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Economics has been described as the study of incentives. People usually think of economics as directly relating to money, but money isn't necessary for economics to exist.

Money is essentially three things: a unit of account, a store of value, and a medium of exchange. So what does this mean? A unit of account is something that lets you consistently measure the value of a thing. For example, you can buy a new car for about $30,000 this year. You could probably go about as low as $20,000 and you could go way higher than that if you wanted to, but for a mid-range sedan $30,000 is a legitimate value. It's because a dollar has a relatively constant value that you can say that this costs this much because if it was changing value a lot you'd constantly have to reprice everything. Money is also a store of value because you can hang on to it, at least in the short term, and it will still be there tomorrow. In reality, the economic systems of the world have set it up so that money slowly loses value over time, about 2% per year is what they target, so you're storing value but if you store value in cash for too long you end up losing all of your value. For this reason rich people don't keep their money in money, they will always keep your money in investments that they expected to grow faster than inflation. Finally, it's a medium of exchange. This just means that it's something that can be easily transferred to other people and it's particularly important that it be accepted universally, and if it is transferred from you to another person then you no longer have any claim to it and the next person has sole ownership of it.

Money is fantastic because it helps you facilitate transactions between people who might not otherwise have use for each other. The grocer might be 65 years old and really not care all that much about video games, but the video game developer can still go by food because the money that they get from 20-year-olds is fully acceptable for use at the grocery store. This is one of the reasons why money is a massive economic innovation that fundamentally changes economies. You no longer need to be able to do something for person a in order to get something from person a.

Without this however, economies still exist they're just less efficient. One of the fundamental rules of economics is called supply and demand. The idea is that the balance between supply and demand determines the value of a thing. It has to be understood that this is not like a law of physics. Right now the largest companies on the face of the Earth make massive amounts of money selling things that are basically unlimited. A lot of them work with data which is infinitely transferable and copyable. Ultimately, the value of a thing is actually the value that anyone is willing to pay for a thing.

Let's talk about a scenario that doesn't include money. Let's say that our neighbor Bob is willing to give you a new video game if you mow the lawn for him today. There are a lot of things that could affect this. There is how valuable you consider the video game to be. If it's a new video game for game console you don't have, for example, then you're going to be less likely to want to put in a bunch of work for something that isn't very valuable to you. If on the other hand, it's a video game that you don't have that's for game console that you own, and it's a game you've been really excited to play, then maybe that video game is very valuable to you. Let's take a look at the other side of the equation. Let's say that you are presently bored, there isn't much going on, in that case your time probably isn't that valuable to you so giving it up doesn't mean a whole lot. On the other hand, let's say that right now you're about to go to a rock concert of your favorite band, then that time is extremely valuable to you and you might not be remotely interested in parting with it. So you can see, even though under this circumstance there's no money changing hands economics can still apply.

One of the most important pieces of economics for anybody to know is called opportunity cost. Opportunity cost is the idea that whenever you spend resources on one thing it means that those resources are not available for something else. One example was seen above where if you mow that guy's lawn you won't be able to go to the Rock concert. Even in a world of unlimited, there are still limits. Let's say that you had every single video game, you are likely to play some a lot, and others almost not at all. Your time becomes the limited resource. As you get older you will find that this is the case more and more often, where you are deciding between multiple completely different things that you must spend your limited resources on. Knowing about this concept of opportunity cost can mean the difference between long-term success and long-term failure, because as you spend your limited resources on unimportant things you close the door to important things.

One of the most important things that you can do in your life is trying to figure out when people have misjudged the value of something. This can be a lot of different things, from people to things to investments to forms of entertainment, being able to see that difference and acting on it early often means that you'll get an opportunity to get a leg up on it other people. It's true that sometimes the best of the best are already obvious and everyone knows it, but there's nothing quite like finding something that nobody realizes is there because they can't see it, picking it up, and suddenly having this great thing for way under the market value because you had a better eye for it than anyone else.

Traditionally there are two separate studies of economics: microeconomics refers to things like we've discussed so far, situations where one transaction is taking place and the many things going on within that transaction the forces at work. Macroeconomics refers to the study of entire economies in the aggregate.

Understanding all the different little things involved with microeconomics is well beyond the scope of this particular essay, but we've already touched on some of the major concepts such as utility.

Macroeconomics is generally looked at from two different standpoints: one school of economics tends to look at the macroeconomic factors as something in themselves, and analyzing those values ends up giving you your modeling. The other school of economics tends to look at macroeconomics as the sum of microeconomic transactions. There are benefits and downsides to both ways of looking at the world. The big picture economists tend to be able to tell you what's going to happen in the next couple of quarters as long as nothing unexpected happens. The little picture economists tend to be able to tell you what that unexpected thing might be. As a millennial, I have lived through more recessions than most other generations. There was a recession in the early 1990s, one in 2000, one in 2008, and one in 2020. The big picture economists were surprised every single time, whereas the small picture economists never were. In 2000 it was obvious that the economic boom being caused by massive amounts of spending to get past the Y2K bug was going to end on January 1st 2000. In 2008, there were plenty of little picture economists sounding the alarm bells about the hazards of subprime mortgage lending and the practices that we're going on that were inflating profits while massively inflating risks. Admittedly, nobody could have seen 2020 coming from an economic standpoint, but the upcoming stagflationary recession is almost universally agreed upon by little picture economists, and almost universally denied by big picture economists. Unfortunately, it's very difficult to rationalize the two because they often tell mutually exclusive stories. They must tell mutually exclusive stories because often the little picture economists are telling us why we can't expect the good times the last forever, or alternatively why we don't need to worry about the bad times lasting forever.

There is always going to be somebody trying to sell you a free lunch. Through my lifetime, this hasn't just meant in a money sense, there's been people trying to sell all kinds of woo woo gadgets based on The unexplained of the moment that do impossible things. Before I was born, radiation was considered the woo woo thing of the moment. There was a bunch of businesses that sold water containing radium that claimed that drinking this radioactive substance was good for your health. In reality, radioactive substances kill you. Famously, this led to the newspaper headline "radium water makes moguls health great right up until his jaw fell off". Interestingly, radiation has actually been very beneficial in a lot of fields. Food that has been exposed to high levels of radiation has basically no active pathogens in it, and radiation is used in medicine to kill cancer or as a diagnostic tool. It does not cure every disease that you had, it doesn't randomly make you have more energy because radiation is energy, but there are uses for it. For most of my lifetime, it's been quantum mechanics. Quantum mechanics is absurd. You spend most of your life learning Newtonian physics which basically make sense. Then the moment that you start talking about quantum physics, all common sense goes directly out the window. The only reason that we can know that quantum mechanics works is that we can test to see if quantum mechanics works, and it does. There are very simple experiments to show things like Heisenberg's uncertainty theorem or wave particle duality. People have taken the quantum mechanical principles that we have been able to prove with experimentation, and they have extrapolated them into promises of immortality with absolutely no basis for that. It's just wishful thinking!

Likewise, there's always somebody who's telling you that all you need to do is take from somebody else and you can get something for free. Or, that there's some magic spell that you can cast to get unlimited free stuff forever. It is certainly true that for the past 10 years or so we have seen economics that just doesn't make any sense, but that does not mean that you can get a free lunch forever. The fact is, usually when you're trying to do something to beat the system you end up hurting a lot more later. It's like taking drugs: it feels great, but then you get addicted, and if you ever try to stop doing the drugs your body crashes and you end up suffering and maybe dying.

People often end up advocating for different economic systems as a solution to our current economic problems. Don't let yourself get tricked: whether it's socialism or fascism, if you are solution to the world's problems is "you need to take over the world and put me in charge" you're not an economic defender, your a super villain!

Capitalism and liberal democracy have their problems, but one of the coolest things about them is that the freedom that they afford you allows you to create whenever you want within it systems. If you want to create a commune, buy some land and go buy a commune. If you want create a workers cooperative, get some of your buddies together and create a workers cooperative. The problem is when people do this, they discovered that all these ideas work out way better on paper than in reality. In the 60's lots of people said up communes, and in spite of not having money there were still some people who were the leaders and everyone else was the followers and guess who got all the nicest stuff? Guess who got all the prettiest girls?

Moving on to a different topic, do you remember and when I said at the beginning of this that economics isn't just about money? That even goes when you're talking about money. Our generation has been hyper focused on who gets to be the CEO. If you were to ask based on how much people focus on it you think that one and everyone hundred people are a fortune 500 CEO. The reality is that too become a fortune 500 CEO, first you usually need connections. Second you need us barely expensive education. Third, you need to want nothing else in your life then to be CEO. As you move up the chain of command, your level of responsibility increases more and more and more. As a frontline worker you may be working hard, but you can also completely turn your brain off to work the moment that you leave the work site. As a supervisor, you probably need to be on call to answer questions about something when you're not on site, and you need to spend some time strategizing and figuring out how your going to handle things beyond the hustle and bustle of that day. As a superintendent, you have to think about everything that's going on and you have to help manage the request from all of the guys that have been passed up through all of the supervisors, and as a manager you might have a dozen superintendents and you're trying to help all of those superintendents do their jobs while the superintendents are all helping there supervisors to do their jobs while the workers are all trying to do their jobs. When you are 15 or 20 rungs up that chain of command, you get to a certain point where you don't get personal time anymore. You are always either dealing with things amongst your personnel, or you're dealing with external forces, or you're talking to the media, or you're doing other things. The life of a CEO is fully recommended to the minute. Most of them have very precarious family lives because they don't have the sort of time to put into their families. They don't really get to spend much time working on hobbies, because they don't get vacations. Even if they're "on vacation", their phone is on and they are ready to take a meeting at a moment's notice. Do you really want that? Do you really want to give up everything just so that you can be in charge of something important? The fact of the matter is, for most people, the answer is no. Most CEOs are a very specific type of person who want that 24/7 always on job, and are willing to make the unbelievable sacrifices to do that job. Don't be mistaken that I'm saying that these people are great people, what I'm actually saying is that for these people the incredible cost of basically giving up there lives is worth that title of CEO and the pay packet that comes with it. Most people would be perfectly happy being the CEO for a week, maybe a year, but how about 5 years? 10 years? 20 years? The precious minutes of your life are ticking away, and your stuck in a business meeting about the acquisition of a factory in Mongolia.

Money is definitely important life, but for most of us it's a means to an end. Mistaking money for a reason to live is tragic. Virtually everything else in life is more important than money, and money is just the way you make sure that you have all those other things in life.

That brings us to debt. You have to understand what debt is. Essentially, you are spending today what you make tomorrow. If you inject nitrous oxide into a cars ignition then you immediately get a massive horsepower boost, but it also damage is the engine so later on the car won't go as fast. Likewise, you feel rich when you are spending debt. You know that you can just buy whatever you want because the money is there. It feels great. Unfortunately, eventually the time comes that you need to pay that debt back, and that can really hurt.

There has been some times that I've gotten some serious windfalls. Amounts of money that should have been life changing. They weren't, because instead of being able to spend it on something new, I had to use to pay down my previous debts. Get can be something that makes you look affluent today at the cost of making you look like a pauper tomorrow.

Saving is the opposite: it makes you look like a pauper today so you can look affluent tomorrow. You have a limited life span, but you have a much more limited career. At this point it is likely that almost half of your life will be spent in a state that you can't work. It is essential that you start early saving for retirement because it's extremely likely that there won't be anything there to help you when the time comes.

On a macro level, I feel that debt is the same way. Countries can spend debt for quite long time and there are a number of effects that mean that spending today really makes you look good. Its been estimated that there is a multiplier effect. That effect means that if you spend $1 of government money, there could be 2,3,4,20 times that amount showing up as a GDP number. GDP is a measure of the economic action inside of an entire economy. Every time that you buy something or sell something or work you are contributing to GDP. That number is very important, because it represents the economic success of a place. People are elected or unelected based solely on this number. Kings get deposed over this number. The problem is that it cuts both ways. You end up spending today and it's feels great, but at some point in the future the time comes to pay that debt back. Incredibly, people think that we can just let this grow forever without consequence. That's simply wrong.

Supply and demand as a general topic applies to both currency and debt. The value of a currency is partially represented by the amount that someone is willing to pay in other currency is for that currency. If you issue a bunch of currency, then its quite likely that the value of your currency will go down. If you find a way to pull bunch of currency out of the market, then its likely that the value of the remaining currency will go up. Likewise, the way that governments issue debt is to sell a piece of paper saying "we will pay you back $100", and then they go to an auction and try to sell those pieces of paper. If there are lots of people climbing for that piece of paper, then the value of each one might be close to $100. Otherwise, the amount of money that a bank or investor would have to be paid in order to lend that $100 might be way more, because there's not a lot of people with money willing to lend that money unless they know that they're going to get paid quite a bit for the trouble.

So essentially, as the amount of debt goes up, the number of people willing to take on that debt will go down, until the cost of that debt starts to rise in order to attract more people to purchase it. Another thing that Central banks are doing is purchasing the debt directly. This does deal with the immediate problem of the debt, and it will keep interest rates low, but it is effectively injecting money into the system, which will eventually cause the value of the dollar to drop.

The point is, for both people and for nations, it feels really good to take out debt in the moment, but it feels terrible later. There are always going to be organizations trying to get you to take out more dead specifically so that they can make money off of you, but that doesn't mean it's a good idea. The more debt you have, the more future earnings you're going to have to give up to pay it back.

I'm going to close off talking about one of the most important things that I've seen in my life, not making the mistake of thinking that graphs go on forever. The idea that what happened recently will go on forever is called recency bias, and in so many ways it is the most dangerous bias there is. During the dot com bubble there are countless companies that went up and people assumed they'd go up forever. Most of those companies no longer exist. In 2007 you couldn't go wrong buying Lehman Brothers, in 2008 they went out of business. Theranos was a company in the tip of everyone's tongue, today it's gone and it's CEO is in jail. The point is that "past performance is no indicator of future returns" isn't just an ass covering statement, it's the truth. Like many things in economics, it goes beyond money. It can refer to the fortunes of political ideas -- the religious right was THE major force when I was growing up, today it's a bit player. It can refer to people -- said Theranos CEO was considered one of the hottest people in culture as a successful, young, beautiful woman and now she's a laughingstock. It can refer to nations -- the Soviet Union was a superpower until it collapsed leaving a normal Russia behind. Estimating what the future may bring requires more than extrapolating the last few points on the graph, it requires insight into what's going on, and it's entirely possible to be wrong.

@saxnot One way to get rich quick is to sell a bunch of rubes on some scheme to get rich quick. Lots of companies rely on people who think all they need to do is sell some shampoo or some weight loss shakes and they'll be rolling in cash. Number of those people who get rich: Virtually nil.

@saxnot One personal example of this for me was when I graduated from high school. I graduated in 2001, and leading up to then, everyone "knew" that getting into computers in any form was a ticket to the easy life. I was in luck, I happened to be very very good on computers! Well, there was a bubble in computers in the years leading up to the Y2K bug, and then after that the bubble popped, and after that a lot of people were looking for work, and also a lot of that work got outsourced. There are good jobs in IT, but not nearly as many as would have needed to exist to justify the hype. A lot of people were left behind to the point that lots of the chronically unemployed I knew were "computer guys".

@saxnot because at the time itself it was said in a very non-technical way. Sort of like the boomers saying "my grandchild is really good on computers" while in reality they're just good on the iPad surfing Facebook or YouTube. In the late 90s it wasn't quite that bad, but there was this idea out there that no matter what you were doing as long as it had something to do with computers you were going to become a multimillionaire because a bunch of executives had become multimillionaires.

There are plenty of jobs that pay reasonably well that involve computers, but without being steered in the right direction everyone was just kind of under the impression that being a computer tech could eventually lead to saving the world.

In one of my other recent essays I talked about how crazy the world was back then. At that particular moment in time things that seemed absolutely impossible were becoming possible, so people just assumed that all the rumors that they heard were true.

@saxnot the greatest recession in public memory, the great Depression, came about because of a change to the Homestead act. The change to the Homestead act said that in order to Homestead you did not need access to groundwater. Previously you needed access to groundwater. At the same time, a temporary change in climate occurred so there was a lot more rain over the Prairie. As a result, for a few years people thought that perhaps the climate had changed permanently so lots of money ended up flowing into these new farms. Also at the same time, the Federal reserve had been created which provided a lender of last resort and appeared to reduce the risk of Bank runs. Because of this, banks were more than happy to lend a whole lot of money to Farmers starting up their own farms using the homestead act.

What happened next is the climate reverted to normal, and suddenly all of this Prairie was trying to grow thirsty crops on planes that didn't get enough precipitation to support those crops. The resulting environmental catastrophe was called the dust bowl, and the farm failures led to bank failures which led to the great Depression.

The point I'm getting at here is just because a thing that we know will be harmful hasn't been harmful yet doesn't mean that it won't be harmful. The last couple decades in particular have introduced a number of dangerous new financial technologies such as QE that allow governments to artificially keep Bond rates low, and so far it hasn't caused a collapse in the value of the currencies, but just because it hasn't happened yet doesn't mean that the fundamental laws of economics stop existing. It's sort of like the concept of carrying capacity in environmentalism: if an island can support 100 deer and 101 deer come to exist, there is no immediate impact, but eventually there will be no food left on that island. In the same way, I'm certain that there's going to be a spiral of debt and inflation in the relatively near future.

@saxnot it's really easy to justify that sort of thing, and it's also really easy to falsely justify that sort of thing. For for a very long time comedians have made jokes about people claiming that something that is obviously a pure luxury expense such as a new game console is actually an investment. We have been investing in all these different things for a century, you would think that at some point these massive investments that pay for themselves would have started paying for themselves and we could have paid back some of the debt. Instead it seems like the massive investments cause us to require further massive investments.

It doesn't matter so much right now, but it absolutely will matter later. The problem is, these investments that don't pay themselves back will still be on the books, and if the inflation starts to spike then interest rates will have to spike, the only alternative would be the Central Bank buying basically every Bond and ignoring the fact that inflation has run away.
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@saxnot yes, in one of my other essays I talk about opportunity and how you can't be looking at other people's opportunities in order to decide what you are going to do.

There is definitely a lot of legitimate opportunities left in computers, and people who work really hard can definitely make their own opportunities. The reason that it wouldn't work would be if you think that it's just a get rich quick scheme and just get into anything related to computers without really caring about what. If you don't really have any passion for it then you'll just get into whatever looks the easiest or the most fun and you'll be yet another unemployed it guy.

@saxnot oh and

E) his mom was on the board of United Way along with the vice president in charge of developing the Personal Computer

F) his parents could lend him 50k (approx 160k today) to buy someone else's OS

@saxnot I can't hate on anyone using what they've got. God knows Bill Gates was never going to succeed depending on his good looks and charm!