5 life lessons Economics can teach us

Many people question the ability of Economics to really reflect what goes on in real life. Of course when Economics makes assumptions like "all else equal" before every causal statement or "rational people think at the margin", I don't discredit people's skepticism. Nevertheless, we can still derive some pretty important life lessons that are probably truer to life than the economic principles they came from.

1. Expectations: economics has taught us that expectations for the future can influence real variables.

Ex. A reduction in an economy's money supply will, all else equal, cause interest rates to rise, and the domestic currency to appreciate in value. This appreciation creates expectations for future and further appreciation of the currency, prompting people to invest where returns in the valuable currency are being offered. That is to say, if the US dollar is appreciating against the Canadian dollar, Canadians would prefer to invest Canadian dollars where returns would be paid in US dollars, with the expectation that the US dollar will continue becoming more valuable. This behavior, prompted by expectations, actually drives the value of the appreciating currency even higher.

Lesson: expectations influence our actions in many ways, and it is action that creates results. Whether you believe you're going to fail or succeed, or that a huge recession is about to hit, you're probably right.

2. Dead-weight loss & Externalities: dead-weight loss is the potential economic profit that is lost to all participants in a supply-demand market for a certain service or good. Its often used to graphically represent the negative effects of policy decisions such as taxation on a particular good. Taxing a good would not only reduce the seller's profits directly, but it would also prompt people to buy less of the good, further reducing the seller's profit as well as consumer benefits from paying less money.

Externalities are extra costs or benefits associated with a good or service that are not factored into prices. Ex. education provides many positive externalities for society, meanwhile goods that create pollution provide negative externalities. As a student I'm skeptical of the former statement and my pocket too begs to differ, but that is what's written in the books!

Lesson: well-meaning actions can have unintended and unanticipated consequences. On the other hand, sometimes ill-meaning actions can produce positive benefits.

3. Diminishing Marginal Utility: a trend/ point in a production or consumption process where an increase in inputs takes away from efficiency or net-benefit. Ex. In a factory, the more workers you have employed, the more the products that can be produced, and the more efficient the process becomes. UNTIL of course the factory becomes so packed with workers that no one is able to move, production gradually ceases, and disease runs rampant. Then worker investment in the production process would be experiencing diminishing marginal utility.

Lesson: more is not always better. In fact, there's almost always a certain amount of anything that can harm if not kill you. Yes, even happiness can cause heart attacks in large amounts. There is something positive to be said about all this though: if you're planning on pulling an all-nighter, think twice. At a certain level of sleep deprivation your efforts will experience diminishing marginal utility. You would have been better off taking a nap and resuming your work with greater efficiency!

4. Opportunity Cost: the cost of something is that which you have to give up to get it, not just the money you pay.

Lesson: tuition is more than just the $5,000 + you pay every year. Factor in hundreds of hours of lost sleep and medical bills, due to a crappy immune system, due to lack of sleep; the forgone profit you could have made by going into an academically light-weight but extremely risky job your parents talked you out of like under-sea welding; the money you could have made by investing $ 20,000 into stocks and bonds and becoming a stock market guru; the money you could have made by becoming a model and living off of your looks; the money you could have saved AND made if you decided to marry a Saudi sheikh and live off of his oil profits... I take it you see what I mean by now. On the bright side, knowledge is priceless :)

5. Fiat Money: money that is considered valuable because the government says so, not because there's anything tangible like gold backing it up. The concept of fiat money allows banks to take your savings and lend it out to people (who must pay it back with interest); meanwhile your money, as far as you're concerned is still in your full possession and existence.

Lesson: money does not grow on trees, despite all the effort you might invest into planting... it does however come out of thin air. Not to worry, there are still a few cultures on this planet that use a barter system and reward hard work.

Please pay no mind to the unintentional transition in tone from philanthropy to cynicism. Economics is still an integral part of spiritual insight in a world made to go round by money.