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Economics For Individuals: Economics Is about The Individual, Not The Collective

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Despite what we may hear from mainstream economists, the study of economics is by and large for and about the individual.

Each time we are confronted with economists in the media, we are bombarded with charts and graphs and overly-complicated terms all meant to make us feel as though we need these “experts” to understand economic concepts like production, consumption, and the transfer of wealth. But this is hardly the case. And while these experts will often make us feel like the sky is falling unless we follow their advice, much of this is just a sign of elitism and a love of central planning.

As Hunter Hastings writes:

“We are taught in school that economics is about grand aggregations of statistics like Gross Domestic Product, and the employment level, and the inflation rate, and how government designs and implements policies to affect these aggregates. That’s just an excuse for government intervention, regulation, taxation, and the continued employment of economists as policy advisors.”

In reality, economics is not, or at least should not be, about central planning or policy that serves the “collective good,” because if we are honest with ourselves, there is no way to identify the wants and needs of groups of people. We can only identify the wants and needs of each individual actor, which is why all economic decision-making must begin with the individual human being — a  concept lost on many state actors.

Unfortunately, many economists make the mistake of looking at economics in terms of the collective, forgetting that the individual is the basis for which all things are possible. And that groups of people are, in reality, not a tangible unit of measurement.

Methodological Individualism

Economics is very much a social science that looks at how producers and consumers interact with one another to best meet each other’s needs. But these interactions happen on the individual level. And unless we start small, observing the individual’s role in this process, we cannot hope to understand the economy as a whole.

For producers to adequately determine the needs of the consumer, they must understand the wants and needs of the individual consumer first. After all, there can be no collective without the individual units of which it is comprised.

In economic terms, this is described as methodological individualism, which is the theory that explains that “social and economic phenomena can be explained by reference to the actions of individuals rather than groups or collectives.”

Elaborating on this, Libertarianism.org explains that this theory:

“…does not claim that only the individual human being is real or that social phenomena do not exist. It simply holds that the individual human being alone is able to think, feel, and act. We can impute actions, purposes, and values only to individuals; when we apply these terms to society, we enter the domain of metaphor.”

While this theory was originally developed by Joseph Schumpeter, it was his predecessor, Carl Menger, who founded the Austrian school of economics, who truly originated the idea. In 1889, he wrote, “There is no economic phenomenon that does not ultimately find its origin and measure in the economically acting human and his economic deliberations.”

Health Care Policy

There is, perhaps, no greater example of how detrimental it is to view economic policy in terms of the collective, rather than the individual, than health care. The entire premise for Obamacare and other versions of universal medicine are based on the presumption that the collective good is more important than the individual.

But, in reality, this “collective good” does not actually exist. And by assuming that the best health care policies must be crafted on the basis of what is good for groups of people instead of what each individual health care consumer wants and needs, you cannot logically hope to make any progress in this field.

It is for this reason that these policies have been such a failure. The government assumes that cost is the bottom line for health care consumers and have operated on this premise. Cost is one component in an individual’s hierarchy of needs, but there are many more elements, especially when there is urgent need for care. Focusing exclusively on cost completely negates the subjective wants of each individual person. No state apparatus can determine this for the collective. Only the producer, working in tandem with the consumer, can create options that truly fulfill their needs.

It is for this reason that we have seen the rise in services like direct pay care, where physicians take out the middleman, whether that be an insurance provider, government, or both, and instead work with actual patients to agree on the cost of care and what services are valued the most. Once producers work with individual consumers to better understand these wants, this concept can be expanded to include more individuals. But it is important to note that even large groups of people are really just several individual units. This idea that as a collective we think and act as one is not only wrong, but it greatly distorts the market process. There is no collective, there are only individuals, and when economists ignore this most important fact it is at their own peril.

As sociologist Georg Simmel said, “Groping for something tangible, we found only individuals and between them nothing but empty space.”

How Fifth Grade Soccer Taught Me about Spontaneous Order

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When I was in the fifth grade, my public school in Orange County, California attempted to teach us a lesson about why we need rules. And what the faculty had hoped would end in chaos actually turned out to be a perfect example of emergent order.

Each day after the students had finished their lunches, we were permitted to play on the playground. For those who didn’t want to use the playground equipment or sit and talk with friends, we also had the option to go play soccer on the field.

Orange County is a haven for soccer players. Almost all of my friends belonged to a team and spent their weekends and after school hours training. I, on the other hand, was not born with the skills of an athlete, so I avoided soccer like the plague.

On one spring afternoon, the adults who were responsible for watching the students during recess asked us to huddle around them for an announcement. Today, they were going to try something new. The usually heavily regulated soccer field would be free from rules for one afternoon.

The students erupted in loud cheers. Our lives were constantly being dictated by rules adults set for us. Most of the time, we didn’t understand what these rules were trying to protect. But we obeyed because to disregard the rules meant punishment.

The Great Soccer Experiment

Hundreds of children ran for the field, anxious to live out this dream of soccer anarchy. As someone with little interest in sports, but a great interest in observing human action, I took myself to the outskirts of the field where I could watch from a safe distance.

Since soccer was a major component of many of these students’ lives, there was no real chaos in the beginning. Students selected their team captains and begin to split up into teams. The only real difference between this day and any other day was the fact that students were permitted to talk and laugh while doing so. Usually, any attempt at small talk during the team selection would warrant a whistle being blown in your face as the adults reminded you to be quiet.

But oddly enough, in the absence of the whistle, things still went smoothly and quickly. The students knew that recess time was limited, they wanted to get on the field and start playing just as much as the adults in charge wanted to control our behavior.

After the teams were selected the real test began: Could a bunch of elementary school students play “lawless soccer” without killing each other? And as it turned out, they could.

I remember standing on the sidelines, waiting for chaos to breakout but instead, noticing how polite and cordial things were. As it turned out, when my classmates were left to their own devices, without fear of having the authoritarian whistle blown in their direction, they were happier because they were free. But this did not bode well for the school’s administration.

After twenty minutes of incident-free playtime, the whistles were back and the students were being rounded up.

The adult on duty cried, “This was a disaster!” All the students looked at each other in surprise. Had we missed something? Was there some bloody student sitting in some corner after being trampled?

“See what happens when there are no rules? This is why you need to trust in the adults to make set guidelines that will keep you safe.”

Again, we all sat perplexed wondering what had just happened. As someone who was not actually playing soccer, I had been watching the entire time. The only difference between today and any other day was the fact that my classmates seemed genuinely happy, instead of constantly looking over their shoulder worrying that an adult would yell at them.

This entire debacle warranted an assembly in which the adults were praised for thinking of such a brilliant lesson to teach us about why rules were needed. All the while, me and my classmates sat utterly confused as to what had really happened. But being accustomed to the “adults always know best” rhetoric, we simply shrugged this off and assumed we had missed something.

What Really Happened on the Field?

I have never been able to fully forget this incident. Even as an adult it has bothered me. The supposedly lawless soccer field was not chaotic at all. It wasn’t until I began studying free market economics that I realized what had really happened on the soccer field that day.

Like all humans, young and old, my classmates were fueled by one of the most powerful motivators of all time: self-interest. Since so many of them were soccer players outside of school, they cared a great deal about the sport. Lunchtime soccer was just another chance to practice their skills and improve. They had no interest in wasting this time. But there is even more to it than that.

The adults had expected the soccer field to turn into a Lord of the Flies fiasco simply because it could. But that never happened. Even as young children we knew enough about life to know that we wanted to avoid getting hurt, which also meant avoiding hurting others. For those who did belong to a soccer team, which was the majority of the students on the field that day, an injury would mean they might have to potentially miss their next soccer game.

On that same train of thought, any attempt to hurt another student would not help you when it came to social capital. No one wants to be friends with a bully. If a student had gone on a rampage and attempted to hurt other players, no one would want him or her on their team. And since we were all stuck together for 12 years of compulsory education, it was not in anyone’s best interest to ruin it for everyone else. Self-interest is a great incentive.

This led to an unspoken understanding on the field: You don’t intentionally hurt me and I won’t intentionally hurt you.

Spontaneous Market Order

This same lesson translates to the market. There is a belief that without rules, all market producers would be trying to poison the food they sell or hurt consumers with their products in some other way. But this rarely happens. Why? Because consumers need the producers and the producers need consumers. To inflict pain or inconvenience on each other would serve no one. This understanding is, in itself, an organic law that keeps the market working for all its players.

When the government gets involved and places unnecessary restriction on the market, they do little more than act like the adults with whistles on the playground, making everyone uncomfortable for no real reason. But even worse, sometimes those in charge partner with producers and protect bad behavior.

When the state gets in the business of protecting certain industries, it disrupts natural responses. Government sanctioned monopolies, for example, are allowed to do whatever they want without responding to consumer feedback, because they have the backing of the state. In truly free markets, consumers could shun a company with bad practices, just like school children could shun a bully acting rudely on the soccer field.

But protecting certain businesses is akin to a school bully being given the authority to hurt other students on the field, with the assurance that the faculty would still force other students to interact with them. This seems outrageous, but it happens all the time. Think of utility companies that enjoy partnerships with local governments. If you are dissatisfied with your gas company, you cannot just switch to another.

When humans are left to their own devices amazing things happen. We need to trust in our ability to work together without government interference, just like my classmates trusted their ability to play a soccer without ushering in the end of the world.

This Year, Make a Resolution to Celebrate Failure

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We are a week into the new year, and undoubtedly, many have already “failed” at keeping some of their resolutions. While it is all too easy to be overly critical of ourselves, losing ourselves in self-deprecating defeat is never the productive route.

So instead of getting bogged down by failure because you were not able to fully cut sugar from your diet or because you failed to visit the gym as often as you had hoped, why not treat your own life like the market, and celebrate failure as a tool for growth?

You Have to Fail before You Succeed

Any successful entrepreneur will tell you that they did not arrive at victory by avoiding failure. Not only would an attempt to do so be fruitless, since it is an unavoidable part of life, but failure is also an indispensable building block for success. It all depends on what you do with it.

Before the iPhone came into existence, Apple spent a great deal of time and resources on its Apple MessagePad. If you are unfamiliar with this particular product that is because it was a complete market dud. Only a handful were ever sold and those that did make it into the hands of consumers had extreme glitches.

The MessagePad was ultimately pulled from the market and was even recently placed in Sweden’s Museum of Failure. And although this product was not by any means a conventional success, it led to Apple eventually inventing the technology necessary for correcting the initial glitch. In doing so, it paved the way for portable electronics like iPhones and iPads.

By reflecting on the MessagePad’s failure, Apple was able to explore what had gone wrong. And by identifying the problem, they knew what path to avoid in the future. And eventually, that initial failure seemed minuscule when compared to the unprecedented success of the iPhone.

And while these stories of market failure are inspirational for hopeful entrepreneurs, sometimes we are not able to see how these lessons can be applied to our own personal life.

Failure Is Not Fun

When I was ten years old, I auditioned for a production of The Music Man. Diligently— and theatrically— singing in front of my mirror daily, I poured my heart into rehearsing for this audition. It never occurred to me that not being cast in the play was a possibility.

As it came to my turn to take center stage in a room full of theater teachers and older high school students, I performed my musical number with ease and perfection. But then came the script readthrough. What had started on a high note had ended in me dropping the script, getting flustered, and completely fumbling my lines. I had spent all my time rehearsing the song, but had dedicated almost no time to learning my lines.

Needless to say, I was not cast. And it would be eleven years before I would audition for another musical. Instead of using this failure to my advantage by perfecting my craft and being more prepared the next time, I sulked for an entire week and missed out on years of performing.

Maybe I was never meant to be a Broadway star, but because I let failure cripple me and inhibit my willingness to take risks, I will never really know. What I do know is that I missed out on many opportunities for growth all because of how I responded to one minor setback. Unfortunately, I didn’t know as a child that failure is an evitable part of life, whether we choose to accept this as truth or not.

But as we overcome obstacles and slay our proverbial dragons, we correct our failures in a very real sense by innovating our own lives. The tasks that once seems hard or unbearable get easier and we learn to push through the moments of rejection and failure. But each time we do, we get stronger and wiser, and this allows us to create value we may not have even recognized before.

But when we throw in the towel because of the unpleasant feelings associated with failure, we cheat ourselves. We may not have the iPhone today if Apple had decided that the failure of the MessagePad was just too great a burden to bear. Imagine what successes might have manifested themselves in our own lives if we had chosen to learn from failure, instead of embracing defeat.

Failure is painful, but it is absolutely necessary for growth. As billionaire investor Ray Dalio says, “Pain plus reflection equals progress.” When we accept it as an inevitable part of life, we can tame and domesticate it and turn it into something useful, to us and to others.

New Years Resolution

So, instead of getting down on yourself when your resolutions fail to come into fruition, maybe try making a new resolution: learn to grow from your failure. My main resolution this year is not to write more or work out more. Instead, my resolution is to celebrate my personal failures, because without them, I would not be the person I am today.

Entrepreneur, author, and podcast host Tim Ferriss recently published a book full of advice from those who have mastered their respective trades. For each expert being interviewed, Ferriss always asks, “How has a failure, or apparent failure, set you up for later success? Do you have a “favorite failure” of yours?” And it is this question that usually elicits the most profound responses.

As any one of Ferriss’ interviewees can attest, we cannot improve our lives until we accept what is not optimally helping us achieve our goals. One of his recent guests was Dalio himself, who explained that his great success was based on learning to think of mistakes as puzzles:

“If I solved the puzzle, the puzzle being, ‘What would I do differently in the future?,’ I would get a ‘gem.’ That gem would be a principle that would let me do a better job the next time that sort of thing came about, and I wrote those principles down and refined them over a period of time…”

Dalio eventually distilled these lessons into his highly-acclaimed book Principles.

Treat your own existence as you would a business enterprise you are heavily invested in. Understand that you will fail. Acknowledge that this can be beautiful, productive, and beneficial if you accept it for what it is. Make the conscious decision to keep improving, even when it breaks your heart to do so. Because in the end, you may end up surpassing even your own expectations for success.

Why Market “Failure” Should Be Welcomed and Celebrated

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Failure is never pleasant. But it is a natural and essential part of life. As flawed human beings, each embarking on our own unique journey, we are bound to make mistakes. But these mishaps should not be viewed negatively. In fact, it is through our shortcomings that we grow and become stronger, better individuals.

Each time we fail to meet the challenge of a given task, we must make an important decision. We can either give up and abandon our quest because it becomes too difficult or, we can have an honest conversation with ourselves and address the issues that caused our shortcoming so that we can avoid making similar mistakes in the future.

The same is true of the market process. Each time a product fails, the creator has a chance to either give up on the project or learn from his mistakes and try again. You may not know it when you check your iPhone or drink your Coca-Cola Classic, for example, but you are reaping the benefits of someone’s failure.

Failure Leads to Discovery

Sweden recently opened a museum dedicated entirely to market failure. But the rejected objects on display at the Museum of Failure are not there to poke fun at the inventors or even the ideas themselves. Instead, it exists to celebrate all the wonderful lessons and successful innovations that came into existence as a direct result of market failure.

The museum’s curator, Samuel West, commented on this unique facility, saying:

“We know that 80-90 percent of all innovation projects, they fail. And you never read about them, you never see them, people don’t talk about them. If there is anything you can do from these failures, it’s learn from them. But you can’t learn about them if you can’t talk about them or see them.”

West and the others involved in the unconventional museum hope that by showcasing these products they can tell inspiring stories. They are also hoping to encourage future innovators and to teach an important lesson about the role failure plays in both personal and market development.

Visitors touring the museum will get to see infamous market rejects such as Crystal Pepsi, Google Glass, and the Microsoft Zune. But what is just as important as highlighting why these products failed is recognizing what this failure led to.  

Before smartphones and tablets were owned by nearly everyone, Apple invented the Newton MessagePad in 1993. Today, the Newton can be found within the walls of the Museum of Failure.

The Apple Newton MessagePad

Marketed as a portable, electronic device that could store contact information, take notes, and manage your calendar, the bulky Newton was the world’s first “personal digital assistant” (PDA). However, the Newton itself was a product ahead of its time and the technology needed to sustain it just wasn’t ready. But that doesn’t mean it didn’t still create immense value.

Lamenting the death of this early handheld device, Wired wrote:

“The Newton wasn’t just killed, it was violently murdered, dragged into a closet by its hair and kicked to death in its youth by one of technology’s great men. And yet it was a remarkable device, one whose influence is still with us today.”

While not a conventional success, the Newton MessagePad did, in many ways, change the world. For starters, it marked the beginning of Apple’s mission to create portable computers that were so small, they could easily fit in your pocket, a dream that would someday manifest itself in the modern world. But in the early 90s, this sounded like an idea better suited for a science fiction movie than reality.

As Wired says, “with Newton, Apple didn’t just set out to create a new device. It wanted to invent an entirely new class of computing.”

The device was great in theory, but each sold for $800 and the technology was spotty, to say the least. One of the minds behind the device, Steve Capps, commented, “We were just way ahead of the technology.”

One of the device’s most cutting-edge feature was its ability to translate the user’s handwriting into type. Unfortunately, the idea was better than the resources available at the time and the handwriting recognition feature was never able to perform as it should.

As the geniuses at Apple worked to find a solution to fix the Newton’s handwriting recognition, they accidentally stumbled upon a new technology that would largely impact our modern day.

Thanks to the Newton MessagePad, the “ARM processor” was invented. The ARM processor works by “stripping out unneeded instructions and optimizing pathways, RISC processors provide outstanding performance at a fraction of the power demand.” But the real appeal in using this new processing technology for the Newton MessagePad was that it was smaller making it ideal for handheld devices. Originally designed to help prolong the battery life of the Newton, today the ARM processor is used in smartphones, tablets, and wearable devices like the Apple Watch. 

Before his death, Steve Jobs commented on the Newton situation saying:

“If Apple had been in a less precarious situation, I would have drilled down myself to figure out how to make it work. I didn’t trust the people running it…By shutting it down, I freed up some good engineers who could work on new mobile devices. And eventually we got it right when we moved on to iPhones and the iPad.”

No one is born an instant success. Market victories are born of perseverance and a willingness to learn from your mistakes and create better, more efficient products.

Sure, the developers at Apple may have been discouraged by the flop of the Newton. But their work paved the way for the future of mobile devices. Without the discovery of the ARM processor, we may not have the same caliber of mobile devices we have grown accustomed to today.

With each failure, we are given a chance to grow, both as individuals and as innovators. Market failure should never be viewed as a sign to give up and throw in the towel. Instead, it should be welcomed and celebrated as part of the market process.

Thank Millennials for Creative Destruction in the Marketplace

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Millennials are shaking up traditional industries and refusing to conduct business as usual. As a result, our economy is becoming more specialized and better able to cater to the unique interests of the individual. But with each new millennial innovation comes a displaced industry that can’t keep up with new competition.

And as outdated industries are being replaced by the new, the world now has access to ever-improving commodities. This should be cause for celebration. But instead of praise, millennials are being chastised for murdering the industries their innovative ideas are replacing.

Market Preference

Each day, an article is released accusing millennials of “ruining” previously well-established market commodities. Oddly enough, the rest of the country seems to view this in a negative light rather than seeing the value millennial consumers and entrepreneurs bring to the market.

Over the last several years, young people have been blamed for ruining grocery shopping, napkins, chain restaurants, and diamonds,  But this is only a small percentage of the comprehensive list of sectors millennials are “responsible” for destroying.

Young people born between the years of 1980-2000 now make up the majority of the American consumer base. This means the millennial generation is largely responsible for fueling market demand. The way we spend our dollars is impacting which businesses survive, and which do not.  

And, as demonstrated by our market preference, we have very different wants and desires than the generations that preceded us. But our willingness to spend $20 on avocado toast rather than purchasing a home does not make millennials the enemy of the minority of consumers. On the contrary, millennials are arguably making life more convenient by means of creative destruction.

Creative Destruction

To blame millennials for ruining entire industries would be somewhat understandable if we weren’t also replacing those industries with options that are far better, more efficient, or more practical to our budgets.

When millennials were denounced for the plummeting sales of napkins, for example, it was simply because millennials preferred to use paper towels instead. Previously, households had purchased both paper towels and paper napkins. Millennials saw this as a costly redundancy and corrected the problem.

Likewise, when articles lambast millennials for ruining the supermarket industry, primary attention is given only to the supposed destruction of that industry. If critics would instead focus on the innovative improvements that have sprung up in the wake of these dying industries, they may not be so quick to judge.

Sure, young people may not be grocery shopping as much as older generations did, but we still have to consume food. And that food has to be purchased from somewhere.

Millennials have hectic schedules and many hold multiple jobs in order to pay off student loan debt while still earning a living. The lack of precious time has led millennials towards quicker and more convenient alternatives that do not involve having to both grocery shop for items and then having to prepare a meal.

As a result, the popularity of meal delivery services in on the rise, providing a viable alternative for young professionals.

Companies like Blue Apron and HelloFresh have been extremely popular with younger consumers because they eliminate the hassle of grocery shopping. Instead, millennials select from a menu and have the ingredients sent to them in pre-measured containers. All the consumer need do is open the box delivered to their front door and follow the instructions.

This replacement of one commodity for another is what economist Joseph Schumpeter called “creative destruction.” Schumpeter even describes free market capitalism as the “the perennial gale of creative destruction.” In order for economies to evolve and grow with the wants of consumers, outdated products and services must be destroyed in order to make room for the new.

This is exactly what millennials are demonstrating today. While critics may focus only on the loss coming from this destruction, what we should be focusing on is the gains. New jobs are created and new commodities contribute to the foundation of what will someday be the next round of this destructive creativity. It is all part of the market process.

Consumption Pioneers

Older generations may be hesitant toward change, but luckily, millennials are making the adoption of new products and services that much easier through feedback.

Young people have an opinion on everything and we want to share it with everyone. As a result, we have become consumption pioneers, willing to boldly try new products and then share our experiences with other consumers.

Whether feedback is posted online or through word of mouth, it has been helpful in easing the fear that comes with the adoption of new products. Individuals are far more likely to try a new service if they know someone who has tried it first and can attest to its quality.

When the ridesharing industry came into fruition, millennials were among the first to try its services. As a DC resident unwilling to pay for a cab, I used Uber frequently in its earlier days. My parents may not have understood why I felt so comfortable jumping into an “unregulated” cab, but the service spoke for itself. For me, it was a safer and less expensive option than hailing a cab on a dark lit DC street.

After a year or two of being a loyal Uber patron, my parents called me one evening to talk them through their first Uber ride. A few months later, they were already using Airbnb instead of traditional hotels. Once they spoke to me and got a firsthand encounter of what they could expect from ridesharing, their opposition to it disappeared.

Over the last several years, as millennials were coming of age and becoming major market participants, chain restaurants began seeing a major decrease in sales. This was recently met with negativity from media outlets who were blaming millennials for their favorite restaurants shutting down. But just like Uber depends on consumers willing to trade money for a ride, restaurants exist to cater to the demand of the consumer, and not the other way around. If there are not enough consumers buying your product, you have no reason to keep your doors open.  

But when it comes to the millennial market destruction, what is most interesting is what happened after millennials stopped patronizing grocery stores: their parents followed.

Using census data, economist Mark Perry found that for the first time on record, consumers were moving away from using grocery stores and instead using their food budgets eating out or using meal delivery services. So even though there was initial hesitation, just like my parents with Uber, older generations have eventually gotten onboard with younger market trends.

Sure, millennials may be exhibiting different market preferences than our parents. But that doesn’t make our ideas dangerous or inferior to those that came before us. By catering the market to our specific modern needs, we have made the world a better, more convenient place to live.

So instead of getting worked up next time another chain restaurant bites the dust, thank a millennial for providing you with market options that won’t make your stomach hurt afterward.

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