This is one of the very good and easy to understand articles about economics by author Huskywannafly posted on Spiderum on May 9, 2017. I found this article so interesting that I brought it here to save. Now let’s learn about economics, there will be many extremely surprising things in this article.
3. Is economics a science?
As I explained in part 1 , the purpose of economics is to find a way to distribute resources in society reasonably and for the economy to function, it requires people in society to trust each other.
Before we get to the main point, let us learn a little more about the nature of economics. Can economics be called a science? It may be, it may not be. First, let us understand what a science is.
A science is a field of study that studies and explains natural phenomena. For example, why fire is hot, why water freezes. And the steps to scientific research are:
- Go find data.
- Data analysis.
- Draw a model of how things work based on data.
- Check that model again.
- If the model fits reality then it is correct, if it is wrong then do it again.
Similarly, economists collect data, draw up theoretical models to study and test their models. But sadly, their models are rarely predictive. In physics, you can predict the outcome no matter how you change the data, like the speed of an object falling or the destructive power of a bullet or the time it takes for water to boil.
But economics is a little different, the same model, but every time we input data from reality, the result is a different number contrary to the prediction. Because people are complex, people do not have only one way of behaving like Newton’s bullet or apple, people are a very sophisticated machine, unpredictable, always in conflict, always changing, that is, cannot be described through a few curves of the graph.
“Economics has been called the dismal science. Once you get to understand it, you may not find it so dismal, but you don’t find it much of a science either.” – Jean Chrétien
So, although economics is a science, it is not as predictable as the natural sciences. It is therefore quite a hybrid, and people call it the Dismal Science (because it often predicts events wrong, sadly).
But it is human nature to want to predict, it is necessary for business and helps people know which direction they are going. So despite the unpredictable nature of economics, people still like to predict and so we have dozens of different theories to describe the same thing.
4. Explain Capitalism and Communism
The core of economics is the study of the distribution of resources in society. So what is the rational distribution? In the last century, there were two theories to solve this problem: Capitalism and Communism .
Figure 10: Capitalism and Communism. @Spiderum
Surely many of you here have been taught about Communist theory in political science at university. However, in this article, I will present a slightly different approach to the problem than in university. First, economics, like any other science, is predictive rather than affirmative.
When economists like Adam Smith, Milton Friedman, Friedrich Hayek write economics books, they set out their theories, they explain why they think it is right. They do not claim to be right and they are open to criticism.
Figure 11: Famous economists in the world. @Spiderum
Even in the field of Natural Sciences, when talking about the Theory of Relativity, Einstein said that if someone found evidence to disprove his theory, he would immediately admit his mistake, and so now we sometimes read an article stating that scientists have proven that the speed of an object is faster than the speed of light.
That’s why you can find dozens of books criticizing Milton Friedman or free market theories. So I disagree with the university approach of saying that the theories in books are “truth” or “affirmation”.
Second, we have to understand that scientific research has no emotional component to it. In our society, we are sensitive to this, and when we hear the words “American” or “Western,” we associate them with all sorts of negative concepts.
And if they criticize our theory, we say that they are “speaking ill of us and spreading propaganda”. Perhaps that is why the scientific spirit in our country is still weak, because people think that the information from the other side is propaganda or that they are doing science but are influenced by political ideology.
We should understand that the scientific community, as the name suggests, works very seriously. For example, when you read a scientific article (emphasis on scientific article) that says “Why the ABC economic model fails”, it is not because they hate that economic model or are paid by some agency to write that article. It is because they have studied that economic model for decades, collecting thousands of data for research.
And when they publish their results, dozens of other scientists (on your behalf) will go through every single idea in that paper to tear it apart. And if it passes that test, it gets published.
Of course, when a post is posted on Facebook via a news site, there will be a huge army of people commenting that it is fake, fake news, and then a bunch of trolls and memes are sent in. We should not do that, but should respect the efforts of scientists as well as their intellectual work, and should not immediately criticize when we see something that is different from our thoughts.
“For example, in one column I wrote the answer that afternoon workouts are best for muscle growth. This is because hormone levels and body temperature in the afternoon are optimal for muscle growth. How do I know that? Because I wrote a 20-page research paper on it that was peer reviewed by 30 other scientists. Then someone jumped in and said I was lying. According to him, men’s hormone levels are highest in the morning…. because guys get hard every morning.” – Dr. Wilfredo Thomas, Lamar University .
Also, for ease of understanding, I will stick to the 19th century theories of capitalism and communism because the current versions are too complicated. And now back to the main issue. So how is resource distribution in market economic theory different from that in communism?
Imagine you are thirsty and stop by a grocery store to buy a can of Coca Cola. The can costs 13,000 VND. Why do you think the can costs that much?
Capitalism explains that a can of water costs 13 thousand because of market supply and demand. When Coca Cola starts producing soft drinks in Vietnam, they will first have to study how much water the Vietnamese people need to drink? For example, 50,000 cans a day, or 100,000?
After researching the market and determining that they had to supply the market with 100,000 cans per day, they began to calculate how much it would cost to produce 100,000 cans per day, how much it would cost to ship, how much it would cost to hire workers, and then what price range would Vietnamese people want to drink at.
After studying those factors, they decided that the cost per can would be 13 thousand. At that price, 100,000 cans would be sold. If they raised the price to 14 thousand, only 80,000 could be sold because fewer people would buy them, leaving them with 20,000 cans, which would be a waste.
If the price is low, say 12 thousand, the company’s profit will decrease. If it is possible to sell 100,000 cans of Coke at 13 thousand each, why sell them at only 12 thousand? The goal of a business is always to maximize profit.
Figure 12: Equilibrium is the point of balance between supply and demand in a free market. @Spiderum
But Marx’s communism has a different perspective. From Marx’s perspective, 13 thousand is the combined labor value of the capitalist (the owner of Coca Cola) and the worker in Coca Cola. He established the formula: Money – Goods – Money .
First, the capitalist, the employer, uses money to buy the labor power of the worker to create goods, then he sells the goods to get the money back. The money that goes out is higher than the money that comes in because the goods sold have increased in value compared to the original materials used to create them. And in this process of converting money and goods, surplus value is created.
According to Karl Marx, surplus is the difference between the value paid for the worker’s labor and the value of the goods created by the worker. As in the example of the can of Coca Cola above, the value of the worker’s labor may be 7,000 VND, but in reality the part of the worker’s salary is only 3,000 VND, and therefore the capitalist steals, or exploits, 4,000 VND of surplus from the worker.
And he believes that the nature of capitalism is always to exploit and suppress workers, because paying higher wages means workers will no longer depend on the capitalist owner.
Figure 13: Propaganda poster of a Communist Party in Europe in 1909. @Spiderum
5. Capitalist and communist economic models
Those two different perspectives lead to two different economic models.
Capitalists support free market policies because they believe that when resources are freely distributed according to the laws of supply and demand, everyone will get what they want within their spending capacity.
These capitalists support free markets (everyone can sell what they want to sell and buy what they need), free trade between countries (like in ASEAN), free movement (like in the European Union – EU).
So when they talk about freedom, these are the concepts of freedom that they are referring to. To ensure that freedom, capitalist countries allow people to own their own property, such as private land, private wealth. By being allowed to own private property, people in capitalism can accumulate assets to become rich.
Marxists, on the other hand, have a different perspective. They do not see the economic problem in terms of the distribution of goods but in terms of class struggle, that is, the conflict between people of different classes, in this case workers and employers. Employers do nothing but own capital and the means of production, and profit from the exploitation of workers.
They believe that when there are no more capitalist corporations and when goods are distributed equally to each person, there will be no more class struggle, that is, society will be peaceful. To do that, the free market must be abolished, the state must control everything in the economy – that is, the centrally planned economy – and the state will replace the market, distributing resources in the country.
For example, the government would force Coca Cola to produce 120,000 cans per day, then it would calculate how much aluminum it would take to produce 120,000 cans of Coca Cola and order the aluminum factory to produce that amount. In addition, the government would calculate how much ink it would take to paint the Coca Cola cans and, similar to the aluminum factory, they would order the paint factory to supply that amount of ink to Coca Cola.
So, before, Coca Cola calculated all of that, now the government calculates. After 120,000 cans of Coca have been produced, the government will distribute them to each person through the ration card system. That way, the government ensures that everyone will get the same amount of Coca, no one has more or less than anyone else. That will be a fair society.
Figure 14: Excerpt from the textbook for teaching Marxism-Leninism in Vietnam. @Spiderum
In addition, the Communist regime also abolishes private property, that is, ownership of private property, because if people can own private property, they can accumulate to enrich themselves, and thus lead to injustice in society.
In Vietnam today, the state does not allow people to own land. In the 2013 Land Law, Article 4 of the law also clearly states: “Land belongs to the entire people, with the State representing the owner and uniformly managing the state on land” . Thus, no one in Vietnamese society can own land, people only have the right to use land .
Figure 15: Excerpt from the textbook for teaching Marxism-Leninism in Vietnam. @Spiderum
6. Social consequences
A vital problem for the subsidized state in the communist regime is how to calculate the needs of society. This is a difficult thing because first, social needs are always changing.
For example, last year in Vietnam, there was an incident of a fly in a Dr. Thanh water bottle, Vietnamese consumers immediately boycotted Tan Hiep Phat products, so in just one month, the social demand for Tan Hiep Phat products changed, so how will the government react?
This is a difficult problem because it is difficult to change the production organization plan immediately. In addition, since all decisions are centralized in the state, namely Hanoi, the change will be very slow. We should remember that the larger the organization and the farther the center of the organization is from the place where the incident occurs, the slower the reaction will be.
Second, the needs of society are too great, beyond the government’s ability to calculate. If the government wants to calculate the needs of society, it must calculate every kilogram of instant noodles produced, every kilogram of pork sold, every tile for each house. Therefore, in the Soviet Union in the 1960s, the government mobilized the most brilliant mathematicians to build a supercomputer to calculate the needs of society, but they failed.
The third problem is that not everyone wants to be fair. In society, there will always be people who want to excel and earn more money than others. These people will break the law in their efforts to get rich and will be considered counter-revolutionary and punished according to the laws of that country.
And the fourth and most serious problem with the Communist economic model is the determination of prices. Marx’s theory holds that the value of a commodity reflects the value of the labor that workers put into producing that commodity, not the supply and demand of the market.
But in fact, if we ignore the market demand factor, we can hardly determine the exact price of a product, and if we determine the price of a product incorrectly, it will cause the economy to develop erratically.
For example, an iPhone costs only 100,000 VND/unit but rice costs 500,000 VND/kg. But why is that? Consider the following example: A 2 billion VND armored vehicle was dismantled and sold as scrap .
Mr. Nguyen Dinh Chinh spent 2 billion VND and many years to build this armored vehicle, hoping that it would be used in the Vietnam People’s Army. According to Marx’s THT formula , this vehicle must cost more than 2 billion VND, because we have to calculate the value of Mr. Chinh’s labor.
But in the end, its value is only 0 dong. Why? Because there is no demand for that car. The army does not need that car. No one in the country needs that car. So when a person produces a product without following the market demand, no matter how much money is spent to produce that product, how much effort is spent, its value is still 0.
Photo 16: Mr. Nguyen Dinh Chinh and the armored vehicle. @P.Huong- VNExpress
In countries with a centralized economy before 1991, or before 1986 in Vietnam, society constantly encountered difficulties in buying and selling when the prices of goods were very random and did not reflect the true needs of society.
What about the capitalist state?
In theory, a perfect free market is best, but in practice, it is difficult to create a perfect free market. The reason why markets are not perfect is because of asymmetric information . For a free market to be perfect, buyers and sellers must understand each other, but this is not possible in real life.
For example, when you choose a university, you cannot be 100% sure from the beginning that this school is suitable for you. Or many people go to work abroad only to discover that they have been sold into slavery when they arrive abroad.
Therefore, the free market always needs government intervention to avoid social evils caused by information disparity. Countries today, including the US, UK, France, Singapore, Australia, as well as Vietnam, all maintain a market economy with government intervention. The difference between countries is the level of intervention as well as the way the government intervenes.
In the US or UK, it is less, but in Vietnam, it is more. For example, the US government will let the price of gasoline go up and down according to the market, but in Vietnam, the government regulates the price of gasoline.
But there is another serious problem in the market economy: income inequality. To understand this problem, imagine that you are born into a wealthy family. You are also a talented investor. One day, through an acquaintance, you learn that the government is going to build a subway through your district, a poor district.
So you decide to invest in real estate in the district you live in. You spend 1 billion VND to buy 10 plots of land, each plot costs 100 million.
Because it is a poor district, there is a lot of vacant land so the land price is very cheap. After buying, you wait, after a year the land price increases from 100 million VND per plot to 150 million VND, some people ask to buy but you do not sell. The second year, the price increases to 250 million VND per plot, you still do not sell to anyone.
Then in the third year, the fourth year, and the fifth year, the land price increases to 500 million per plot, so you sell it. So you earn 5 billion, 5 times more profit than the beginning. You earn money completely legally, without cheating anyone.
Figure 17: An article about inflated land prices. @Spiderum
But your way of making money is problematic for the economy. First, for 5 years you hold that land and refuse buyers, you have wasted that land resource for 5 years. For 5 years, people who need land for housing have not been able to live there, shops, stores, cinemas, grocery stores could have been built there.
So instead of being used to contribute to the economy and provide housing for many people, 10 plots of land have been lying bare for 5 years, overgrown with grass.
The second problem is that your land holding, also known as speculation, and that of many others has created a shortage of land, resulting in high land prices, or what we often call “real estate fever”. High land prices also push up house prices, making it impossible for low-income people to own a house.
Rich people like you get richer, while poor people have a hard time getting out of poverty. But it’s not your fault at all.
7. Current economic model
After 1991, the Soviet-style centralized economic model completely disappeared from the world. Countries with the old centralized economic model such as China and Vietnam have all switched to a mixed economic model , still a market economy but the state controls key industries (for example, in Vietnam, there are Vinashin shipbuilding group, EVN electricity group, PVN Oil and Gas Corporation, all of which are state-owned companies).
But even though it is a mixed economy, the main model of the economy is still a market economy.
The current market economy has become complicated when people today, with the help of advanced technology, can do business in all kinds of forms, new business models spring up like mushrooms after the rain, 10 years ago we did not have AirBnB, Uber, Grab or Tiki.
These new business models bring us many benefits, but at the same time, they also pose more complex problems for governments such as wealth inequality, information theft, unemployment due to robots… All of these problems, although different, revolve around the same nature of resource distribution in society.
8. Article source
This is an article by author Huskywannfly posted on Spiderum on May 9, 2017.
Thank you for reading my sharing, hopefully it has brought more or less useful value to you.
- Sky -