Like a ship in the ocean, when there is a slight breeze at their back people take it for granted and expect it to continue. In a period of economic growth people get stuck in a false sense of security. People live a comfortable life and expect it to continue forever. When the tide suddenly shifts and they don’t expect it they get completely thrown off their axis. People really do lose their jobs, their house, their business, their spouse when a recession hits and it cripples them psychologically.
I call this situation economic naivety. It’s a curse that 90-95% of people are victims of. One of the principles of The Grit Zone is to understand the world as it exists, not as you wish it to exist. Willful ignorance, sentimentality, and complaining about unfairness will not help you when you lose your job because of a recession or technological change.
Economic Concepts For Daily Life
Do you automatically think of a bunch of charts or calculus when someone says economics? This is an incomplete picture that economists have created about the subject. Economics isn’t a science and should not be treated like one. Economic models help to explain the world, but they are far from perfect.
The best way to view economics is as a subject with heuristic to better understand the world.
Opportunity Cost – The benefit missed when an investor, individual or business chooses one alternative over another.
Scarcity – There are unlimited human wants and needs in a world of limited resources.
Supply and Demand – The relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. … The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good.
Productivity – This measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output.
How To Learn To Understand The Economy
You will learn about the economy by studying economics and finance. This is how you will acquire apprentice level knowledge of the economy. A lot of these theories fall apart when they encounter the real world. Once you start to relate economic theories to the real world and understanding their respective strengths and weaknesses you can say you are starting to understand the economy.
The number one thing I recommend anyone do, whether they have prior knowledge or not, is watch the video linked below. How The Economic Machine Works by Ray Dalio. Ray Dalio is a billionaire hedge fund manager, and the author of Principles: Life and Work, which I highly recommend reading. As a hedge fund manager (investment fund) manager with a net worth of $18 billion it’s fair to say he understands the economy.
The next thing I recommend you start doing is making a habit of learning the language of financial markets. Economics and finance are their own languages, albeit easier to develop a basic understanding of than most languages. To learn the lingo and jargon I recommend you watch Bloomberg Markets: The Open.
Jonathan Ferro hosts an hour long program centered around the Opening Bell on Wall Street. The program showcases the most insightful and interesting Bloomberg charts and graphics, as well as research, commentary and analysis. (source, Bloomberg) That link will take you to the most recent episode of The Open. You can watch these episodes at any point, they are a hour long and you can watch them at any point on the Bloomberg website. I recommend you listen to it on your commute to work, or when you have an hour to spend listening and watch the financial news.
Essential Study For Understanding The Economy
These 3 books are my top recommendations for understanding the structure of the economic system.
- Basic Economics by Thomas Sowell. This is a common sense guide to understanding the economy.
- The Ascent of Money: A Financial History of The World by Niall Ferguson. The greatest living historian writes about the financial history of the world, a critically important book.
- Principles of Macroeconomics by Gregory Mankiw. A comprehensive guide to the economy on the macro scale.
This will give you a very solid framework for understanding the economic and financial system.
If you want to understand the economy, you should not start by reading Karl Marx, John Maynard Keynes, Ludwig von Mises, or Adam Smith. You can save these authors for later when you have a better foundation for understanding the general economy.
Greg Mankiw Reading List
For a deeper dive into economics, Greg Mankiw, Professor of Introductory Economics (ec 10) at Harvard has a recommended reading list. It’s fair to say that Greg Mankiw is an expert in Economics, I would highly recommend checking out the books he recommends.
Every few years, I teach (in addition to ec 10) a freshman seminar for about a dozen students. The seminar is essentially a book group for students who are taking introductory economics concurrently or who have advanced placement credit in economics. Here is a list of this year’s books:
- The Worldly Philosophers, by Robert Heilbroner
- Spin-Free Economics, by Nariman Behravesh
- Capitalism and Freedom, by Milton Friedman
- Equality and Efficiency: The Big Tradeoff, by Arthur Okun
- Nudge, by Richard Thaler and Cass Sunstein
- The Return of Depression Economics, by Paul Krugman
- Animal Spirits, by George Akerlof and Robert Shiller
- The Myth of the Rational Voter, by Bryan Caplan
- Economic Gangsters, by Raymond Fisman and Edward Miguel
- The Price of Everything, by Russell Roberts