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