The Economy Explained

September 18, 2010 โ€” I was an Economics major in college but in hindsight I don't like the way it was taught. I came away with an academic, unrealistic view of the economy. If I had to teach economics I would try to explain it in a more realistic, practical manner.

I think there are two big concepts that if you understand, you'll have a better grasp of the economy than most people.

The first idea is that the economy has a pulse and its been beating for thousands of years. The second is that the economy is like a brain and if you visualize it in that way you can make better decisions depending on your goals.

In Media Res

Thousands of years ago people were trading goods and service, knitting clothes, and growing crops. The economy slowly came to life probably around 20 or 15 thousand years ago and it's never stopped. Although countless kingdoms, countries, industries, companies, families, workers, owners, have come and gone, this giant invisible thing called the economy has kept on trucking.

And not much has changed.

Certainly in 2,000 B.C. there was a lot more bartering and a lot less Visa, but most of the concepts that describe today's economy are the same as back then. You had industries and specialization, rich and poor, goods and services, marketplaces and trade routes, taxes and government spending, debts and investments.

Today, the economy is more connected. It covers more of the globe. But it's still the same economy that came to life thousands of years ago. It's just grown up a bit.

What are the implications of this? I think the main thing to take away from this idea is that we live in a pretty cool time where the economy has matured for thousands of years. It has a lot to offer if we understand what it is and how to use it. Which brings me to my next point.

The economy is like a brain.

The second big idea I try to keep in mind about the economy is that it's like a neural network. It's really hard to form a model of what the economy really looks like, but I think a great analogy is the human brain.

At a microscopic level, the brain is composed of around 100 billion neurons. The economy is currently composed of around 8 billion humans.

The average neuron is directly connected to 1,000 other neurons via synapses. Some neurons have more connections, some have less. The average human is directly connected to 200 other humans in their daily economic dealings. Some more, some less.

Neurons and synapses are not distributed evenly in the brain. Some are in relatively central connections, some are on the periphery. Likewise, some humans operate in critical parts of the economy(London or Japan for example), while many live in the periphery(Driggs, Idaho or Afghanistan, for example).

If we run with this analogy that the economy is like the human brain, what can we take home from that?

For people that want a high paying job

If you want a high paying job then you should think carefully about where you plug yourself into the network/economy. You want to plug yourself in where there's a lot of action. You want to plug yourself into a "nerve center". These nerve centers can be certain geographies, certain industries, certain companies, etc. For instance, plugging yourself into an investment banking job on Wall Street will bring you more money than teaching surfing in Maui. Now, if you're born in the periphery, like a third world nation, you might be SOL. It's tremendously easier to plug yourself into a nerve center if you're born in the right place at the right time.

If you don't care much for money there are plenty of peripheries

Now if you don't want a high paying job there are more choices available to you. Most of the economy is not a nerve center. It's also a lot easier to move from a high paying spot in the economic brain to a place in a lower paying spot.

Starting a business you've got to inject yourself into it.

When you start a business, you're basically a neuron with no synapses living outside the brain. You've got to inject yourself into the brain and build as many synapses as possible. When you start a business, the brain("the economy"), doesn't give a shit about you. You've got to plug yourself in and make yourself needed. You've got to get other neurons(people/companies/governments) to depend on you. You can do this through a combination of hard work, great products/services, great sales, etc.

Now one thing I find interesting is that a lot of people say entrepreneurs are rebels. This is sort of true, however, for a business to be successful the business has to conform a lot for the economy to build connections to it. If you want to be a nerve center, you've got to make it easy for other parts of the economy to connect to you. You can't be so different that you are incompatible with the rest of the economy. If you want to be a complete rebel, you can do that on the periphery, but you won't become a big company/nerve center.

If you're an existing business, it's hard to get dislodged.

Once you are "injected" into the economy, it's hard to get dislodged. If a lot of neurons have a lot of synapses connected to you, those will only die slowly. For a long time business will flow through you. This explains why a company like AOL can still make a fortune.

In conclusion

In conclusion, the economy is a tremendous creature that can provide you with a lot if you plug yourself in. It's been growing for thousands of years and has a lot to offer. You can also to choose to stay largely unplugged from it, and that's okay too.


View source