In part, understanding economics comes down to imagining 100 people living on an island. If 50 were involved in farming, you’d have 50 left for everything else. Then if conditions improve (say, through technology) to where only 40 were required to work in farming, 10 more would be available for everything else. That’s the core theory of efficiency. As fewer people are required to produce the desired outputs in one area, the price and cost of those outputs are lowered. That saved money and those workers are then free to pursue something else. And that something else becomes a rise in the standard of living.
Let’s use an example, if those freed people start a hair salon, then everyone gets food and beauty for the same price as food. (Remember, the cost of food decreases since it requires fewer people to produce. That saved money and those workers are then directed to salons.) You can extend this principle to the modern world. If we taught everyone to cook—and changed common culture to favour home cooking—all the additional money spent on restaurants would then be saved and those workers would be free to do something else (say, work in health care).
Needs vs. wants
Any increased production in industries that provide for basics leads to money and workers becoming available for luxuries, which is great. If we only need 40 people to produce the goods and services that relate to basic needs, everyone else works for products and services that pamper us (like, massages). But obviously basics come first.
Basics include food, shelter, clothing, utilities, and safety. And it’s important to keep the price of these items down so everyone can easily get by. But two things can prevent this from happening: cultural attitudes and market intervention.
Cultural attitudes
If culture says restaurant food is better or that weddings cost $40,000, people misinterpret the meaning of basics. That’s how you get 60 year-olds on skid row because they overspent on their kid’s nuptials. Unfortunately, no one has control over what society feels and even the best of intents can become ruined by belief. So even a super-efficient system would result in society having the poor because of what some people think. And remember, cultural attitude doesn’t mean one size fits all. Many ethnic groups live their own way financially, and so do many families and friends.
Market intervention
If everyone needs water and it’s only provided by the government, the cost of wages and the water company’s efficiency greatly affect price. Same goes for any monopoly. Take this deeper and you’ll see that outside of food and clothing, most basic needs are affected by public intervention. Shelter is built according to regulations and subject to property tax. Utilities are all regulated. And minimum wage affects the cost of my burger.
In Canada, education is only provided by the government. If they say it takes four years and $50,000 to learn about business, that’s what it takes. And if they overpay for fear of strikes or to appeal to voter loyalty, that too is just the way it is.
Summary
In general, there are two economies: one for basic needs and another for luxuries. Government is heavily involved in basics and luxuries are greatly affected by culture. In a perfect world, governments would operate efficiently by not overpaying for labour or adding unnecessary regulations, and people would divorce themselves from certain aspects of culture to purchase only what they can afford. Then again, the world was never intended to be perfect and sometimes we drive each other crazy.
Note: See the article Emotional Quality.