Tag Archives: Economics

The Organism’s Greater Good

Principle
When a group of self-interested individuals has selfish interest in seeing that instances of selfishness get punished. An individual displaying selfish behavior will be punished those whose self-interest is negatively affected by his selfish behavior.
Explanation
“Yet these phenomena are rare. What stops the mutiny? Why do segregation distorters, B chromosomes and cancer cells not succeed in winning the contest? Why does harmony generally prevail over selfishness? Because the organism, the coagulation, asserts its greater interest. But what is the organism? There is no such thing. It is merely the sum of the selfish parts;; and a group of units selected to be selfish cannot surely turn altruistic.
     The resolution of this paradox takes us back to the honey bees. Each worker bee has a selfish inter in producing drones; but each worker equally has a selfish interests that no other worker produce drones. For every self drone-producer there are thousands of bees with a selfish interest in preventing drone production. So a bee hive is not, as Shakespeare thought, a despotism, run from above. It is a democracy, in which the individual wishes of the many prevail over the egoism of each” (33, The Origins of Virtue)
Source
The Origins of Virtue by Matt Ridley

Division of Labor

Principle
When members of a group specialize at tasks that would be normally be pursued by each individual separately, the aggregate task output of the group specializing at tasks will be greater than the task output of a group that chose not to specialize at tasks.
Explanation
“Somebody not trained in pinking could probably only make one pin a day, and even when practised he would only be able to make twenty or so. Yet, dividing labour between pin-makers and non-pin-makers and by further dividing the task of pin manufacture between a number of specialist trades, we vastly increase the number of pins that can be made by each person. Ten people in a pin factory could and did, said Smith, produce 48,000 pins a day. To buy twenty pins from such a factor therefore costs only 1/240 of a man-day, whereas would have taken a purchaser a whole day at least to make them himself.
     The reasons for this advantage, said Smith, lay in three chief consequences of the division of labour. By specializing in pin-making, the pin-maker improves his dexterity at pin-making through practice; he also saves the time that would otherwise be spent switching from task to task; and it pays him to invent, buy or use specialized machinery that speeds up that task” (42, The Origins of Virtue)
Source
 
The Origins of Virtue by Matt Ridley

Credit

Term

The promise of one party to pay value at a later date in exchange for another party paying value at the current date.

Explanation

” ‘Credit’ is the third person  singular conjugation of the present tense of the Latin verb credere, ‘to believe.’ It’s the most exceptional and interesting thing in the financial world. Similar leaps of belief underlie every human transaction in life: Your wife might cheat on you, but you hope otherwise. The online store may not ship you your goods, but you trust otherwise. Credit derivatives are just the explicit encapsulations of such beliefs, in financial and contractual form, for corporate entities. Unlike other financial securities, such as shares of IBM stock or oil futures, a credit derivative is not even some theoretical value of a tangible good. It’s the perceived value of complete intangible, the perception of the probability of meeting some future obligation” (20, Chaos Monkeys)

Source

Chaos Monkeys by Antonio Garica Martinez

 

Comparative Advantage

Term

“The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.” (Oxford Dictionary of English)

Investopedia explanation

“The essence of this law can be illustrated with a simple example. Imagine that you are a skilled cabinetmaker as well as a gifted painter. It takes you a day to build a cabinet or a day to paint a picture. In the local economy, paintings sell for $400 and cabinets go for $350. Your neighbor also shares the same skill sets, but it takes him a day and a half to build a cabinet and three days to complete a painting. You have an absolute advantage over your neighbor in both areas, so you should try to outproduce him across the board, right? Wrong.

Here’s why: If you flip between painting and cabinetmaking over a six-day work week, you would produce three paintings and three cabinets worth $2,250. If your neighbor embarked upon the same work schedule, he would produce one painting and two cabinets worth $1,100. There would be a total of four paintings and five cabinets produced: a total of nine production units. If, however, you were to choose to focus on painting, the area where you have the greatest comparative advantage and the most profit, and leave cabinetmaking to your neighbor, something magical would happen. You would produce six paintings worth $2,400 per week, while your neighbor would produce four cabinets worth $1,400, bringing the total to 10 production units. In real terms, both you and your neighbor would be richer for specializing – and the local economy is one production unit the better for it.” (Investopedia)

Source

Investopedia

Immeasurable Intangible Labor

Principle

The work of knowledge work is often difficult to measure and its value is therefore hard to determine.

Economist Thomas Piketty made this point when arguing that that the general inability to measure the value of work enables executives to claim salaries that greatly succeed an executive’s marginal productivity.

Explanation

“Generally speaking, as knowledge work makes more complex demands of the labor force, it becomes harder to measure the value of an individual’s efforts.” (55, Deep Work)

Source

Deep Work by Cal Newport