So You Want to Know About Economics Read online

  So

  You Want

  to Know About

  Economics

  Roopa Pai has written over twenty books for children, covering the gamut from fantasy to popular science to philosophy. She combines three other loves—history, young people, and her hometown Bangalore—in her job as a tour guide with heritage walks and tours company, BangaloreWalks. Her bestselling The Gita For Children won the Crossword Popular Award for Children’s Writing in 2016.

  Mohit Suneja started his life as an artist from a young age when he drew portraits and copied action figures from comic books. He followed his passion and trained at the College of Art, New Delhi where he later went on to teach as a professor of Visual Communication. He has since worked in many roles in many industries and created everything from book covers to wall paintings. Today, Mohit is set to travel at the speed of his imagination trying to create a better world through his art.

  Published in Red Turtle by

  Rupa Publications India Pvt. Ltd 2017

  7/16, Ansari Road, Daryaganj

  New Delhi 110002

  Copyright © Roopa Pai 2017

  Illustrations copyright © Rupa Publications India Pvt. Ltd 2017

  The views and opinions expressed in this book are the author’s own and the facts are as reported by him/her which have been verified to the extent possible, and the publishers are not in any way liable for the same.

  All rights reserved.

  No part of this publication may be reproduced, transmitted, or stored in a retrieval system, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

  ISBN: 978-81-291-XXX-X

  First impression 2017

  10 9 8 7 6 5 4 3 2 1

  The moral right of the author has been asserted.

  This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated, without the publisher’s prior consent, in any form of binding or cover other than that in which it is published.

  For Dhwani Yagnaraman and Inika Prasad, future economists and overall rockstars, with many thanks for test-driving this book.

  CONTENTS

  Introduction

  The World Before Economics

  What Countries Think About When They Think About Economics (a.k.a Macroeconomics)

  What You And I Think About When We Think About Economics (a.k.a Microeconomics)

  Epilogue

  Acknowledgements

  INTRODUCTION

  WHY SHOULD WE TALK ABOUT ECONOMICS?

  Here’s an idea. Pick up a notebook and pen, walk to the nearest adult, and with your most earnest face (practice in front of the mirror first), tell them you are conducting a Very Important survey for a school project. There are only two questions, so would they please give you five minutes of their time? If you live with more or less reasonable people, they will most likely agree.

  When your unsuspecting victim has settled down, ask her your first question:

  ‘What is your opinion of Economics as a subject?’

  The person you are interviewing will most likely look distinctly traumatised by the question. Then she will perhaps respond in one of the following ways.

  ▶‘Absolutely. The. Most. Mind-numbingly. Boring. Subject. On. Earth!’

  ▶‘You’d have to be a math genius to even begin to understand what the subject is about. I’m not.’

  ▶‘I passed with decent marks, but if you asked me what Economics taught me, I don’t quite, erm, know.’

  ▶‘No opinion at all. I’ve never studied it, and never been tempted to. Can I go now? I have to pee.’

  Pushing on ruthlessly, ask the second question:

  ‘What do you think about when you think about Economics?’

  People who have never studied the subject will be wonderfully vague. ‘It’s about money, right? About budgets—how a country divides the money it has? About GDP and stocks and shares and… uh, stuff to do with the Reserve Bank and the Finance Minister and taxes… and… oh all right, all right, I admit it, I don’t think about Economics at all. Please don’t judge me.’

  People who have studied the subject, on the other hand, will clear their throats, sit up straighter, and proceed to throw random words and phrases at you. ‘It’s about, you know, markets and things. Supply, demand, price elasticity, externalities, cost-benefit, scarcity, resources, exchange rates, maximising utility, protectionism, globalisation, and all of them, of course, ceteris paribus…’ When they finally catch your glassy-eyed expression, they will turn up their noses and say, ‘See, it’s Very Complicated. Difficult to explain. You wouldn’t understand it.’

  Only a few people—a rare species but they do exist—will smile beatifically when you ask them these questions. They will lean forward in their seats, faces animated, eyes sparkling, and tell you that Economics is the most exciting subject in the world. Over the next half hour, pinning you to your seat with their fire-and-brimstone eyes, they will tell you why they think so. This is what they might say:

  1.Economics is important because it is really the study of how the world thinks and works! See, economists are really psychologists in disguise—they have looked into the deepest, darkest recesses of the human heart and discovered that all of us are essentially selfish beings at the core. But if every person is doing selfish things that only benefit him or her, how come society is doing more or less okay? Economists believe they have the answer to that Big Question, and they spend their lives figuring out how to arrange things in the world so that society benefits while people go on doing their selfish things.

  2.Economists are really superheroes fighting for a fairer world! One of their lives’ Big Challenges is to figure out the best ways to share the world’s limited resources (like minerals, metals, oil, human labour, time, energy or money) amongst people who have unlimited needs, in ways that are as moral and ethical as possible. They constantly obsess over how to make things somewhat equitable for everyone—the rich and the poor, developed countries and developing countries, the healthy and the sick, and the old and the young, so that both sides benefit. They look at every problem from more than one point of view, and then they present all the different views, so that people can make the right choice for themselves.*

  3.Economists are closet environmentalists. Just like environmentalists, they are constantly trying to understand how we, the 7 billion people that inhabit this planet, can get the most out of what the universe gives us for free—sunlit skies, clean air, flowing rivers, lush forests—without mindlessly destroying it and ruining things for ourselves. The two groups have very different ideas on how to make this happen, though.

  4.Economists are wizards who make magical things happen with numbers. They have shown, time and again, that when, say, a billion people work together, the sum of their individual efforts is far greater than what it is supposed to be.

  5.And by the way, if someone told you they didn’t think about Economics at all, they don’t know what they’re talking about, because everyone is thinking Economics all the time, even if they don’t realize it. Every time you go into a supermarket and find your favourite breakfast cereal, you are benefiting from the Economics of a free market, which makes sure that everything the consumer wants (and some stuff that she doesn’t even know she wants!) is available easily to her. Every time you scarf down a dosa at your local South Indian café, you are helping the economy of your neighbourhood grow. Every time you pay for a plastic bag in a store because you neglected to bring your own from home, you are participating in the fight for a cleaner, less toxic world (who do you think came u
p with the idea to have people pay for plastic bags so that they eventually use less of them? An economist!). So there!

  By now, you are convinced that your manic-eyed interviewee is either wilfully exaggerating or has a couple of screws loose. But admit it, either way, your interest has been piqued.

  So stick around and listen in while we talk about Economics. I’m betting you’ll be glad you did.

  *Economists are so particular about looking at every problem from all sides that it often feels like they never have a firm opinion on anything. That can get pretty frustrating when you are asking them for advice. Harry Truman, the 33rd President of the United States, once famously requested to be sent a ‘one-armed economist’, because he was so tired of hearing every economist say, ‘On the one hand, this,’ and ‘On the other hand, that’.

  THE WORLD BEFORE ECONOMICS

  Let’s begin with a quick flashback to 2 million years ago, when the first human (or maybe she was the fifty-ninth) walked jauntily out of her cave, swinging a stick she had just found. It was a beautiful day, and our human was feeling chuffed—as far as she knew, she was the only creature in the world that walked on two legs, plus she had an interesting-looking stick!

  Her happy state of mind didn’t last, however. Ten minutes later, she ran into Another Human. One part of her mind conceded that it might be fun to have a companion, but the other part was already looking longingly at the smooth flat stones that he was playing with. Oh, she wanted those stones, and she knew only one way of getting them. She raised her stick to knock He-Human on the head, when she noticed that he was looking at her stick with the same moony expression.

  She-Human’s brain went into overdrive as a Big Idea began to form. Maybe there was another way to do this.

  ‘Oonga, oonga?’ said She-Human, extending the stick.

  ‘Yabba-Dabba-Doo!’ exulted He-Human, happily handing over his stones.

  Grinning like loons, She- and He-Human walked off into the sunset, arms around each other’s shoulders—the first-ever trade had been made!

  Since that historic moment, humans haven’t stopped trading with each other. Shiny beads for cloth, cows for cooking pots, gold for pepper, carbon emissions for clean air—substitute anything for anything on either side of the equation and it is likely that the two have been traded at some time, in some form, at some price or the other.

  But why are we jabbering about trade here? Because contrary to popular belief, it is trade that makes the world go round, not money! Money is just what is used to conduct a trade. See? You learn something new everyday!

  FOLLOW THE MONEY

  So we’ve established that trade is the root of all Economics. And we know that money is the root of all trade i.e., Pretty Darn Important to this book. So let’s go off and find out a little more about it, shall we?

  First off, what is money? It is what we use to conduct trade in the modern world. Serious, well-informed Economics experts define it as ‘any item that is generally accepted as payment for goods and repayment of debts.’ Meh. You knew that.

  What about the purpose and function of money? As someone put it succinctly:

  Money’s a matter of functions four,

  A Medium, a Measure, a Standard, a Store.

  Erm, say what?

  See, it works like this. Money is:

  ▶A great MEDIUM of exchange: Why? Because it’s light, small and everyone will happily accept it in return for what they are selling to you or doing for you. For instance, if you said to your friend (do NOT try this at home): ‘Hey, can you do my math assignment for me? I will pay you 50 bucks’, it is more likely that he will say yes, than if you had said, ‘If you do my math assignment for me, I will give you my new socks (which my grandmom bought for me and I absolutely hate), a bar of chocolate (that has been sitting around in the fridge forever), a big bear hug (see how much I love you?).’

  Also, it’s more convenient to carry money in your pocket than to cart a bunch of frisky goats to barter at the mall every time you go shopping.

  ▶A MEASURE of value: Just like we have standard units to measure distance, time, weight, and temperature, ‘money’ is the standard unit we use to measure the ‘value’ of something. The more money you pay for something, the greater its ‘value’.

  But what we think of as ‘real money’ is not that different in look and feel to ‘Monopoly money’ (case in point: the new ₹2000 note). So what makes real money real? The fact that a country’s government says it is! Within that country, these government-approved pieces of coloured paper can be used legally in exchange for ‘goods’ like pizza and ‘services’ like bus-rides.

  ▶A STANDARD of deferred* payment: In plain English, that means money is an accepted way to pay off a loan, i.e., pay someone back tomorrow for money they lent you today. If a friend lent you 100 rupees today so that you could pitch in your share for another friend’s birthday gift, she will always be happy to accept 100 rupees from you tomorrow as repayment of her loan to you. She may be less happy to accept a book or a bunch of flowers as repayment, even if you say they cost exactly the same amount.

  ▶A STORE of value: Remember the time you squirreled away the chocolate you got at Diwali just so that you could bring it out after your sibling had run through his share? What you had done was to create a ‘store of value’, whose ‘value’ was the expression on your sibling’s face when he discovered your treachery. You couldn’t have done the squirreling away with, say, strawberries, because they would spoil if you kept them too long. Money is like chocolate—it doesn’t spoil (although it might be less valuable the longer you keep it, because of something called inflation, which we will talk about on page 92). So if you salt away your pocket money instead of wasting it on things that you can arm-twist your parents into paying for, you would have created another store of value to torture your sibling with. (Also, if you had put your money into a bank, instead of just stuffing it into your underwear drawer, you would have created an even larger store of value because of something called interest which a bank would pay you. We’ll talk about this in more detail on page 138.) The danger of not putting your money in a bank is that when something like demonetisation comes along (it happens rarely, but it does happen, as we found out in November 2016), that money turns instantly into nothing more than coloured pieces of paper that have no value. (We’ll talk a little more about that on page 56.)

  OKAY, WE’VE GOT MONEY FIGGERED OUT. CAN WE GET TO ECONOMICS ALREADY?

  Not so fast! You see, Economics, as we understand it today, is a fairly new idea, and to understand why someone thought it up, we need to know what went before. ‘Economics’, as a branch of study, didn’t even exist 250 years ago. Coming to think of it, neither did electricity, sliced bread, plastic, selfies, or the United States of America. Why, there weren’t even any other countries, or, more accurately, ‘nation-states’, in those days.

  Nation-state? Wozzat?

  To answer that question, we have to time-travel back to the fifteenth century. At that time, if you took any region of the known world, it was basically a patchwork of kingdoms or tribal societies, some small, some large, with loosely-defined borders. Even in large kingdoms, the king or emperor rarely had absolute control. It worked like this—a powerful king would conquer a small neighbouring kingdom, and would then allow the defeated king to continue ruling his kingdom, with the old rules and laws. The only conditions? The smaller king paid the more powerful one a yearly tribute of a large amount of money, and maintained an army to fight off the big guy’s enemies.

  Overall, a win-lose situation was turned into a win-(sort-of)-win situation. The big king got more money into his treasury and left the headache of fighting off enemies in that region to someone else, and the smaller king got to stay king.

  What about the common people? Often, they didn’t even know that they had been conquered. They lived in their faraway villages, worked on their farms or their weaving looms or potter’s wheels, rarely travelled, and spent their spa
re time worrying about how they were going to pay their taxes to their greedy landlords and still feed their families. Without newspapers, television or the Internet, they very rarely knew what their king even looked like. Needless to say, they didn’t feel any loyalty to him or to their ‘country’.

  As you can see, it was all a bit vague on every side. To add to the confusion, things were constantly shifting and changing. For instance, a couple of months after he had been conquered, the smaller king would declare his independence and refuse to pay the yearly tribute. He would sneakily get into alliances with the big king’s enemies and plan attacks on the big king. Or maybe the big king would get swallowed up by a bigger one, and the small king would only realize this some six months later when a trader from the capital happened to be passing through his kingdom and brought the news.

  Things may have proceeded indefinitely in this manner if it hadn’t been for Europe. In the fourteenth century, a new and exciting energy had begun to sweep across Europe as it shook off a dull and dreary period of its history, now called the Dark Ages. The rumble began in Italy, but soon spread across the continent. People who had blindly followed the rules laid down by priests and kings and rarely thought about things for themselves began to question everything. These new ‘rebels’ were curious about all kinds of stuff: How do things work? Does the Bible really say what the priests say it says? Is there anything I can build to make my work easier?

  They were also full of a grand sense of adventure and hope. Surely there is more to the world than my little village? Surely not everyone in the world has to grow crops or make pots—what if I want to paint, or write, or play my lute, and make a living that way? Surely a man has it in his power to fashion his own destiny?

  People began to experiment with art, science, politics, literature, architecture, music and philosophy. The outpouring of creativity felt like a revival of the intelligence and energy of mankind itself. The invention of the printing press in 1440 by German innovator Johannes Gutenberg helped these revolutionary ideas spread quickly, encouraging more people to think and build and paint and write. No wonder the period is now called the Renaissance (‘rebirth’ in French).