Thursday, February 21, 2008

Money, Economics and Happiness

I study economics.I don't consider myself "an expert", but I believe I have somewhat deeper understanding what economics is than most layman. So I'm not really surprised how many people confuse economics with something it is not.
The typical example is that "economics is about money". It's not, believe me. Economics is about everything except of money (this is just a slight exaggeration). Money are studied, of course, but they are the least important thing of all in the economic science. It is interesting how they evolved as a means of payment, storage of value etc., but for most of the current economic research, money just don't matter.
What matters is incentives. Incentive is an understanding that doing something will have certain effect on me (possibly via something or somebody I care about). For example - buying an ice-cream will reduce my ability to buy other things, but also make me happier for a while (and fatter and sadder in the long-run). If you kill somebody, you probably go to the prison. That's an incentive not to do that - at least for most of the people.
Money are a way how doing something costly reduces my ability to do other things. But money themselves are useless. They are just pieces of paper that entitle their owner to do/get/see things. And most people care about doing things, not about these pieces of paper. They of course say that money matter, buy what they in fact mean that it is what money allow them to do that matters.
Sadly, some people don't realize this distinction and blame the economics. Even worse, some people confuse things money allow you to do with just money. Economics is general enough to allow people to be happy just because they have money, but people who tend to enjoy this kind of happiness don't end up happy at the end. Having money comes at the cost - friends, family, health, time...
Most importantly, economics is not about "people making money". Economics is rather general and most of it follows old but good rule: de gustibus non est disputandum, which means that economics does not question your tastes. Tastes (preferences) are taken as given - something that is axiomatically given. What economics does it that it takes these preferences, possibilities of behavior (like work, trade, marry,...) and resources and analyzes the outcome of interaction of people with (in general) various resources, tastes and abilities.
Because of that, economics is useful even if you care about only about number of plastic bags you have, or probability that you will find a wife or just about anything. Economics is a science about how you can reach these goals in the most efficient way. (Today, it is also science about how people solve complex problems when the quality of the solution determines their happiness, ie. how rational people can be, and many other things)
Be prepared for next part in the series "What is not Economics". Coming soon to your homes.

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