The Practical Economist: 20 Laws That Work for You, Not Just the Market
This Is What Will Never Change in The Next 4 Years
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Economics, often seen as a dry and complex subject, affects our lives in so many ways. I want to share how a basic understanding of economic laws applies to life. From how you budget and invest to the choices you make in your career and daily spending, I’ll show you how these principles can help you live a life filled with abundance and contentment. I truly believe many of these concepts can transform the way you approach life, money, and happiness. These laws are not just for the experts in business suits and briefcases. They are for you, me, and everyone striving to make the most of life.
“The most basic question is not what is best, but who shall decide what is best,” says economist, author, and social commentator Thomas Sowell.
Use these concepts to ponder how to live. They apply to our values, goals, relationships, money and time. These decisions are important because they determine the course of our lives. You decide what to apply in your life.
The choice is always yours.
1. The Phillips Curve
This concept explains the trade-off between inflation and unemployment. When inflation is low, unemployment tends to be high, and vice versa. In your career choices, balance job security and personal fulfilment. Sometimes, aiming for the highest-paying job might lead to more stress and less time for personal happiness. Finding that equilibrium is crucial for your career satisfaction.
When negotiating your salary or raises, timing is everything. In times of high inflation and low unemployment, you might have more leverage to get a raise. During periods of low inflation and high unemployment, you may have less bargaining power for higher wages.
2. The Wealth Effect
When people feel wealthier, they tend to spend more.
As your wealth increases, you tend to spend more; when it decreases, you tend to spend less. When you experience a windfall, such as a bonus or inheritance, you might be more inclined to make significant purchases, like a new car or a luxury item, thanks to the wealth effect. Recognise how your perception of your financial situation affects your choices.
3. Externalities
The economic effects of a transaction between two parties (typically buyers and sellers) also affect a third party who is not directly involved in the transaction.
In your daily life, consider how your actions affect others. Sharing rides or using public transportation reduces traffic congestion. A choice to maintain a healthy lifestyle can have positive externalities on the healthcare system. Responsible driving reduces accidents and congestion.
4. Scarcity
At its core, economics is all about dealing with scarcity. In your personal life, that means recognising that your time is finite and investing time in needs instead of wants. When considering career options, think about the scarcity of time and the opportunity cost of pursuing one profession over another.
When looking for a place to live, you have to make choices based on the scarcity of your budget, location preferences, and housing options available.
5. The Law of Supply and Demand
A fundamental concept in economics that teaches us that prices and quantities in markets are determined by the balance between what’s available and what people want.
You can use this concept to decide when and where to spend your money. Understanding supply and demand can help you find better deals or spend wisely.
6. Economies of Scale
It highlights how, in many cases, producing more of a good can reduce the cost per unit. You can plan your shopping to run multiple errands in one trip to save time and fuel costs.
Or buy items in bulk and share subscriptions like magazines, music, or software. Whether it’s a group vacation or a shared service, economies of scale can help you get more for less.
7. Consumer Surplus
It’s the difference between what you’re willing to pay for a good or service and what you actually pay. In your life, it encourages you to seek value and maximise the satisfaction you get from your spending.
Look for opportunities to maximise your money through discounts, sales, or choosing experiences that bring you great joy.
8. The Law of Diminishing Returns
The law suggests there’s a point at which the benefits of something will start to decline. Pushing too hard in any area of your life, whether work, exercise or leisure, can diminish returns.
To live a good life, find a balance, don’t overcommit to a single area. Working too long may diminish productivity and quality of work. Allocate your time wisely for the most significant impact and avoid overcommitting in one area to the detriment of others.
9. Gross Domestic Product (GDP)
While often used to measure a country’s economic health, this concept can also apply to your personal life. Think of it as your “life’s GDP” — the sum total of your experiences and achievements.
Just like a nation aims for a growing GDP, you can aim to increase the quality and richness of your life experiences over time.
10. The Laffer Curve
There’s an optimal tax rate that maximises government revenue without overburdening taxpayers. In your personal finances, that means finding the right balance between saving and spending.
Don’t overtax yourself by hoarding money nor by overspending recklessly. Find your own “Laffer Curve” to ensure your financial well-being.
11. Pareto Efficiency
It’s possible to make at least one person better off without making anyone else worse off. Applied to your personal life, strive for win-win situations in your relationships and interactions.
When scheduling your day, balance your work, personal, and leisure time to maximise harmony in all areas of your life. In a team or group project, distribute tasks and responsibilities in a way that plays to each member’s strengths.
12. The Time-Value of Money
Money you have today is worth more than the same amount in the future.
When saving or investing money, consider its time-value. Money invested today can grow over time due to interest or investment returns.
Credit card interest can accumulate quickly due to high annual percentage rates (APRs). Building an emergency fund can cover unexpected expenses without resorting to high-interest loans or credit cards.
13. Utility
The satisfaction or pleasure people derive from consuming goods and services. To apply the concept of utility in your daily life, you can make decisions that maximise your happiness. For example, spend more on experiences that bring joy (like vacations) than material possessions.
Or prioritising activities and habits that contribute to your overall life satisfaction, such as regular exercise and time with the people you love. It also means pursuing a career that aligns with your interests.
14. Opportunity cost
Every choice you make has a trade-off. When you spend your time and money on something, you’re giving up the opportunity to use those resources for something else.
So, when you’re deciding how to spend your time or money, think about what you’re sacrificing and make sure it aligns with your values and priorities.
15. Marginal utility
As you consume more of a good or service, the additional satisfaction or happiness you get from each additional unit decreases.
It’s a reminder not to overindulge in things like food, entertainment, or material possessions. Be mindful of overconsumption and its long-term consequences. Allocate your resources in a way that maximises your overall life satisfaction.
16. The Law of Comparative Advantage
This principle encourages specialisation. As countries benefit from producing what they’re most efficient at, you can apply this by focusing on your strengths and passions.
If you’re skilled at a particular task, it makes sense to prioritise it over others that you find more challenging. Invest in skills you have a natural aptitude for or interest in. Do more of what brings out the best in you. It’s an approach to life that improves your happiness.
16. Game Theory
It explores strategic interactions, consequences and how our actions may affect the choices and outcomes of others.
Understanding game theory can help you navigate relationships and conflicts more effectively in your social life. For every decision, think about the long-term outcomes and risks. Make choices that lead to mutually beneficial outcomes and build stronger connections.
18. Elasticity
Elasticity measures how responsive the quantity demanded or supplied is to changes in price or income. In your life, this concept can be applied to adapt to changing circumstances.
Being flexible and responsive to economic shifts, both in your finances and in the job market, can help you maintain financial stability and adapt to life’s challenges.
19. Maslow’s Hierarchy of Needs
While not a traditional economic theory, it’s a psychological concept that aligns with economic well-being. It illustrates that to achieve self-actualisation and live a fulfilling life, you must first fulfil your basic needs like food, shelter, and security.
From an economic standpoint, it emphasises the importance of meeting your existential needs as a foundation for a good life.
20. The Veblen Effect
Named after economist Thorstein Veblen, this theory explains why people want something more because it’s expensive. Price becomes a signal of status. You don’t just buy the thing, you buy the image it gives you. Are your purchases genuinely satisfying your needs or merely driven by social pressure or the desire to impress. Choices driven by your value improve your chances of happiness. Do I want this for me, or for how it makes me look?
That question saves you money and sanity.
In conclusion, applying even a few of these economic theories to your life can help you find happiness, balance, and fulfilment. The key takeaway is that economics isn’t just about numbers; it’s about making better, informed decisions for a great life. So, whether you’re budgeting for your family, investing in your future, or choosing a career path, remember these are all valuable tools for life.
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>This Is What Will Never Change in The Next 4 Years
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Book of the week
In Ikigai: The Japanese Secret to a Long and Happy Life, author and blogger Héctor García (author of A Geek in Japan) and novelist and self-help writer Francesc Miralles teach you to apply the Japanese concept of ikigai, or life purpose, to your own life.
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4 questions worth pondering
Look around the places you spend the most time. What behaviour does this space encourage? How can you set things up to make your good habits easier?
How can I make today feel like play to find flow?
In what areas of your life would you benefit from setting clearer boundaries?
What can you remove from your life that would improve it?
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Until Next Week,
Be Well.
Thomas
“Our necessities are few, but our wants are endless.”— George Bernard Shaw
Postanly Weekly is a reader-supported newsletter. To support my work, you can upgrade to a paid subscription for $9 per month or $60 for an entire year. Or use this special link for 50% off forever. Plus free access to The Thinking Edge: 27 (with future updates) thinking tools, models, principles for life and career. Inspired by the wisdom of brilliant minds.