Economics is a field mainly utilised by governments and corporations in order to analyse the strength or weakness of a financial system.
What comes after the analysis is the implementation of custom policy for the purpose of either expanding and contracting the economy.
Most people regard economics as an academic science that only concerns professors and governments . However, there are fundamental laws in economics that must be learnt.
Economics of Information
“Markets tend to favour the party that knows more”
What is the Economics of Information?
The economics of information is the study of how information can affect an economy and influence economical decisions.
While most people want to learn about demand and supply, macro and microeconomics, monetary and fiscal policy, they overlook one of the most important ideas in economics.
George J. Stigler (1961) starts with this sentiment in the beginning of his journal article The Economics of Information.
“ONE should hardly have to tell academicians that information is a valuable resource: knowledge is power. And yet it occupies a slum dwelling in the town of economics.“
The Economics of Information can be applied to many phenomena such as business markets, price, marketing, self-development, sports and much more.
The Economics Perspective.
Let us look into the economic explanation of this principle.
A main notion that economists tend to refer to while discussing this topic is the situation in which one party in a market has more knowledge than the other party and the former is at an advantage because of this.
This is also known as information asymmetry “where one agent had information not available to another” (E. Stiglitz, 2017).
It must be understood that some people, corporations, and small businesses will go as far to promote information asymmetry in the marketplace, the marketing process, the disclaimer of regulations and so on.
“Some market participants realise that opportunities for profit can be enhanced by increasing information asymmetries and devote efforts to ensuring the existence and persistence of these information asymmetries, as costly as they may be to the economy as a whole.” (E. Stiglitz, 2017).
This is how companies can sell you products that you think you need but you don’t actually need, this is how some businesses get away with breaking several laws and regulations, this is how companies are able to stay competitive in an ever-expanding market, etc.
Information Asymmetry can occur on different levels:
- If you are selling a good, you obviously know more about it and you can choose to say a few things about it and choose not to say some things about it. (e.g., selling a used car or used items)
- If you know of resources, manufacturing process, ideas, and other market inputs that your competition don’t know about, you can perform better.
- If you know your target audience better, you can develop and market your products better.
- If customers know & understand Fair Trading Laws better, they can make better decisions.
- If customers research products deeply they can make better decisions.
There may be some more, but we believe this list is adequate for our purposes in this article.
How can we apply the Economics of Information Principle?
The practical application of the Economics of Information principle is all about making sure you keep updated with all kinds of information, so to stay relevant and profitable in the market.
The principle is sound. If you know more, you are much better off.
Knowledge is the difference between a mediocre product and an innovative product.
Knowledge is the difference between a successful and an unsuccessful marketing campaign.
Knowledge is the difference between a satisfied and unsatisfied customer.
People foolishly disdain knowledge for pleasures, money and relaxation.
There are those who are too proud to participate in an internship. They say “why on earth should I work for free?” Well there are a few answers to this ignorant question.
One will suffice though.
The more knowledge you have, the more you can ask in return.
“Human capital theory predicts that differences in wages arise because of differences in human capital. The latter can be accumulated in two ways: through experience and education” (Serneels, 2008).
If you don’t have much skills and knowledge, then why should you expect companies to pay you with a higher wage.
“You should never disdain an apprenticeship with no pay. In fact, it is often the height of wisdom to find the perfect mentor and offer your services as an assistant for free” (Greene, 2012).
We advise everyone to pursue internships and apprenticeships, as the Economics of Information is a merciless principle.
In the end, what you don’t know can hurt you. For example:
If Nokia knew of and invested in touch screen technology, they probably would have been the leader in smartphones today.
If Kodak weren’t blinded by their success, they would have known of the rise of digital technologies.
If Blockbuster researched Netflix deeply they would have known that Netflix is the future and hence would have bought it for $50 million when they had the chance and now they would have been worth over $8.5 billion.
The lesson here is simple and clear:
Gain as much knowledge as you can.
Read books, listen to podcasts, attend classes, learn a skill and so on.
We would like to mention that there are a few different types of knowledge:
- Theory: This is the information that is concerned with ‘how things work’. You couldn’t be able to compete with Elon Musk if you don’t know the theories of physics.
- Practical: This is the actual skills that turn theories into products and innovation. Elon may have the theory, but he might not have the handy skills of a tradesmen or engineer.
- Relevant News: This concerns the economic and business environment that surrounds you. You would not start a business in a recession and you most likely won’t sell your business in a boom.
We should also mention an important point.
“Knowledge will not attract money, unless it is organised, and intelligently directed, through practical plans of action, to the definite end of accumulation of money” (Hill, 1983).
For instance, you may have more physics, engineering and computer science knowledge than Elon Musk but if there is no ‘practical plan of action’ then that what benefit will that knowledge do for you.
People like to say ‘knowledge is power’ but “it is nothing of the sort! Knowledge is only potential power. It becomes power only when, and if, it is organised into definite plans of action and directed to a definite end” (Hill, 1983).
The main advice here is not to gain as much knowledge as you can but to apply the knowledge that you do have.
Do not attempt to read as much books as you can. Attempt to read one book deeply and apply the concepts in your daily life.
You don’t need to attend to the ‘self help’ guru scene. Why should you? They repeat they same thing over and over again. The problem is not your lack of knowledge per say, it is your lack of the application of knowledge.
The liability is on you to apply the knowledge that has already been taught for centuries into your daily life.
Marketers simply use the ‘fear of missing out’ phenomena in order to get you to attend pointless events and conferences. The attentive person will realise that the contemporary ‘self help’ gurus are not providing new information, they are simply rephrasing what has been said many years ago.
The only time where these events are important to attend is when the knowledge that is provided has been adapted to the modern world. For instance a good conference to attend will be ‘personal development in the digital age.’
We will conclude by reemphasising the importance of all forms of knowledge in every situation. Whether it be financial, philosophical, psychological, scientific, etc, knowledge is a must.
The last essential advice is the application of that knowledge whenever possible.
Opportunity Cost / Utility
“Intelligent people make decisions based on opportunity costs.”
What is opportunity cost?
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another(Investopedia).
The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services.
Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable.
The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good (Khan Academy).
Opportunity cost can be applied to literally anything.
You are now reading this article instead of doing many other things like walking the dog, watching a movie, cooking a meal and so on.
If you at this time read this article you will acquire specific benefits. But if you walked the dog instead you will miss out on the benefits of reading the article and acquire the benefits of walking the dog.
The main concern of this economic principle is how can we choose the right decision.
“Life is complex and uncertain. There are an infinite number of things that we can be doing at any time. Indeed, every decision that we take involves some kind of trade off. We may trade off utility now against utility in the future”(Wheelan, 2019).
Choosing the right option is a daunting task. There is an infinite amount of possibilities!
We will not explain how to choose the right option, because that is up to the reader. What you value will be different to what I value.
But what is important, is to understand that you must choose what seems most valuable to you at that moment.
Do not allow those intrusive thoughts enter your head and whisper, “You could be doing this”, or “Why are you wasting your time on that when you could be doing this” and so on.
The Economics Perspective
The notion of choosing the right option & profiting from it as much as possible is known as Utility Maximisation in economics.
Utility simply means value, and obviously several parties in the market want to maximise the value of their economic decisions.
A humorous example of this, is when you check out of an hotel, you make sure you take all the condiments, towels, cleaning products, etc. with you. When you do this, you are maximising the utility of your stay at the hotel.
Corporations strive to maximise utility at each possible moment.
Firms don’t simply make a product and just sell it.
Rather, firms spend big money on researching and planning ways to maximise utility from each economic action.
They wont only profit through selling you a good. They will prompt you to sign up for their newsletter or rewards program. They will ask you to refer their business to your friends. They will ask you to follow them and interact with them on social media and so on.
If companies are focusing on maximising utility, then why aren’t you?
How can we apply the Opportunity Cost / Utility Principle?
In order for you to succeed in life you need to maximise your utility in three main things:
Most people spend their time in their present relaxing and burning their time on mindless entertainment.
We understand this though, coming home from work does not motivate you to read a book, start a project, go for a run, etc.
However sacrificing pleasure and relaxation is necessary for future everlasting relaxation.
You have to trade off your utility in the present for utility in the future.
If you’re going to try, go all the way. Otherwise, don’t even start. This could mean losing girlfriends, wives, relatives and maybe even your mind. It could mean not eating for three or four days. It could mean freezing on a park bench. It could mean jail. It could mean derision. It could mean mockery–isolation. Isolation is the gift (Charles Bukowski)
How many people have you heard complain the same thing over and over again; “The system is rigged against me, the rich get rich and the poor get poorer”. He says this while spending the little money he has on Gucci and Prada and while the real wealthy people are simply wearing jeans and a shirt.
There is nothing wrong with the system rather there is something wrong with these people’s attitude.
Foolish people purchase goods that only provide utility once.
For example; If you buy liquor, you only drink it once and feel the effects once. You cant drink your liquor and have it too.
You must purchase goods & services that will benefit you now and in the future.
For example; Instead of buying a hotshot car, you should buy property. When you own property you can either; live in it in the present and rent it out in the future, or rent it out immediately and earn regular income in the present and in the future.
By choosing property instead of the car you may miss out on the benefit of looking rich and being popular but you acquire the amazing benefit of regular passive income.
“A man does not need brilliance or genius, all he needs is energy” (Albert M. Greenfield)
Energy has the potential to turn rubbish into gold. But unfortunately people don’t realise this, hence they waste their energy on fruitless activities.
I, personally am very devoted to the topic of energy. In my article The awful dream: “My dream job is at Google” I argue that people have the skills and the energy to do great things, rather than to work for a corporation.
“The world does not need more drone workers simply following orders.
“The world needs strong, passionate and intellectual minds who will transform the world into a better place.”
Do not misplace your energy into a corporation who will fire you at the blink of an eye.
Your energy is sacred. Utilise it in the projects you wish to follow.
To conclude on this principle.
You have to trade off your utility in the present for utility in the future which means:
Stop buying unnecessary products (Games, iPhones, Expensive Food, etc.). Stop trying to look rich. Stop going out to unnecessary outings. Stop associating with lazy friends.
Start waking up early. Start good habits. Start a project. Associate with good friends
There are much more examples to give, however we believe we have explained the notion sufficiently.
Utility is value and the lesson here is, you must maximise your utility in the present & the future.
“Human Capital is an Economic Passport”
What is Human Capital?
The above skills are absolutely necessary for an individuals success.
Wheelan makes the point that people are poor not because they can’t find good jobs but rather the real issue is a lack of skills and human capital.
There is an important difference between the individual who possess useful, in-demand skills and knowledge than someone who does not have any skills or knowledge.
The one with more useful skills and knowledge finds jobs easier because the human capital he posses is of high quality and of high demand.
If you work in a fast-food restaurant and some incident occurs which prompts management to fire some workers, you will be fired without a second thought. That is because you are not valuable to them, you can easily be replaced because flipping burgers is not akin to splitting atoms.
However, if you work as an electrical engineer and management may need to fire some people, they will be reluctant to fire you as you have the education and the skills that they really require.
We will return to an important quote we mentioned in the beginning of this principle.
If you posses a great human capital, you are highly demanded and your economic passport can take you many places just as a regular passport will.
If you started your own million-dollar empire in an industry and say for instance you lost all of that.
It will be no issue.
Other companies or entrepreneurs will be interested to work with you as they know you possess great human capital.
Wherever you are in the world you could show people your economic passport and easily find work, however if you don’t have no skills or education, you most likely will be working low level jobs.
The Economic Perspective
“The concept of human capital recognises that not all labour is equal. But employers can improve the quality of that capital by investing in employees—the education, experience, and abilities of employees all have economic value for employers and for the economy as a whole” (Investopedia).
It is in the best interests of employers to improve the quality of human capital. Because as human capital increases, productivity increases. And as you may know, when productivity increases costs are reduced and profits may rise.
The human resources departments of many corporations are invested in providing seminars and conferences for employees because “Productivity growth depends on investment in physical capital, human capital, in research and development, …” (Wheelan, 2019)
We will mention one last quote reemphasising the importance of investment into human capital.
In a sample of 64 countries, there is clear evidence that output growth is positively correlated with the change in educational attainment, even when one conditions on physical capital accumulation (Temple, 1999)
How can we apply the Human Capital Principle?
The first application of this principle is to get an education, preferably in an industry that is in demand.
Regardless if you wish to follow you passions or not, you should still pursue an education because some passions cant be relied upon for a basic income. You should receive a degree of sorts, find work in relevant industries and work on your passions on the side.
The world is a competitive arena. If you cannot compete in the labour market then you will not be able to get a job, if you do somehow to manage to get a job, it will not be a good paying job.
The uneducated & unskilled always tumbles and trips in life.
It is absolutely necessary for you to become ‘So Good They Can’t Ignore You’ as Cal Newport would say.
Forget these Gary Vee fanboys saying that they want to skip an education.
Skipping education is understandable, especially if you can’t afford the tuition, but we advise everyone who can afford an education in a university or a trade to do so.
Alternatively if you cannot acquire an education, you should be able to learn some important skills and showcase those skills with a portfolio of some sorts. There are plenty of online courses that one can take and there are plenty of other methods of acquiring quality human capital.
Don’t give me examples of Bill Gates and Steve Jobs becoming successful without an education. You most likely are no where near on their level. They are revolutionising the technology industry while you are struggling to start a drop shipping store.
The next important application of this principle is to aquire work experience.
Many of you may know, graduating from college does not secure you a good job. The internet is filled with the complaints of graduates not being able to find work. This is mainly due to two reasons; a) the labour market is competitive and b) employers have the freedom to choose from many applicants in the job market.
There are tons of graduates.
What differentiates between the ones who get jobs and the ones who don’t is the amount of experience they have on their belt.
Now of course, we are aware that nepotism is a main reason why some people may not get jobs, the Wall Street scene in America is largely built on networks and connections. Posh students already have a guaranteed spot with a company, so some of them tend to party their way through college and afterwards slide into a cushy desk job.
The advice for this unfair situation is the same. Make sure you are so good that these companies that involve themselves in nepotism cant ignore you. In some cases they will hire you, because you are so much better than one of their family members or friends.
Work experience is not only important for staying competitive in the job market, it is also important for building your character, developing discipline, training the mind and transforming yourself into the best version of your self.
“In the process (of an apprenticeship) you will master the necessary skills, discipline your mind, and transform yourself into an independent thinker, prepared for the creative challenges on the way to mastery” (Greene, 2012)
This quote leads us to the last practical application of The Principle of Human Capital
You must develop social intelligence, charisma and entrepreneurial vigour.
You may be smart and skilled, but if you can work well with people then who would want to hire you.
If your emotional abilities aren’t in hand, if you don’t have self-awareness, if you are not able to manage your distressing emotions, if you can’t have empathy and have effective relationships, then no matter how smart you are, you are not going to get very far (Goleman, 2006).
I have seen people with no skills or experience get hired.
Its shocking and it frustrates me sometimes. How can someone with less skills get the job instead of me who has more skills?
The answer is simple. People with social intelligence & charisma can interact with customers, clients and other team members much better and by doing so they create a productive workplace and can turn customers in to repeating customers.
The different ways you may improve your social intelligence and charisma include:
- Improving communication skills
“Communication is the most important skill in life” (R. Covey, 1989/2004)
- Improving listening skills
“Transforming your self into a deep listener will not only prove more amusing as you open your mind to their mind but will also provide the most invaluable lessons about human psychology” (Greene, 2018)
- Improving your body language presentation.
“Our nonverbal cues are a bit like magnets. They can repel people. “Wow, that guy is angry – or he thinks he’s pretty important – I think I’ll steer clear of him.” They can also attract people. Non verbals signal that you are open to someone – that you like them – and they have a feeling that you like them if they have a feeling that you are like them. This goes a long way toward helping us make a connection with someone” (Hoobyar & Dotz, 2013).
We have outlined three important success principles that are sourced from Economics.
These lessons are universal lessons that can be applied to any situation and we advise our readers to constantly keep these principles close by.
The three economic priniciples for succcess were:
- Economics of Information: “Markets tend to favour the party that knows more.”
- Oppurtunity Cost / Utility: “Intelligent people make decisions based on opportunity costs.”
- Human Capital: “Human Capital is an Economic Passport.”
We will be expanding on the notion of sourcing success lessions from Economics in an upcoming book entitled 10 Economic Principles for Success.
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