Core Principle 4 - The Interdependence Principle - No Decision is an Island

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to think like an economist.
This is Think Like an Economist with me.
I'm just a Wolfus and I'm Betsy Stevenson. This podcast
will help you transform your life by learning to well
think like an economist.
Journalist and former economics student nest Turan Tabakoli fa joins
us as we go through the tools that will help
you rethink everything.
So this is excisely we've been going through the four
core principles which we can then use to solve pretty
much any dilemma or decision. And today is the final one.
Yes, today we're looking at the interdependence principle. I think
of this as the economist superpower. We can see the
hidden connections between just about everything.
Let me give you the textbook definition of this principle.
Your best choice depends on your other choices, the choices
others make developments in other markets, and expectations about the future.
So basically everything is connected, which sounds very peace and love.
I think so. And also, when any of these factors change,
your best choice may change too. Let's get straight into
it with an example. We've been talking a lot about coffee.
Let's say nas that you're the owner of a coffee
shop selling coffee and hot drinks and desserts, and it's
summer and people are into chilling out late into the
evening with a drink and dessert. You make extend your
opening hours, say closing at nine pm instead of six pm,
maybe also serving some wine too. But if you were
also considering giving barista classes, but you don't have the
bandwidth to give classes and to extend your opening hours,
remember your time and energy or a scarce resource. So
what you choose about one will impact what you can
do with the other.
And it's not just about you. You need to look
at other people within your market. So in this case,
other businesses like restaurants or bars or competing cafes are
all trying to win your customers. As a result, your
best choice depends on what customers decide whether they want
to chill in a cafe in the evening or at a.
Bar, and so then you also need to factor in
developments in other markets. Say the local museum stay open
late in the summer too, Well, that's good for you
as it means more foot traffic between six and nine pm.
But it could also mean more competition for workers from
the museum, which may drive up your way.
And finally, you want to think about your expectations for
the future. Do you think the economy is going to
pick up that I'm mean more people with more money
to spend, including your business.
So everything is connected, which sounds a bit overwhelming as well.
How does this principle help us in our decision making?
The goal of the interdependence principle is to give you
a structured way to think about these kinds of connections
so that you don't feel overwhelmed.
The idea is to give you a tool for thinking
systematically through the different interconnections at play. The interdependence principle
reminds you there are four types of linkages to think through.
Okay, so I think I've got it. I can see
a bunch of interdependencies, any of which might change my
best choice. So the first of the interdependencies is between
each of my individual choices, so if I stay open
late or if I give barista lessons. The second set
of linkages is between businesses or people in the same market,
say between my coffee shop and my competitors. The third
set of connections exists between markets, so when museums stay
open late, that'll affect my business. And the fourth and
final set of interdependencies occur over time. Is the choices
I make today affect what I'll be able to do
in the future, and my expectations about the future also
shape the choices I'm going to make today.
That's right. And again, if any of these factors change,
your best choice might change too. So let's really hone
in so that we can understand each of these four
dependencies better. The first thing in dependency, it's about dependencies
between your own choices that arise because you've got limited money, time,
and their attention. You can't do everything. You face constraints,
so you have to make choices. More of one thing
means less of another.
Nas you need to choose if you'll spend money going
to see a movie or meeting a friend for some drinks.
Look, there's also only twenty four hours in the day,
so choosing any activity leaves you with less time for
anything else.
And I've got to admit that I have limited attention,
which is a big deal in our age of distraction.
So if I spend all my time focusing on Twitter,
I'll end up neglecting other aspects of my life.
Yeah, that's definitely right. Well. The second interdependencies about dependencies
between people or between businesses, So your choices will also
depend on the choices made by others in the economy,
including other people, other businesses. And the first interdependency, we
were focusing on your limited resources, nas now we're focusing
on society scarce resources. The more others get, the less
there is for you, So other people's choices will affect
you and your best choice.
The easiest way to think about all this is to
look at how buyers and sellers compete. For instance, when
Google hires more coders, that makes it harder for nearby
startups to find new talent. This interdependence between Google's hiring
decisions and those of nearby startups occurs because they're both
buyers competing in the labor market. Look, that's not the
only effect. If your friend gets a job at Google.
That's one less job for you to get. That interdependence
arises because you and your friend are competing as sellers
in the labor market, selling your skills.
So I guess we need to really focus on markets
to understand this second set of interdependencies.
Yes, and we'll be digging into supply and demand in
more detail and upcoming episodes.
Now, let's move on to the third set of independencies.
Remember this four of them. The third one is all
about connections between different markets.
So let's say interest rates go up in the credit market. Well,
then mortgages are more expensive, so you may decide not
to buy a house. So your choice in the housing
mar market depends on the credit market.
Now, when demand for homes full, entrepreneurs often convert family
homes into other uses, such as childcare centers, making it
easier for people to find childcare. So your choice in
the childcare market depends on the housing market.
And the childcare market's closely linked with the labor market
because reliable and affordable childcare makes it more likely that
parents will return to work. So your choice in the
labor market depends on the market for childcare.
See We've mapped out dependencies running from one industry to another,
from the credit market to the housing market, from the
housing market to the childcare market, and from the childcare
market to the labor market.
Put it all together and you can see why I
call this the economist's superpower. We've just traced out how
high interest rates, I mean mortgages are more expensive, so
you're less likely to buy a house, which makes entrepreneurs
more likely to turn homes into childcare centers. And now
you're more likely to put your kid in one of
these centers and go back to work.
The butterfly flapping its wings. Here is a chain in
the mortgage market, and as you think through the consequences,
you realize that it may affect where you live, whether
you work, and where your kids are.
Of course, all these changes play out over time, which
brings us to the fourth interdependency, which is about dependencies
over time.
For just about anything you do, you've got the option
of doing it today or doing it tomorrow. For instance,
if your start up designs a new app, you get
to choose when to bring it to market today, tomorrow,
next week. Employers get to decide when to hire workers
get to choose when to work, and investors get to
choose when to invest. So in each of these cases,
there's always the question is it better to act today
or tomorrow? And your answer is going to depend about
your expectations for the future, and so as those expectations change,
your best choice might change too.
Thinking about time is a big deal when it comes
to your investments. So if you invest in a factory
and getting fit and studying economics, that all these give
you opportunities for the future. So with these examples, you
get the opportunity to produce more in the future, to
be healthier in the future, or to make better life decisions.
As you learn how to think like an economist, your
investment choices today really depend on your expectations about the future.
So it seems that the interdependence principle is about the
question what else.
Yeah, look, there's actually two what else questions? What else
might my decision affect? And what else might affect my decision?
And if right now you're saying what else, the good
news is that was the fourth of our four key principles.
That was the interdependence principle. How do we sum this
all up?
So we've just now been through four different types of interdependencies,
and what these four types do is allow you to
break all those connections that feel overwhelming into four buckets,
thinking about dependencies between your own choices, dependencies between people
are businesses, dependencies between markets, and dependencies over time. When
you put into those four buckets, now as you're going
to feel a little bit less overwhelmed. I hope by
all these interdependencies.
I really am. I think I'm starting to get it.
So are there any things I can practice before we
come back?
Well? I always say that economics is a muscle, and
you'll develop that muscle by working it out. So I'm
glad you asked so.
This week, as you go about your life, as you
make each decision, think about all the different things that
your best choice depends on, and hopefully you'll start to
recognize the power of the interdependence principle in describing all
the ways that our choices are connected.
Okay, that sounds really good. Okay, so we'll be back
next time. Thanks Betsy, Thanks Justin, Ah.
Thanks Nas. I'm looking forward to talking to you next time.
And now we're done with the four or principles. The
rest of this podcast is going to be about, applying
them to important economic decisions.
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