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24 March 2009

I am a student of Economics*. I feel the asterick is necessary since I do not feel most peoples’ conception of Economcs is the same as mine.

What do you hear when you hear Economics? The “dismal science”? Capitalism? The stock market bubble? Alan Greenspan? The “Invisible Hand”? Ridiculous hypotheses of hyper-rationality?

That’s not what I think Economics is. My conception of Economics is based on two premises:
(a) can best be summed up in a quote of my Macroeconomics professor: “In Ecconomics, more is not better. The right amount is the right amount”. Economics is, at it’s heart about finding equilibria, the intersections of two lines. Economics does not dictate that growth is primary measure of a successful economy. Those are assumptions that society (and politics) apply to their interpretation of economic data.
(2) All economics processes should be considered in the long term. I know the short term considerations are nice because they have so few exogenous variables to take as given and so many externalities to disregard. But I feel it’s unrealistic. Mostly in that I feel most businesses and economies would like to exist in 10, 20, 50 years from now. Those that don’t probably are planning on being exploitative and should be regarded with suspicion.

Consideration of Economics in the Long Run changes many important factors:

Firstly, business practices, reputation, adaptability, reinvestment become much
more important than annual profit rates. Sustainability becomes the watchword.

Furthermore, in the long run, the exogenous becomes endogenous, and externalities are internalized. While economies may be “open”, the Earth is still a closed system. In the Short Run, the small view, the Outside world is so large and other that it is disregarded. However, in the Long Run, anything you do to affect the closed system eventually affects you. This is especially true for environmental externalities. Yes, you can pollute the atmosphere, empty the aquafiers, overtax the soils. The reserves of clean air, fresh water, fertile earth seem just waiting for exploitation. It seems like a good idea in the Short Run. But in the Long Run, well, if you use it all today, there won’t be any left tomorrow. The air will be unbreathable, water scare, soil dead. What will you do then?

Thinking only in the short term is easy, yes. But it’s also crazy, suicidal, even. We’ve been binge drinking oil all evening, what will we do in the morning when we wake up with a splitting hangover and an empty keg? What were we thinking, we’ll ask. But we know the answer: we weren’t.

Realistically, we should scrutinize models of business, of politics, of society, not just to see if they work well, but to see if they work well in the long term.

Again, to quote my Macro professor, there are two lessons economics teaches you:
#1 (Microeconomics): Markets are wonderful.
#2 (Macroeconomics): Markets are not so wonderful.

Both of these are equally important. In my opinion, solving the problems raised by the second issue are more interesting.

I believe that the principles of economics can be used to analyze endevours for their Long Run potential.

I am a sutainable economist.


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