- [Narrator] In December of 1799, George Washington,
the first president of the United States,
started complaining of a sore throat
and difficulty breathing.
Being a former president, he had very good access
to a team of doctors who started to diagnose
and treat his condition by draining his blood.
In total, the doctors attending to Washington
ended up draining two and a half liters of his blood
before he eventually passed away less than two days
after first complaining about a sore throat.
Medical specialists have argued about the actual illness
that caused Washington's breathing difficulties,
but all doctors today universally agreed
that removing that much blood from someone
didn't help the situation and possibly ended up
killing him in the process of treating him
for an illness that he may very well
have just recovered from naturally.
Our understanding of the human body, illnesses,
medical best practices and treatments
has come a very long way in the past 200 years.
And that has helped us enjoy lives
that are longer on average,
massively reduced infant mortality
and increased living standards for people
suffering from medical conditions.
Economics, just like medicine,
is a consistently evolving field of study,
which also has real impacts
on the way that we live our lives.
The traditional sciences tend to get
all of the glory when we talk about
the increased living standards
we've enjoyed in recent history
and it's easy to see why.
Every time you make a call,
shop at an abundantly stocked supermarket,
or you know, don't die of a common infection,
you have advances in physics, medicine, chemistry
and a long list of other scientific endeavors to thank.
But a lot of these advancements were accommodated
and accelerated by developing understanding
of what an economy is and how to effectively manage one.
Although it may be far less tangible,
there is a very strong argument
that advances in financial systems, trade practices
and economic controls have done just as much to provide us
with the wealth and prosperity we enjoy today
as all of the other advancements in technology
that have come about over the same time span.
Looking forward, this could mean that theoretically
further breakthroughs in economic knowledge
could accommodate a world
where we all live like billionaires do today.
Now, I know that's a pretty big claim,
so we'll need to look at a few things to back it up.
But this also makes it really important to ask the question
how much do we actually know about economics?
Are we those 18th century doctors trying our best
to fix economies, only to do more harm than good?
Or is our collective knowledge of economics
close to complete with only minor improvements left to make?
Well to find out, we, as always,
need to answer a few key questions.
So how do advancements in economics
translate to improved living conditions
to regular people in the real world?
How can we tell how far along we are
in our understanding of economics?
And finally, could this solve existential issues,
like achieving limitless growth in a finite world?
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To really understand the progression
of our economic understanding as a species,
it's important to understand what economics is
in the broadest possible sense.
Economics is a social science that studies
the way that people interact with things of value.
This is the same as saying physics is a natural science
that studies matter, it's fundamental constituents,
it's motion and behavior through space and time.
Physicists will try and answer questions
about the nature of the universe,
where economists will try and answer
the central economic problem,
which is that we as humans have unlimited desires,
but only limited resources
in which to fulfill those desires,
so certain sacrifices must be made.
The central economic problem is unfortunately not solvable.
But it can be broken down into four separate questions.
What should be produced?
How much should be produced?
How should it be produced?
And who should it be produced for?
If you look at anything written by economists
it will be an attempt to answer these questions
in different ways to produce slightly better outcomes
by either allocating resources in a way
that makes people more satisfied,
or by simply finding a way to produce more
with the resources that we have available to us.
Even economic theories as broad as capitalism
are just a way to answer these questions.
In the case of capitalism,
it's what's most demanded by the market
in the amount that is demanded,
produced in the most efficient
and cost effective way possible,
to be given to those that are willing
and able to pay for it.
It's by no means a perfect system,
but it is very efficient at allocating resources
and incentivizing the utilization of more resources
to improve the wellbeing of its participants.
Capitalism as an economic system is however, for example
terrible at answering questions
about what to do with things of negative value.
If you're wondering what these things are
with negative value, well, it's stuff like trash,
sewage, chemical waste, spent nuclear fuel,
and probably the biggest one of all,
greenhouse gas emissions.
People actually value the absence of these things,
but the market system of capitalist economies
have no real mechanism to assign the costs of these items
to the parties responsible for producing them
without government intervention.
I know it sounds absolutely awful to say,
but from a purely cold-hearted
rational economics point of view,
this classification can also be applied to people
that may be disabled, elderly or otherwise incapable
of producing more value than they consume.
It sounds terrible because there have been
some famously not-so-fantastic ways
of dealing with this in the past, but it doesn't need to be.
And with aging populations in a lot of countries,
our economic systems need to have solutions
to more and more people in an economy being unable to work
and requiring the assistance of those that still can.
So capitalism, the basic system
by which we run every advanced economy in the world today
is good at answering some questions
and not so great at answering other questions.
Different economies around the world have tried
to plug these gaps with different workarounds,
like carbon pricing and forced retirement savings.
But oftentimes these workarounds just create more problems.
Now, to go back to economics
just being any other science, like say physics,
there is an interesting comparison we can draw.
Geocentrism, as in the theory that the world
was the center of the universe and everything,
including the sun, rotated around it,
answered most questions that people had
about what went on in the sky.
It did the trick for navigation, tracking the seasons
and everything else that people back then
needed to monitor the sky for.
There were, of course, a few inconsistencies
in the movements of celestial bodies,
but these were just gaps that were answered
using various workarounds
that oftentimes created more problems.
Sounds familiar, right?
So could capitalism be to economics
what geocentrism was to astronomy?
Well, we don't know what we don't know.
And it's possible that tomorrow
some brilliant economists will come up with a system
that revolutionizes the way that we manage economies
to such an extent that it'll be like entering the space age.
It sounds crazy, but it's already happened
and the impacts were huge.
The advent and widespread adoption of steam power
along with a handful of other technologies
are widely recognized as the drivers
of the Industrial Revolution,
which set us on our current trajectory
of massive worldwide economic growth.
But there was something else in the world
happening around this time.
Mercantilism was the general economic system
that the global economy ran off
before economics was even an academic discipline.
The idea of mercantilism was that an economy
should try and export as much as possible
while importing as little as possible
because that way you could accumulate
as much gold as possible.
Now, to a world that had not yet studied economics,
this made perfect sense.
Gold was almost a universally accepted store of value,
so if you wanted to be wealthy,
you'd get as much gold as possible.
Of course, mercantilism is not how we run
our economies today because the study of economics
has shown that economic cooperation and free trade
produces much more wealth overall,
because certain regions have advantages
in producing certain items,
and if we all just do what we're good at,
the world becomes a richer place.
It also makes it possible to produce items
that simply couldn't be made
within the confines of a single nation,
no matter how big it is.
You are currently getting some small economic benefit
from watching this video, and you might attribute that
to the technology which has made it possible.
But also consider the advanced economic systems
that coordinate all of that technology.
The video you are watching now would not have been possible
without silicon-rich quartz.
And you might think you know where this is going,
but you'd be wrong.
That quartz rock from South America is refined
into pure silicon and is then shipped to Germany
where a company called Zeiss
will turn it into a mirror with micron precision.
Those levels of precision are achieved
by using machines that turn that silicon into a vapor
before depositing it one atom at a time onto a mirror plate.
These machines were made possible
by technical collaboration between dozens of universities
and research institutes across Europe and North America.
Once these mirrors are made, they are then shipped
to the Netherlands to a company called ASML,
which puts them into machines called fabs.
The mirrors work in conjunction with high-powered lasers
to etch computer chip patterns
into more blocks of pure silicon to make CPUs and GPU's.
These fabs are then shipped to companies like TSMC,
which manufactures chips based on designs
supplied by companies like AMD, Intel and Nvidia.
Those chips are then shipped to companies
like Foxconn, which will combine them
with other advanced components
to make something like a smartphone.
They will then deliver this smartphone
to a company like Apple, who will design and market it
for customers all over the world.
That is less than 1% of the steps involved
in making an advanced product like a smartphone.
I haven't mentioned the companies
that transport any of these products,
or the teams making sure the whole process is kept secure,
or even the institutions already working
on making the technology this whole supply chain
is based around, completely obsolete.
It's easy to see this whole process as simply
a marvel of modern science and engineering, and it is.
But all of that economic collaboration, free trade
and division of labor across dozens of countries
and millions of workers would not have been possible
without the economic advancements of people like Adam Smith.
Our economies are also wealthier today
thanks to the teachings of people like Keynes,
who showed that the business cycle
could be managed by governments
so that economies continue to grow wealthier over time
by taking advantage of both the natural booms
and busts that comes with an economy runoff debt.
Today, most economists in positions of power
subscribe to the Neo-Keynesian School of Economics,
which lays out how to run an economy
by effectively managing debt, employment, inflation,
taxation and supply side output to generate wealth
that would not have been imaginable when Keynes was alive.
It's easy to think that economics has been solved
and that we will never experience another wealth boom
like what we had when we transitioned from mercantilism
or embraced the business cycle.
But of course, we don't know what we don't know.
So it's probably more productive to ask
what are the limits of economics?
Economics is not magic.
It can't create wealth where there is none.
All it can do is guide people
on what the most efficient allocation of resources is
in order to achieve a desired outcome.
That outcome should hopefully be the equitable prosperity
of all participants in that economy, but even if it isn't,
you can still use a good understanding of economics
to get a society to where you want it to be.
The second limitation of economics
is that it cannot be used to predict the future.
John Maynard Keynes himself, after helping to develop
our modern understanding of the business cycle,
attempted to grow his fortune by investing
based on the predictable ups and downs
of the economy over time.
It didn't work.
Economists are often heralded or shamed
for making predictions about the future
that turn out to come true or not come true.
It's definitely their fault for attempting
to make predictions, but really of course,
nobody can predict the future, least of all economists.
If a doctor said that someone's outlook
was healthy with nothing to worry about,
and then that person later went on
to develop a terrible illness,
then nobody would think less of that doctor
because it's not their job
to predict someone's medical future.
Likewise, economists can look at the metrics
they have available to them
and say that there is no cause for alarm,
only for something to come along which proves them wrong.
Economists shouldn't predict the future.
They should instead make recommendations about the present
to encourage economic growth and to reduce bad outcomes
or make them less likely going forward.
The next limitation of economics
is that it is a really difficult subject to learn about.
Now, I don't mean that like it's hard
for an undergrad student to learn about
what an indifference curve is.
I will happily admit that there are lots of subjects
out there that are far more difficult than economics.
What I mean is that it's incredibly difficult
to study new economic theories
because you can't create an economy in a lab,
and national economies aren't going to change
how they operate just to test a theory
that could make them better off overall,
because if that theory doesn't work
then they have potentially made the lives
of millions of people worse.
This difficulty in studying and verifying economic theories
might sound really disheartening
because it means that progress is slow.
But maybe slow progress means that we will be benefiting
from economic advancements for generations to come.
There is probably an economic system out there
that works to encourage innovation, motivate workers
and reward the intelligent allocation of capital,
while also actively discouraging the negative externalities
that are so abundant in current market economies.
What would that look like?
I don't know.
If I could definitively demonstrate a way
to manage our economies differently
that would result in greater levels
of wealth generation for the world,
I'd be collecting my Nobel Prize right about now.
But the good news is that we probably know
very little about economics, and if nothing else,
all of the craziness in the world right now
is a unique opportunity to learn,
so that we are better prepared for next time.
Thanks for watching mate, bye.