Business & Economics Decision-making & Problem Solving
The Great Mental Models, Volume 4
Economics and Art
- Publisher
- Penguin Publishing Group
- Initial publish date
- Oct 2024
- Category
- Decision-Making & Problem Solving, Personal & Practical Guides, Skills
-
Hardback
- ISBN
- 9780593720004
- Publish Date
- Oct 2024
- List Price
- $48.00
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Description
From the New York Times bestselling author of Clear Thinking and Farnam Street founder, Shane Parrish.
The fourth and final installment in the timeless Great Mental Models series.
Time and time again, great thinkers such as Charlie Munger and Warren Buffett have credited their success to mental models–representations of how something works that can scale onto other fields.
Mastering a small number of mental models enables you to rapidly grasp new information, identify patterns others miss, and avoid the common mistakes that hold people back.
Volume 4 of The Great Mental Models series delves into the realms of economics and art, presenting more than twenty-four valuable ideas with clear language and style. This book equips you with an understanding of the dynamics shaping our world. It will teach you strategies to leverage these principles and give you a significant edge in the aspects of life you value most.
Some of the mental models covered in this book include:
- Creative destruction: New innovations must sometimes come at the cost of maintaining the status quo.
- Representation: The depiction of an idea can be visual, but it can also rely on symbols or other ideas.
- Genre: Creative expressions tend to be grouped according to socially constructed norms; while a work can play with or bend genre, it can’t exist outside of genre.
The Great Mental Models series demystifies once elusive concepts and illuminates rich knowledge that traditional education overlooks. This series is the most comprehensive and accessible guide on using mental models to better understand our world, solve problems, and gain an advantage.
About the authors
Shane is the founder of Farnam Street, and currently resides in Ottawa, Canada. Farnam Street (FS) is one of the world’s fastest growing websites, dedicated to helping our readers master the best of what other people have already figured out. We curate, examine and explore the timeless ideas and mental models that history’s brightest minds have used to live lives of purpose. Our readers include students, teachers, CEOs, coaches, athletes, artists, leaders, followers, politicians and more. They’re not defined by gender, age, income, or politics but rather by a shared passion for avoiding problems, making better decisions, and lifelong learning.
Rhiannon Beaubien is a writer and the managing editor at Farnam Street Media where she leads the development of The Great Mental Models book series. She is based out of Ottawa, Canada and regularly explores how to apply the timeless ideas behind mental models on fs.blog. She worked at a Canadian intelligence agency for more than ten years and is also an author of fiction.
Excerpt: The Great Mental Models, Volume 4: Economics and Art (by (author) Shane Parrish & Rhiannon Beaubien)
Scarcity
When resources are finite.
It sometimes feels as
if we have temporarily solved the problem of scarcity and replaced
it with the problem
of excess.
-Matt Haig
Economics, as a field, exists because of a fundamental problem we face as individuals, groups, and a species: how to allocate scarce resources to meet limitless needs. All resources are scarce, meaning there is a finite amount available.
Scarcity is like having one pizza for a hundred people at a party. You don't have enough for everyone who wants it. In economics, scarcity means a limited supply of things people want or need, such as money, time, or raw materials. One way to look at the development of human societies over time is as a process of overcoming different kinds of scarcity. Technology enables us to increase our access to scarce resources or to decrease our requirements for them.
Scarcity forces creativity and invention. When we run up against limits, we find ways to increase supply of or reduce demand for resources. While eliminating scarcity is unlikely, technology helps us make resources go further.
Where there is scarcity of something, its price goes up. For a resource to have economic value, it must be both scarce and desirable. If something is scarce, but no one wants or needs it, then it has no or low value. If something is desirable but not scarce, its value is also low or nonexistent. A resource can be valuable purely by dint of being scarce-for example, if owning it serves as a signal of wealth.
Perceptions of scarcity impact our ability to make decisions. Not only does scarcity trigger our biological instinct for self-preservation, it often results in making trade-offs. We become fenced in by perceived limits, whether they reflect actual limits or not.
Experiencing temporary scarcity of something essential can impact our actions for a long time after. For example, someone who grows up in poverty and then, later in life, makes a lot of money may continue to fear running out of money or may retain frugal habits that are no longer needed. The Great Depression is an example of this; many people who grew up during the Depression maintained the same resource-preserving behaviors well after it ended.
Looking back at how our time or money was spent during moments of scarcity, we are bound to be disappointed. Immediate scarcity looms large, and important things unrelated to it will be neglected. When we experience scarcity again and again, these omissions can add up.
-Sendhil Mullainathan and Eldar Shafir
When we lack what we need, we are often forced to make complex, even constant, calculations, which is mentally taxing and leaves less attention for other things.
Scarcity may be harmful to us when it comes to the requirements of living, like food, but that doesn't mean abundance is always good news for our thinking. The kind of abundance many people in wealthy countries experience is something altogether new in human history. Food, for example, has never been more abundant in wealthy countries. Yes, we need to eat, but we don't need to eat a lot of refined sugar. When a resource that has been scarce for much of human history becomes abundant to the point where we can access more than we need or have the capacity to use, we may struggle to stop consuming it.
When one resource becomes more abundant, something else tends to become the bottleneck restricting how much we can consume. Making a lot of money, say, can come at the expense of not having enough time to spend it. We may need to moderate our use of one resource to allow us to realize the benefit of another.
Sometimes, making something more abundant (whether in reality or perception) can go both ways in terms of affecting how much of it people consume. Usually, the more abundant something desirable is, the more of it we consume. Think rice in Asia, bread in Italy, coconuts in Costa Rica-the abundance of something brings its price down. However, if we expect something desirable to be in short supply, we may behave in detrimental ways. The possibility of a short supply of a resource can trigger the urge to hoard as much of it as possible for ourselves, as we saw with the hoarding of basics like toilet paper during the early days of the COVID pandemic.
Scarcity can also perpetuate itself. When access to a resource has previously been severely limited, leading to high economic value, it creates strong incentives to maintain its scarcity, even if the resource actually becomes abundant. Take diamonds: for centuries, their supply was tightly controlled, making them expensive. Now we can grow flawless diamonds in labs, but the industry still works hard to preserve the perception of scarcity. They're not selling diamonds; they're selling the story.
Scarcity is the business model of the luxury sector. Luxury brands take advantage of one particular aspect of psychology: the fact that the more scarce something is, the more we want it. Hermès can make more Birkin bags but chooses not to. Fewer than 100,000 Birkins are made every year, and the process of buying one is famously difficult-it involves either waiting for months or having a purchase history with Hermès. This controlled scarcity is key to the high prices of the luxury sector.
Scarcity as a model is very useful as a tool for second-order thinking. If I get more or less of something, what is the result? More money? Great! What will I spend it on? How will my life be different when I've made those choices? For example, money seems to be the most sought-after resource, since it's key to obtaining many others. Yet lottery winners often end up richer (at least temporarily) but not much happier, having walked into new problems: loss of privacy, risk of exploitation, being valued for your money and not your character, and struggling to balance a huge new responsibility in a way your family and friends see as fair.
In our personal lives, scarcity can be a great motivator. When we think about reducing scarcity, maybe we think about learning new skills to increase our income. Maybe we think about changing jobs to earn a higher salary or decrease our commute. In both cases, we are aiming to give ourselves more of a resource, either money or time, and therefore to reduce the scarcity of those elements in our lives.
When considering how to reduce scarcity, it's equally important to consider what effects that reduction in scarcity might have. As in the example of lottery winners, we need to do a little second-order thinking and say, "Now that I have more money or time, what am I going to do with it?" It's just as important to think, "If I do those things, then how does my life change?"
Many seem to think that having a three-million-dollar net worth or a salary of five hundred thousand dollars would solve most of their problems. They are often surprised to find out that due to lifestyle creep (increasing your living standard to match a higher salary), many people with high salaries spend most of what they make and feel the same financial pressures as the rest of us. Whatever economic rung of the ladder you're on, that cohort has its own financial cues, expectations, and mores. It's about acknowledging that changes in one part of a system will often generate changes in another part.
Reducing the Scarcity of Information
To help us understand just how far-reaching the consequences of reducing scarcity can be, let's look at the abundance of information created by the printing press. Exploring moments in history like this is not the same as evaluating the control we have over our individual choices, and the changes wrought by the printing press were almost entirely out of the realm of being predictable by its inventor. But the printing press is, an excellent example of how changing scarcity can have rippling consequences in areas you might not initially consider.
Before it, manuscripts were hand copied by scribes. Manuscripts were also often written on parchment, and these two factors go a long way toward explaining why there was comparatively little written material around. Parchment, made from animal skins, takes longer to produce than paper, and hand copying is time-consuming. Even if sufficient scribes could be hired to produce a manuscript in a few days, we can easily imagine how many copies a printing press could produce in the same amount of time.
Information, before the printing press, was scarce. This scarcity meant that it required work for scribes to find manuscripts to copy. Christopher de Hamel explains that "the keeping, borrowing, begging, or hiring of exemplars [books to copy] was an important preliminary to the business of writing a medieval book."
Further, hand copying inevitably introduced errors. Although many manuscripts display evidence of review, in that they contain corrections, it is a certainty that not all errors were caught. A scribe was lucky to have one text to copy; having two of the same, for comparison, would have been an inconceivable luxury. Because of the reality that hand copying risked perpetuating earlier errors while also introducing new errors, older texts often were more accurate. The scarcity of manuscripts also meant there was no way of knowing if more, better, or more useful information was out there. There was no index of all known works, no compendium of knowledge.
People did not learn from manuscripts in the way we learn from books today. Manuscripts were not shared widely and thus were not considered a learning tool for the average person. Knowledge was shared verbally and directly. To learn how to do something, you had to be taught by someone who already knew. Most information was passed along orally, and on a need-to-know basis.
The printing press caused a radical change in the availability of written information and its preservation and future utility. "After the advent of printing," Elizabeth Eisenstein explains in her seminal work on the subject, "the transmission of written information became more efficient." Scribes no longer had to wander in search of texts; copies of manuscripts were widely available. People no longer had to learn solely by being taught in person.
These initial changes caused widespread ripples of change throughout Western European society. It's impossible to cover all of them here, but let's look at a few.
First, different theories and ideas could be compared and considered together for the first time. "Different texts," Eisenstein explains, "which had been previously dispersed and scattered were also being brought closer together for individual readers." Can you imagine the power of having so many ideas in one's library? In scribal culture, you would have been lucky to have one book on mathematics. After the printing press, you could have multiple texts on a single subject, allowing for a more complete picture of the state of knowledge in a subject.
The reduction in scarcity of information quickened the pace of developing new information. Putting different texts together highlighted inconsistencies and contradictions and inspired investigation and resolution. "An enriched reading matter also encouraged the development of new intellectual combinations and permutations. . . . And then, later on, the creation of entirely new systems of thought" were added to the pool of available information, Eisenstein notes.
Second, new types of written products emerged. There was "the job-printing that accompanied book-printing. It lent itself to commercial advertising, official propaganda, seditious agitation, and bureaucratic red tape as no scribal procedure ever had." This point is about the creation of structures that go with the creation of new products. More information meant new possibilities for communicating and using that information, which in turn created new categories of information.
Take propaganda. By definition, propaganda involves wide distribution. It is targeted at the masses. Whether it's leaflets, radio broadcasts, or internet memes, propaganda can exist only if there is technology to replicate it in sufficient volume to reach large numbers of people. Propaganda couldn't exist in scribal culture; there wasn't enough potential for reproduction and dissemination. The printing press allowed for a new type of written product, propaganda, that in turn supported the creation of organizations that could use it.
Being able to trace the effects of the printing press on areas such as business possibilities, organizational development, and social structures shows us how widespread the impact of decreasing the scarcity of information was.
Third, books offered educational independence. "There is simply no equivalent in scribal culture for the 'avalanche' of 'how-to' books which poured off the new presses, explaining by 'easy steps' just how to master diverse skills, ranging from playing a musical instrument to keeping accounts." In The Printing Press as an Agent of Change, Eisenstein recounts many examples of how the availability of educational books undermined the guild system and changed the nature of apprenticeship.
More information meant that students did not necessarily require teachers. This in turn put pressure on teachers to contribute something more to education than could be provided in books. It also meant that people could shop around to find lessons that interested them versus relying on what was available in their town. People could develop skills that didn't exist in their area, thereby increasing the availability of a wide spectrum of services.
Competition, therefore, also increased. Before books, if the local blacksmith didn't want to take you on as an apprentice, you would likely be stuck unless you could move to another village. After books, assuming you were literate, there was at least the possibility of teaching yourself the basics (especially because the use of images also increased with the printing press) so that you could start your own blacksmith shop.
Fourth, more people could participate in creating information. "Sixteenth-century editors and publishers . . . did not merely store data passively in compendia," Eisenstein writes. "They created vast networks of correspondents, solicited criticism of each edition, sometimes publicly promising to mention the names of readers who sent in new information or who spotted the errors which would be weeded out." This was an early form of crowdsourcing. Books were not the same as manuscripts; they were not something that was merely copied. They were analyzed, challenged, and developed. The printing press created the notion of an edition, the idea that a text would be updated as new information became available. Increased engagement with the printed word created a feedback loop that worked to further reduce the scarcity of information. "After printing, large-scale data collection did become subject to new forms of feedback which had not been possible in the age of scribes."
Finally, underpinning all of these changes was the way preservation changed. Eisenstein writes, "Of all the new features introduced by the duplicative powers of print, preservation is probably the most important." The printing press transformed the nature of preservation of written text, changing texts from something you tucked away for safekeeping to something you shared widely. Now, you preserved something by printing it on paper, many times, and sending it out into the world. "The notion that valuable data could be preserved best by being made public, rather than by being kept secret, ran counter to tradition . . . and was central both to early modern science and to Enlightenment thought."
Editorial Reviews
“I’m really glad this exists in the world and I can see that I will be recommending it often.”
— Matt Mullenweg, co-founder of WordPress, founder and CEO of Automattic
“If you’ve read Charlie Munger’s Almanack this is the book you deeply crave in its wake. … Learn the big ideas from the big disciplines and you’ll be able to twist and turn problems in interesting ways at unprecedented speeds. … You owe yourself this book.”
— Simon Eskildsen
“This is what non-fiction books should aspire to be like. Informative, concise, universal, practical, visual, sharing stories and examples for context. Definitely, a must-read if you’re into universal multi-disciplinary thinking.”
— Carl Rannaberg
“I can truly say it is one of the best books I’ve ever had the pleasure of getting lost in. I loved the book and the challenges to conventional wisdom and thinking it presents.”
— Rod Berryman
“Want to learn? Read This! This should be a standard text for high school and university students.”
— Code Cubitt
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