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The Economics of Everything IV: The Unknown, the Known and the Unexpected

What can we know and where are we actually heading to?

We have gone a long way from modeling the Wealth of Nations to modeling the behavior of people – at least partly and sometimes better than at other times. Is that everything or are there fundamental things that need to be discovered still? Further, will we ever be able to explain everything or will gaps remain just because of what the discipline entails? Even if not, following the topic is still necessary for everyone. We will end just as we began, with an outlook on how economics enters your own life – if you want it or not. So, let’s take a last deep dive into The Economics of Everything. This is the fourth of four parts of this mini-series.

Economics stands and falls with measuring. In one way or another you measure everything, and some things are easier to measure than others. So, to look at what we could achieve, let’s imagine a world in which everything is possible. This is the starting point of every economic analysis: a world of perfect information without any friction. If we had that, it would be easy to estimate the performance of nations and firms, calculate output and fair prices, estimate the decisions and behavior of people (imagine constantly being in others’ heads) – then all systems could be solved, we had a ‘General Theory about EVERYTHING' and Economics would be like physics: these problems exist, these are the exact cause-effect relationships and this is how to solve it. Clearly, this is not the case – unfortunately. As always then we need to find ways to deal with it, namely time, simplifications, ignorance, or new models. This shows in turn that we are limited in the scope of what we can know. Perfect knowledge is an ideal you cannot live up to.  Either you leave things out, on purpose or unconsciously or you assume certain values, or you add complexity by including new models, or you wait for time to pass such that new scientific findings might enable you to include certain factors. Even though it sounds appealing, Economics will not become an exact natural science with unanimously identifiable patterns which symbolize cause-effect relationships. Our human world is so complex, that a formalization goes beyond the means of current brain- and computation power. Deal with it – and we do.

Still two things are to be emphasized: We are not at the end yet and it remains a useful discipline to study as well as understand the world. To have a peek at the first point: there are still many challenges in decision-making, international trade (why or why not do nations trade?), how can you carefully embed behavioral factors into all (applicable) classical models or how do wealth and poverty actually come about? Or to speak in millennial challenges: can we solve poverty and inequality, and how can we integrate the environment into the aims of growth? To go into these domains Economics remains a very important subject to consider. Still, many things can help you in your own life already: Accounting and a close look at costs, benefits and discounting for all situations involving money. Understanding incentives, labor market decisions and having at least a sketch of the big Economic picture to make sense of inflation, currencies, political decisions and more. With a rudimentary understanding of Economics you are already able to make a bit more sense of the world you live in.

Whereas we dive deeper into the known and with that acquire some new knowledge of the unknown on the way – see the determinants of growth or the constituents of poverty, sometimes unexpected things strike us: why do people save less than is good for them? Why do states spend too much and why do we fall into preventable crises? Which types of costs are now crucial for businesses, and might these be important to consumers as well? All of a sudden you realize your hypothesis was wrong and that you must go into the totally different direction. Unlike Marx proclaimed, the Economy is not a deterministic engine, rather a tree branching out into all different directions, some we did not imagine some decades back: Environmental Economics, Sports Economics or Economics of Education just to name a few. And no warranty is given that today’s subdomains of Economics will prevail into the future and that no other will enter. As the German proverb goes: Firstly, it will come; and second, in another way than you thought.

I want to end with some running gags of Economics, some sentences you must remember, and be just to recognize a true Economist: 1) Effort is costly – a classic, describing that anything of value does not come without work, and sometimes this might distort incentives. 2) It depends – the classical answer to any economic problem, because often without the specification of underlying parameters different interpretations are possible. 3) Correlation is not causation – two things appearing together needn’t be related and you must be careful with inferences. 4) Just shift the curves – the classic phrase in macroeconomics when dealing with models. 5) Decreasing marginal utility (returns) – even though I like more, I like everything that comes on top a bit less (or it is a bit less productive). 

Of course, this is by far not everything. And of course, the title “The Economics of Everything” was as pretentious as it could possibly be. Still, I hope I could convey some useful introductory information which made Economics more graspable for you. In order to actually explain the Economics of EVERYTHING an encyclopedia of multiple volumes would be necessary, to cover every term, every model, every school and every position in the way it deserves. If you are an Economics student and found yourself in these writings – then you are on the right track – and if you’re not an Economics student – then you should consider it in which setting or way whatsoever. That is all I have to say.