The 3 Fundamental Questions of Economics: A definitive explanation of the questions that give rise to this field of study
Lots of people studying economics don't know what it's really about
Unless you've taken an economics course (and maybe even if you have), you probably have the wrong idea of what economics is. Economics is obviously a very complicated and broad field of study, but what is at the most primal core of economics? Throughout my conversations with people unfamiliar with the subject, I have realized that people generally have a misconception of what economics really is at its most fundamental core. Some people seem to think of it as something close to accounting. Other people seem to think of it as close to business or entrepreneurship. Others still think of economics as having something to do with the political realm. Although they are all moving in the right direction with these definitions, they are pretty much all wrong.
Economics might touch on accounting, business, entrepreneurship, politics, and many other human endeavors, but it does so only incidentally. It touches accounting because accounting is the language of finance and economic sometimes deals with things related to finance. It touches business and entrepreneurship because firms and individuals act in rational ways that economists attempt to describe. It touches political science because economists attempt to answer important questions about how societies organize themselves to produce things. It touches other things also, but only incidentally. Economics, narrowly defined, is actually something quite different than what most people believe it to be - something very different than accounting, business, or politics. Economics, at its most basic core, is the pursuit of something much simpler - it is an attempt to answer just three basic questions:
These three questions are more macro-oriented (economics can be divided into macroeconomics and microeconomics). All societies and all nations must answer these three questions.
Why do these economics questions need to be answered?
Why do all nations have to answer these questions? Because we live in a world of scarcity and we want to efficiently allocate the scarce resources that exist. In a world of unlimited resources without any scarcity of any kind, these three questions wouldn't make sense because no choice would need to be made - everything could be produced for everyone. In a world of scarcity, however, a choice must be made, either implicitly or explicitly. By its very nature, the scarcity in our world imposes constraints upon our actions and forces an answer to those three questions. But that might be a bit too philosophical for our purposes here, so we'll continue.
These question show you how broad the study of economics is, at its core
Looking at those questions, you might be puzzled. If this isn't what you thought economics was about that's ok. Economics is obviously a very broad field of study and goes way beyond those three questions, but pretty much everything that economics is and does emanates from an attempt to answer those three questions. That is why I love economics so much and that is why I am so intrigued by it.
Econ Question 1: What is to be produced?
Every society must answer this question and has answered this question since antiquity. To sustain life, water and food are required. Some for of shelter is also a primary necessity for life and safety. Society has managed to move beyond the basic necessities of life and much of the world (specifically the Western world) lives in a state of such affluence that past generations would not even be able to comprehend our lifestyles.
A society, whether that society is a small tribe in our distant past or a modern nation, must decide what is to be produced. Economics looks at this question at both a macro and a micro level, but we'll focus on the macro level here for the purposes of explanation.
Asking, "What to produce?" might sound a bit confusing, but it shouldn't be. The question is simple and straightforward. Economics literally is concerned with the final mix of goods and services produced by a society during a certain time interval (usually a year). The question's answer is also easy to see or observe. You just have to look at the final mix of goods and services produced by a society. For example, we can observe the final mix of goods and services produced in the United States in a given year. Obviously there are a lot of things produced and it would be extremely difficult (if not impossible) to count or list them all, but that isn't a problem and that isn't a concern. The point isn't to count or list the goods or services produced. We can understand in our mind that every year a certain mix of goods and services is produced in the United States and we can understand that this mix of goods and services is society's answer to the question of "What to produce?"
Here are a few examples that might help illustrate the meaning of the question:
Econ Question 2: For whom to produce it?
The next logical question after it is determined (somehow) what is to be produced, is "for who?" This makes a lot of sense. After all, everything produced is for the benefit of the society. Whenever anyone makes something, it is either to benefit himself or herself directly, or it is to obtain income by selling that product or service to another. The only way to do that is to provide some sort of value to the other. Obviously, this is a bit idealistic, because sometimes useless things cloaked in a lot of marketing are sold to unsuspecting buyers, but we won't go down that path in this piece.
Here are a few examples that might better illustrate the question:
Econ Question 3: How to produce it?
Finally, once we decide what to produce and for whom, we should think about how to produce it. This question might not seem as important as the other two at first glance, but it is actually very important. How we produce something reflects our beliefs and values. It also downstaters our society's technological abilities.
Here are a few examples to better illustrate what this question is getting at:
But wait, there's a 4th question! - Who decides?
The above 3 questions really are the main questions that economics attempts to answer, but in answering those 3 questions, a fourth question organically arises:
This question is a very interesting one to answer. It makes sense to ask it, doesn't it? We're answering three questions. So WHO should answer them? Who should decide what to produce, for whom to produce it, and how to produce it? Question 4 has been answered in man different ways throughout history. Let's examine a couple of these answers:
It's important to understand that what we presented above was a very basic description of capitalism and command systems. Additionally, it's important to realize that no nation fits a mold perfectly. Most nations that are capitalist, for example, have aspects of a command system (eg. some socialism with a generally capitalist framework). Sometimes command economies have capitalist pockets in place (eg. relatively sophisticated black markets where a more capitalist structure prevails).
There are other interesting ways to answer the 4th question - they go beyond capitalism vs. command economies
Let's examine a few other possibilities for answering Question 4 (Who decides?), with a few interesting, creative, and potentially outside-the-box approaches:
Brining this all together
This was a long piece on what started out as three simple questions. The thing is, they are not that simple. They might sound simple, but they are incredibly deep and it takes years of study and thinking to truly understand how profound the questions are and how beautifully economics attempts to answer them. That's one of the many reasons why economics is so interesting and enjoyable.
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