1.2 What is economics and why do people cooperate?

The dramatic tale of mining and making a living in Kellogg is a story of cooperation and conflict that affected the people of Kellogg and the environment.

Cooperation and conflict

cooperation

Cooperation means participating in a common project that is intended to produce mutual benefits.

The main actors introduced in the Bunker Hill story—the owners of Bunker Hill and the workers they employed—were not friends. Nonetheless, they worked together to produce metals because—before the fire at the plant—both expected to benefit from the smelter’s operations. In other words, they cooperated by producing something jointly. Unlike its everyday meaning, in economics cooperation does not refer to the goodwill that people often feel while engaging in common projects. Instead, it means participating in a common project that is intended to produce mutual benefits. For example, when someone sells a good or service to another person at a price such that both people benefit, we say that the people cooperated, even though their only reason for trading was their own self-interest and they didn’t have to know about each other.

The people of Kellogg wanted decent jobs, and they wanted their children to get a good education and grow up healthy. The owners of the smelter, who did not live in Kellogg, wanted to make a profit by employing the people of Kellogg and the surrounding towns and by selling the lead, silver, and zinc which their workers produced. To do this, they had to employ people from the local area. Their actions show the gains from cooperation because together they could do better than either party could do on its own.

But there was also a conflict of interest between the workers and the owners. Sustaining a healthy environment for the people of the town required costly systems to filter and capture the emissions of the smelting process. This meant lower profits for the owners, which may explain why they did not repair these systems following the fire. The owners knew that their profits depended on their workers working hard on the job. Their profits would be greater if they could require workers to work harder and accept lower wages.

The environment of the town—and the entire planet—was not an actor in this story of conflict and cooperation. It was more like an innocent bystander. How the interaction between the owners and the workers turned out would affect the quality of the air, water, and other aspects of the environment not only for the people of Kellogg, but also far beyond Kellogg and for years to come.

Figure 1.1 illustrates some of the actors in the story of Kellogg. The three main actors are the Bunker Hill Company, the government of Kellogg, and the citizens and workers of the town, including Bill Yoss, the welder, and his family. The green represents Kellogg’s environment, which is called the biosphere. Arrows show the relationships between the actors or between the actors and the environment. For example, the red arrow at the top right shows pollution moving from Bunker Hill to the biosphere, and the green arrows show the natural resources that Bunker Hill converts into lead, zinc, and other metals.

The arrows also show that both Bunker Hill and its citizens and workers pay taxes to the government and are affected by environmental regulations issued by the government. The blue arrows show that citizens work for Bunker Hill and vote, pay taxes, and work for the government. The blue arrow labeled “Care, household work” shows that people also perform those services for their own household (and possibly for other households in Kellogg, too). Follow the steps to see the connections between the different parts of the economy.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1

The economy of Kellogg in the biosphere.

Figure 1.1 The economy of Kellogg in the biosphere. Think of the figure as a map that includes the main connections among the actors, but which leaves out a lot of detail.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1a

The role of the government

The households and the firms in the economy are regulated by and participate in the government of their town (and the state and the country in which they live). Some household members work for the government of Kellogg and are paid for their services. Firms like the Bunker Hill Co. provide goods and services to the government. The government taxes households and firms in Kellogg and provides public goods that everyone uses, such as the roads on which people drive, the schools that children attend, and public amenities like parks and recreation centers.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1b

The biosphere and physical environment

We start with the biosphere. The biosphere and physical environment contain and form the basis of all economic activity.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1c

Adding households

Now consider households, like those of Bill Yoss’s family. They comprise the people who work in the economy and who use goods and services provided by other people. They also provide care for other members of their households as well as members of other households, such as parents, children of friends and family members, and so on. Members of households use air, plants, and animal life to sustain themselves, and they produce emissions.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1d

Introducing firms and production

The people in households provide labor to firms, such as the Bunker Hill Company and other firms that are part of the economy. The Bunker Hill Company and other firms use natural resources from the biosphere and emit pollution that the biosphere must bear. These firms produce goods and services that households purchase at market prices. They pay wages to their workers (from the households). They also provide goods and services to other firms that use them in their production processes.

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https://books.core-econ.org/uoe-101/01-02.html#figure-1-1e

The economy and the biosphere

The previous steps showed how the biosphere, firms, households, and the government formed the economy and biosphere of Kellogg, Idaho. We can abstract from a given town or city, and think about the role of each aspect of the economy—firms, households, and the government—and think about them embedded in the biosphere. The figure allows us to understand how the economy and the biosphere relate to each other in towns, cities, and countries across the world.

Economics

economics

Economics is the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this changes over time and differs across societies.

The story of Kellogg and the figure illustrating its economy is our introduction to economics, which is the study of how people interact with each other and with the natural environment in producing their livelihoods.

This definition has three parts:

• “producing their livelihoods”
• “interact with each other”
• “interact with the natural environment”.

Let’s examine each part of this definition in terms of the Kellogg story.

The people of Kellogg “produce their livelihoods” by taking actions, whether paid or unpaid, that enable them to have the food, clothing, housing, healthcare, childcare, and eldercare on which their quality of life depends.

People in Kellogg also “interact with others” to produce their livelihoods. They work for companies (such as Bunker Hill) in return for wages, and their work pollutes the environment. Other interactions include the following:

• People (members of the workers’ and owners’ families) interact with sellers in supermarkets when they shop to acquire the food and other goods that they live on.
• The Bunker Hill Company sells in the market for metals, interacting with buyers of lead, silver, and zinc.
• Family members care for young people and elderly people in their own families and for other families.
• The government regulates, taxes, and supports the actions of people like Bill Yoss and firms like the Bunker Hill Company.

In Kellogg, “interacting with the natural environment” includes Bunker Hill’s pollution of the environment and the impact of workers’ and other people’s use of carbon-based fuels to operate their vehicles and heat their homes.

The idea of interacting with others and with the environment illustrates an important principle of economics called the interdependence principle: The decisions people make and the outcomes people receive depend on the actions people take and the repetition of actions that other people take, perhaps in response to the actions of others. We live in a world in which our decisions affect other people.