The key tension here, as I’ve noted before, is that economics tries to be a precise science while seeking to describe messy human reality. In this spirit, economics, or at least some branches of it, have posited that humans are rational - not in the sense that we normally understand that term, but in the sense that they behave in ‘economically optimal’ ways, given that particular branch’s definition of optimal. There is even a term for this: homo economicus.

Under this line of thinking, it is said that one rationally carries out a cost/benefit analysis of every action prior to a decision. (Mind you, this needn’t be with a spreadsheet and 3 pie charts, it could be intuitively and even inexplicably.) In practical terms this is said to mean that as consumers/producers we seek to maximize utility/profit. (For a more precise and unadulterated definition of the oft-misunderstood word ‘profit’ see Episode 004.)

Weighing Wants

To get to the heart of this, we have to look closer at the term value, which I introduced in the aforesaid episode, and have discussed elsewhere in this series. Specifically we have to consider perceived value, a fundamentally subjective concept.

As an example, when we discussed price in Episode 003 we saw how it’s a sort of ‘negotiation’ between the buyer and seller. In the current terminology we’d say they’re each seeking to maximize their utility/profit, ie, they’re being rational. This could depend on several factors, including, for example, supply and demand which we discussed in Episode 017 but ultimately if something is subjective, how do we pin it down with precision? How do we put a number to it?

Furthermore, how do we satisfactorily explain or predict such perceptions of value among individual actors in the economy? For we have also seen, as I’ve noted previously, if we can’t measure something do we even know it well enough?

All this goes to the very tension of economics I was referring to.

In Fool Bloom

So far we have considered the question of a single entity, but let’s see how this pans out in aggregate. Imagine it’s 1600s Europe, the early age of exploration, and an exotic and rare new flower is introduced into a country. Instantly, it becomes a status symbol for the rich and everyone’s after them - the price of the flower skyrockets, so much so that at its peak, one variety of the flower is sold for several times the salary of a skilled craftsman!

If you think this is contrived it’s not, this actually happened in the 1630s in the Dutch Republic, then undergoing the Dutch Golden Age - the Tulip Mania.

It may be irrational, in our normal sense, for a buyer to be rational (an alcoholic seeking to buy more alcohol and thus find more ‘utility’?) but if this is scattered about among individuals here and there it’s one thing. But we can see what happens when everyone joins the bandwagon of this irrationally rational behavior, such as in the Tulip Mania mentioned.

If tulips can be sold at such exorbitant prices as hinted, why would anyone be incentivized to grow wheat or other essential crop? Given that buyers are valuing, and thus paying, more for a shiny new flower than food? But how does that perceived value of the rational actor square with the real and proper value lost in the economy as a whole, and ever in the long term, by such collective irrational exuberance?

So the price of the given asset-in-obsession goes up and up and up - and the more it goes up the more people think it’ll go up, and so well, ‘rationally’ they buy it up, and the more it goes up! This is what is called a bubble.

But how long and how big can we go on inflating a bubble? What happens when the music stops? And that is exactly what we will explore next time: arguably the mother of all crashes in financial history!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• The Intelligent Investor, Benjamin Graham - read from the very “Father of value investing”

Let’s meet our fictional friends to start with. Steve and Bryan have been in the silversmith and pawn-brokerage business for some time now. In recent days however, having gained the reputation of the town, they have found a way to extend their activities. The townsfolk are tired of having to carry around silver for all the payments, and as the only shop in town dealing with large amounts of silver, Steve and Bryan have offered to let customers deposit their silver in their vault in exchange for a written and signed note representing the amount deposited. Since that note represents a certified quantity of silver, the depositor can then use that note instead of actual silver on a day-to-day basis. Given Steve and Bryan are trusted people around, their promise on the note is enough to satisfy the depositor that any time they want their silver back, they can simply return the note for the amount.

One weekend after a couple of weeks of such activity, Steve and Bryan are sat in the garden with Brenda and Irene and having a chat. Steve is like, so yeah we have all this silver sitting in our vault, Bryan adding, but the curious thing is nobody has come to claim their silver back even though we gave them a written promise. Brenda chimes in, well given that you’ve mentioned the amount of silver on each note, and anyone can use any note to come back to claim the silver at any time, they’re not in a hurry, after all it’s easier to handle such notes rather than heavy sacks of silver.

Irene then goes, but wait, if you are sitting on all this silver, and they won’t come back to claim any of it because it’s easier to handle the notes, maybe you shouldn’t leave the silver idle, you should maybe lend some of it out?

In Gold We Trust, But...

So yes, that’s the birth of paper money. (And Steve and Bryan were the proto-Goldman Sachs? Or is it Silverman Sacks?!) But if you look closely something else is happening here. Imagine our friends have a thousand pounds by weight in silver in deposit, against which they have given out those notes representing a thousand pounds. And then, going by Brenda and Irene’s observation, they lend out a 100 pounds of the silver, to other people who need money. That silver goes into the economy and... you guessed it, someone along the line deposits that silver back into the vault in return for notes promising 100 pounds of silver. So now, we have 1100 pounds in the economy -- against ONLY a thousand real pounds of silver.

This may sound like jiggery-pokery, but this is practically what EVERY bank does when lending you out money. Economists even give it a respectable-sounding name - Fractional Reserve Banking. In other words, only a fraction of the gold or silver representing the issued paper money is actually in the vault at any time.

And guess what, governments are fine with it. Based on the state of the economy and other factors, governments have even encouraged banks to engage in such activity.

You will recognize this from the following sentence on many currency notes: I promise to pay the bearer the sum of 10 pounds (or whatever other original indicator of weight, such as peso, libra/lira etc.)

And different forms of this have had different names across history: in some versions, a bill of exchange, a promissory note, or an IOU (literally “I owe you”, with kind of the same gravitas as ‘BRB’ and ‘OMG’ I hear you say?)

The Preserve of Reserve

The reality here is the fact that, if this is done within limits, it can actually stimulate the economy. Imagine in our story that the economic activity -- the sum total of stuff being bought and sold -- in the town was in fact to the tune of 2000 pounds of silver by value, but the actual silver in possession was only the thousand. By reusing the reserve as depicted, it’s possible to have 2000 pounds by way of those promissory notes in circulation that then facilitates the desired economic activity. Without adequate amount of money in an economy to match the productivity, productivity would decline, as we saw very vividly in Episode 023 while discussing money supply.

And after all, as I’ve reiterated, ‘money’ is just the measure of value, so what’s really the difference between using some shiny metal to represent that value or a note signed by a trusted party that represents that metal that represents...?

But of course life’s not that simple. First who is Steve and Bryan, or in real life, any bank to decide to multiply money in this way? In other words, as said in my introductory quip, to literally ‘make’ money? Isn’t it still on some level someone creating money out of thin air? (I can’t decide whether to make a rabbit hole or a hat-rabbit analogy here!) What privileges to such banks get by doing this? Surely when this trend first emerged, people were more than happy to substitute carrying sacks of gold and silver in exchange for those notes which was easier to hide and especially carry around. That’s why it’s persisted despite such questions.

And we in the current day have taken it even further, by entrusting small pulses of electricity to move data on a spreadsheet on some central computer by waving a piece of electromagnetized plastic with a satisfying beep? In other words we have exchanged frail paper currency for even less tangible current!

So yes, as I’ve also reiterated, it all depends on trust. We trust that those digital pulses or the ink on paper with that promise mean something, that they represent the stated value of money.

And what happens when there’s even the smallest fissure in that trust, when someone suspects the vault has less silver than the notes floating around? And when people, all the people with those notes, then rush to the bank to get their silver back? That’s a juicy topic for another day!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• Seeeking Symmetry, Finding Balance, Making Harmony - on the origins of the early modern banking system

We haven’t met our fictional friends lately. Brenda has news for Steve, Bryan, and Irene. The coming weekend is to be another one of those once-a-few-years lavish banquets thrown by the Lord Mayor to all the townsfolk. This is a tradition when there has been a bumper harvest that year.

Steve’s first to exult, he’s like, yess, this is great! (Simple guy alert!)

And then Bryan’s like, wait so this banquet only happens when we have a surplus harvest, not if we just break even, or worse. (Perceptive fella him!)

Brenda confirms, yes, this year we have a surplus of 200 bushels, they’ll be put to good use for the banquet. (Facts-girl is back!)

And then Irene... Irene goes, wait a minute, if all the surplus is used up in one grand party after harvest, what progress are we making in the long term by way of additional grain accumulation and reinvesting?!

Oh, What’s the Point!

So can see the contours of the trap emerging. Thomas Malthus in the late 1700 posited this cycle: an increase in a population’s food production leads to an improvement in their condition, but only temporarily as it leads to greater population, which leads to resource depletion on account of greater consumption, then starvation, famine and disease, and thus a drop in the population, and back to square one.

In other words, suggesting that prosperity would always cancel itself out and human lot can never really be improved beyond some sort of a subsistence common denominator. One might see a kind of zero-sum-game cruel gruel with lots of oh-what’s-the-point toppings thrown in.

Being an Anglican cleric, he explained this suffering as ordained by God to impose virtuous behavior. Furthermore, Malthus had certain “ideas” around population control and dealing with “the lower classes”, ideas of the sort we wouldn’t be particularly comfortable talking about in decent discourse.

So, was Malthus right at all?

Time-Warp Traps and Steam Valves

I think by now the answer is fairly clear to us. I mean, some of the initial observation holds true, that an increase in production leads to an increase in population. Among others, I’ve discussed the effects of this swing in TecC 36 and TecC 40 where I discuss the effects of it against the great rise in population in the first centuries after the first millennium and then its drastic fall closer to the mid-millennium.

In fact, this had indeed been the lot of human societies since the dawn of agriculture and sedentary civilization (TecC 10). But the funny thing is, by the time Malthus was writing this, the Industrial Revolution was picking up steam in Britain, (steam puns intended oh yes!) making his observations obsolete in his own country first and then further afield.

This is because the sudden increase in technological output the Industrial Revolution wrought for the first time ever in history gave humanity the escape velocity to overcome that trap. Realization that there were such drastic changes afoot was gaining ground in the late 1700s, notable mention being Adam Smith’s description of the emerging system in his landmark book, published 2 decades before Malthus’s.

So can we say Malthus was trapped in a trap of his own making?

There are other ironies too. As I hinted, Malthus insisted on adverse effects on the population and thus his controversial ideas such as “preventive checks”. It has been the case in the ensuing centuries and especially over the last 100 years or so that industrial-grade development and prosperity has in fact ushered in a fall in population rates, not just in the traditional ‘West’ but in almost all parts of the world, to the point that there are many voices now talking about the dangers of depopulation.

I don’t want to go into those arguments here but the demographic changes in this direction have been factually documented (currently just the birth rate but in the foreseeable future the actual numbers predicted to drop as well). What would Malthus say if provided with these statistics in our time?

What Malthus failed to see was the power of technological ingenuity and the economic effects of harnessing technology (I discuss the first of these in my technocentric series and will continue to tackle the latter aspect in this series).

In any case, what are we to learn from all this? Malthus might have been too late in formulating his idea, like investing in a large candle factory just as Edison was electrifying the place, but his theory does help us appreciate the “hockey stick” phenomenon of technological progress and human prosperity brought about, warts and all, by the Industrial Revolution.

Would we really want to go back to the, well, Malthusian, misery of the Middle Ages?

And how many of the latest strokey-beard theories of our own day would future history prove to be massively Malthusianly mistaken?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• How humans escaped the Malthusian trap

To the extent that competition is at the opposite end of monopoly, and given monopoly literally refers to ‘one-seller’, the phenomenon we are talking about here should translate to ‘many-sellers’. (I wonder why, unlike for ‘monopoly’ and ‘oligopoly’ “few-sellers”, we don’t use a Greek-derived term for this related phenomenon - I guess ‘polypoly’ would sound like a parrot trying to do economics?)

But yes, it’s quite simply just that: there are several sellers offering you the same or similar thing. This we have seen requires a functional (or free) market allowing for additional sellers - competitors, to naturally emerge without the existing players hindering them, which as we’ve seen doesn’t always work along ideal lines.

Competition as it operates in such a functional market gives the buyers more choice. Which means the pricing is likely to be more competitive, in line with the dynamic I outlined in Episode 003 while discussing price.

Competition is also in dichotomy with cooperation, but within the realm of sellers trying to offer similar goods, ‘cooperation’ can morph into its shadier cousin collusion, and as Adam Smith derisively observed, the only thing competitors trying to cooperate would lead to is cartelization - in other words collusion to charge the same (high) prices and thus negate the benefits of competition for the buyer.

Furthermore, just like supply and demand which we discussed in Episode 017, competition is a dynamic that goes beyond the simple market-square buyer-seller demand: it’s a lot more pervasive.

Best Foot Forward

Let’s explore the benefits of competition. Competition fosters innovation. If you are vying to offer the same goods as others, you are motivated to find better ways of doing it - a better technique to make the goods so you can offer better quality, or a lower price, or better yet, both. We have seen this at play all the time. (For an in-depth historical example of how this would pan out, I can offer, among others, TecC 43 from my other series here dedicated to innovation and progress.)

Of course competition also means the seller having to be on the toes all the time. But in the economy as a whole, this is a net positive for society - we are all sellers in only one small set of things, but buyers of many more - our consumer footprint is much larger. Besides, most large-scale production being the domain of corporate entities with deep pockets, it’s competition that allows individual consumers like you and me some say in the whole process.

But even producers, including the large-scale ones, have hidden benefits of competition. It both means there’s a valid demand for a certain good or service in the market, but also gives them insights as to how such demand operates and how the buyers behave. Picture the widespread phenomenon of several hairdressers or Japanese restaurants clustered on the same street - this is of course deliberate, and demonstrates that in some sense, given they cannot eradicate competition, producers in some sense seek to embrace it?

Tying it All Up

Going back to the topic of price, we saw back there how price is essentially a signal, each item’s price distilling, in its own way, the sum aggregate of the entire economy. And consumer behavior in response to such prices allow for the dynamics of supply and demand to play out forming a constant feedback loop regulating the proper allocation and use of the limited resources that make up the entire economy.

Similarly, back in Episode 002 where I asked an even more fundamental question - what is the market itself, answering by saying that it’s fundamentally an information system, I trust we can see how all these concepts tie together: without competition, we’d have a monopoly, which means the price wouldn’t reflect the true state of reality, which means there is no incentive for producers to optimize resource allocation, which leads not just to waste but also environmental damage, damage that given the suppression of such signals would be much harder to quantify.

And as I said, competition goes way beyond the market square, like supply and demand it affects a good part of our daily decision-making. We are all forced to compete in a great many areas of our daily endeavors. And like those market-square sellers, we might prefer to have less or none of this, but as I hope we’ve seen it’s what makes things move.

But then yes, for our day-to-day lives in particular, that comparison between competition and cooperation resurfaces - given the benefits of both, (and while we generally see cooperation as a positive, it has its downsides too as I hope to get to another time) when is competition the right tool for a challenge at hand and when instead is cooperation?

Can we have both, and if so in what relative proportions? How do we know then how to find that balance?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• The Story of Innovation and Progress

Back in Episode 022 while on the topic of mercantilism, we touched upon the idea of cartels - a small band of merchants grouping together for market abuse and unfair advantage. Let’s take it a notch up.

Let’s first go back to where we left our fictional friends way back in Episode 003 when discussing price. Back then, at the idyllic townsquare market, Brenda and Irene strolling around, on inquiring the price of a sack of grain, get quoted 8 and 10 copper coins by Steve and Bryan. They may have been surprised by the difference in price, maybe they first thought of shopping around a bit more. Maybe they were happy to pay either price, the lower for obvious reasons, the higher for the less obvious reasons I explored back in that piece.

A fortnight later, when Brenda and Irene are both out again, they only find Steve. And this time he’s charging them 15 copper coins! When they grumble, he’s like take it or leave it (with a look of it’s my way or the highway!)

So Few For So Many

So what’s going on here then eh? Maybe by undercutting the other seller, he gained an edge and the other seller moved shop to the next town. Maybe the other seller found a better market to sell his goods at a better price anyways. Or some other set of circumstances.

But right over here, potential buyers are left with only one choice of seller. Intentionally or not, Steve has a monopoly.

In the much more complex world of modern commerce, there could be a myriad other factors that lead to monopolies, although underhanded measures like deliberate undercutting (charging lower while taking a profit cut until bleeding your rivals out), can and do occur. To extend the phenomenon we discussed in the mercantilism episode, where a few sellers got for themselves an unfair advantage by using the corrupt and coercive arm of the State to block newcomers, and thus formed an oligopoly, taking that process to its ultimate end is what leads to monopoly - “a few sellers only” to “only one seller”.

Sole Seller or Sold Soul?

We have all likely seen and dealt with monopolies in our lives. We might even use the word ‘monopolize’ in non-commercial contexts. But let’s look at its repercussions in the wider context here.

We saw back in the price episode that in a functioning market price is not purely in the hands of the seller, but subject to a bunch of other factors, including what other sellers are offering. Now, obviously, some such constraints are weakened, and the sole seller can charge higher prices without restraint - and thus even distort the market equilibrium I touched upon back there.

Alongside that, in line with the newly found take-it-or-leave-it nonchalance of the seller -- I mean if the potential buyer has nowhere else to go..., the seller doesn’t have to bother so much about the quality of their goods, again leading to worse outcomes for the buyers and the economy as a whole.

It’s also important to note that the monopolist seller, such as Steve here, might not even be a bad person, but the whole incentive structured is so skewed to enable such undesirable behavior - whether on an individual or an institutional level.

So what is the answer to this? We all perhaps instinctively know the answer, but from an economic angle I’ll elaborate on the matter in the next episode.

Furthermore there are some services that can, in many cases, not be provided by the market, and falls into the arms of the state to deliver. The obvious ones are defense, justice, what we call public infrastructure and indeed the apparatus of the state itself - which is by definition, within a sovereign realm, a monopoly. (Oh you don’t like this army? Go subscribe to that army down the road, they do Tuesdays half price!)

And then there are often politicians who, fairly or unfairly, denouncing a particular industry for abusing its powers, ask for the state to take over. (”Bro, I had too much to drink last night, I have a hangover.” “Here, have this Bourbon, it’ll cure you of your hangover.” )

So given what we have seen so far, that monopolies can lead to undesirable outcomes, how is it that some services are widely to understood to be best dealt with by the state - say for example the trains (Anyone tried the coffee in a State-run train?) For then they are still a monopoly? How can we justify those politicians’ argument purporting to solve the problem of market abuse by, well, erecting a monopoly?

What is the metaphoric price -- for the state could hide the actual marketprice by routing the production costs via taxes, we are willing to pay in terms of lower quality and less choice? Or can we find a balance where we can, via partnerships and collaboration, harness the best abilities of both the state and the market?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• The Watermellon Sellers - hilarious video depicting how a monopoly can form - watch on mute

Specifically, when we talk about supply and demand, it’s with regard to, in this strict sense, the items we want or can offer in exchange, and not the measure itself. Can there be such a thing as ‘too much money’ in the economy? Too little? What are the repercussions of either? Especially now that we have clearly categorically distinguished between ‘money’ and ‘wealth’ in the previous episode.

Let’s go back to the metaphor I offered there to depict this: that money is like the measuring tape rather than any actual tailoring. If a tailoring team completes 5 suits a week, there might be a need for, say up to 5 tapes in the course of working on those suits, perhaps 10, two for each. (Note to professsional tailors, this is just an example, tailor-made for non-tailors by a non-tailor!)

So as in the example last time, if a tailor hoards several dozen tapes while still at 5 suits at any time, what’s the point of all those tapes? In quite the same way, the amount of money - the money supply in an economy must reflect the real economic output, the value being created, to measure it adequately. Simply jacking up by printing lots of cash simply recreates this tailor-made problem across the economy.

Similarly if there is only one tape that has to go around managing 5 suits being worked on by the team, it’s not hard to see how it slows down the work. Everyone’s fighting to get their hands on that one tape. So correspondingly, a fall in the money supply can have severe repercussions.

Like There’s no Tomorrow

Most of us might have a sense of what happens when there’s too much money chasing the same goods - inflation, and as we saw in the very first episode, when governments overdo this, hyperinflation. We instinctively know that inflation is undesirable, you don’t want to see the price of goods in the supermarket keep climbing every day you’re out shopping.

But deflation, the opposite phenomenon, can have its problems too, in particular in raising the costs of servicing a debt. We will dedicate specific articles to each of these to be explored in their own right.

And more broadly, the question of money supply has had such rigorous research and debate that a lot more can be said later on at a more advanced stage of this series, which is some way off. But even before we get into the depths of Monetarism and monetarist policies, terms we routinely hear in the news, I may add that a huge part of the focus and attention of Central Banks, the banks that print money in an economy, has come to be dedicated to controlling the money supply.

After the 2008 financial crash, the term quantitative easing was thrown around quite a bit. Quite simply it referred to printing tons of money to alleviate the damage done by developments such as the credit crunch that followed the sudden loss in trust. Some commentators bemoaned that central banks were printing money like there’s no tomorrow. But the counterargument is that it was this that stopped a repeat of the Great Depression, at which point there was a severe drop in the money supply. So regulators and authorities did learn something from that catastrophe, and we may say, didn’t repeat those mistakes.

The Pain in Spain

I will in due course have a lot to tell about these two recent crises, but for now, keeping it simple, let’s look at that older case which I presented in the last episode as the classic case of getting this wrong, that being perhaps the most dramatic case in history.

The Spanish crown, among other kingdoms in the vicinity, back in the 1400-1500s were hugely motivated in their explorations by the lure of gold and silver. And silver they did eventually find, even a whole mountain of it in South America, which they extracted with brutal consequences to the local population and the environment, and shipped them over to Spain. So suddenly, there’s a lot more silver in Spain and in Europe more widely. But here’s the thing, there was no corresponding increase in the industry or production within the Spanish economy. So just as in the above analogy, that silver now meant much less, and there was inflation.

It’s one thing to think that conquered peoples invariably suffered, being subject to forced labor in very toxic conditions to extract that silver, which the indigenous populations in the Americas1 did have to endure, but the ordinary people of the ‘conquering’ nation saw their lot worsen as well. Let’s take an example (these figures are only representative): say an ordinary peasant in Spain would pay one silver coin to purchase his weekly supply of food and other essentials. With that rampant inflation, the price of the same goods shoots up to 5 silver coins. But the peasant’s wages are the same, he still has only 1 silver coin at hand for the same goods.

We cannot change the past. And as I said last time, these early explorations had other motivations too, but can we say the lack of an understanding of basic economics was a significant factor in the misery that ensued on both sides. They say charity begins at home. Economics also begins at home. We each have to first seek to understand such basic economic ideas and apply them in our own lives before we expect our public institutions to properly do so?

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• The Fifth Sun (A history of the Aztec conquest based on indigenous sources)

In the High Middle ages there existed a system called feudalism, centered around serfs living a miserable life bound to their lords, and the system of guilds which were essentially rackets - these I have explored in some detail in TecC 39 and TecC 43 in my series on innovation and progress.

However with an increase in economic activity in Europe that marked the end of the Middle Ages and ushered in the Renaissance/Early Modern Ages, there arose a new system, driven by the increased competition between rival polities and emerging nation-states. This is what we call mercantilism.

Madness in the Methods

The idea was simple, or one might say, simplistic: in any exchange, one party wins and the other party loses, that it was always a zero-sum game, the economic pie was fixed and wouldn’t grow. Furthermore, the idea of wealth was solely the amount of gold and silver stockpiled in the country, that’s it!

The consequence of this was, given bullion was the means of international trade, countries gripped by mercantilism sought to minimize imports and maximize exports: after all, if you bought goods from abroad it might a drain on your gold/silver reserves, and vice versa. In summary, trade was seen as a war, not as a dance.

This led to a raft of restrictive measures promulgated and enforced by the State, notably trade restrictions on imports including the imposition of tariffs, which is simply an onerous tax levied on the goods making the inflow of goods prohibitive by raising the costs to the consumers in the importing country.

You Scratch my Back I Stab yours

But here’s the thing, as I hope we’ve seen in the course of the last 21 episodes, with the concepts of value creation in particular, in a normal, emergent scenario, trade happens when both parties see a benefit to it. You might not necessarily like the price of something but you might buy it anyway because that’s a better course than not having the said item. Sometimes it’s the best course available given the vagaries of scarcity of goods and resources.

So why didn’t that apply, as was asserted by the proponents of mercantilism, to nation-states across international borders? Again, we have seen the answer to this - it’s in fact what we started this series with: money itself has no intrinsic value, it’s simply a measure of value. And given gold and silver have been used to measure value, since they have acted as ‘money’ this value proposition applies to bullion too. It’s akin to hoarding measuring tapes instead of using it to carry out productive tailoring.

And the pursuit of maximizing exports and minimizing imports had ruinous consequences.

Mighty Cannons and Silver Bullets

If, as it became the done-thing in Europe in the early 1500s, you want to export lots to hoard up gold and silver, what do you do, you go overseas and aggressively seek buyers abroad, and given this mindset, the aim is not mutually beneficial trading partners, but captive markets, that captivity being enforced by the force of the cannonball. Sound familiar?

The poster-boy in this enterprise was the Kingdom of Spain, freshly united and having expelled its Muslim population after 8 centuries of their presence in the Iberian peninsula. (There are other factors at play such as being fired by a fervor never to be invaded, and the missionary zeal, as part of that fervor, to spread their Catholic religion far and wide, but let’s stick to the economic angle, important as these other factors are to the wider history.)

So when the Spanish conquistadors arrived in the Americas that they had only recently discovered, pretty much all they did was ask the locals if they had any gold or silver - simply looking past the vast quantities of actual natural resources the new continents had aplenty! (Imagine being invited to the most incredible banquet ever, every dish imaginable, and you go, do you have any ketchup?)

Eventually they did find massive amounts of silver -- literally a mountain of silver, this makes for a juicy story in its own right so I’ll come back to it another time, and the focus of Spanish crown was in simply extracting the silver. As a consequence of the flood of silver into Europe, obviously its value fell (ie, inflation) with the authorities having no clue as to why, and in fact with the lives of ordinary Spaniards getting far worse in this project of royal debasement of money.

Bruges, Antwerp, Amsterdam, and then London being early pioneers of financial innovation and progress, the Dutch and the English mindsets started off slightly less mercantilist, as compared to their southern rivals, and thus more economically sound, relatively speaking.

Until one man from Glasgow fought to change it all. Adam Smith struck a dagger at the very heart of the system of Mercantilism. As we saw in the earlier episodes mentioning him, he was fiercely against the monopolistic practices of the merchant class that had had the State in their grip. Smith specifically insisted that the idea of mercantilism was in fact a stitchup by the monopolistic merchant class to entrench their own incumbent advantage and power by eliminating competition, with the regulatory might of the State in cahoots.

So, in the place of mercantilism, as I’ve written at length previously, Adam Smith sought to describe and usher in a system that was concerned with many more economically sound concepts such as the mutual benefit of trade and myriad others we’ve explored.

Luckily in our own current enlightened times, as nation-states we don’t take a beggar-thy-neighbor attitude to international trade erecting barriers such as tariffs, right?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 39 - Alchemy’s Forbidden Fruit - On Feudalism

• TecC 43 - Making Work Art, Making Art Work, Engineering Excellence - Touches upon Guilds

Furthermore, under that topic we explored how scarcity is indeed the mother of the invention of the very discipline of economics, so is this about, given a future state of abundance, in fact escaping economics?

We broadly know what abundance is, it’s what our political leaders have been promising us from time immemorial, a promise whose fulfilment, one might say, remains perpetually an election cycle away! Anyways, now that we have established what it isn’t, let’s take a proper look at what it might be.

Abundance can be a bit formally defined as the presence of unlimited, or practically unlimited, quantity of a given resource. Abundance of any resource can occur naturally, like water next to a large river, or is man-made. As we’ve explored previously for example in discussing value creation, human wants being much greater than what’s naturally available (Nature: here’s some water, berries, a few trees. Man: cool cool, but how about a thousand types of cheese, a hundred varieties of fermented hop and grape with fancy names and notes, a pocket device to send unlimited cat pictures), we humans have to step up to produce them - raw materials to finished goods.

And is thus born a discipline such as economics to help direct the act of production in the best possible way -- not just in maximizing production but also ensuring an ecologically sound way of doing so -- leading to a whole bunch of concepts we’ve already covered in this series (capital/resource, the market, price, risk, debt, specialization, standardization etc)

Rolling Dice or Flipping the Coin?

Thus the logical progression has been to explore how to utilize fields such as economics to improve technology such that we can arrive at a state of abundance in many areas, a few obvious high-priority ones being food, clothing and other essentials.

But then, if we say economics is concerned with scarcity, there can arise the reasonable question: is seeking abundance via this discipline not a contradiction, will it not be counterproductive, is it a paradox?

I would offer that there need be no problem on those grounds - but I’ll caveat that different political philosophers have taken strongly different positions on this. But here’s one line of thinking: scarcity and abundance being two sides of the same coin, it’s by understanding and managing scarcity well that we may even seek to mitigate or eliminate it. (Doctors study diseases not to spread them but cure them?)

In other words, isn’t it the case that if economic concepts and their practical applications are managed properly, there is room for ushering in greater abundance, as we have seen in a great many items since the dawn of the industrial age (just compare the modern middle class and their consumptive insistence with the medieval peasantry and their precarious subsistence.) And the onus of getting that right is on us humans rather than anything else?

From Paucity to Plenty

Let’s go back to the middle ages, imagine you happened to do some time-travel, back to the year 1000. Imagine you told a peasant tilling the field that one day in the future you will be able to send a message to the other end of the earth for practically zero cost. Forget one message, you could even send a thousand, and in fact folk would be tired of how many messages they’re getting from across the world every single day!

We may safely guess that they would have you burnt at the stake for witchcraft! But let’s pause to think about this witchcraft! Back in the year 1000 only kings, and a few noblemen, could afford to send out a message beyond the confines of their town or local region. It required a man on a horse, food and supplies, the risk of going through bandit territory, days or weeks, and then, often no certainty he even made it. (And of course widespread was the practice that if the other king or nobleman didn’t like the message, they’d shoot the messenger, but I digress..)

Fast-forward to the industrial revolution: the telegraph, revolutionary but you still had to count every word, then the telephone, eventually email and SMS, text messaging on the iPhone while still in bed with eyes half closed at 6am!

Assuming the monthly subscription costs baked in as a given, what is really the cost of sending a single message today, do we even think or blink about it, about how long it’s getting, how many words are being used!

So yes, we’ve come a long way. With regard to the information industry, we have indeed achieved abundance. (And are confronting new challenges such as information overload, but that’s another story!)

With the ever-accelerating advances in machine intelligence, robotics, space and related areas, there is a chance that within our lifetime, if managed properly, we could get to abundance in many more areas, including, as I discuss elsewhere in depth, material commodities such as food and clothing.

In the meantime, the best we can do is develop a greater awareness of the underlying concepts that economics offers us to start with?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• Econ 08 - Digitization and Dematerialization

It is said about ‘the classics’, or classical literature that everyone has an opinion on them but nobody’s read them. In this decimilestone episode of the series, we meet the author of one such great classic work relevant to our subject.

A Fertile Island

No man is an island, it’s also said, and no great cultural and intellectual output emerges from a vacuum. Let’s explore the context and the background before we get to the person.

In my parallel series on human achievement (tecc), I’ve traced the evolution of human intellectual progress from the earliest days. By the time we get to the 1700s, there arose in Scotland an effervescence of intellectual output which has been termed the Scottish Enlightenment which developed within the fertile soil of the wider British context of rapid innovation setting the stage for the industrial revolution in Britain shortly thereafter. The Enlightenment within Britain itself was part of a wider movement in Western Europe as a break from the medieval past (all of which I’ve been covering in the said other series with more to come.)

It was into this milieu of extraordinary intellectual output that was born Adam Smith. Adam Smith in a sense needs no introduction. He’s widely regarded as the ‘father of economics’ or even the ‘father of capitalism’. (Although check out TecC 48 and TecC 49.) Smith is seen as having pioneered the idea of so-called ‘free-market capitalism’, and based on who you ask, unfettered economic activity and industrial expansion with profit-seeking as the sole motive, and with the State moving out of the way with no role to play. And of course such ideas are claimed to have been crystallized by him in his landmark book ‘The Inquiry into the Nature and Causes of the Wealth of Nations’, or simply ‘The Wealth of Nations’.

But was he really all that and was that really his tenet, message and goal?

Notions and Sentiments

Much as some people may love to hate this Gordon-Gekko image of Smith, I have disappointing news for them - he was indeed a very different person than his popular caricature. He was first and foremost a moral philosopher mainly concerned about understanding and improving the human condition, in particular that of the less fortunate sections of society.

This manifests in what might in fact be an even greater work of his, ‘The Theory of Moral Sentiments’ published much earlier, and so thought even by the author himself. Even though some of the notions of morality and similar values have changed in the two and a half centuries that have passed since, scholarly research and opinion have pointed out some ‘surprisingly modern’ treatment by Smith on these topics, such as, as per research, around concepts like mutual empathy, egalitarianism, individual sovereignty, and human dignity.

An Inquiry in Earnest

So his subsequent inquiry into economic questions that form the substance of his more famous work can be traced to stem from this deep concern for improving the human condition as just mentioned. Let’s take a few examples of this as emanating from that work.

We saw in the previous episode his description of the notion of division of labor as underpinning (sorry, can’t help the pun) the new economic system that was emerging leading to the Industrial Revolution in Britain, an economic system others later, approvingly or disapprovingly, have called ‘capitalism’.

In the episode on specialization I mentioned how the philosopher Karl Marx, perhaps the one person most opposed to the so-called ‘capitalism’, railed against specialization. Now guess what, in fact Adam Smith in his discussion of the division of labor expressed deep concerns on the same matter.

Let’s next look at the other popular misnotion: that a ‘free market’ should be allowed to operate unfettered by the interference of the State. Adam Smith’s work evinced no such ideological position. Smith expressly insisted that the State had a very specific role in ensuring the good functioning of markets and the well-being of society thereof. As part of this, he explicitly called for State programmes, such as on-going access to public education, to help alleviate the sense of loss of dignity that can arise by being a small cog in a big industrial wheel. Yes, don’t take my word for it, he said it!

And perhaps most strikingly, he looked upon wealthy merchants who then try to game the market system to their incumbent advantage - the fatcats as we may call them, with extreme scorn. (”...the mean rapacity and monopolizing spirit of the merchants and manufacturers...”)

He spoke of their oligarchic tendencies to form cartels, to stifle new competition, to bend the State with tax preferences and protective tariffs, to suit their own interests...

A more recent economist, or a few of them, have spoken about the need to “save Capitalism from the Capitalists”. While Smith wouldn’t have used such terms in his time, he was probably the first man (he wasn’t named ‘Adam’ for nothing!) to recognize and express the danger of such excessive concentration of wealth and power by people who rose within the system as posing the biggest threat to the system that made them!

Ultimately, all these need to be taken in context, not just the ‘contemporary context’ I provided above, but for us looking back into the past and connecting it to the present, a wider evolutionary or historical context.

Adam Smith in essence sought to debunk an older economic (and political) system that had existed into his lifetime.

We may think our system is bad, and most of us would agree it’s not perfect (what is?) but to understand what we have, we must, as I’ll come back to, recognize how awful the system before it was. And it is in this light that we must look at what Adam Smith did: describe and help elevate an economic system that was, and despite everything remains, a huge improvement over what existed before.

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 06 - The First Great Acceleration: The Birth of Industry - The Revolution othat changed Everything

• The Theory of Moral Sentiments, Adam Smith - Gutenberg

• An Inquiry into the Nature and Causes of the Wealth of Nations - Gutenberg

Just as in that episode, the fictional anchor for this episode is going to be the story already narrated in TecC 43, where we saw how, after a disastrous start in a joint initiative, with everyone stepping on everyone else’s toes, our four fictional friends eventually manage to allocate each of themselves specific areas of focus and work things out.

The Coordinates of Cooperation

What they do can be explained either as specialization or division of labor, in fact it’s kinda both - it’s the division of labor that allows for specialization to take place. And in the specialization episode, we correspondingly focused on some of the more human elements of the phenomenon, given that specifically relates to one’s role, identity etc, here let’s look at a few other parameters.

We can in fact look at division of labor as related to process more than the people per se. It’s the overall system of coordination, cooperation and indeed specialization.

There are thus the questions of how the overall set of activities is broken up into discrete parts each of which can be handled separately from the others but in tandem, whether simultaneously or in sequence. Beyond this, there’s the question of how the coordination/cooperation is ensured or enforced.

All this said, there has to be a certain amount of scale to justify division of labor: the requirement of making artisanal jam to be sold over a full week of an annual market event justified our fictional friends in the fictional story to apply these concepts. But if it was just a matter of preparing 3 jars of jams to gift a visiting aunt, it’s probably best done solo. (Hello aunt Margaret, what time are you arriving this weekend? And don’t worry I have a team of 12 people working on a small gift for you!)

Pinning it Down

The classic example of division of labor in economics literature is the famous one provided by Adam Smith in his landmark work on the subject: the pin factory. He contrasts a solitary worker with a specialized team of 10 workers. Having broken down the overall task of making a pin into 18 subtasks, such as drawing the wire, straightening it, cutting it, making it a pointy on one end, adding a head on the other and so on... The contrast Smith draws is the sole worker’s handful, about 20 pins a day to the ten-worker team’s around 48,000 pins in a day!

The Division that Multiplies

That’s roughly 4800 per worker, where applying division of labor has yielded an improvement of 2,400 X. We can appreciate some of the factors that make any such improvement possible. Apart from allowing each worker to become more dexterous in their task at focus, and avoiding the costs of code-switching both by way of cognitive load and the time lost in the transitions, this division of labor and the intense focus can facilitate the discovery of better techniques or even newer labor-saving tools, as Smith outlines. This way, as we delegate more and more of these subtasks to technology - new tools built specifically to handle them, we save ourselves of the drudge. So paradoxically division of labor itself might be helping us rid ourselves of the monotony of division of labor?

There are other advantages too, it’s more viable to find a substitute worker or quickly train one for one particular task should the original worker not be available for some reason, since there is less of a learning curve. This of course entails lower disruption and downtime and thus increased overall productivity.

Division of Labor exists everywhere in our modern world. For example, much of the music we are used to enjoying would be impossible - imagine your favorite rockstar hopping between the drums, the bass and singing mic + guitar all at once! Imagine how much more time and effort it would take to make the movies, fabricate the machines, build the buildings we are all used to seeing around us, if at all!

In fact in the modern world, even the simplest device is the result of extensive division of labor. As the author Matt Ridley has said, nobody, no single individual, knows how to make a computer mouse! ***

I mentioned Adam Smith given it’s sort of mandatory to do so when discussing this concept, but I haven’t introduced him in the series yet, the father of economics in a series relating to economics! I had originally planned to introduce the topic of division of labor alongside Adam Smith in the same episode, but then, that wouldn’t be division of labor, would it?

So yes, we shall next meet the man himself, buckle up!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• Who knows how to make a computer mouse? - Matt Ridley

But first a quick, and of course efficient, detour to check on our fictional friends. Steve, Bryan, Brenda and Irene are sat around the garden table discussing the week’s matters. Bruno the dog and Iris the cat are of course... well you know them by now!

Recently both Steve and Bryan have taken up a new business - in parallel: shirt-making, thanks to a surplus of cotton in their region. While they don’t say as much, they each want to do a better job than the other. So Brenda and Irene are like, how’s it going lads? Steve is like, well, I keep running out of stock, in this last cycle I made 10 shirts from the stock that came through at the beginning. Bryan is like, hmm, I got the same amount of stock too, I got 15 done. Something must be done.

The next day Brenda and Irene walk into Steve’s workshop, followed by Bruno and Iris, and what do they see, tons of pieces of cloth strewn everywhere. He has more equipment than can be seen in Bryan’s workshop. Brenda is like, Steve, where are your manuals? Steve’s like, what manuals? Irene’s turn, and where are your accounts, how are you keeping track of how much stock is getting consumed. Steve’s look doesn’t get any less bewildered.

Bruno the dog and Iris the cat walk out in disgust.

Yardstick’s Yields

So it’s obvious where we are going with this. And on the face of it, we all know what efficiency is: how well we get something out of what we put in -- there is some nuance with related terms such as effectiveness and efficacy but those are for another day. And while discussing value creation previously, I’ve formalized that general concept by way of the production equation: inputs + processing = output. Only, here, with efficiency, we are concerned with more consciously measuring the inputs and outputs with some degree of accuracy.

This broader notion has been expressed in slight variants severally before, for example, by Lord Kelvin and much later, Peter Drucker. In my own paraphrasing to capture that essence: if you can’t measure what you’re doing, you do not know what you’re doing. (The variants of these famous figures having ‘manage’ or ‘improve’ in the second part.) Because quite simply, unless we know the baseline for today, how can we tell how we did tomorrow?

As I trust I’ve demonstrated in this series so far, economics is about more than numbers and charts. Economics straddles science (including mathematics) and the social world - areas such as psychology and anthropology. It’s an attempt to apply mathematical rigor to such aspects of human behavior, which is why it gets tricky, and one may say, economics therefore ends up disappointing both the scientific types and the humanities types.

Still, the concept and application of efficiency, which reflects this desire for mathematical vigor, is vital and fundamental to the pursuit of economics, with its ultimate aim of improving the human condition within our environment.

Metrics and Optics

But even before such a discipline as ‘economics’ was formally constituted, there had been efforts to understand and apply efficiency, albeit haphazardly or, as the economists might say, unscientifically. But in essence, all technological progress can be seen to be part of an endeavor to achieve better efficiency: writing, printing, even the wheel! (Yeah, I mean just try tugging any amounts of material on wooden logs like the Stone-Hengers did!)

(I’ve demonstrated this in action in my series on innovation linked.)

But efficiency isn’t everything. You may be justified to say that economics overemphasizes efficiency. Life is a lot more complex than that. Oftentimes in fact inefficiency is the best way or even the only viable way. Consider this: as you sit down to dinner at a nice restaurant on a first date, you can’t ask your date to fill out a form before you process the answers for compatibility and decide to order starters (Sandra, if you don’t mind paying particular attention to the hobbies, preferred holiday destination and especially the Myers-Briggs section on page 17 through 19, and then we can look at the menu...)

So how do we know what areas are better off when we seek efficiency and what other areas need other priorities, or at least, what is the right balance between seeking efficiency or not, seeking to measure or not, seeking to be precise or let go?

Economics, at this point, one might say, can by definition offer only part of the answer. Still, given the broader principles I’ve applied in my writing beyond just pure economic theory, I trust we have a better way of getting to such answers as relevant to each of us in our own lives. So stick along!

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC - A study of efficiency by way of exploring human progress and achievement

Back in the first of those two episodes, we posed a question. At the townsquare market when Brenda and Irene each inquired on the price of a sack of grain, Steve and Bryan quoted different prices for the same quantity, 8 and 10 copper coins. But why the difference? Furthermore, the question can be broadened to beyond just the same item or quantity. Without fully answering the question back in that story, we considered a few factors at play, and as we intuitively know, supply and demand are a couple of them.

The Ups and Downs

While we don’t need a literal textbook definition of these two words, let’s poke them around a bit. Firstly, much of this question arises because of the aforementioned reality of scarcity - things are limited in supply. And then, different people want different amounts of different things. So obviously if more people want something than there is supply of it, the effort needed to satisfy that need gets greater - and that, is signaled by the figure we call price. And of course, in a functional market, if there is less demand for something, the price will correspondingly go down.

It generally works in the other direction too. If a seller jacks up the price of some item of utility, it may dissuade people from buying it. And conversely: we are all familiar with those empty shelves in the supermarket for those heavily discounted items - usually perishable goods, like your favorite yogurt brand?

The Balancing Game

So in a sense this is about equilibrium, every good in the economy is in this game with every other and with people seeking the goods, and in aggregate add up to then confer upon each good a certain price - hence my insistence in that episode that price is essentially a filtered-down signal of the underlying economy. Thus in other words, it’s a reflection of human behavior in aggregate as well.

How well the prices reflect the economy depends on how functional (some use the word ‘free’) the market is - how freely such signals can move without the distortion of forces such as subsidies and price controls - topics for another day. And there is a feedback mechanism built in to such a system, each purchase changes the supply, and the prices and purchases act as a feedback loop which further changes the picture, ad infinitum, again, all subject to how freely these dynamics are allowed to play out.

Let’s take a simple example - without even money necessarily in the picture. Imagine in your town there is a park that’s getting popular with the townsfolk as a picnic spot. As more and more people decide to go to that park for their picnic, the experience for each group will start to degrade - it’s noisier, more crowded, less fun over all - that’s the price they’re paying, the feedback loop also consisting of the ‘gossip’ or general talk about how crowded the place is getting. And then someone finds another park not really used for picnics, some folk start to go there instead, it’s pristine, initially, and then... you know where this is going.

A Delicate Dance

As participants in the economy, we are used to the effects of supply and demand. We know, for example, that in the unlikely event of war in the Middle East, prices go up because everything needs energy to function. We know that housing prices are highest where there’s more demand. Even human capital is entwined with the supply-demand dynamic - wages depend on the availability of certain jobs, our skills etc.

Ultimately, however, the point I’m making there is supply and demand are in fact everywhere in all aspects of our lives. Consider this fun story: the dance form of the tango developed at a time when there was huge immigration of male population into Argentina (from Italy) which meant very little supply of female contact for most of these young men, the only outlet being a faint chance to find a dance at the overcrowded-with-men weekend ball. So yes, men, it is said, practiced this intimate dance with other men all through the week just so they each could dance the tango well enough to impress and attract the attention of one of the women to dance with them!

(So in fact it takes three to tango, right?)

But yes, we can’t escape supply and demand - they are more than a graph with 2 lines crossing. But perhaps we can train ourselves to be aware of the dynamic, to spot the trends - that pristine, rarely picnicked-at park, make the best of it, dance the tango well enough!

To take one last but more pertinent example, research has found that in recent decades, with the prevalence of social media and its myriad distractions, people’s attention span is starting to shrink quite severely, what with living in a trigger-happy, push-of-a-button, instantly-tweet-my-grievances world!

In an era of augmented intelligence where we can offload many cognitive tasks to machines, there is one skill that will still remain key: the ability to pay attention without distraction, the ability to focus deeply, the ability to do deep work. Those who can retain or strengthen this one thing will be in high demand in an era of low supply of it, and these few will have a high price tag on themselves!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• A Passion for Tango, David Turner

• Tango - Album by Julio Iglesias

• Carlos Gardel

Thank you for holding on for a whole week from the end of reading the last episode on delayed gratification, so you have my undiluted gratitude! In line with my promise to you when I ended that piece, let’s take that concept to its logical next step.

The word investment conjures up some rather advanced images - of complex mathematics, overbearing financial advisers and glassy-facade banking institutions. The core of it is much simpler and more relatable than all that fancy stuff.

Let’s also clear out the notion that investment = saving, it’s certainly not as passive as that. Investment is essentially the process of marshalling the other elements of economics we discussed in previous episodes - capital, the time value of money, opportunity cost, and especially risk and putting them to use, implementing, or as I previously said, crystallizing delayed gratification. Let’s see how all this adds up.

The Vestment of Progress

Let’s start with capital, Episode 005 where I insisted that capital is not the same as money, and indeed in the episode on money, Episode 001 that money itself has no intrinsic value.

Capital is anything, any resource, including human skills, that we put to productive use. In other words, investment is capital put to work!

And the time value of money, Episode 007 comes into the picture because well, any investment takes time to bear fruit and we have to be confident that it’s worth that time we waited for it.

Which then brings us to opportunity cost, Episode 009, for every investment involves decisions made, and for the investment to be viable, we have to assess each decision against the alternatives.

And despite all that, the investment may not pay off. If you join the financial advice industry, for the first three months of your financial advisor internship, you’re supposed to chant every single day all day “Past performance is not indicative of future result”. Well, ok ok, it’s not quite so, but that’s the one they are trained to mention in every single communication with you without fail. (I suspect still that financial advice professionals won’t say that about themselves in an interview or a first date!)

To get back on track, my point is of course about risk. Risk is perhaps the most important concept and component surrounding the whole story of investment. In fact it goes both ways, the entire industry of ‘investment banking’ can be said to be built on the core need to manage risk. But more on that angle another time.

Divested Interests

So let’s see where we would be without the idea of investment, without the activity of investing, and the connection to the previous episode.

Let’s start perhaps with the more obvious ones, ones that are perhaps more conspicuous in our life, ones we more easily recognize as investments.

Those roads, bridges, skyscrapers would never get built. (Manhattan would just be a very expensive swamp, an improvement, some would argue.)

No skilled professionals, for without the investment of one’s childhood in education and training, no skilled work would be possible. (Your surgeon would essentially be a very confident guesser with a sharp stick!)

No better tools or techniques. By extension, we wouldn’t have dedicated disciplines such as science and technology. (We’d have to carve our angry tweets on stone!)

So yes, no cars, no homes to be owned after 30 years... (silver lining? No worries about mortgage payments either!)

Going back to the very basics, last time I touched upon the idea of planting seeds in the ground and tending to them in the expectation of harvesting a crop a few months down the line.

Investment thus is at the very heart of human endeavor indeed, it’s the sacrifice, it’s the effort, it’s the risk, it’s the decisions, such that one day in the future they may all bear fruit.

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 49 - Foreseeing New Frontiers, Integrating Novel Instruments, Creating Unprecedented Value

We haven’t met our fictional friends in a while, so let’s go back to the setting in Episode 012 where Steve, Bryan, Brenda and Irene are sat in the garden looking around as Bruno the dog and Iris the cat are doing doggy and catty things around. Specifically, Bruno brings in a bone and buries it next to his kennel, which leads them to digress from their task at hand to philosophize. It’s a sunny afternoon after all and the beer won’t drink itself!

Brenda is like, isn’t that clever of little Bruno? Irene going, yeah, he’s saving up for the future, very prudent. Bryan reacts by saying, pah, what’s the big deal, he’s just burying a bone, with Steve adding, well, I mean humans don’t do such silly things, if I have a good sandwich in my hand, I’d eat it right away, why let it rot.

Brenda snaps back, no Steve, that’s not it, Bruno is showing restraint now for enjoyment later. Bryan starting to see, oh wait, that’s right, Steve, we do such things all the time as well, with Irene adding, that’s true. Steve, I mean after every harvest don’t you store up some of the produce for the next season’s planting, surely you don’t eat it all right away?

When the Waiting’s Worth It

Yes, that’s it, it’s that simple. Delayed Gratification is simply about sacrificing the prospect of immediate reward in favor of something likely more valuable at a future point in time. While this is mainly treated under the discipline of psychology, this, like many other concepts in that domain, has significant economic bearings as well. So let’s explore it from that angle.

This can be compared in many ways to the notion of the time value of money we discussed in Episode 007, along with capital we saw in Episode 005 - money, or using money and capital can be put to good use right now rather than later, allowing it to produce a return, a sort of a mirror image of delayed gratification.

It could even be human capital, like even though you want to stay in bed, it’s Monday morning after all, you resolve to and do get up early to write, as scheduled, that new piece about, let’s say, forgoing immediate enjoyment for long-term gain!

In making such choices, we are also applying the idea of opportunity cost. The cost of the lost opportunity of doing something productive and thus more rewarding longer-term is what you pay by snoozing and staying in bed (although there are times it may be justified!)

The most famous experiment around this is the 1970s Stanford University ‘marshmallow experiment’, where 4-year-olds were offered either one marshmallow they could eat right now or had to wait, in a closed room unsupervised, to get two later. (It’s almost as if one cannot ever write a piece on this topic without mentioning this particular experiment - it’s the marshmallow tax!) Kids who turned out to show restraint in that experiment were generally seen to be more competent and successful later in life. But let’s look at more specifically economic ramifications.

As you Slow So Shall You Reap

Back in TecC 10 in my other series here on the story of human innovation and progress, I spoke about the advent of farming - human existence in sedentary agricultural lifestyle is like the last 5 minutes of a 24-hour day, compared to the hunter-gatherer living over the rest of that 24-hour analogy.

And the central dilemma there was just that - how did the early farmers develop, first the idea, and then the ability, both individual and institutional, to store up the seed for future productive use rather than consume it right away - it may be obvious to us but we must be mindful it was a completely new idea to them representing an intellectual breakthrough!

There’s another classic example: education. The human species is said to have the longest childhood in the animal kingdom, and given childhood is that phase for any individual creature to learn the realities of life as relevant, humans expend the greatest effort in providing for it, unlike any other species.

And this - delayed gratification, scales from the individual to societies, institutions and nations - it’s at the very foundation of what we generally call civilization. Those of these bodies that are constitutionally built for long-term thinking and action may be expected to show better outcomes, economic and otherwise. (The question of how much short-term restraint many of our institutions from corporations to governments show compared to the 4-year-olds is left as an exercise to the reader.)

So, yes, this is a lot more than a dog and a bone, we’ve seen how this seemingly unrelated idea is intimately linked with concepts we’ve touched on in previous pieces, from capital to interest (time value of money), debt to opportunity cost to trade itself.

But there’s one other key concept vital in crystallizing the concept of delayed gratification in more specifically economic terms, one key concept needed to put flesh on the bone, and that’s what’s coming next. So between now and a week to come: it’s delayed gratification!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 10 - Seeds of Civilization: The First Great Bargain

Once more, that older innovation-series article, TecC 19 demonstrates by way of fiction how the idea might have arisen. So taking that as our standard, let’s proceed!

We saw in the very first episode of this series, Episode 001, that money can be seen as a social contract, which essentially works only if people agree to give the same meaning, value, to a certain piece of paper or other artefact. Back there I also likened this aspect of money with language. With small differences, a standard is the same, isn’t it.

From the perspective of this series, standardization would have been the logical outgrowth of the foundational concepts we’ve previously touched upon, especially trade, Episode 010, and specialization, Episode 011. Let’s dig a bit deeper into what might be different or unique about this concept.

Intuition to Institution

In the earliest times of human interaction via practices such as trade, especially as the scale and scope of such exchange expanded beyond a small isolated community, the need to identify compatible agreed-upon ways of doing things across group divisions, or at least the benefit of doing so would have at some stage become apparent.

It would lower the barriers to the matters of exchange - in modern parlance, it would lower transaction costs - an economics term that I believe may be more widely used and understood beyond the field. (My intent in my writing is to use purely non-technical terms to describe these phenomena, but this one’s a glaring violation!)

But perhaps, the phenomenon of standardization deviates from the emergence of money, and especially language, somewhat sooner, in the involvement of a centralized body to oversee its use. This could be a standards body constituted of the different participants defining and policing the rules of engagement, comparable to the developments we traced in Episode 002 around the growth of the market, or it could be an even more overarching institution, the State, especially as the scale increases. Quite often, such bodies may be semi-autonomous arms of the state.

So one might say that even if at first emergent, practices at some stage undergo a certain formalization to become a standard.

The Standard-Bearers

In both this and the innovation (TecC) series, time and again there has arisen the question of the dichotomy between two systems of organizing anything: top-down vs bottom-up. Usually, as we’ve seen, the forces at play in each case have appeared somewhat in opposition to the forces in the other dynamic. However, standardization is one of those things that’s pertinent in not just top-down systems, where it’s easy to conceive of it, but also in bottom-up systems.

The classic telephone system was built as a top-down, central exchange-based standard. The Internet, a bottom-up system where any node can join the internetwork, is an expressly protocol-based design, where the protocol serves as the standard.

One may even argue that standards, by way of the just-mentioned protocols, are even more fundamental in bottom-up systems. And as I’ve said before, the best clues to this come from nature / biology. It can be argued that every aspect of planetary behavior, and every aspect of cellular behavior, operate on the basis of some kind of a ‘standard’, whether encoded in the laws of gravity or embedded in the codes of DNA.

But coming back to human affairs, standards are still pervasive. But we usually only realize this when something goes wrong: you’re at the nice cosy cafe and you try to stick your charger cable into the socket and it doesn’t fit!

So we may conclude that standardization is an unalloyed blessing in our lives. Or may we? Promulgating a standard, which means eliminating other ways of doing that particular thing, we may say, has its own opportunity cost (Episode 009).

In the design of complex systems, how do we know this approach to formulating a standard is in the long-run better than that? Only where there is some sort of competing standards can we have an opportunity to see which one’s working better? But then if we have multiple standards, are they even standards?

(And often there’s the spectre of the wrong standard prevailing, owing to custom or other factors - the QWERTY keyboard most of us use was expressly designed to slow down the typists banging away on those early typewriters that jammed easily!)

So yes, the fundamental question is - what is the right balance between standardization and variety / competition?

And then, the top-down/bottom-up dichotomy comes back. At what stage in the development of a new system do we formalize emergent practice as a standard? What is the right engagement of top-down versus bottom-up forces in this?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 19 - Footprints in the Dust - one of the greastest examples of standardization ever

• TecC 29 - Common Grounds: The Neat and Sound Worth of Grassroots Growth - the emergence of bottom-up standards

And indeed, apart from the historical angle, I do have a fictional depiction around how this arose, in that episode. But, fiction and history apart, let’s now focus on the core concept itself, in other words, let’s specialize!

In Episode 010 we touched upon the specific concept of trade. Whilst in the smallest isolated communities, every member would have bothered with every aspect of making things they need, from trade, ie the ability to get certain items from someone else in exchange for what you have or can make, it naturally proceeds that different individuals could focus on making the different things they need.

This proffers a few striking advantages to the group as a whole. Different individuals have different propensities, so they might be inclined to do, or learn to do, one type of work better than another. It has been shown that broadly it’s easier to focus on a few things than to keep switching tasks all the time: code-switching is hard, it’s a cognitive load (just imagine ejecting and inserting separate CDs into your working personal computer every few minutes!)

Furthermore, there is a limit to how many skills single person can master - the classic jack of all, master of none, stuff. As communities get larger therefore, with their needs growing, it becomes quite compelling for such division to emerge or be enforced.

Divide et Coopera

The classic explanation of this phenomenon, division of labor is of course that by the economist Adam Smith in the late 1700s. But let’s take a look at a more recent example or argument of this at play.

There is this question, should a very highly skilled professional, say a brain surgeon, wash one’s own car before heading to work in the morning? The answer economists (and the Association of Car-washers) would give is, no, they should hire someone to do the job for them!

If we think about this, especially having considered opportunity cost in Episode 009, the brain surgeon would utilize one’s time and exertions to far better outcomes in the operating theater than outside the house. The car-washing can be done by someone with far less training and expertise than the brain surgeon: your time has a market value, act accordingly! (Of course, if our professional expert finds the car-washing act itself therapeutic there can be a carveout made here, but how about we relegate that to Saturdays...)

Twixt Skills and Wills

So yes, in a nutshell that’s what specialization is about, a concept we are so used to in the modern day, that one may be justified to ask, what’s the big deal?

Allowing different members of a group to focus on different areas of work, whether it’s in a small village or a big industrial setup, allows them to, by way of gaining experience in that area, become much more skilled at it. Again something we take for granted. But this helps significantly increase the overall quality of output, and when combined with innovation as I’ve demonstrated in the quoted piece, even build much better, far superior, more ambitious things.

Therefore specialization is an accelerant of value creation, Episode 004. However, there are a few problems with specialization, and we cannot ignore them.

Most obviously, specialization leads to interdependence, which is generally seen as a good thing, but it relies on the larger system of trade and cooperation to continue to function. And then, the inability or difficulty for us to switch from one silo to another can feel stifling, and the more the degree of specialization the harder can this be. We end up being cogs in the wheel. The philosopher Karl Marx most famously complained against specialization insisting, I paraphrase, anyone should be able to do anything at any time. (I only know how to make the left shoe, Dave makes the right one)

Some of the greatest examples of genius we have were in fact not specialists at all. Leonardo da Vinci, perhaps the greatest example from the Renaissance was one such - he dabbled in a great many things, from canal fortifications to dissecting corpses to designing flying machines that won’t become reality for another 500 years! He was good at most of those things, he was indeed brilliant, but he was also easily distracted - a great many of his ventures were in the end left half done.

So yes, generalization has costs and limits, but specialization also comes with costs - what is the right balance between the two for any of us?

Specialization may have worked in da Vinci’s time because things were less complex 500 years ago than now. It might have been necessary in the early industrial era because there was no other way we knew to carry out that level of industrial scaling. But then, today we have better instruments and techniques which have also progressed in line with the increase in sophistication, so we are after all, in the modern, post-industrial knowledge age, rather more generalists than we think we are?

And then, the application of machine intelligence to more and more aspects of modern knowledge-based work, especially for the more mundane stuff, can surely allow us to, without sacrificing quality thanks to such cognitive tools, become more and more generalist?

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 20 - A study in the catastrophic breakdown of specialization

Let’s first do a quick fictional round.

Our friends Steve, Bryan, Brenda and Irene are sat in the garden, some of them halfheartedly taking stock of their recent business activities to keep the books up to date, but mostly in the mood to just take it easy - it’s a sunny afternoon, the birds are chirping. Bruno the dog and Iris the cat are playing out there. So they just need an excuse.

That’s when they notice Bruno bringing in a piece of bone with a very proud look on his face. He buries it carefully making a place for it next to his kennel almost as if it were a sacred ritual of a treasure deposit. He then goes away to sip some water and.. Iris the cat sneakily saunters over and just sits on it (cats are not particularly into bones, remember!) Bruno is seething, he starts barking at Iris furiously but the cat won’t budge.

Our four friends, amused watching this, have found their theatrical excuse to digress from work for a fine philosophical treatment of the just-observed phenomenon. Bring on the beers!

From Bare Bones to Smartphones

Yes, so we now know the burning question. Who does that bone belong to? Or to come back to human reality, who does anything belong to? This has been a question thinkers in many societies have grappled with. Let’s do the same (start stroking your chin..), and let’s get down to first principles first.

Back in Episode 004, when we discussed value creation, we saw that things exist in nature as such. And the starting point for value creation is that we take something from the pristine surrounding and do something with it making it suitable for human use.

In other words, there is a difference between something unused in nature and ‘appropriately taken’ (the proper word here would have more aptly been ‘appropriate’ with its inherent meaning of ‘proper’ and ‘property’, but sadly there are too many judgemental connotations to that now loaded word that I hesitate. Given our goal for now is to get to the concepts without any ideological baggage. As promised before in the stated episode, I’ll come back to the thorny questions of... impropriety in due course.)

But yes, the etymology there is quite clear, all those words, derived from Latin ‘proprius’, do have those shared and related senses, also add in ‘proprietor’ and ‘proprietary’ to that list.

High-hanging Fruit

So at the conceptual level, this line of reasoning offers a framework for the core question posed above. And once someone has taken a said natural resource, put their own labor into it (in the simplest theoretical example, the mere act of stretching out and plucking an apple from the tree), they have attribution.1

But who’s to say someone else won’t lay claim to the labor of someone, just as we saw in our silly story above? How is one to affirm that attribution in practical terms? How can such a system as outlined above practically work?

That’s where the enforcer comes in: the State. In most practical cases, it is only with the State, the legal apparatus that sets the rules of engagement, that we can really have a functional system of property rights.

Let’s think about this for a moment, in practical terms, any functioning ‘right’ is indeed a construct of the State? Otherwise, we are just whistling in the air, shouting in the wind?

We may say, in principle, we have a right to something, but in practice it needs enforced? (Don’t get me wrong there’s a lot of well-constructed argument along moral lines for a theoretical basis of rights, but I’m only refering to the practical application in this case. And that said, this remains a highly debated area, so take this with that in mind.)

The First Principal

Let’s now go back to another principle. What drives the whole process of resource extraction and value creation is agency. It’s agency that thus also informs attribution. In this context, I’ve so far been vague about ‘someone’, but what is the unit of agency? An individual? Groups of individuals acting as a unit?

I’ll come back to the aggregate question (of groups, institutions, corporations acting in collective capacity) for that deserves its own detailed treatment, but ultimately the individual is the smallest unit of agency and thus of rights? It’s because agency requires discretion, and the individual is the smallest unit where decisions happen. (Think about it, even in the most collectivist arrangements, there has been one, say, Supreme Leader, who has had the final say?)

In any case, beyond the individual, we can’t split it further down, despite economist’s penchant for saying “on the one hand...” and quickly contradicting (or hedging) themselves by going “on the other...” *2

I once remember watching a video of the very first contact with some remote uncontacted tribes in the deep Amazonian interior. Having never seen modern goods and clothing, one of the bewildered tribesman walks up to one of the explorers and starts to pull out his T-Shirt, clearly fascinated by it and wanting to try it on. And we can agree not out of greed per se, but quite simply because they had no concept of property rights.

While a more ‘communal’ system might work for small, isolated everyone-knows-everyone, hunter-gatherer groups who subsist on (and satisfy themselves with) what’s available in their immediate surroundings, for society to scale, for agency to flourish, for prosperity to take root, and thus for us to live in the world we live in, we should perhaps pause to appreciate the proper and appropriate value of property rights?

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 10 - A more detailed account connected to the potential origin of property rights

• TecC 47 - On the origins of intellectual property

Let’s in fact take this forward from where we last left off on one particular point. Back in Episode 009 discussing opportunity cost, we were faced with a few dilemmas, such as which of the two full-time job offers to take, or even something as mundane as whether to go out for the evening or stay in. That’s when the idea of scarcity came to the fore.

The Specter of Scarcity

The fact of the matter is quite simple: almost everything - every resource we consume, is scarce, in other words, in finite supply.

This in itself is not a revelation to us. We are all aware that the natural resources on our planet are finite (even if perhaps as a species we should’ve recognized this sooner?) Land is scarce, our skills are finite, our attention is limited. We are aware perhaps more than anything else that time is scarce: how many of us have wished we had more than 24 hours in a day?

But scarcity cuts through other dimensions of reality as well. You could say that the traffic lights are a response to scarcity - streams of vehicles cutting across a perpendicular thoroughfare cannot all drive on at the same time. So we are forced to allocate.

Striking Deals

Scarcity forces choice. And choice reveals values. Let’s think about this for a moment. If we could have any amount of anything at any moment at no cost whatsoever, in some sense you’d never need to bother to choose anything, you’d just have everything.

But because we don’t live in such a universe, we have to pick. And as we saw in Episode 003, price is a signal that gives us information of the relative affordability of the different choices we are confronted with, representing the underlying reality of their availability in the system as a whole. And that connects to value - what we value more, how much we think a thing is worth, and thus whether the price on offer is viable for me or not.

This throws up moral, even philosophical, questions: the choices I make in my spending reveal my values, could I have made better choices and thus led a life of better value? How do we define this whole ‘value’ thing in the myriad nuances of that word I’m using?

But it also has practical ramifications. At the very least you don’t want to go broke, or have buyer’s remorse, or in general get a bad deal.

Enough’s Enough?

And then there is the question, if resources are scarce and technology or innovation is about reducing the scarcity of resources by means of improved production (my whole TecC series since early 2025 is dedicated to exploring this), assuming we do increase the availability of a certain resource: how much is enough?

This is a thorny question, because, human needs and wants are infinite - as soon as a previous, projected yardstick of ‘enough’ is met, our wants expand, we want more.

So in fact this is not just a puzzle in the physical realm, but also a bit of a quandary in the psychological.

Consider for example, the phenomenon of artificial scarcity, taking as an example diamonds. Sidestepping the question of what diamonds are actually worth or why they tend to become best friends with some of us, are they even scarce in the first place?

Given diamond is just carbon, if we devise a laboratory method of crafting the perfect diamond completely indistinguishable from the ‘real thing’ how would the dynamics shift? (Also, maybe they already have done lab stuff, don’t quote me on this, this is just a thought experiment.)

Still, and leaving the glitter aside, while not perfect, economics is humanity’s best known attempt to handle the specter of scarcity.

Given the pace of technological progress, there is a chance that many more elements will sooner or later escape the straitjacket of scarcity but in our current reality we cannot escape it -- and I’ve looked into this exciting prospect in my futurist research, but until then, we’ll have to use economics for those elements -- and until then, ironically annoyingly enough for the siren seductress Scarcity, I’ll have a fair bit to write about all this!

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Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• A Study of Innovation from a Technocentric Perspective

A Decimilestone

We started with the very question of money itself, because the popular perception of it in some quarters can be somewhat blurred; we saw that it can be similar with the market, price, but especially profit and capital - its general use has diverged from the conceptual reality to the point of making for confusion or even conflict. We then considered aspects such as risk, the time value of money, interest, debt and opportunity cost - many of these may seem outside the scope of a series on money but fundamentally speaking they are not.

Taken together, this set is intended to serve as the first layer of an introduction to economics and finance, hence, as you may have guessed, the series ref ‘EcFin’. Let’s now briefly look at one last concept that ties this all together.

Taking Stock in Trade

Yes - trade! Again, like some of the other topics one could say, what? I know what trade is! But again, let’s peel the surface.

Of course, in its simplest definition trade is the exchange of goods, a practice that started off with the simplest barter between two individuals in the earliest of times. How early?!

Here’s the thing, trade is almost entirely a human activity, none of our relatives in the animal kingdom really carry out anything that can be seen as trade in any sustained and deliberate way.

All animals still do manage resources, seek profits (see Episode 004), hoard capital (in different ways as different from the squirrel stashing away nuts to the camel doing it ‘in-house’!). Some of our primate cousins have developed systems of reciprocity and political factionalism, which means they deal with risk and especially debt: you scratch my back today, I’ll scratch yours tomorrow - literally!

But not trade as we do it! Alongside a handful of other attributes such as the opposable thumb, highly developed vocal chords, which allows for language, trade is the other primary human trait. Note that this list starts with the more physical ones - the opposable thumb turned out to be rather handy 👍, our hominid ancestors could grip a club and thwart a predator, but increasingly it’s the more advanced intellectual systems that come to define us, or at least distinguish us from the rest of the animal kingdom.

Of these, I’ve time and again spoken about language - TecC 15 where I first discussed the Proto-Indo-Europeans and the origins of most of the main languages of Eurasia, TecC 28 where I got into the roots of our number terms again going back to the PIE-folk, but also others.

So let’s pause to appreciate the other one.

A Fine and Worthy Trade-on

To be able to trade requires developing mindsets and institutions, first and foremost trust, as we all know only too well, whether in the positive or in the negative. We need disciplines such as delayed gratification. On top of the bottom-up emergence of trade, as we saw in the market episode, we also need other institutions around it to ensure fair play (whatever our notions of that may be.)

In sum, and combining the two human traits I’ve just mentioned, economics is simply an extension or formalization of our language, our ideas, our practices. And of course, as this field has developed over the thousands of years it has, this technical language has become rather jargon-heavy to the casual outsider, and contributes to the dismal image of economics as a social science.

However, economics touches a great many aspects of our daily lives, as we’ve seen in this series so far, where we have decisions to make, risks to take, limited resources to manage, economics as a discipline is more ubiquitous than generally appreciated.

So it helps to be able to demystify the fundamental, and even advanced concepts, in the field by piercing through the thicket of jargon, and in accomplishing this I reiterate my commitment to you.

Thank you for your interest and support, what we’ve seen so far is but just a teaser, there’s a lot more to the story of money!

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

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Further Reading & Reference

• TecC 15 - Imperishable Fame or Immeasurable Impact?

• Reich, David. (2018). Who We Are and How We Got Here. Oxford University Press. ISBN 978-0198821250.

Let’s imagine a few situations in life: you’ve got a job offer (maybe you did blurt out a good explanation in that interview after all!), maybe you’re deciding whether to buy that house we touched upon last time, or even something rather simpler - like are we eating out or staying in tonight.

The Untold Tolls

When it comes to making many such decisions, Opportunity Cost is simply the value of the best alternative you did not choose. It’s the ‘cost’ of the ‘second best’ opportunity -- if we assume the best choice was made.

This arises, or is seen as a ‘cost’, because you chose to forego something, it’s a ‘loss’, a potential benefit you did not enjoy. The decision path was constrained by the fact that the alternatives were mutually exclusive which is because of limits on the resources and reality: you can’t both accept this full-time job offer and that one, you can’t both stay in and eat out at the same time...

And given economics concerns itself with best managing limited resources, this is a central theme in the field, the objective being analysing the quality of decisions, and ultimately that of resource management.

But, as I hinted, this pervades every area of our lives.

The Thousand Roads not Taken

It indeed does, even outside the realm of formal and conscious application of economic theory, because quite simply almost anything we do is a bunch of decisions each of which we may choose one way or the other.

Every yes is a thousand nos, every path taken is a thousand not taken. (Not precisely a thousand but you get the idea.)

So while this might seem like it has nothing to do with money, given the centrality of this concept in economics, or if you prefer here: ‘lifestyle optimization and results maximization’, being able to assess or quantify this ‘cost’ can be valuable. And even more simply, just being aware of this whole idea can take us towards making better, more informed decisions.

In fact we have seen opportunity cost earlier in this very series, just not so named. Remember in Episode 007 Bryan hesitating to lend out Steve his 100 silver coins because he had his own plans of deploying it usefully, with the idea becoming palatable only after the arrangement involved Steve paying an additional 5 silver coins for each month held?

The Twin Sisters of Chance and Choice

Back in Episode 006, while discussing chance, we saw the word contingent with regard to all the things in this world that may or may not happen (with the epistemological foundations of the concept laid out in TecC 33C1).

If contingency is about forces beyond our control, opportunity cost is for things we decide. The paths we take.

The thing is, decisions are hard, even simple or silly things like what color socks do I put in this morning... decisions are a cognitive load. (Our word ‘decide/decision’, similar to ‘incision’ and ‘precision’, comes from the Latin dē + cid-, literally “to cut off”)

Furthermore, if decisions are hard enough, the later regret of what turned out to be a bad decision can be even more painful.

(There’s some interesting research on how offering more choices on a menu led to increased stress levels among customers.)

Across human history much effort has been expended on offloading decision-making: to the planets, to the birds, to dice. (I’ve discussed the rationale of this in TecC 24.) That may make navigating the vagaries of life seem easier: dodging responsibility, deflecting blame.

But isn’t it better to try and make better decisions from the opportunities available to us, and what’s of better value than to fully appreciate the workings of opportunity cost?

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Appreciate with a ☕️

Article written by Ash Stuart

Images, video, voice narration and some footnotes generated by AI

Nothing in this presentation constitutes as advice - financial, investment or other

Subscribe now

Further Reading & Reference

• Flights of Chance - How human societies circumvented the burden of decision making

• Two economic blindspots we all share - an article by which touches upon ideas related to opportunity cost