Some Important Principles of Economics

What would I consider to be some important principles of economics that I want my students to walk away with?

1. Market processes promote long-term growth. The market processes of specialization, exploiting comparative advantage, and creative destruction have benefits that are widely dispersed in the long run. These processes impose short-term costs on those who have invested in physical and human capital made obsolete.

2. Competition is a regulatory mechanism. For example, the ability of a business to exploit consumers or workers is attenuated by competitive forces. Businesses do not like competition. They lobby for policies that stifle competition. Often, such lobbying is successful. Competition is far from perfect as a regulatory mechanism. It is possible to be too optimistic about how well it can work. It is also possible to be too optimistic about the prospects for fixing the flaws in markets using government regulation.

3. Human cooperation is difficult to achieve. The conditions under which large organizations can operate without internal friction are never satisfied. Aligning incentives is more difficult in the real world than it might appear to be in the abstract.

4. Economists need two hands. The conditions under which markets will produce optimal outcomes are never satisfied. The conditions under which a government official can act as an omniscient, benevolent central planner are never satisfied.

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6 Responses to Some Important Principles of Economics

  1. George says:

    Your last sentence is exactly right. However, it is rarely mentioned in Econ classes. We just assume that the top-down mechanism magically works for control and correction.

  2. Dave says:

    I think you forgot that markets result in slavery. Just ask Brad DeLong.

  3. Matt says:

    What is the definition of “exploit” in principle 2 above?

  4. mike shupp says:

    Start from the beginning, with inequalities. I didn’t produce the oxygen I breathed this morning and throughout the day — some of it came from the local trees, and some from trees in Brazilian jungles. I didn’t personally produce the eggs I had for breakfast — they came from chickens perhaps several hundred miles away. I didn’t grow the cotton in my T-shirt. I didn’t mine the copper that became wires in my computer or telephone lines. I didn’t produce the CD playing music in my computer, didn’t even play an instrument in the studio when the recording was made 20 years ago. I didn’t print, or even write, the novel sitting on bed. And, despite my noble intentions, I didn’t play a role in any of the TV dramas I watch or the real-life matters that fill up my morning newspapers.

    Life, in short, involves imbalances. Inequalities. Entropy as the the physicists call it. Modern life involves many imbalances. We can imagine places which are closer to balance than our own, where the hens laying eggs are in our back yards. where the bread and potatoes we ate this morning came from local farms, where the axe resting on our shoulders was hammered out by the village blacksmith, where the only music we hear are the chants at religious services, where life as we live it today will be the same tomorrow and the day after tomorrow and the day after that and …. We have names for such places — Somalia and Zambia, for instance. We do not long to live in such places.

    You have the idea. Imbalances are not to be feared. They are part of the universe. They provide richness which can be — should be — exploited and enjoyed. The more imbalances — the greater the imbalances — we exploit, the richer our lives become.

    On the other hand, there are both inequalities and equalities. Some of us toil in Chilean copper mines, but not all 7 billion of us. Some of us sail the seas, conveying copper to Singapore and San Diego. Some of us refine that copper and shape it for use in computer circuits. Some of us read news accounts in front of television cameras, and others of us watch. We SPECIALIZE. We not only exploit, we actively create inequalities and imbalances — and we praise the people who do this best.

    There is iron in Minnesota but not much cotton, there is wheat but one can go for years without eating a decent kangaroo steak or harvesting a single virgin vinyl LP record. For life to be bearable in Minnesota, we must bring in material from elsewhere. For life to be bearable outside Minnesota, we must have some of the richness produced there. From such considerations, we are led to the notion of TRADE.

    Minnesota grows wheat destined to become bread flour. So does Manitoba (and Michigan and Mississippi and Mexico). So do farmers in Kansas, or such is their intention, but much of their produce becomes instead cake flour. Or it’s turned into brownies or holiday cookies. Perhaps the Kansas wheat is actually better for making brownies than Minnesota wheat. DIFFERENTIATION.

    Or maybe the Kansas wheat is just cheaper. Markets again PRICE COMPETITION.

    And so on and so on. Note the unnoticed constant: human beings, with human minds, have created the riches of the modern world. Whales do not record and market recordings of whale songs. Chimpanzees do not bite into Sara Lee cookies and exclaim “This is GOOD'” Australian foragers 5000 years ago did not roam the continent seeking out pitchblende deposits. Why, even fifty years ago, the brightest of financial experts in the United States would have choked on the very idea of such an innovative marketing scheme as employed by PETS.COM.

    The modern economy ain’t physics, in other words. It isn’t something the Lord God Jehovah handed down or the Satan pushed up to us. It’s a human creation. It’s artificial in some ways, and we’re entitled to tinker with it a bit, and we’re entitled to place some limits on it, but it does some stuff magnificently and we should understand and appreciate it.

    ——-
    Speaking with my extreme Left-Wing hat on, of course. I’m usually much more Middle-Of-The-Roader.

    Some of us toil in Chilean copper mines, but not all 7 billion of us. Some of us sail the seas, conveying copper to Singapore and San Diego. Some of us refine that copper and shape it for use in computer circuits. Some of us read news accounts in front of television cameras, and others of us watch. We specialize. We create inequalities and imbalances.

  5. Lord says:

    A narrow view of competition. A broader view identifies the resulting power inequalities and lobbying also as more competition. Competition is not just what you like, just as evolution is not just progress.

  6. Thomas DeMeo says:

    I’d add that markets and competition require political tolerance of winners and (particularly) losers to work.

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