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Essential Economics from ASPL - Part One

12.11.2012

Over the next few months, we’ll be taking a look at economics and how this impacts our social, commercial and financial decision making. Most of our clients have a reasonable grasp of the basics through their education, business or the media, and we thought it may be useful and interesting to provide a little more background.

Economics is all about our struggle to achieve happiness in a world full of constraints

Too little time and too little money is available to do everything we want. Because we can’t have everything, we have to make choices. Economics is the science that studies how we make those choices and is indispensable if we really want to understand human beings, both as individuals and as members of larger communities and organisations.

Essentially economics is all about how people deal with scarcity

In addition to too little time and too little money, only a finite supply of natural resources such as oil and iron exist. Consequently we have to choose wisely about what to do with the limited resources we have available.

What does the past tell us?

For much of human history, people didn’t manage to squeeze much out of their limited resources. Standards of living were low and people lived only into their 20s until just a few centuries ago. The standard of living for one generation was no higher than that of previous generations. Except for the nobility, everybody lived at or near subsistence level century after century.

In the last 250 years or so however, everything changed. The process of rapid innovation led to the invention or exploitation of electricity, engines, complicated machines, computers, radio, television, bio-technology, scientific agriculture, antibiotics, aviation and a host of other technologies. Each of these items enabled humankind to do much more with the limited amounts of air, water, soil and sea available on Planet Earth.

The result was an explosion in living standards with life expectancy at birth now well over 60 years worldwide and many people able to afford much better housing, clothing and food than could ever be imagined a few hundred years ago.

Of course not everything is perfect and grinding poverty is still a fact of life in a large portion of the world, and even the richest nations have to cope with pressing economic problems like unemployment, persistent poverty or lack of access to key resources. But the fact remains that the modern world is a much richer place than it has been in the past and we now have sustained economic growth in most nations, which means that living standards have been rising consistently year after year.

Much of this is due to new technologies. Makes you wonder why technologies didn’t happen earlier.

In fact it wasn’t until the late 18th century, in England, that the Industrial Revolution got started and living standards in many nations rose substantially and kept on rising, year after year.

There were four main factors that combined in the late 18th century to accelerate economic growth:

  1. Democracy (i.e. people are more likely to invest if that investment is protected by the rule of law instead of depending on the whim of a tyrant). Also the governments of the democratic era have been better at incorporating the views of the merchants and manufacturers who have created the wealth that we now enjoy;
  2. The Limited Liability Corporation. Under this business structure, investors lose only the amount of their investment and are not liable for any debts that the Corporation is unable to pay. Therefore limited liability greatly reduces the risks of investing in businesses;
  3. Patent Rights. Before patents, inventors usually saw their ideas stolen before they made any money. Patents give a financial incentive to produce lots of inventions;
  4. Widespread literacy and education. Without highly educated inventors, new technologies simply didn’t get invented. Consequently the decision that many nations made to make primary and then secondary education mandatory paved the way for rapid and sustained economic growth.

These changes gave us a world of growth and opportunity ... an abundance so unprecedented in world history that the greatest public health problem in many countries today is obesity. A situation our ancestors would never have believed possible.

By Adrian Smith

Other articles in this series:

Essential Economics from ASPL - Part Two

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Regular contact, valuations, knowledge of the market. Mr W - Gloucestershire

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Adrian Smith

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