the first thing economists do

So I have been at the textbooks lately and been rather enjoying it too. In the last 2 days I have been getting stuck into some economics and have become rather interested in the method of analysis used by economists. Any economy will have vast amounts of variables that are all interconnected in many (either obvious or discreet) ways. Economists develop and analyse relationships between variables so as to gain understanding of what happens when something changes (i.e. the chain effect of decisions made by government or the reserve bank etc). I have been rather impressed by their method of analysis. Let me ellaborate by giving an example of a way that economists naturally go about their investigation:

They will look at a situation and examine 'ceteris parabus' what will occur if something changes. Ceteris parabus literally means: 'all else being equal'. So what happens is that they examine DIRECT cause and effect relationships. Secondary effects and spin-off consequences are ignored. Only the main stuff is examined and once that is understood then secondary effects can be considered. For example (stay with me you non-financially interested people... there may be something non-financial in store later...) if interest rates increase (as will happen the next time the reserve bank meets) then investment spending decreases. This is because people don't spend a lot of money when money is expensive and money is expensive when the interest rates are higher. Less investment spending leads to lower production which leads to lower national income. There we go! We have just looked at the relationship between interest rates and investment spending 'ceteris parabus'... What we didn't consider though is that by raising the interest rates, some people will benefit by earning a HIGHER income. Consider the man who has R3million in the bank... If the interest rate rises 50 basis points then he will earn an extra R15000 per year for doing nothing. (Kinda makes you want to have R3mil in the bank doesn't it?!) But we condidered him as an afterthought. The main relationship was analysed not the accompanying one because it held the predominant effect. Ok, ok... so what is the life lesson?... Well, i guess that it can be a handy skill to be able to analyse life 'ceteris parabus'. To be able to see the main relationship. the main cause that is causing the effect in a given situation. To be able to identify the crux of a matter that may have many negligible 'cruxes 'that could confuse a man. To distinguish the salient matter at hand. (Ok, i think it's becoming obvious that i'm saying the same thing but looking in the thesaurus for fancier words everytime. ha ha!) I think that is called wisdom. The ability to see things for the way that they really are. The wise man will know the heart of the matter and he will concern himself with that heart. The foolish man will not see the defining issue and will get caught up in trying to understand things that really don't matter at the end of the day. Or the beginning. Wisdom. Seeing life as a series of interconnected variables and being able to understand each one ceteris paribus and thus understand the flavour of the whole. Wisdom.

Economists also do something else that is quite handy, but you can catch that thought in my next blog post...