Thinking Citizen Blog — The Three Most Basic Principles of Economics

Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day

Today’s topic: Stepping Back II: The Three Most Basic Principles of Economics

Last time, the economic literacy test. Did you give it a go? If not, please do so before reading any further. What follows is my answer to the first set of questions from the test, namely, what are the three most basic principles of economics and the best three examples of each. Experts — please chime in. Correct, elaborate, elucidate.

PRINCIPLE #1 TAX IT GET LESS OF IT, SUBSIDIZE IT GET MORE OF IT (aka “incentives matter”)

1. Tax work, get less of it. Subsidize non-work, get more of it.

2. Tax hiring (eg. minimum wage) get less of it.

3. Tax housing (eg. rent control) get less of it.

NB: Judge policies not by the intentions, but by the consequences.

PRINCIPLE #2: PARADOX OF THE INVISIBLE HAND — THE FREE EXCHANGE OF IDEAS, GOODS, AND SERVICES TENDS TO MAXIMIZE PROSPERITY — AKA THE PARADOX OF SELFISHNESS

1. Compare the conditions in North and South Korea.

2. Compare the relative success of Maoist China versus post Maoist China.

3. Compare the relative prosperity of the Soviet Union and the United States.

NB: the supply/demand chart is a graphic depiction of the invisible hand.

PRINCIPLE #3 GOVERNMENT IS NECESSARY: aka “externalities” and “public goods”

1. Every time I take a deep breath in a big US city, I say a prayer of thanks for environmental regulations remembering well the pollution of the late 1960s and early 1970s.

2. Without law and order life would be poor, lonely, nasty, brutish and short.

3. Public education is the key to maximizing long term productivity growth and prosperity for all.

Addendum: “No free lunch” — the real economist (versus the hired gun) looks at all the costs to all the players over all time horizons. “Opportunity cost” — the real cost of doing something is the next best alternative. To me the opportunity cost of not putting education first is, well, infinite.

YOUR TURN — Please share:

a.) the coolest thing you learned this week related to business, economics, finance.

b.) the coolest thing you learned in your life related to business, economics, finance.

c.) anything at all related to business, economics, finance.

d.) anything at all