the social science of choice, and they differentiate between two main types, microeconomics, the economics of individuals and small businesses; and macroeconomics, the economics which concentrate on nations and large multinational companies.

The next large theme handled was production, including 4 main factors of production, land, labour, capital and entrepreneurship. Land refers to the raw materials used in the production of goods, labour the work that individuals must complete in order to produce the good, capital the assets that a company must have to produce the goods and entrepreneurship, the organisation and goals the business possesses.  Simply by looking at these factors it is clear that the digital revolution would fundamentally change what, and by whom goods are produced. The increase in digital media means that companies, and increasingly individuals do not require large amounts of natural resources, for example, a mash up artist just requires a copy of the intended parent files. Additionally many digital users do not require vast assets to produce goods, many of which can be created using a PC, potentially with a key piece of required software, this is far smaller than the large production facilities which many companies are required to possess. It is clear therefore that just from a basic level that the web has altered or has the potential to alter the fundamentals of economics. The authors contend that the information revolution in the 1990s and the subsequent growth of the web has altered the lives individuals in much the same way as the industrial revolution of the 1700s and 1800s.

Economics does take a negative view of individuals, arguing that all individuals are fundamentally self centred and individualistic, who always act according to self interest.(As an aside, economics  seems to view individuals as being governed by the id, and pleasure principle in Freudian psychology) This action is taken as a given by economists, who argue that the role of the state is to manage the wants of the citizens, as no individual can ever be truly satisfied. Scarcity is a common to all, as individuals inherently want for more, they can never be satisfied, due to limit of resources, making every decision a trade-off. This is easy to see in everyday transactions, as individual only has a finite set of resources, as such we must make decisions on how best to use our limited source. Based on the notion of limited resources, economics also focuses on opportunity costs, that is the cost of not doing something else with the resources an individual possesses. Interestingly economists only look at this in terms of profit and loss rather than simply opportunities for other activities, for example an individual may invest a significant amount of time developing social bonds by spending time with a large group of friends, the individual has not gained a direct use of their capital, and as such they may have been better investing their time into completing required work. Sociologists could argue that spending time with others fosters the gain of social capital, a potentially valuable resource. The investment of resources is always a trade off between activities, as such actively investing in the future reduces the resources available now, in exchange for increasing the potential for resources in the future.

As Individuals only have a finite set of resources, it is obvious that individuals benefit from specialisation, individuals cannot be the best at everything, but by specialising and gaining expert skill levels in one subset, they can produce the best goods they can. If multiple specialists from different skill sets combine, they can then trade, allowing all parties to gain a benefit, and access to goods otherwise denied to them. Interestingly this is where the growth of the web contradicts with classical economic theory, many of the youtube sensations, or web mash up artists are not experts in these fields, and in the vast majority of cases are not trading their ideas for a form of capital gain, but simply to be a member of a community, or to express creativity, of course it is possible to argue that these could count as investments into the future but it seems very unlikely that this is the motivating factor behind such actions.

The next large economic theory I focused on was demand and supply, a key tenet in economics, central to demand is the law of demand, which states that if all other factors are equal, the lower the cost of an item the higher the demand. It is possible that this is where the web has fundamentally revolutionised consumer behaviour, the web has allowed individuals to access information, at a relatively low cost, that would have potentially remained inaccessible, Wikipedia has allowed everyone with an internet connection to learn about a variety of topics, e-commerce has allowed individuals to access goods otherwise denied to them at a lower cost. The web is used in rural areas of developing countries to check the global price of goods to ensure that the farmers are getting a fair price for the goods that they produce. People generally want greater value for money, demand more, and value innovation more. Of course it could be argued that these social trends started long before the explosion of the massed web, but the web has fundamentally changed the perceptions of value and the way the global game is played.     

The coming week I will be returning to sociology to see how sociologists can help explain these trends, and consider whether we are simply in the start of a snow ball, and whether this trend could continue indefinitely in its current state, or whether these trends are somehow doomed. The web has allowed the Djinn out of the lamp, and people don’t want him to go back in. If classical economics is based on the “Wealth of Nations”, written in 1776, is the coming age characterised by the wealth of the individual, with classical economics being resigned to antiquity?

Written by ca306 on November 3rd, 2010

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