Wednesday, August 15, 2007

Why Economics Isn't Totally Useless

A previous post discussed how government regulation can be an escape from the prisoners' dilemma. A comment to that post noted that the regulation came at the expense of consumers and/or the local taxpayers. This highlights the different viewpoints of economists and business people. I put myself more in the business than the economics camp, and my initial reaction to the comment was "OK, but I care about my profit not at whose expense that profit comes."

For those of you who haven't sat through a number of economics classes (should I admire you or pity you?), economists spend an awful lot of time worried about concepts like "efficiency" and "social welfare." Taking these classes with a business viewpoint, my thought was "why should I care about social welfare?" I care about making money, regardless of whether it increases or decreases social welfare. Here's a contrast: say you could find a way to become a monopoly producer. Economist say monopoly bad; business person say monopoly good.

So, why don't I think economics is totally useless for business people? Because if you understand how to increase social welfare, you also understand how to reduce it. If you understand how to identify assets not being used in their highest-valued use (inefficiency), you can probably figure out a way to make some money by moving that asset to a better use. Michael Porter of Harvard Business School got famous by taking tools from industrial organization economics and turning them on their head to advise businesses how to create strategies for competitive advantage. Economics provides very useful tools - how you choose to use those tools is up to you.


  1. You won't be in business long, if you don't understand fundamental economic trade offs. 'Cause your competitors do.

  2. Ah hah! You found me out. Economist-in-training, but more or less interested in economics, ethics, and philosophy.

    If all you care about is profit, that makes me happy, because you're supposed to. Profit maximization is the engine for "creative destruction" in the business world.

    If you recklessly disregard social welfare, it may come back to bite you. Imagine a world where no company needed to hire lobbyists to fight government regulation. This would be a world where business owners are more sensitive to the needs of its customers and the effects of its operation on its neighbors.

    Just because we don't live in that world doesn't mean I think businesses, even monopolistic ones, are bad.

    It just means I realize that markets are imperfect, but they're the best we've got. It means that I recognize that you can't know everything all the time, and therefore your decisions will invariably hurt someone.

    Government regulation to fix these problems is fine. Government regulation that transfers costs to those that do not receive benefits *create* imperfect markets where they wouldn't be otherwise.

    And that's not socially just.

    Good post. Thanks for making me re-think today.

  3. To be fair it very tough to get use to these things, but I am not really all that concern since as a business guy, I am able to work well on trading with simple approach. This is all to do with OctaFX broker with their supporting service which includes having low spreads starting from just 0.1 pips while there are over 60-70 instruments to select from and most importantly we get 24 support service which means we don’t have to worry about anything at all.