Key Economic Concepts

Hello readers, welcome back to You might be wondering why I am writing another post considering I only published the last post two days ago. However, I recently came across some important economic concepts and I thought it would be useful to share a few ideas with you. This post will be quite short compared to usual as I will only be talking about two key economic ideas: ‘Homo economicus’ and ‘The invisible hand theory’. I might have mentioned these terms in previous posts or you may have come across them before, but since they are so important to economists around the world, I thought it would be beneficial to go a bit further into them. If you have any questions or don’t understand anything discussed in today’s post, feel free to contact me at or post your questions in the comments below.

On a side note, I’m sure most of you have been keeping up to date with Brexit and that Theresa May has in fact triggered article 50 of the Lisbon treaty, entering the UK into a period of two years of formal negotiations to determine certain policies and allow for an amicable divorce. This means there really is no turning back now and I’m sorry to say it but, ‘Brexit means Brexit’. In my next post, I will be analyzing this in much more detail and will discuss some of the economic implications as well as provide clarity to the whole issue. You might recall me doing a post on Brexit last year, about what people thought would happen next and the implications of Brexit. It will be interesting to see whether or not the predictions were true and what the future for Britain could look like now. After that post, I will be looking into something quite different that featured recently in the Economist-‘Amazon’s Empire’.


‘Homo Economicus’

  What does it mean?

In economics, the term ‘homo economicus’ also known, as the ‘economic man’ is a concept assumed in many theories, which portrays humans as ‘consistently rational and narrowly self-interested agents’. In general terms ‘homo economics’ attempts to maximize utility (satisfaction) for consumers and profit for producers. This theory stands in contrast to the concepts of behavioral economics and homo ‘reciprocans’ (which emphasises human cooperation).

‘Homo economicus’ essentially defines the ideal economic man who only acts rationally and pursues wealth for his own self-interest given the constraints he faces. The economic man is described as one who avoids unnecessary work by using rational judgment. In game theory ‘homo economicus’ is involved as in all the scenarios/situations perfect rationality is assumed.


To what extent is it true?

The idea is often criticized, with many economists claiming that people are mostly irrational e.g. purchasing a car (a depreciating asset is irrational) yet people still buy cars. It is however the prevalent model of human behavior among economists.

Most social scientists believe that human behavior is often complex, contradictory, imperfect and unpredictable. On the flipside, Economists, use the model, ‘Homo economicus’, who is endowed with perfect (or abnormally high) rationality, self-interest and knowledge. Besides the obvious fact that humans aren’t perfect, the model suffers from other basic problems. Humans are ultimately driven by their emotions, not their logic, and emotions are often irrational. Nor are humans 100 percent self-interested. They perform generous acts like charity, volunteering, lending a helping hand, parenting and even giving one’s life for one’s country. They also perform self-destructive acts like substance abuse, negative addiction, negative risk-taking, procrastination, and suicide. Nor are people highly knowledgeable about all their affairs; they can be expert in only a few topics at a time. The reasons why economists use such a flawed model like Homo economicus is because it makes their economic analysis simpler and allows them to generate results that confirm their hypotheses. Such methodology, however can lead to inaccurate conclusions.




 Adam Smith’s invisible hand theory

 Screen Shot 2017-03-31 at 10.48.46Those of you who are studying or have studied economics are bound to have come across Adam Smith. He is what people refer to as ‘the father-figure of economics’ and if you ever wondered where economics came from and how all this demand and supply stuff really started in the first place; it was down to this guy. Perhaps one of his most famous ideas was the ‘invisible hand theory’, which was first proposed in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776), usually abbreviated as ‘The Wealth of Nations’. It is considered his masterpiece and was the first modern work of economics.

Adam Smith’s research was extensive and there is a wealth of information about him and his ideas online. Today I will just be looking at one of his concepts: ‘The Invisible Hand Theory’.


What does it mean?

The definition of it is:

The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.

What exactly is it?

Adam Smith assumed that an economy can work well in a free market scenario where everyone will work for his/her own interest. He explained that an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves. He suggested that if people were allowed to trade freely, self-interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand. In a free market scenario where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better than your competitor. Whenever enough people demand something, the market will supply it and everyone will be happy. The seller ends up getting the price and the buyer will get better goods at the desired price.

Perhaps one of Adam smith’s most famous quotes, which was in ‘The Wealth of Nations’ is:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”

This essentially means that, if an individual can profit by manufacturing some product or supplying some service, Smith reasoned, he will in fact do so. His very ability to turn that profit proves that other members of the society must want those goods or services. In this way, the full spectrum of society’s needs will be met through the pursuit of individual self-interest. Such a free-market economy should work smoothly and efficiently without any global management as if guided and organized by Smith’s famous invisible hand.


Sources used:

10 things you need to know about the Spring Budget.

Hello readers, welcome back to my blog on interesting economics news stories. Last time, I discussed whether or not it makes sense to purchase second-hand cars in economic terms, and I looked at a concept known as Akerlof’s lemon theory. I hope that you found it useful and are now starting to understand how economics can play such a pivotal role in our day-to-day lives. In today’s post, I will be going back to discussing current economics news. If you’ve been keeping up to date with the news, you might recall that the 8th of March 2017 was the date that the Chancellor of the Exchequer, Philip Hammond, presented his Budget to parliament. Within this post, I will outline some of the key things that emerged from this and how these changes could affect you, as well as what you need to be aware of. I will briefly outline at the start, what the Budget is for those of you who don’t know. I will keep this post short and to the point, and hopefully be the end of it, you will have a clearer idea as to where the UK economy could be headed. As per usual, please post any questions below or email them directly to me at

What exactly is the Budget?

As I mentioned in the autumn statement post a few months back, the government makes two major speeches a year about how it is going to spend the nation’s money, which it receives from taxes. This includes the types of services e.g the NHS and may involve fiscal austerity, which is where government borrowing is reduced in order to cut the size of the deficit. The budget is the first of the two speeches and it is worked out by the Chancellor and his office, the Treasury. The reason for this is so that the government can work out what to spend its limited amount of money on, in order to maximize utility and create the best possible outcome for the UK. Just like you decide how to spend your income, the government has to work out how much to spend on schools, police, and housing. By tradition, the budget takes place in the spring, although the chancellor can give an extra update on the country’s economic position later on in the year if required, as was the case in July 2015, when an election had just taken place. The Budget is also supposed to be where the Chancellor discusses tax plans (fiscal policies) whereas the Autumn Statement is more about predictions for the economy and how much different government departments could spend. Although this is not set in stone and some tax plans are often included in the Autumn Statement. That being said, it was announced back in November, that from now on there will not be an Autumn Statement anymore and there will just be an annual budget.

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The Key Points you need to know:
Although the Budget looks at a number of different aspects of the economy from health care to education to savings and taxes, I have put together a list of the ten things I think are most important:

  1. The economic forecast:

Unemployment is at an all-time low and the number of people employed in the UK sits at 31.8 million. The Office for Budget Responsibility (OBR) forecasts growth of 2% in 2017. The rate of inflation in the UK rose to 2.3% in February 2017. The Bank of England has decided to keep the interest rate (base rate) at 0.25%, as they don’t want to make any major changes in the economy particularly since we are in the middle of brexiting. However, if inflation continues to rise past the Bank of England’s target, this will have to increase.

  1. Cutting borrowing and stabilising the public finances:

Britain has a debt of nearly £1.7 trillion – around £62,000 for every household in the country. In 2009-10 the UK borrowed £1 in every £5 that was spent. This year it is set to be £1 in every £15. Borrowing is forecast to be reduced by nearly three quarters by 2016-17.

  1. The NHS:

There is set to be £425 million investment in the NHS in the next three years. In addition, £2 billion will be spent on adult social care over the next three years. This will help councils to provide high-quality social care to more people and will ease the pressure on the already overworked NHS.

4.     Education:      

£536 million will go to new free schools. £216 million will be invested in school maintenance.

5.     National Productivity Investment Fund (NPIF):

The government is funding improvements to infrastructure, including:

  • £690 million for new local transport projects, to improve congestion on roads and public transport
  • £220 million to improve congestion points on national roads, with £90 million going to the North and £23 million to the Midlands
  • Supporting local projects in the next twelve months like improvements on the A483 corridor in Cheshire and on the Leicester Outer Ring Road
  • A new strategy to make the UK a world leader in 5G technology
  • £16 million for a national 5G Innovation Network to trial new 5G technology.
  • And £200 million for local projects to build fast and reliable full-fibre broadband networks.


6.    The main rate of National Insurance contributions (NICs) for the self-employed will increase.

Currently, the self-employed may have to pay both Class 4 and Class 2 NICs:

  • Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
  • Class 2 NICs are paid on profits of £5,965 or more

From 2018, Class 2 NICs will be abolished. Class 4 NICs will rise to 10% in April 2018 and to 11% in April 2019.

Taken together, only a self-employed person with profits over £16,250 will have to pay more as a result of these changes. This better reflects the fact that the differences in contributory benefit entitlement between the self-employed and employees are now small, following the introduction of the new State Pension in April 2016.

  1. Sugar Tax:


    Sugar Tax set at 18p and 24p per litre for the main and higher bands (more than 5g of sugar per 100ml and more than 8g per 100ml respectively).

    The vehicle excise duty for hauliers nd HGVs remains frozen and there have been no changes to duties on alcohol and tobacco.

8.    ‘National living wage’

Rises to £7.50 an hour in April. This is merely confirmation of what Hammond said in last November’s autumn statement. It is a rise, but not enough to meet the target of £9 an hour by 2020 on its current trajectory.

9.    Scotland, Wales and Northern Ireland

  • £350m for the Scottish government.
  • £200m for the Welsh government.
  • £120m for the Northern Ireland executive.

May has placed a huge emphasis on keeping the union together. She is strongly discouraging calling a second referendum as she believes we are better off together. Slightly contradictory perhaps, since she is taking the UK out of the EU and breaking up close connections.

10.   Tax avoidance

  • £820m of tax avoidance measures.
  • VAT on roaming telecoms outside the EU.
  • New financial penalty for professionals who create schemes defeated by HMRC.
  • Stop businesses converting capital losses into trading losses.

Crackdowns on tax avoidance have become a key aspect in the Budget. This is to stop the unfairness in the tax system, with added penalties on accountants who help people to try to dodge their liabilities.


Still want more information about the budget?

Check out the short video clip by the Guardian


Sources Used:

Does it make sense economically to purchase second-hand cars?

Hello readers, welcome back to this weeks edition of Last week, you might remember me discussing whether robots could ‘steal our jobs’ and the potential economic consequences this would carry with it. Having considered a number of different views from different academics and economists across the globe, it was clear by the end of the post that we are not likely to be headed toward a rise of the machine world or a utopia where no one works anymore; rather it is probable that we could experience something between the two. At the moment the main limiting factor that is restricting robots and their use are the extreme costs associated with them. Further, there is the moral argument looming in the background that how can we rely on machines to do everything for us when humans were born to work, and if robots become more and more human-like, how will we be able to distinguish ourselves from these ‘synthetic creatures’. I left you all with a few questions to think about. Obviously there were no right or wrong answers since we simply cannot predict the future and we don’t have enough information to solve this complex phenomenon, but hopefully, it got you thinking like an economist!

In today’s post, I will be looking at information failure, which is actually another form of market failure, and how this applies to the real world. In the post about ‘carbon taxes and negative externalities’, I addressed a different sort of market failure-the market failure behind pollution, namely a negative externality problem. I focused on the solutions to what was termed as ‘the greatest market failure the world has seen’ and my argument was based on how a carbon tax really was the best solution. This post however will discuss the theory behind information failure and how this applies to the second hand car market. I will keep this post short and to the point and hopefully it will be an interesting theory to ponder over, perhaps during your lunch break. Next week I will be reviewing the recent announcement of The Budget and the economic impacts this carries with it.


‘Akerlof’s Lemon Thoery’

Now you might be thinking about the yellow citrus fruit we all know as, the lemon and wondering how this has anything to do with economics. However, I can assure you that this actually has everything to do with economics. If you were looking for a recipe for a lemon cake or something lemon orientated and happened to stroll across this blog, apologies, but you might want to look elsewhere as this post will be discussing economic issues.

The noble prize winning economist George Akerlof in his 1970 paper, ‘The Market for Lemons’ first proposed the theory behind asymmetric information and he used the example of buying second hand cars to explain it. For those of you who don’t know what asymmetric information is, investopedia have explained it in a nutshell: “A form of information failure, which is present whenever one party to an economic transaction possesses greater material knowledge than the other party. This normally manifests itself when the seller of a good or service has greater knowledge than the buyer, although the opposite is possible. Almost all economic transactions involve information asymmetries”.
Anyway, his theory went something like this:

Suppose we say that ‘peaches’ are good cars and that buyers value these peaches at £10,000 and sellers value them slightly less. On the flipside, a ‘lemon’- a bad car is only valued at £5000 by the buyer and again a little less to the seller. If the issue of asymmetric information did not exist meaning there would be no market failure, the trade in both peaches and lemons would both flourish. However, with economics, nothing is as simple as this and the real world is much more complex than this. In reality, scratches can be covered up, engine problems cannot be declared in the service records and mileage counters could even be adjusted and so buyers can struggle to tell the difference. In order for buyers to compensate for this risk that the car could be a lemon, buyers slash their offers to £7500. Although, any rational seller, who knows that their car is a peach would reject this offer. This gives rise to the concept of “adverse selection”, that is only sellers who will be prepared to accept £7500 are those who know that the car they are selling is a lemon. Smart buyers could foresee this problem and knowing that they will only ever be sold a lemon they will offer a reduced offer of £5000. As a result, the seller ends up with the same price they would have done even if there hadn’t been this ambiguity in the first place, although they keep the peaches separate in the garage. Even though there are buyers out there who would be willing and able to pay the asking price for a peach which they knew was actually a peach, this “information asymmetry” between buyers and sellers kills the market, as buyers and sellers don’t have equal amounts of information required to make an informed decision. This is the basis of Akerlof’s thesis, and if buyers were able to appreciate the qualities of each car, good cars would fetch more money and it should be no more attractive to sell a cheap lemon than an expensive peach.

I was first introduced to this concept in Harford’s book, “the undercover economist” and by doing further research into this topic it is clear that the used-car market hasn’t disappeared, and so economists have debated how much Akerlof’s model really explains the market, nevertheless it is an interesting economics related idea which is worth discussing.

The reason why it is called a lemon theory for those who are still figuring how lemons come into all of this is because Americans use the term ‘lemon’ to describe something which is defective, just like a second-hand car may well be.


So should you buy second-hand cars now that you are equipped with this economics knowledge?

If you didn’t quite understand this post or are still worried about the fact that you could end up purchasing a defective car, it is probably best that you stick to purchasing a new car, providing that you don’t burst the bubble and get yourself into a whole load of debt with ridiculous interest repayments.

However if you’ve understood the fundamental theory, you should still be perfectly able to purchase a second-hand car. Remember though, that this is just a theory and like with many economics theories, the issue is much more complex and does not always hold in the real world.


Sources used

‘The Undercover Economist’ by Tim Harford

Could robots really replace our jobs and what would be the economic consequences?

Hello readers, welcome back to Last time, I shared my essay that I had been working on which discussed the idea of implementing ‘a large and extended tax on carbon’ and how this option would “Trump” the obvious alternatives such as CCS and Carbon Cap & Trade. If you didn’t get a chance to read it but are keen to learn more about this topic, I highly recommend that you give it a read, even if you don’t understand all the economics behind it. Climate change, I believe along with millions of others, is an important issue and unless we realize this, there is only going to be more adverse effects on future generations. Already we have witnessed 2016 as being the hottest year in history and if we can’t accept that global warming will have significant consequences environmentally, socially and economically then we will have to wait and let time tell us, the hard way.


In this post, however, I will be going back to discussing interesting economics news stories and have decided to focus on something quite abstract, yet relevant to all of us. Could robots replace our workforce and what would happen to the economy if they do? I will consider whether our economy will transform into a more efficient one as a result of the increase in productivity or if it would do the reverse and lead to worldwide unemployment, and a further increase inequality. Now, this may sound like another essay title in itself, although, I will keep the arguments short and to the point, as well as leave you with a few things to keep your mind active before my next post. It is important to remember that this topic has strong moral arguments as well as economic impacts. I will briefly touch upon these, although I will mainly be looking at the underlying economics behind this issue since this is strictly an economics blog.

Feel free to leave any thoughts you may have below. Like with the carbon tax, this is a very controversial topic and many people have different rationales as to why robots are good or bad for our economy, as outlined below. At this point, you might be thinking that economics is a bit of a ‘soft subject’, full of theories which some people follow and others completely disagree. Admittedly it’s not a ‘hard’ science like physics where we can follow Newton’s laws of motion and its not like psychology where we study the mind, rather it’s somewhere between the two. Later in the year, I hope to do a post on ‘why we should study economics’, to address some of these claims, and presumptions that people have about economics. How I like to think of it, is that economic fuels our lives, it’s all around us and helps us to manage the dynamic, ever-changing world in which we live in. Everything we do from the cup of coffee we buy in the morning to the houses we buy, to the goods/services we consume, to how much we earn or the currency we use is all related to economics and it is essential that we understand everything that is going on around us.

Economic theories and potential consequences of robots:

The general thesis that we have about the topic of jobs and robots, is that ‘robots will steal all our jobs and will replace our workforce’. However, whether this is possible or not has been discussed and debated amongst leading economics professors in the world and they still haven’t made up their mind. Below are a few of the main arguments out there.

According to Professor Moshe Vardi, in a report by the telegraph, within the next 30 years, we could see the rise of robots which will lead to unemployment rates greater than 50%. Vardi fundamentally argues that, “We are approaching a time when machines will be able to outperform humans at almost any task”, and that, “Robots are doing more and more jobs that people used to do.”. She poses the question that if machines are capable of doing pretty much everything that humans can do, what will humans do all day?

It is clear that she is one of those people who believe the use of robots will take our jobs and will have negative consequences associated with it. She is particularly concerned about the fact that human labour, something which is essential to human well-being could become obsolete and that unemployment rates of 50% would be extremely damaging.

Supporting this is a 2013 study by the University of Oxford which identified that almost half of those currently employed in the United States are at risk of being put out of work by automation in the next decade or two. Most vulnerable were transportation, logistics, and administrative occupations.

Rodney Brooks, the chief executive of Rethink Robotics, speaking at the Quartz event-The Next Billion in San Francisco has a different idea. Although he says that there are no tools better than human hands and discusses the logistics and practicality issues that, “We still have not made much progress on making dexterous hands for robots”, he still thinks robots are important and will bring with them many economic benefits. To illustrate this he uses the example of China who has around five workers for every retiree. By 2040, that ratio will be approximately 1.6 to one. The number of people older than 65 in China will rise from around 100 million in 2005 to 329 million in 2050. “That’s where domestic robots can play a part”, he said. They will be able to provide assistance to increasingly frail humans, whether that’s a driverless car taking them to the hospital or a smart machine that can help with lifting and other tasks around the home. In addition, he says that people may even prefer these robots to human helpers as robots respect privacy completely.

Many other professors are also in the middle and identify that we are neither headed toward a rise of the machine world nor a utopia where no one works anymore. Humans will still be necessary for the economy of the future, even if we can’t predict what we will be doing and that although technology will increase, humans will still be the basis of evolution. They also say that job losses in some occupations will certainly continue, but it will be accompanied by gains in different fields, just as in the past.

I was recently at an economics conference at the University of Warwick and one of the speakers was actually discussing this exact dilemma. His idea was that robots will play a part but they won’t take over the world and their economic consequences won’t be as bad as others predict. He started off by discussing that computing power without a doubt, is increasing exponentially. For example in 1948 Harvard developed a computer which cost 100 million dollars and that was less powerful than a $1.50 pocket calculator you can buy today. He then said that despite this we are not heading towards self-conscious intelligence, but instead we are aiming to produce smarter machines, which do not ‘think’. He suggests from his research that 80% of all jobs that exist will disappear but new jobs that don’t yet exist will be created. Another idea that emerged from this discussion was that no one would own a car in the future. Instead, they would all be automated and you will be able to call one up like an Uber. Not only would this cause an increase in efficiency but it would virtually eliminate the need for parking which is extremely valuable in urban areas. Further, in terms of manufacturing everything would eventually become cheaper and cheaper as the marginal cost of production would drastically fall (however this would take time to establish and a sharp decline in growth in the short run would not be unexpected).

The final idea was that actually creating jobs are a cost. For example, take the example of a factory which states that it will create “4000” jobs. The inference is that we are building a factory to get jobs when actually we want the factory for the output e.g. cars. Jobs are a cost to get the cars and the ideal situation he proposes would be getting the cars without having the jobs.

So there you have it. Some people are completely against the use of robots and believe that they will only eliminate jobs that people need, not just to earn a living but because humans were born to work. On the flipside, other economists think that we are not quite there in terms of the technology and that even when the technology does improve and robots replace our existing jobs, new jobs will inevitably be created.

Other implications to consider:

  • The robotics industry is worth around $135 billion. Clearly, this new technology, which could revolutionize society, comes at a huge cost which only the super rich will be able to afford, leading to greater disparities in inequality. According to Oxfam, the world’s 8 richest men have the same wealth as nearly 4 billion people.
  • If robots are going to replace our jobs, how will regular people earn a living?
  • Technology fundamentally fails. We’ve all been there when your trying to do something really important and the computer decides that now is the best time for it to play up. Admittedly these are small issues but if we are going to transform our whole workforce into robots and they just happened to go wrong one day, there would be severe economic implications. If we are at a stage where we are fully dependent on robots then society could simply ‘freeze’ overnight.

Bit worried about your job?

Check out the link below from the BBC, which allows you to find out your ‘automation risk’ and how soon your job could be replaced by essentially what is a circuit board and some aluminum.

What do I think?

I follow the argument that robots will become more encoded in our society at some stage in the future. We already have fully automated car factories and personal assistant on our smartphones and it’s only a matter of time before the technology improves further. Secondly, even if they were to replace jobs, I think overall the gains in productivity and efficiency would offset some of the social issues discussed and new jobs, which we don’t even know exist, will emerge. The issue is without a doubt complex and there are so many different routes to follow on this topic. Below are a few Questions for you to think about? (there are no right or wrong answers!):

  1. If humans were made redundant by robots what would humans do all day?
  1. Having read the potential economic implications would you argue for or against having robots in our society?
  1. What kind of jobs will definitely disappear and which ones are irreplaceable no matter how good the technology is?

Sources used: