What is Economics?

A wonderful question indeed!

What is economics? I do not think there is one definition. People from different professions with different viewpoints would have their own definition on this, each not being wrong. We will look at what our reputed sources say followed by own definitions.

Wikipedia gives the source of its definition at Online Etymology Dictionary. It defines it as

1530s, "household management," from L. oeconomia, from Gk. oikonomia "household management, thrift," from oikonomos "manager, steward," from oikos "house" (cognate with L. vicus "district," vicinus "near;" O.E. wic "dwelling, village;" see villa) + nomos "managing," from nemein "manage" (see numismatics). The sense of "wealth and resources of a country" (short for political economy) is from 1650s.

To put in simple words, the above definition means "managing a household". Another definition of economics albeit with a different usage reported at same source is

as a term in advertising, at first meant simply "cheaper" (1821), then "bigger and thus cheaper per unit or amount" (1950).

 Answers.com defines it as:

The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.

Another one that is worth noting from ingrimayne.com is:

One of the earliest and most famous definitions of economics was that of Thomas Carlyle, who in the early 19th century termed it the "dismal science."

At the turn of the century, Alfred Marshall's Principles of Economics was the most influential textbook in economics. Marshall defined economics as

a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.

I have had enough of them. Let me put forth my views!

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As I opened my textbook on economics written by Harvard Economics Professor Gregory Mankiw, I found another one. Well, you may check Gregory Mankiw's blog on interesting economic reads and I highly recommend his book if you want in an easy to understand language. Economics is no doubt all about supply and demand. The definition given there was

Economics is the art of managing unlimited demand (human wants) with limited supply (resources).

Sure, that one did make sense and was an interesting one. Then our professor of economics, Prof. Azhar Khan, who teaches at Gokhale Institute of Political Economy, Symbiosis Institute of Business Management and Symbiosis Institute of International Business (all located in Pune) came with a definition of his own and was by far one of the best teachers I have ever had. It was

Economics is the sum effect of social structure, historical accidents and prevailing social attitudes.

In the first lecture, his elaboration was convincing. India's social structure of castiesm which ensured a few perennially rich and few perennially poor, separation of Pakistan which was a lucky historical accident, and the prevailing social attitudes where youth philosophy comes in the picture would all determine India's economy.

In my Std. IX, I remember Economics as a subject coupled together with Geography (Oh, see the effect, I still write subject names in capitals) in one textbook. It was in the syllabus of Maharashtra Board in India. It had a very simple definition that I found appealing.

Economics is the study of sources of income.

That's it! That's how economic problems and financial problems differ. If you are jobless, it is an economic problem as there is no source of income, if you have money in bank but cannot withdraw it out due to bank holidays, it is a financial problem. Sure, that was at school level but it help explained a lot. Sectors of the economy like services, agriculture, manufacturing, trade, etc were a part of economics whereas jargons on stock market, money markets, bonds, equity, derivatives, etc. were a part of finance. The lesser said on accountancy or book keeping, the better!

Does Investing in Real Estate Make Sense?

NO!

The question is answered. How? That's what the post is all about. Just spare 4 minutes of your life's time to read a counter view on why it does not make sense to invest in real estate.

I am sure, most of the people in the world have hypnotized you by now that investment in real estate is the best investment. Especially, if you are a visitor from the eastern countries, particularly India, I can understand your emotions for real estate. Put all your emotions aside, and let logic and rationality come into the fore of your mind when it comes to money matters.

First, just ask a question to yourself, are these fans of real estate investment financially literate? Probability is that 9 out of those 10 brains you know would not be aware about what goes in he capital markets, stock markets, etc. All their brains know is cash in, cash out without any concern for time value of money.

We have been brought out to think that real estate is an asset, not a liability. It is both, let us elaborate on the difference which is more important for you. For living, you and your family would not need more than a 2BHK (bedrooms, hall and kitchen) or a 3BHK flat. Sure, that is an asset, or rather a necessity as you do not have to worry about rents and any conditions laid out by your owner. But, if you possess any more property than your necessity of living, it is all a liability.

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How? The taxes to be paid, the interest to be paid in case if it is on loan amount, it's maintenance, etc. You never know what's going on the land you bought, is it safe or not? It does not ensure you cash-in-hand. Buying property and selling off is another tiresome process which would involve real estate agents or brokers, their fees, selling it would take some time depending on the demand supply equations, real estate agent's commission once again.. Rather than this, think if you can potentially surf the internet and make yourself more financially literate!

Now, how exactly is that a liability? Our assets and liability are measured by cash value, where these definitions have come from accountancy. If you are aware, economics>finance>accountancy. Robert Kiyosaki's book, 'Rich Dad Poor Dad' offers a practical and different world-view of assets and liability than the normal. It is based on the cash flow and not cash value. Out of the 3 major financial statements that a corporation gives out every year, viz., Income Statement (also called Profit and Loss Statement), Balance Sheet and Cash Flow, Cash Flow has it's own and highest importance for the financial community. And that is why, I think, measuring assets or liability based on cash flow  is more important than anything else.

If you own a house, which is not rented, or rather no one is ready to take it on rent, you are unable to maintain which depreciates value, and you are supposed to pay property tax, water bills, electricity bills howsoever small they may sound, it is not an asset from any viewpoint. It is a liability as there is no inward cash flow involved although cash value appears high.

Moe importantly, cash is the emperor whereas profit is the king is an oft repeated statement in the world of finance. You might think that it would be profitable to sell it in the long run (with all the costs), but it would still involve time and no cash-in-hand which is more important. Putting the same amount in banks savings account, time deposits, investment plans, could have potentially turned out better with lesser hassles as you could do all this with the help of a few clicks!

If you believe in the hypothesis that real estate/property rates never fall, think again. Property rates have seen a steady downfall in UK and US! Nothing is recession proof.

Most importantly, if you believe there would be a real estate boom at some time in the future, which I am sure there would be one, a smart move would be to buy stocks of cement companies, lock manufacturing companies, paint companies, furniture companies, real estate companies, retail sector, FMCG sector, as all of it is bound to rise as real estate goes up! It would take only a few clicks to do this and you would be helping the economy of your country as well. How? The very money that you would put in shares or other financial instruments would be used by these major companies to fund their operations. They would become stronger, grow and create more job opportunities in future. On the contrary, what would a dead investment in some lone land at a far off place contribute to the economy except that agent's commission and a minuscule tax for the government?

And finally, there are hoards of people looking for buying property when not needed who are financially not literate. Leave it for them, they would keep buying! I have always wondered why those of my friends and acquaintances investing in shares have had a blind eye towards real estate... A few reasons were listed, a few would be written later in coming blog posts, so stay subscribed or keep visiting!