Lesson 1 – Division of Labor and Trade.
Imagine two villages a very long time ago. In each village, everyone shares. Everyone works at everything and shares in everything. One village has better apples nearby. The other has better fishing. They exchange and value is created.
Carrying the apples and fish is also value. From the village with more abundant apples, we carry apples to the village with more abundant fishing. That adds value for which they will exchange more fish.
For this to work, expectations are key. We collect and carry apples because we expect you will give us fish. They catch extra fish expecting the apple gatherers to come for them.
We don’t have to own anything for this to work (more on ownership later). The apples are near our village, the fish are near theirs. They could walk over to collect apples, and we could walk over and fish. The simple division of labor and trading create value.
Lesson 2 – Prices
How many apples are worth one average-sized fish? We might start with as many apples as one person can carry in exchange for as many fish as that person can carry. But that is not the best price.
Lesson 3 – Ownership
In our simple example, everyone contributes to the village and everyone shares. We all farm together, forage together and hunt together. Everything belongs to everyone.
We might even share our land with other villages, but eventually we will claim territories. This starts in the animal kingdom and extends to humans.
That means we may have to fight for and defend our territory.
We may also have ownership within our village. If I spend many nights making a tool or a weapon to hunt, I can claim it as mine. If my tool or weapon is more skillfully made than those made by others, I own the benefits of that superior tool.
Lesson 4 – Expectations – Confidence and Information
For all of this to work, we have to have confidence in what to expect. Before I do the work catching extra fish to trade with you, I have to expect that you will come with apples before they spoil.
And that you won’t just come attack me and take the fish.
And you have to have some confidence I’ll have fish to trade before you pick the apples and carry them all that way. And that I won’t steal them from you, or that robbers won’t along the trip.
In addition to fish and apples, information is created, shared, and exchanged through our trading.
This part of the economic process is where governments, from tribal chiefs to kings to legislatures, bureaus, and central banks, play their most critical important role. And it is arguably the least understood and greatest area of malpractice and outright mischief.
Lesson 5 – Side Effects
Which brings us to side effects.All economic processes, all decisions, have side effects. This is mathematically inevitable because economic systems, at least those to date on our planet, are closed systems with feedback loops.
To defend ourselves and our territories we may have a powerful Chief. He organizes and leads our conflict with other tribes. But then the chief may use his powers to claim extra rights and privileges for himself and his friends and family.
Lesson 6 – Productivity (Technology and Innovation)
Through division of labor we can develop can lead to specialized skills.
Instead of having everyone share in every task, it makes sense to divide tasks. It doesn’t make sense for the whole village to walk a long ways to the hunting ground and wait all day for prey. It only takes a few of us, and the others can stay home and farm or fish or forage. This division of labor creates value. In addition, we can develop specialized skills.
Specialized skills change the division of labor. The new ox-drawn plow requires less people for farming.
Within the village this can work even if everything is shared. Some farm, some gather, some care for children and elders and prepare food, some hunt, some fish. But all of these are contributed to the common pot.
This sharing requires norms (morals) to enforce sharing and discourage free-riding.
Lesson 7 – Resources (Territory, Sustainability, and Generations)
Natural Resources
Environmental side-effects
Sustainability
Inter-generational transfer (or not?)
Lesson 8 – Regulation
It’s the referees, dummy. And the Commissioner.
The issue with regulation is not how much more or less, but how effective.
Lesson 9 -Information Technology
From cuneiform tablets to printing presses to coffeehouse pamphlets to yellow journalism to radio and television to the internet… this is the 800 pound gorilla.
Elephants and Economics 