Redefining Education in Developing World: An Organic Way of Teaching (Part 1)

1. Introduction to Education and Economics
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Image source: http://www.myeducationadvices.com/

1.1. Why education to begin with?

An economy is made of people. People created all the necessities for the economy to function properly. You may think "Wait a minute, what about endowments from our mother earth such as water, fertile soil, trees, etc?" Shouldn't those be considered non-human factors of production? Certainly yes. Nonetheless, no matter how you look at it, we are the ones to make the ultimate decisions about how those resources should be utilized. Thus, I have come to a conclusion that developing an economy, developing a country, in essence, begins with education or re-education of its people.

Why education? People approach this question differently, but there is a simple economic way of answering such question. You see, an economy is people in disguise. The economy, just like a car, is not going to steer itself, we are the ones to do it. You might think that market economy is all about the invisible hand playing with the uncontrollable force of demand and supply, but that is simply untrue. What is invisible hand? What is the market force? Aren't they all made up of millions of human interactions? of millions of transactions?

"The invisible hand doing its job"
Image source: https://www.youtube.com/watch?v=ulyVXa-u4wE

To me, the only difference between central planning and free market economy is none other than the source of control. In central planning economy, the top few or the government is the king who exercises top-down approach to make decisions from above in order to direct economic activities at the front line. Free market is just doing the opposite by concentrating economic power in the hands of the majority, of the people at the front line, to let them (the ones with expertise in their respective fields) decide what best for them and where resources should be allocated to achieve the optimal outcomes. This or that, the bottom line is the whole economy, the whole nation is strongly connected to its people. The people are the ones who drive the economy forward, not some invisible spooky hand.

This is much related to the last few paragraphs of our previous article as we discussed about education as a primary means among several others to be employed to achieve a sustainable rate of increasing human well-being. I did promise that I will elaborate the point I made to show you what my ideal academic world really is as I went as far as to recommend deficit spending (spending>income ==> spend borrowed money). I am doing just that right now.

However, before getting to that point, we have to ask ourselves this question: why should we go through all the troubles, even as to suggest running a deficit to ensure effective education?

Because education is strongly tied to the effectiveness of labour. In economics, at its very core, there is something called "production function". Production function simply tells you how much an economy can product given the inputs used. In its most basic form, the production function is:

Y = A*F(K,L)

where Y is the total amount of output produced; A is technology (it is a bit more complicated than that, but for simplicity, let's regard A as technology); K is capital (factories, machinery, equipment, etc); L is labour (anyone old enough to work legally);

The so-called production function at its much less complex form
Image source: thismatter.com

So output is A times the function of K and L. In other words, the amount of goods and services an economy produced depends on how much of labour and capital it uses to produce the output and by how much technology can further improve the productivity of those labour and capital.

There has been a finding which states that the return to the factors of production is alpha=0.25 and beta=0.75 for capital and labour respectively. This means that a unit of labour contributes to 0.75 or 75% of the total output while capital only accounts for 25%.

However, I cannot vouch for this particular finding. Though it is far from perfect, it is what I have learnt, and I think it is good, at least, to know. It pounds in the basic foundation of economics, if nothing much.

Labour is crucial to the growth of developing nations. So, by educating people, we are improving the effectiveness, the quality of labour allowing more production and faster growth, even with the same amount of capital. Plus, note that as a country develops, it also starts to either create or import capital and technology (in case of import, it allows the country to leapfrog in terms of technology), and thus, it is super important to have enough qualified labour that is able to employ the new capital and technology. Since, logically speaking, the additional output produced by an additional unit of labour is supposedly large in the developing nation assuming stable political state and enabling physical and soft infrastructures, labour quality is an essential factor to further push the beneficial effect to its best form. Moreover, since importing also entails cultural, political and philosophical influences, it is a must that the recipients are well-educated enough to analyze, filter negative elements and assimilate positive ones into their own society.

Investing in education is thus indispensable, and it all comes down the questions below.

How can we elevate the effectiveness and impact of education? How can we reshape education to ensure a well-educated population in the direction that can help many of the poor countries' economies to take off?
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1.2. How do the majority define modern education?

And to answer these questions, we have to first define, not education, but our ways of defining education because this is where it matters the most. Why? Because in this world, there are those who define stuff, and those who learn from the definitions readily made for them by the former. Since the latter makes up the majority of the population, the world is thus shaped by the force of the practitioners. Why? Because the pioneers who have molded the way this world operates, the pioneers who who contributed to the foundation of human thinking and those who keep stacking more blocks on the top are only a tiny percentage of the population, and some of those are not even in this world anymore. The ones left in charge are those influenced by either traditional mindsets or contemporary ones which somewhat are also influenced and shaped by the orthodox.

For this reason, since the olden days, education is mostly regarded as what provided by the academic world, which is a world of its own. The batch of knowledge most people refer to is delivered in the form of formal and compulsory education. The academic realm is mostly associated with formal education, whether provided by private or public institutions, charged or free of charge. Note that, I did not only use the word "education" but "formal education". Why is that?

A typical classroom setting found across the globe. I was there, not literally.
Image source: www.fed-soc.org

You see, the reason I used the term "formal education" is because when we talk about education or someone educated, we, most of the time, expect them to see if they are holding their Bachelor's, Master's or doctoral degrees. We tend to think of education as something so linear, something acquired by entering and spending years in school. For young people with little work experience, when they seek jobs, their potential employers will most likely ask them for their level of "formal education" and only then will they seek other qualifying indicators such as volunteering experiences.

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Extra:

Is there an economic explanation to this common and customary practice of ours? It all comes down to cost, either pecuniary or non-pecuniary, or both.

You see, when two parties come together to make a deal, they are looking for something out of one another. The prospective employees look for jobs that pay as much as possible considering the capacity they possess, and their potential employers are looking to select only candidates with the right set of skills they need so their expense on labour to be cost-effective. Each of these two groups are looking to fulfill their own self-interests, but what really slows down the process is the asymmetric information. Firms cannot ascertain the level of skills applicants have with just the applicants babbling about how great they are and how they want to help improve the entire world. Employers need a solid proof of the applicants' capacity, and the only way to do that is through papers stamped, sighed, sealed, and delivered from certified capacity building institutions (i.e. school...). These papers you accumulate after years of cramming for exams and still survive will give your potential employers a much less costly method of screening applicants to see the green light and the red light.

So, for the sake of economic efficiency, whether you like it or not, formal education is a must.
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However, this mindset is also where we need to fix the most.

Formal education is a requisite in building the fundamental knowledge of a wide range of subjects from science to art and anything in-between. The academic realm will demand basic knowledge gained from compulsory formal education before it can allow anyone to pursue higher education. It is only a common sense for both private and public sectors to be actively looking to recruit youthful individuals with high level of formal education into their organizations.

Just giving you a heads up, I am not arguing against formal education. I, to be honest, strongly support it.

However, this is where it all goes a bit off track for the developing world. What we are doing now is adapting ourselves to the formal education system adopted in the global north instead of adapting and adjusting education to fit with the current needs and conditions of ours, of the global south.

The continuation to this article will be written later, hopefully soon. To be continued to "Part 2"!

Thanks for spending time here. 

Poverty: A Well-known but Little-understood Social Disease

A woman with her two children living in a dump site in Cambodia
Source: http://keytokhmer.blogspot.com/

Poverty is dreadful. It is miserable. It is a strange social phenomenon. You may be thinking "Strange?
Is that the right word to describe poverty?" The answer is No. No, I cannot define poverty by just this one word. I cannot define poverty in terms of financial inadequacy either. I actually only find poverty to be a strange idea when people start talking about it as if being poor is all about having less money. In fact, poverty is about more than just being financially poor. Why? Because poverty encompasses a whole lot more than we think. Poverty exists at many levels and cover a wide range of dimensions in life. Poverty is the deprivation of qualities required to ensure a decent living standard, a quality life. This particular way of defining poverty is mostly overlooked due to the tendency to simplify the term as merely the lack of financial resources.

Being poor comes in different shapes and sizes. Being poor is not entirely about the lack of money to sustain life. Being poor is about being deficient in various desired qualities. Illiteracy is a form of poverty, and so is morbidity. Being poor does not just come from insufficiency but also excess. For instance, obesity is mostly due to the excessive consumption of calories or cake, and as a consequence, you have a poor health. Too much alcohol consumption can also lead to the poverty of health.

Amartya Sen
Source: http://en.wikipedia.org/wiki/Amartya_Sen

There is also the poverty of imagination, the poverty of freedom, in which either the mind or the body or both are confined.

So you see, poverty is much related to the society you are in, whether you are financially poor or rich. Either way, poverty have influenced your life.

There have been many people who tried to develop new methods to define life quality, new ways to measure poverty, either as substitutes or complements to the conventional poverty indicators like the Poverty Line which is the minimum income necessary to sustain one's life. For what reasons are we trying to redefine poverty again and again? Because a better definition allows for a more accurate problem identification and analysis, and thus, a more effective and robust problem-solving mechanism.

Mahbub ul Haq
Source: http://en.wikipedia.org/wiki/Mahbub_ul_Haq

Human Development Index, HDI, for instance, is fruit of those people's labour. Created by two of the most profound economic thinkers of our time, named Amartya Sen and Mahbub ul Haq, HDI is the compound of three elements deemed requisites of life: Income, Health and Education. The two economists were convinced that people are not machine. People are organic, and thus, policies need to be developed for humans and their well-being which comprises both material and non-material possessions.

Amartya talked about human capabilities. In short, it is about what people are capable of in addition to what they have. Suppose you were poor, and you were able to earn about $50/month. Starting from this month, and for whatever reasons, you are able to earn $30 more per month. Here are the some questions I have for you:

• Does that make you $30 richer? or any better off than before? 
• To what extent has your life been improved? and at what cost? 
• Assuming you are buying better and more nutritious food, are your body and mind healthy enough to be able to fully consume and absorb the food or all the nutrients?
• Are you well-educated enough to spend the money wisely to ensure long-term improvement?
• Are you given fair opportunity and freedom to spend the money the way you think are best for you? 
• Are you restrained or supported by external sources to further elevate the positive impacts the additional earning may or will have on your life?
• Is there an enabling environment for your idea and creativity to come to life?
• How is the long-term projection of your society? Is it under exploitation or oppression of any form? Is social injustice prevalent? Do you see yourself living in a better society where this additional income matters?
• Are you psychologically healthy enough to feel the motivation and encouragement this improvement in life quality has given you?

These are just several questions I have, but trust me, there are many more. I hope these questions have reflected the point I want to make here. Measuring poverty by solely looking at people's income is not a good enough indicator to give you a full grasp of the problem.

The last question on the list is actually a very interesting one because it is related to a term called "Relative Poverty". What is relative poverty? By my understanding, relative poverty is about the relative position you see yourself in within your society, how you compare yourself to different groups of people in your country or the entire world, and how the resulted image about yourself that you derive from such contemplation will influence your psychological well-being and those around you. 

Relative poverty is a real challenge, a barrier to emotional well-being of people, in a society where income inequality is conspicuous, where the differences in status are in retina display that they manifest themselves along side each other, giving you time to feel how miserable you are compared to those riding high-end cars like Rolls-Royce. 

Relative poverty is an insidious social disease. It gives people the idea that they are poor even though they can sustain their life and live just fine. Relative poverty may lead to social disorder, to the demonstration of discontent of the mass because wealth tends to be concentrated in the hands of the much richer few. These are problems that demand on-time attention and solutions as the country is moving from low-income to middle-income or high-income status. We need to ensure that such transition will also bring along well-being and equity (and equality where it is due) to all people living in our society. This is why treating poverty superficially by attempting to only lift income does not solve the problem. Not to say that we should not put effort into raising the income level of the people, but it should not be the only approach chosen or prioritized. The next paragraph will show you why exactly increasing income doesn't cut it.

There have been cases of the existence of two countries with the same level of income per capita while at the same time, with a huge difference in HDI or the well-being between people of the two countries. Why? Because of the contexts they live in. For instance, two persons, one lives in country A where free trade is adopted while another one lives in country B where imports are highly taxed (high tariff). The one living in country A is more likely enjoying a better life quality due to lower cost and wider range of products offered, while the one living in country B is having fewer options and facing higher price with inferior technological level of products. So you see, although both have the same level of income, due to the different economic policies adopted, it leads to different outcomes in terms of life quality for each of them.

Despite it being seemingly obvious, there is still a grave misconception by some economists and a large number of people who think that everything else will just fall into place following the rise of income. NO. It doesn't work that way. Never did and never will. 

Holistic treatments are required. We need to stop regarding income as an end, but rather, one of the means. What do I mean by that? Simply put, what I want to say is that, instead of thinking of people as beings that consume jobs and money, we need to think of them as beings that consume food, clothes, clean water, shelters, transportation, justice, equity, equality, and so forth. Of course, most of these are available with good jobs and money. However, the routes taken to achieving such outcomes are highly dependent on your understanding of poverty and its relations to the many other facets of life. A better knowledge of the conceptual framework will allow you to make better decisions in terms of setting priorities for better resource allocation. (This is actually a very important topic that should be explained further to enable a more comprehensive understanding of the concept. I will write another article sooner or later with a sole focus on "resource allocation". Anyway, let's move on with our article.)

The true beauty of development. A picture that can make the most beautiful painting pale in comparison.
Source: http://www.minhajwelfare.org/our-work/education/

Education sector is an example of where we can put our effort into to combat poverty. Remember that poor people also have children, and based on empirical research, they have even more children than the richer ones do. So, if education can be a tool to free people from long-term deprivation of good life qualities, then we need to look into this much less visible part of the society, and it will be okay for a government to run deficit to spend more to enable education to spread its wing here. It is a good long term investment because even if we are not capable of giving them much immediate short-term relief, we are at least ensuring that in the longer run, they and their younger generations will live much better lives. Since there are more poor people in many developing countries, I can make a strong assumption that there are more poor children as well. In 10 to 20 years time, they will be a part of the labour force driving the country economy forward. So, investing in them is no different from investing in the future of our nation. This is one way to combat poverty in the long-run. However, note in mind that, for this approach to be effective, it still needs to be executed in conjunction with many other methods used to tackle poverty from different sides of the society, and only then, will we be able to truly prevail.

Of course, education for adults is also important, but I will keep that till later. This is it for now. I hope you enjoy reading the article as always. I will talk more about the remedies one may take to treat such social disease in our next article. I will also try to be more detailed, to write more about what I think of how we can, for example, better improve education for the poor to be more effective, efficient and sustainable with a much stronger impact .

If you are new here and want to know more about this topic, visit the links below to read 2 related articles that will give you a better picture of the idea:

1. http://economind101.blogspot.com/2013/12/gdp-economic-illusion.html
   (Explain why you should not boast about your country's growth by only talking about GDP)
2. http://economind101.blogspot.com/2014/01/wage-hike-and-its-implication.html
   (Explain why trying to make life better by simply increasing income can lead to economic and social problems)

Economy Up-Close: A Tale of Sok and His Friends

*Note: If you hate reading facts, then jump right into the interesting story. I have already marked it for you.
*Another Note: I, however, encourage you to read everything if you are not a Cambodian. Or Laotian or Thai who shares similar tradition, culture and religious belief. Still, whether or not you are one, do read it if you can. Very useful information provided.
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Never before have I been so fascinated by Economics. Writing this article is the only way I can think of to express my impression on an awesome story I had the opportunity to witness with my own four eyes. The story I am going to tell you is about the birth of a small market economy driven by the laws of supply and demand and other factors that could make it happen.

Let me start by giving you a bit of an overview of Cambodia and poverty within this country. Cambodia is one of the developing countries of the global south. We are, however, very fortunate to have such a resilient country which persists and thrives despite the really bumpy road. I am proud to be a Cambodian, but being proud should never be on the same line as being arrogant. There are still many challenges now and in many years ahead. I see the many flaws the country has and the improvements to be made.

Just throwing in some facts. According to the most recent data by Asian Development Bank (ADB), the total number of population in Cambodia is 14.7 million (2013), and about 25% of the entire population is living under the set poverty line of $1.25/day while the poorest 20% only share about 7.9% of the national income. The data from the UNDP also gives us a more inclusive indicator called "multidimensional poverty" which is complementary to the traditional poverty indicator that is solely based on income. This new indicator measures poverty based on three primary aspects: Income, Health and Education. The data shows us that 45.9% of the population is living in multidimensional poverty. That means they are not just poor in terms of having little money, but also in terms of poorer health and education. For more details, please consult google.

Not to take it too far because the whole point of mentioning those basic facts is just to give you an idea of the current state of Cambodia from the half-empty-glass point of view, so we can figure out ways of how to fill the empty part.

Poverty, to be specific, is what I have seen everyday after leaving home to go to work, having a cup of coffee with friends, going for a ride along the riverside, going to restaurant... I am not even talking about what I have witnessed in the rural areas yet. It has become so apparent to me simply because poverty and affluence are occurring along side each other. At night, on the same street, you can see a family in their luxurious and high-class Range Rover, and you can see another family sleeping helplessly on the side of the street struggling to survive each day while suffering from chronic hunger, meaning they wake up hungry, they feel hungry the whole day, and they go to sleep hungry. The scary thing is that such contrasting states of being has become so familiar to us, to the people here, that we have started to become oblivious of it while some have chosen to ignore it.

Enough of this. I will now take you along with me to Prek Ta Tun village, Ksach Kandal district, Kandal Province. We are going to a pagoda named "Botum Raengsey" to join with many people there on a special religious festival called Pchum Ben or Ancestors' Day, which lasts for 15 days, celebrated by Cambodians every year to pay respect and make in-kind offerings to the deceased relatives up to 7 generations.

During Pchum Ben, almost everyone brings food as an offering to their ancestors who are believed to be released, for a period of 15 days, from the underworld in search of their descendants who brought along food-offerings for the starving ghosts of their predecessors. It is believed that by doing so, it is also a kind of merit-offering that is able to release their ancestors from their agony in hell so they can have peace in heaven. What if we do not make any offering at all? We will be cursed! I hope not. I do not know the detail. The explanation has never been very clear to me.

What I want to point out is just that there is normally lots and lots of food in pagoda during Pchum Ben period. You see, I do not know if ghosts exist. If they do, I do not know if they eat physical food, but I know for sure, with absolute certainty, that actual living people do. So, many of the poor gather in pagoda during the 15-day festival hoping to get something to fill their stomach and get some money from people who have become more generous because of the festival effect with the final destiny, heaven, as their incentive.

It works most of the time for the poor. I mean that is why many poor, or less-fortunate, people, especially children, go to pagoda during this religious festival period. Sometimes, to get more than just food, they beg (for money). It works better than on a normal day, but still, they do not get much, and they are often ignored and shunned by the better-off people (or so they seem).

A gloomy article it may seem, a cynical author you may say. However, starting from this point on, we will experience together how Economics can help make even a small change that can improve life quality for the poor, during Pchum Ben day at least.
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The story goes like this... (It is a true story, and this is where it gets interesting)

A woman praying to the Buddha statue

Welcome! This is​ a typical scene inside any Buddhist temples, at least here in Cambodia. You can see a woman praying to the Buddha statue in the picture. Well, there were many more people at the food hall (because it was lunch time!). Did I mentioned that the food hall is also a holy place in pagoda? Pretty much everywhere, except the restrooms.

Here we are, the Food Hall. Told you so! It was crowded!

There were many village children coming to Pagoda looking for something to eat and to bring home. Money is top in the list. What could those small children do to earn money? They begged. A typical scene all over Cambodia (but definitely not what the picture to your right is about).

Anyway, I am pleased to introduce you to our protagonist and his friends today (see the below picture and its caption). Let us call him Sok, a very typical Cambodian name. Of course, that is not his real name. I was stupid enough to forget asking him for his name. Still, this picture below is enough because a picture is worth a thousand words. Not to say his real name is that long. I hope he is not going to sue me in the future for posting it here. I did ask for his consent to take and post the picture... but without his signature. I doubt he understands what I meant when I said "May I post this on the Internet later on?". He will soon learn, I do hope.

Meet Sok (Red shirt on the left) and his friends! Sok said "Hello" to you too!

Just like any other kids walking around in the premise of the pagoda, Sok was at first begging for money. People did not welcome him, and he did not earn that much from begging either. It is sad, but aside from writing about his hardship, I can only do very little.

For some unknown reason, about an hour later, Sok seemed to have realized something, or maybe he was simply tired of walking around begging for money from people, with little success. His action caught my attention because he suddenly sat down at the entrance of the food hall in which the monk were chanting before having lunch offered to them by the people. Of course, everyone had to get into the food hall to listen to the unintelligible Sutta (in Pali language).

So what was he doing sitting at the entrance like that? Was he too tired of standing and walking? and just decided to sit and beg instead? Not really.

You see, for Buddhists, when going into a sacred place, we take off our shoes to show our utmost reverence for the Buddha and the monks.

This creates a problem. Poverty, Shoes. Povery, Shoes. Poverty, Shoes... Poverty, free Shoes... you got that?

Ain't nobody has the time to keep their eyes on their shoes. Most of the time, they are too busy concentrating on the chanting, whether or not they understand any of that. So shoes are there at the entrance for anyone brave enough to grab a few of them to sell and earn some bucks or riels (Cambodia's currency). Just a side note, since Cambodia is a partially dollarized country, we use both riels and dollars. Anyway, you see the problem. You go in, you lose your shoes, and worst of all, they don't go to your ancestors. Win-lose situation. Nobody likes it.

Sok somehow realized this problem that people were facing. Like many economists said, in an economy, the scarcest resources of all are knowledge and insight. Two working as one. Those with the right knowledge and insight at the right time and the right place, with the courage to initiate and the strong will to persist, will prevail regardless of who they are. This is what happens most of the time. A poor farm boy can even become the richest man of great sophistication because of his employment of his own knowledge and insight.

Tired of begging (probably), Sok might have at first done it out of his goodwill. He saw the problem, and he tried to solve it. He set up a spot where he would just sit and watch over people's shoes. As you have seen in the picture above, He and the other kids did not realize, at first, that this simple problem-solving service will not just help the people but the sole supplier of the service, Sok.

By the way, Sok was the only one who did the job at first. His friends (the three kids in the picture) just joined in for the photo shot.

I was very interested in Sok's initiation. So, I took a picture hoping to see something interesting happened. I wanted to turn it into something that could change his day. I waited and observed what would happen next. Suddenly, a woman walked out of the food hall and handed Sok 500 riels (about a dime). That is my friend, an incentive! Every business needs incentive to continue its operation. Where there are demand and supply, incentive will be made visible through the transaction.

At first, the other kids were just running around, playing, and begging for money from the passers-by from time to time like they usually do. That gave me an idea! I then kept walking in and out several times. Each time, I kept repeating the same act. I handed the shoes to Sok when I entered. When I left, I took the shoes back and gave him 500 riels as a thank for his service. By my 3rd or 4th trip, this act of passing benefit to Sok, the service provider, caught the other kids' attention.

About half an hour later after the fact, this was what happened.

Wait wait wait... they are not Soks! There cannot be more than one Sok. They are 2 other kids offering the same service.

4 more inside of the food hall? 5? So about 7 in total doing the same thing as Sok does.

Yes, a bunch of other kids started to imitate Sok and opened up their own shoes-keeping business, in hope to gain or surpass Sok in terms of profit! They have now become Sok's competitors!

"Where did they come from? They are taking away my customers!" Sok thought (I made this up). 

                                                                                                                                                              Sok was not very happy about this (See his face? ha!). But sorry kid, this is free market, and for this particular type of competition, we can call it a perfect competition in which businesses offer identical products or services with no barrier to entry and exit. As Sok realized his profit, he could not hide it from the eyes of the other kids who were also profit-seeking individuals. Sok could not monopolize the business because the demand was too much for him to handle alone, and there was no rules or regulations stating that only Sok can provide the service. Plus, he could only watch over limited number of pairs of shoes if he did not hire other kids to work under him (and he did not). As the shoes-keeping business, which existed on the same timeline and place, offered greater incentive than standing around beeing, begging now incurred a huge opportunity cost (a huge loss of money that could have been made by entering into the tiny shoes-keeping industry). Consequently, several other kids ended up in the same business.

Before the shoes-keeping business took off! Lots of shoes in
risk of being stolen! We need Sok!

The problem arising from having to take off your shoes and the risk of losing them had given Sok a great idea to begin this little business of his. His insight, despite how young he still is and difficult conditions he is in, gave him the edge against the other kids and probably adults as well as allowing him to help solve the existing problem people had on that day. Thus, we can see that demand has created supply or in this case, it can be also said that supply has created demand because people might not have realized that they even needed this kind of service at first. However, after Sok started his little business, people welcomed him at the entrance. They smiled at him and thanked him while at the same time compensated him for his time and energy with some money. This is exactly what incentive is. Once profit had been realized, other kids with profit-seeking behavior became more and more interested. Eventually, at the entrance, we had our little shoes-keeping service industry with perfect competition operated under the free market system. The only thing that did not happen as expected based on the economic theory I have learned is that as more kids supplied the same service as Sok did, price did not fall. There were people who actually gave 2,000 riels and such. This is why development economics can be a little bit difference from the fierce business competition stated the orthodox economics. It factors in "Generosity" of the people. This is what drove up price offered by the demanders of the service, and thus, a greater satisfaction to them and a greater benefit to the suppliers.

Lucky him that Sok started all this.

So, were the kids better off? Surely they were. About 2 hours later, before I left the pagoda, I asked them about the amount they made (and still, I forgot to ask for their names... regret that!). Sok made 15,000 riels and another kid made 5,000 riels. I do not know about the rest. Well, early bird gets more worms, I guess. The initiator benefited more due to the smaller competition and more customers of his own while the followers also benefit greatly but to a lesser extent. Still, they were all much better-off that day!

Moreover, to attract more customers, they had also thought of ways to provide better quality services. Sok and the other kids neatly arranged the shoes in order, and for my patronage, Sok even put my shoes (the biggest black pairs on the right of the pink shoes) at the front (He told me that). What a nice kid! Due to this privilege he gave me, I was also more inclined to further use his service. What a great entrepreneur Sok is!

Is this the end of the money circulation in that small economy? Not really. So where will the money go next? Probably to the ice-cream seller in the right picture.

See the street vendor in the middle of the picture?

As ice-cream is really sweet and makes people feel thirsty, it is a complimentary product to drinking water products. So the next person to benefit might be the street vendor selling drinking water and beverage in the pagoda that day (The street vendor was in the picture far back).

This is just a small economy that has been improved to an extent thanks to one kid with a great entrepreneurial spirit. I salute you, kid.

I consider myself very lucky to be able to witness such an improvement in people's income, even if for a day. This shows us that the law of economics, the law of supply and demand, applies to every level of our society. I, thus, urge the development workers to start thinking economics and employ solutions to poverty that consist of 5 elements:

- Relevance
- Effectiveness
- Efficiency
- Impact
- Sustainability

The use of economics to improve life quality can meet the 5 conditions while being much less costly than the traditional solutions which do not factor in much of economic thinking.

Once again, this article could not be made possible without Sok and his friend. I still am fascinated by what I have observed, and this particular experience has reassured me of the crucial role economics plays in development and life in general.

Thank you for spending time reading this article, and I will see you again next time with an even more amazing piece of economics!

All the best.



Sources used:
http://www.kh.undp.org/content/cambodia/en/home/countryinfo/
http://www.adb.org/sites/default/files/pub/2014/basic-statistics-2014.pdf
http://en.wikipedia.org/wiki/Pchum_Ben

Explaining Stock Market using Behavioral Economics: Level of Resistance and Level of Support. Seriously, how do they work!?? (revised)

**Note1: For those who don't like to read long article, you can skip the first several paragraphs. Scroll down a bit, and jump to the text below the line. I clearly mark it for you. 

**Note2: However, the first several paragraphs do introduce you to a bit of new knowledge as well. If you have time, read them all. 

**Note3: I want to let you know that though I did some research before I wrote, my explanation is purely based on my thinking and the knowledge I have so far. So do not use this as a reference, unless it really convinces you that this article makes a lot of sense. 
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I have been thinking of trying to post something new and refreshing to give a bit of breadth to the blog... and voila, there you have it. Today, I was doing some reading, and I came across the terms: "level of resistance" and "level of support" used in trading stock and forex. I do not know if these 2 terms are broadly used in any other types of trading like trading securities in general. That does not matter anyway.

Just a bit of additional info before we start. What are securities? By definition, securities are divided into debt securities and equities. Trading debt securities is none other than trading debt. An example of a debt security would be Bonds, like government and corporate bonds. In contrast, equities represent ownership of assets. Example? Stock, and that is what I am going to talk about today.

Our discussion will be related to stock market, but I am not trying to teach you about how to trade or how to make millions of dollars. If you read this article hoping to make some bucks, then the exit is right there. 

I mean, come on, I, myself, have not even bought or sold any stock once in my life. How can I provide you with the million-dollar tips? Plus, I am a risk-averse person, probably because I have no money, which make any financial loss a huge deal for me. However, I have a decreasing absolute risk aversion trait. What does that mean? That means as I am getting richer, I will become less risk averse, and thus, the amount of wealth I am willing to expose to risk will increase. When that time comes, hopefully, sooner rather than later, I will give it a shot.

Neither am I going to explain you about stock, about stuff like long/short position... okay, may be a bit about the long/short jargon. Nothing much, really. Long means buy. Short means sell. Think of it this way; you have a line of cookies, and when it is getting shorter, then means you have sold some cookies to someone else. By the same token, when it gets longer, that means you have bought some cookies to include in your collection, the long line of cookies in your kitchen. Simple, but not 100% correct. There are more to long/short stock. They are not simply buy and sell, but buy and sell are close enough for the purpose of this article. For more information (if you are curious), please google them.

As you can see, I am not here to teach you Finance 101. I am here to talk about how the level of resistance and level of support are what they are, and why they have been used widely despite the lack of explanation. The thing is I have been going around trying to find a good explanation of why and how those two work, but sadly, I could not find any good sources on the web that provide a clear rationale of what is going on behind the scene (maybe, you can. Give it a try!). I can just imagine the frustration of students trying to digest this knowledge while having little idea of how it works and why it is there.

So, I am going to explain them by myself, using economics or just common sense. There is no secret to it. Things are the way they are because of a reason or two. 

Enough chitchatting, let's get into business.

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**The real stuff begins here:

Before we begin, I want to introduce three important elements I am using today to make some sense of the stock shenanigans. (Note: There is not point in using the word "shenanigans" here. It is not even relevant. However, I just think it sounds cool and what to put it somewhere in the text. Try to understand it from the context only, not the exact meaning. lol)

You need to understand three explanatory elements and the definition of the two terms (support and resistance) before we can unravel the mystery. 

First, knowledge of common. What is it? Knowledge of common is common knowledge. I just think it is cooler to use "of". Basically, it is the knowledge shared by either most or all people.

Second, rational expectation. Rational expectation is pretty much what rational people expect to happen as a result of their actions or some uncontrollable exogenous force or shock. Mostly, people use the knowledge they have gained from the various sources such as personal experience, media, books, grapevine and so forth; they then combine the knowledge of the past with the available information of the present to arrive at a final product, the conclusion in the form of expectation, a rational one. Can you see the connection between the first and second elements yet? Get it? People use knowledge to form a rational expectation!

Third, self-fulfilling prophecy. Just a heads up, in case the third element makes you think there is something spiritual about this article, the answer is No. No, There is nothing here for you if you want a fortune-telling. Anyway, self-fulling prophecy is basically a prediction that becomes true because people simply believe the prediction and act accordingly anticipating what foretold to be realized in the future. There are instances in which no matter how ridiculous or baseless the prophecy may sound to the logical thinkers, it can become true with enough people believing in it. That just means being logical is to take this fact into account when engaging in thought. So, can you see how the first, the second, and the third elements are connected yet? People believe in the prophecy (in the form of knowledge), act it out with rational expectation, and the prophecy is actualized!

knowledge of common, rational expectation, and self-fulling prophecy. We will use these three to explain level of resistance and level of support. However, to explain how and why they happen, I need to first clearly define the two financial terminologies.

Image source: http://www.tradingacademy.com/assets/images/fec/supportresistance1.jpg

The picture above will act as an illustration to aid your learning of the concept. They might look simple, but their inherent complexity is undeniable, even to the experienced traders. Let's not make life any harder that it is. There are simple definitions too.

Just like the picture shows, the level of support is a line, a price level, which stock price seems to have difficulty falling below. You will see that the price was pushed down several times, but it could not go lower than the level of support.

On the contrary, level of resistance is the price line, the price ceiling that stock price cannot seem to break through. As you can see in the picture, the price, most of the time, could not increase any further once it reaches the red line, and the fluctuation, most of the time, is within the band of the support line and the resistance line.

This concept is most useful in short-term trading. Why is that? Because short-term trading is influenced more by the profit-seeking behavior of individual traders who do short-term speculation based on their instinct or belief of when and at what point to buy and to sell. Unlike long-term trend, short-term trend is unlikely to be affected by real variables like exogenous (or external) economic shock, new innovation, new products or services, government policies, or any changes in the actual operation of a firm or the whole industry or the business environment. It is based mostly on the animal spirit of the people. That is, by my own definition, what short-term trading is, and this is when level of support and level of resistance work best.

So what does this tell you? It tells you that there are a lot of psychological factors coming into play here, and what I am doing now is using behavioral economics to explain why resistance and support lines exist. (Behavioral economics can be simply regarded as a branch of economics that studies human behaviour and how that influences their individual economic decision and the collective economy)

First of all, we have to understand that short-term traders are always interested in understanding the tools, the concepts to give them the edge in trading. Once level of support and level of resistance have been introduced, once the terms have been coined, people become curious and they study and study to absorb this new knowledge. Sooner or later, the concept becomes a common knowledge for the mass. This particular topic will be everywhere in school, in finance class, and people become more and more acquainted with it, more convinced that support and resistance lines actually work. Once enough people, whether or not they understand the underlying reasons, believe in support and resistance lines, this new knowledge will then become the knowledge of common.

This is when rational expectation comes into play. As you may have guessed, traders are rational people. Well, most profit-seeking individuals are rational. They make rational decision to arrive at a logical conclusion based on what they know, on the information they possess to speculate the future. You will see what I mean by "rational expectation". Keep reading.

Based on the past low stock price and its persistence to fall below that low mark, people start to draw a line and they call it support line. So when a large number of people expect that price will not fall below support line, they will want to buy stock at this point hoping to gain from the imminent increase in price. Voila, now everyone buys stock based on the expectation they form rationally. What does economics tell you? Buy = Demand. People demand more stock at the point of support line, and consequently, the price rises! This pattern repeats itself again and again a few times or many times, leading to what we call "the level of support". In the end, price really does not fall below the support line because people keep buying more stocks pushing the price up as it nearly reaches the support line.

This is what I mean by self-fulling prophecy. Enough people believe that price will not fall below the limit that they draw, they act it out as any rational being would, and due to this reason, price does not fall below the level of support. This further reassures people that level of support does work! So they continue to repeat and the result repeats itself as well.

Same goes for the line of resistance. Same process; knowledge of common and rational expectation lead to self-fulfilling prophecy. Enough people believe that price will not go beyond the resistance line. They start selling when price comes close to the line to gain the maximum profit because they know that price will soon fall. Again, what does economics tell you? Sell = Supply. As people sell their stock, the company's stocks pile up due to sudden increase in supply, and price simply falls as a result.

In the long run, however, stock price will follow the changes in the real-world variables. For instance, just like when Apple announces its new products, and its shareholders start to buy more stock due to their strong faith in the company believing its new products will bring Apple much more success as a company, and thus, a greater return for its shareholders. That is why we see either upward trend or downward trend of a company's stocks. This is one way to break through the support or resistance line.

And that's a wrap. I hope you enjoy reading and ingesting new knowledge just like how I enjoy writing this article. It is just refreshing being able to write something new once in a while.

Until next time,

Market Failure: The Flaws of Capitalism and Laissez Faire Economics

SOME CHANGES MADE~!
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16-08-2014
**Some mistakes spotted as I re-read the article. I will revise them later to create a better flow, make the article more reader friendly and not causing much confusion.**

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Contents as of 29-08-2014:

My apology. As stated above, I noticed some mistakes. Well, not mistakes in a strict sense, but more like something that can potentially cause confusion. I have just realized that I really need to insert this paragraph somewhere in the text, and no where can I fit it in better than at the beginning of the article.

So let me clarify one thing. I want to make it clear to all of you of there. Long story short, capitalism is about private ownership. Free market is about the freedom in exchanging of goods and services. Simply speaking, capitalism is accumulating privately-owned wealth, while free market or laissez faire economics is about freely trading your wealth after having it converted into something tradable. The two are entwined and quite often got mixed up. While free market requires capitalism to operate effectively and efficiently, capitalism does not necessarily need free market. In fact, in extreme case, capitalism can also exist in the absence of free market (like when only monopoly exists, what is monopoly? Google it). For simplicity, the article does not differentiate much between the two. Most of the time, you will see either term used in the same paragraph. Do not freak out! Despite the difference, the consequences resulted from having both or either one of the two (capitalism or free market) freely reign an economy are quite similar. At least, that is what I think!

From my very first article, little did I write in favor government intervention or restriction on the free market system. It seems as if I am in full support of an economy with no or little government intervention. And that is not the case actually. In economics, we have something called "Market Failure". Market Failure is neither a myth nor an attempt of a government to gain more power. Market Failure is real, and it is pretty much related to Capitalism and Laissez Faire Economics.

In essence, capitalism is a key component of free market, and capitalism is to allow people to pursue their dream, prioritize their self-interest, and optimize the use of their resources to attain the best possible outcome and maximum profit. We can also say that the many individual quests to accumulate wealth, combined, have given birth to capitalism, and the economic system that allows everyone to do so, or to be accurate, that enhances the effectiveness of capitalism and directs it towards the optimal path for the mass is the one that favors free market system with little or without exertion of force or control is called Laissez Faire Economics.

Being free is good. People fight for freedom. They want to liberate themselves from all sorts of bondage. This is human nature, to be free because YOLO, you only live once. However, note that in theory, we mostly talk about economic freedom in its perfect form, we always talk about the extreme of this or that because it is just much easier to imagine and study, and much less complex to analyze as it gets rid of the myriads of other influential variables that increase uncertainty and unpredictability. The real world is not as simple, and for this reason, free market cannot and should not exist on its own. I will explain why later in the article.

Capitalism promotes free market which is believed to give birth to all sorts of great incentives for the people to work their buttS off because in capitalism, your get to reap what you sow. You speculate well, you seize the right opportunity at the right time, you invent and innovate, you add much brain power, energy and time as inputs, and the final product is yours to sell to the world. Your increased productivity drives the world economy forward. You work for yourself, but to increase your productivity, you hire people, i.e. pay them, to work for you. In that sense, everyone is better off! A single person's initiation, his spirit of entrepreneurship to create something of value from which he can derive profit, will, whether or not that is his aim, benefit the world and the society around him. Those beneficiaries are called stakeholders, and who are they? They are employees, suppliers, buyers, society in which the business operates, and also the international community as well.

As mentioned, the great thing about free market is that a single person's greed is turned into everyone's benefits. The desire to produce to earn, the desire to beat your competitors by cutting cost, reinventing the wheel, giving birth to new invention and innovation, improving existing products and services... all result in betterment of human living standard as witnessed during the last couple of centuries. Nothing, nothing but capitalism/free market will ever respond so quickly to the new demand, want or need of consumers. Why? Because the ambitious ones always seek the gap that must be filled within a market. Businessmen respond and adapt quickly to the changes in market conditions, much faster than the government ever could, because they are the frontline soldiers, they have the expertise in their own respective fields of production, they know the drill, and the most important of all, they seek profit, and capitalism gives them the enabling environment to do so.

HOWEVER, wait for it...

TOO MUCH of anything is NEVER GOOD. Too much cake will make you fat, too much nightclub will make you bad, and too much study will make you sad. Like wise, too much of free market will corrupt the economy. Capitalism is good because the complex economic system turns self-interest into collective yields. Nonetheless, this simple reasoning that justifies the use of laissez faire economics was contested. Many times. And is still going on. And on. And on.

The challenger based their opposition to the free market on the so-called Market Failure, the Flaws of Capitalism and Laissez Faire Economics. Though much is true that free market has been good (or so we think) to us for many decades, leading to double-digit economic growth for nations like China for many years, capitalism still has its engine sparked and run by profit-seeking individuals who probably do not think much of the well-being of the rest of the world. Of course, somehow, free market dictates that their actions will keep the globe spun and everyone gets a piece of the sweetness. However, the greed driven behavior will make the system implode. You will see why soon.

Capitalism/free market often does not lead to Pareto Efficiency or Pareto Optimality, an economic state where every individual well-being can no longer be optimized without causing harm in some sort of form to the others. The problem is that Capitalism/Free market will continue to drive the economy onwards even the cost to the society at large outweighs the profit to a small number of individuals, and no matter how much return certain actions will yield to the collective social welfare, capitalism fails to make them happen if the individual benefit is not there. This statement I made, I think (and if I am correct), pretty much sums up everything of the defects of capitalism. Simply put, social cost is just too great that the individual benefits yielded by an action (say a business action) is insignificant, and this leads to inefficiency or waste or huge opportunity cost.

I will give you more specific examples on the matter.

Let's us now look at market failure from a few different angles.

The first thing that comes to my mind when thinking about market failure is none other than Externalities. What are they? They are the by-products resulted before, during or after a business action that may either of beneficial or harmful effects for the people in general, not limited to the direct stakeholders. Now, let's focus on negative externalities so we can challenge the concept of free market. These are mostly unintended or perversely done so despite knowing the demerits. For instance, the severe environmental damage set in by the Chinese manufacturers in a number of regions in China, the burning forest in Indonesia leading to negative health impacts on countries like Singapore and so forth. These are all decisions made by profit-seeking individuals who may or may not have carefully studied the repercussion of their actions, and they ended up harming the communities or societies, even the ones of great distant from them.

Let's try to relate this to individual rationality and collective irrationality, the past article of this blog. I will give you an example. You see, when free market rules, individuals will exert their utmost effort to meet their own best vested interest, even in something some people consider trivial like driving. Everyone is pushing forward for the little available space on the lane so they can arrive at their destination a bit faster, and this is actually a very rational and free-market-like decision. What is the result? Traffic congestion. If the rule of getting in the line/queue was not firmly established and enforced, the result is traffic congestion. Smoking is also another example. Smoking is bad for the smokers, and well, these are individual choice knowing well that they are exchanging some of their own life span for those moments of transient pleasure. By the laws of free-market and freedom of choice, this should be okay. However, their decision introduces negative externality, smoke that is a threat to the health of the people around them. So now, we have smoke-free laws.

Talk about smoking, let us now get into de-merit goods and services. De-merit goods and services are those goods and services that despite their demand on the market, they are harmful in some way to all or certain segments of the population. Like? Like Cigarette or Alcohol or Drug. Without regulations and taxes placed on these goods, who knows what our world will turn into? These are why we have the no-drink-while-driving laws and such. It is of crucial importance to realize that certain limitation need to be in place for the market to function as it should.

How about public goods? Let us first define public goods. What are they? Well, they have 3 characteristics, but sadly, I only remember two, and googling or yahoo-ing or binging doesn't seem to help either. Actually, during my study, my prof specifically said that pure public goods are hard to come across or think of. Well, for simplicity, let's just say that public goods are the one that are non-rivalrous and non-excludable. Non-rivalrous goods are those which are not depletable. In other words, if you think of Hamburger as a public goods, then no matter how much group A consumes it, it will never exhaust the supply of Hamburger for group B. Non-excludable goods are those that everyone can consume, everyone can utilize. For instance, you cannot ban a person from enjoying the beautiful sunset or listen to free music played by some street bands. You cannot ban a person from fishing, but the more he fishes, the less fish there will be for the rest of the world. This is why we have fishing license and regulation! Come to think of it, maybe air is a pure public goods... I think.. not sure though. Don't take my words for it.

Anyway, when we talk about public goods, we are talking about the missing market that might as well be non-existent or insufficient to meet the people's demand when free market is allowed to reign a nation. What might those be? For instance, street light, national defense, highway and such. Why is that? Because of the "free-rider" problem. In other word, the moment you produces street light or something as big as national defense, you cannot exclude any citizen of a country from benefiting from it simply because he/she doesn't pay for it. National defense is for the whole nation, and if it was produced in a free-market, some people might refuse to pay for it, and this is a problem because the less you pay, the less you have to sustain the national defense. That is why we have the tax system, the tax laws that requires everyone to pay taxes. This is only made possible by an entity considered as the locomotive of the nation, the government. Not just national defense or street light, even education or health which is not a complete public goods might not be made enough to meet the demand under the free-market if the government does not intervene.

And do you think that the many transactions happening even as we speak can continue so smoothly without the laws and regulations to govern them? No. Of course not. This is partly due to the asymmetric information. In a transaction, it is not in their best interest for the sellers or sometimes also the buyers to disclose all the information (including intention and motive) they have available for the products or services. This is why we have the judicial branch to take care of things like fraudulence.

Last but not least (though there are so much more to talk about), I want to talk about income inequality. Free market is more likely to expand the gap of income than shrinking them. Free market does not stop the rich from accumulating more and more wealth (even some are doing it through the means of exploitation in various forms). Though this might sound negative, what I really meant is that free market won't stop rewarding you or reward you less for your success. It will keep doing so, and eventually, there will be a small bunch of people with great wealth and power while the majority will be in the range between middle-income and low-income. Many examples can be seen throughout the history of human kind, and like it or not, income inequality can lead to social unrest and revolution. Violent or not, the restructuring of the economic system through such means will drastically damage the economy as it upsets the balance of wealth and power once so familiar to the people. Income inequality, at its worst, can lead to what I would like to call "relative poor" portion of the population. This is a social problem. The relative poor is the one who is not exactly poor, by strict definition, but still thinks that he/she is poor when comparing to the richer few. This has a lot to do with the psychological phenomena which I am not knowledgeable enough to elaborate.

Well, this is a pretty long article, and I will end it here for the sake of saving you from boredom. This is not the end of it, and there are so much more to write. As you may have noticed, I really did not get into detail (which would only make it much longer). To sum up, what I want to convey to you, my dear reader, is that there is nothing that is good when taking to the extreme. Moderation is the key. It is easier talked than done, or in my case, written than done. When you talk about moderation, people ask "but to what extent? What is the appropriate degree of moderation?", well folks, this is a complicated question. Moderation cannot be perfectly executed because, easy answer, there is no perfection in this world, and to answer it in a bit more complicated way... the world, as we know it, is made of so many variables as the factors that influence an economy; by this rationale, in order to balance between free-market and central planning, we need to first gather data, analyse, see the pattern, see the trend, observe the reality, understand factors of production, conduct speculation, and do cross-sectoral meeting to discuss about the possible impacts of certain decisions to be made for the whole nation. One thing for sure is that a great economist must be present in order to coordinate and direct the process. A good decision can result in a leap-forward for an economy while a bad one can also result in a leap-backward or the lost of potential (huge opportunity cost) for an economy. So balancing and moderation are important, and... to be continued.

That's it for now. We will meet in our next article.

Free Market and its Self-Correcting System: A glimpse at Income Effect and Substitution Effect (Featuring Zombies)

In economics, nothing is more fun than observing words and thought of economists being animated in the real world, our everyday life. One of the earliest economic concepts I came across was none other than income effect and substitution effect, the two popular terms which every economist is so fond of. They are very simple and easy-to-digest concepts, to be honest.

Income effect basically states that the more you earn or the more income you generate, the more you consume. For example, assuming you really like cake. When you earn $1000/month, you can only buy 1 cake/week. That is the budget cap because you need to spend your money on other necessities like utilities (water, electricity, internet...), healthy food, gas for your car, etc. But once you get promoted to a much much higher position and end up earning $10,000/month? Your entire house rains cake. You might even buy a fridge solely dedicated to storing cake. You will get really fat and have a stroke from all the cake you consume.

Substitution effect, on the other hand, focuses on the change in price and change in consumption pattern, or simply put, the higher the price of a certain product, the more likely you are to consume none or less of them and switch to purchasing their substitutes, if there is any; and the reverse is also true. For example, let's say you are the same person who likes cake to the point that you can die for it, literally. Suddenly, without any warning, World War Z happens. Zombies apocalypse befalls your country (but for some unknown and inexplicable reason, it is a special type of zombies in a way that they are only attracted to cakes and bakers in your country...), and so, all the bakers in your country have been, unfortunately, turned into zombies. And for some other unknown reason, your company is still running and you still get paid $10,000/month (because I say so). Well, the crisis your country faces now is severe cake shortage (Of course, let's just ignore all the zombies that are running around. No one cares about them). Wait, I should have mentioned also that every other country puts up huge and impregnable walls, blocking the way of anyone, let alone zombies, that can inflict even the slightest injury on their bakers. So yes, you can still get the cake you love so much by importing it. If you really want to eat cake, you need to talk to the importers who will have to risk their life to import the cake from the neighboring countries. A cake now will costs you $9,000 (I am just making it up on the spot). So you see the point. You will now consume less cake simply because the domestic market price of the cake has risen up so much due to the cake zombies crisis. And that is Substitution Effect.

All the hassles it takes to get cake might then change you into a new person. You might start to develop a new liking to your new cake's substitute, probably, ice-cream. Sadly, this new favorite will not make you get any thinner than your previous cake-loving self. But at least, it has taught you something about economics, to be specific, substitution effect.

So to you, ice-cream is probably a substitute product. Just like how some people see Pepsi as a substitute to Coke or vice-versa.

With the zombies apocalypse crippling the cake market operation, it negatively affects many cake ingredients suppliers such as flour seller, sugar farmer and so forth. This might force some of them out of business, but don't lose hope because the lower demand for sugar in the cake industry will push sugar price down, NOT out of the market, yet. Instead, the economy will re-adjust itself. Lower price of sugar will enable more ice-cream makers to make cheaper ice-cream, and thus, increase the demand for ice-cream and expand ice-cream industry.

At the same time, I forgot to mention earlier that along with substitute products, we also have something called complementary products. Assuming cake is just so expensive, so unaffordable that the whole country is now starting to consume more ice-cream as a replacement and coming to like it. As ice-cream becomes more popular, there are bound to be some products that also tag along in this growth spurt. For example, cookies! Some people like to have their ice-cream with some cookies as their side dish. So when the demand for ice-cream rises, cookies business is also doing great, much better than when people were stuffing their face with cake. In this scenario, cookies represent a complementary product because the demand for cookies and the demand for ice-cream are positively correlated. In other words, when people consume more (or less) ice-cream, they also consume more (or less) cookies.

The interesting part is that even if the economy is to be extensively damaged by zombies invasion (causing unemployment, food shortage...), and everyone could barely earn enough income to survive, there are still people who see this as their opportunity to earn money, and thus, introducing a simple economic solution (without knowing it is one), the production of inferior goods.

Inferior goods are those goods that people need more when they become poorer and less when richer (its example is the entire paragraph below). Normal goods is the opposite. Normal goods are something that you consume more as you get richer and less as you get poorer. For example, movies.

Inferior goods are produced within an industry that seeks its profit from people with low income. With rising food price, due to food shortage (substitution effect) and lower income (income effect), people are now facing starvation. So to meet their desperate need for food, people will pretty much consume anything edible (so do the zombies, I guess, but they probably won't pay anyone any money), caring less about the quality of the product. This is when mass production of cheap and low-quality food is hugely rewarding, and those who realize that and dare to follow their ambition to become the richest man in town might start a business that produces inferior goods, for example, instant noodle. People are suffering from zombies attack, the economy crippled, so in time like this, when you can buy your lunch (a pack of instant noodle) for (just an example) $0.25, who wouldn't want it? Assuming the cost to make a pack of noodle is $0.1, so as long as the government doesn't decide to involve itself by, for example, reducing the price even further to, say, $0.09 for a pack of noodle rendering the business unprofitable, then the people can be saved. Believe me, there have been instances that the government did something similar to what I described and ended up starving many people to death (because with $0.09 a pack, no one would be irrational enough to continue producing instant noodle as it might not even cover the cost of doing it).

So what does this tell you about Economics? It tells you about beauty of free market that it allows resource ownership and freedom of choice. Individuals are the one to make their own decision, unlike within a centrally planned economy in which the government or some supreme ruler makes arbitrary decision for the rest of the country (we will discuss more about it in our next article).

Even without much government interference, an economy always has a self-correcting system that allows it to be quite resilient in the face of any foreseen or unforeseen crises. In economics, we have alternative choices; hence, when one door closes, one or many more open. With top-down approach, with too much intervention from the government, there were times when people suffered greatly due to economic hardship (and that is undeniable) as bad economic decisions have led to political turmoil, public outrage, rebellion, war and destruction. Of course, that doesn't mean we need no regulations. Free market is favorable but only with appropriate rules and regulations to level the playing field because sometimes, the self-correcting does not bring us to the state of recovery fast enough (I will talk more about it in our future articles as well). We need people with sufficient knowledge of economics to aid the decision makers. Likewise, we need decision makers who are, at the very least, well-trained in the basics of economics.

Economic Theories VS Pragmatism

People say that theory is not practical, and that, my friend, is not a criticism, but a truism. Why? Because theory is the production of observation, thought and analysis that will weed out many indirect correlations and emphasize the ones that matter the most to the study and interest. It is not different from learning Taekwondo or Karate or any other martial arts. You have to start from the very basic of the basics. First, you would be taught "Kata" or "Form" of the art, which to beginners are simply dancing around like a fool. You should know you cannot follow each and every step of Kata in real fight. If you do think you can do that, trust me, don't. Kata, I believe, is intended to build within you the foundation of the martial art, its basic forms and nature, so once you are well-acquainted with them, you may then engage in the real action.

Likewise, it is not a surprise that all Economic theories are pretty much taught to you for the same purpose. The more you learn, the more your knowledge base expands, the more flexible you become, the deeper you can think, the more critical thinking you have, the more accurate your deduction becomes. There is no shortcut.

Again and again, I always try to include this in every article, though slightly altered from one to the next, but still convey the same meaning nonetheless that Economics is broad in width and profound in depth. Forgive me if this sounds like I overrate Economics, but as far as I am concerned, the former statement I made is true to its core. 

That is why by the time you have mastered a bunch of the fundamental economic concepts/theories, you will be challenged and haunted by the fact that all of them make sense, but in the real world application, with vast possibilities and unpredictability while the margin of error is never getting any bigger, the likelihood that dependence on an economic theory and/or theories alone to explain and forecast the climate change of the world of economy is unsustainable and inaccurate has always been inducing fear and loss of credibility for the economic discipline again and again for a great number of people. 

However, one must never forget that theories are there to be employed, not solely, but in conjunction with real observation and ongoing analysis of the world, the context. That is why, in the study of economics, reading off your textbooks, attending lecture and listening to your professors are not enough to produce a well-rounded understanding of economics. My advice to you is that once you think you have sufficient knowledge of the text, start looking around for hands-on experience, real time and real world observation, or at least, read reports that convey those experiences to you. Only by then can you be sure of the usefulness of your knowledge. 

If anyone tells you that theories are useless, they probably mean following only the theories you have learnt is stupid. If they mean theories themselves are pointless, those people probably do not have that much understanding of the world of knowledge, the academic realm. 

You must understand that the world has become what it is today thanks to the many theories, not limited to Economics, layer by layer built upon one another, in which the latter is an upgrade of the former. As the pool of knowledge is expanding so is the world evolving to a more complex form. But note that these two, I believe, are strongly correlated. Theories were turned into real practice, and the world evolved as a result, which led to more theories be created, and in turn, resulted in more advanced form of the world. 

For the same reason, economic theories have been extracted from the understanding of the real world, and they have been used extensively in shaping a better world. Their visibility, however, might not be apparent to those who do not seek the knowledge. Regardless, they remains to be a part of the vital force the drives onward the world economy and human well-being. The prosperity you witness today is not just the result of scientific evolution, but also the adoption of an effective and efficient economic system conducive to growth. If you want to know more, why not read more about economics? You will be surprised by how much you do not know, just like I was.

In economic theories, we trust.