To stay away from economics myths, we need to understand how economists see the world.
I aim to introduce eight additional principles and perspectives that further explain the economic way of thinking.
1) Well-Intended Actions Can Have Unintended Consequences
When we think about economics, we can see that bad things can happen even when people mean well. Roger LeRoy Miller, Daniel Benjamin, and Douglass North write a book called The Economics of Public Issues. In it, they talk about how the FDA tries to avoid Type I errors, like drugs being released too early and being unsafe for people to use. However, the extra testing that is needed could lead to Type II errors, like people needlessly suffering, dying, or going through unnecessary pain because the drug was safe but delayed.
It's an example of an unintended effect that football helmets have made more concussions happen. This is because more safety makes people more willing to take risks, which is called moral hazard. Economists have also looked into how to drive a race car. Adam Pope and Robert Tollison showed how the "Peltzman effect" works in NASCAR. It's more dangerous for both drivers and fans because of the stricter safety rules that have caused more accidents on the track.
Economic thinking also lets us look at the bad outcomes of public health policy with a critical eye. The COVID-19 hospital limits, for instance, had an effect on older people and people whose first language is not English. Due to a COVID-19 diagnosis, hospitals let most parents visit their young children alone. However, they had different rules for older adults and adults who didn't speak English. The goal was to keep people safe, but what happened instead was that older people and people of color who were left alone suffered emotional harm and loneliness that was bad for their health. Also, if the healthcare workers don't speak English well, they might not have understood what the patient was trying to say, which could have led to a wrong diagnosis or needless pain or suffering. Parents also had to pay for their loved ones to die alone, which was another cost.
2) The Importance of Property Rights
Aristotle said, "What is common to the most people is treated with the least care. Everyone is more likely to ignore the duty that he expects another to perform." To put it another way, nothing is really theirs when everyone has it. It's called the "tragedy of the commons."
When I first talk about this subject, I usually ask the kids to rub under their desks. They often give me the doubtful look, and some of them tell me they won't do it. Most of the time, they are right when they think there is gum or something else unpleasant under their desks. Student desks are not their own property, so they don't have as much reason to take care of them as they would if it were their own desk in their bedroom.
A common resource good is something like sheep eating grass on an open field that no one owns. It is a resource that can't be taken away and is "rivalrous in consumption," to use technical terms. There is no personal reason to plant grass again once it is gone.
Animals that are in danger of going extinct are a good example of property rights and rewards. Some people say that being on a restaurant menu is the best thing that can happen to a rare animal. Some people are shocked and offended by this, but the reasoning is strong. People own animals that are sold in a legal market. Being an owner gives people a reason to both kill the animal to sell it later and breed it so that there are more to serve at restaurants. In an adjacent avenue, the number of endangered African animals that lived on private Texas farms that let people hunt them grew. The ranch owners charged hunters a lot of money to go on an African tour, so they had a reason to keep the number of animals killed low so that enough could have babies.
3) The Diamond-Water Paradox and Why Athletes, Singers, and Movie Stars Are Wealthy
Economists tried to figure out why water, which is needed to live, was priced so low compared to diamonds, which are mostly used for jewelry. The puzzle was caused by not understanding marginal utility. The Marginal Revolution in economics helped to clear this up. From the start, economists thought that the price of water should be higher than the price of gems because water was much more useful overall. They didn't understand that price is linked to marginal utility, not total utility. "Utility" is just another word for "benefit," and "marginal" means "the one extra." Most of the time, diamonds have a higher marginal value. To put it another way, most people would rather spend a lot of money on a diamond ring than a bottle of water, even though they need water to live. To show this point, imagine someone who is lost in the desert with $1,000. In that situation, they would gladly give up their money for a single bottle of water because, at that moment, that bottle of water has a very high marginal utility—it is the value of their life.
In the same way, popular actors, singers, and athletes get paid a lot more than teachers, firefighters, and nurses, who shape and save lives. That being said, pay is not based on how important the job is. People with the skills to become the next professional athlete, Hollywood star, or pop music star aren't as common as people with the skills to become the next teacher, firefighter, or nurse. Becoming the second type isn't easy, but it is easier and more likely to happen.
Also, what consumers want is very important. Although my family would probably come to my talk at the San Jose Shark Tank (the SAP Center), I don't think many other people would. On the other hand, tens of thousands of people want to see their favorite band perform or NHL hockey games.
4) The “This Will Save American Jobs” Fallacy
In his famous book Economics in One Lesson, Henry Hazlitt says that economists make mistakes when they only look at the short-term effects of a policy and not its long-term effects or when they only look at the effects on one group and not all groups.
Some people say that importing goods hurts the American economy and that "buying American" will keep jobs in the United States. These claims are clearly false. People in the U.S. would gain from trade hurdles or the "buy American" movement, but others would lose their jobs.
As an example, let's look at my car, a Honda Pilot, which most people would think of as a Japanese model. But American hands built it in Lincoln, Alabama. Also, when my Pilot needs service, I don't take it to Japan; I take it to the Honda shop in California, where people from the United States work. People from the United States would have had to bring my Pilot to the United States and unload it at the Port of Los Angeles or San Francisco, even if it had been made in Japan. If we don't bring in goods from other countries, those port workers will lose their jobs.
Also, when politicians call for trade restrictions or tariffs to "save American jobs," the prices of imports go up and the prices of local goods go up because there is less competition. People would have to pay more for the foreign car they want or choose a local car that is cheaper but still more expensive than it would be with free trade. This means that Americans will have less money to spend on other goods and services made in the United States.
5) Consequences of Interfering with the Price System
Prices are signs that tell buyers and sellers how to change how much they buy and how much they sell. Prices help make the best use of limited resources in a free market. There are problems when governments set price floors or ceilings to protect consumers and mess with the way prices work. These rules are meant to protect buyers from being "exploited" or to protect farmers from low prices, but price floors cause shortages and price ceilings cause surpluses.
6) The Importance of the Rules of the Game
The study of how people act when certain rules are in place is what economics is all about. This is just a fancy word for saying that the rules of society affect how people act. There are rich countries and poor countries. They aren't always poor because their people are lazy or because their country doesn't have enough natural resources. Instead, these things are affected by the institutions that are in place, mostly the economic system.
To show this, think about how North Korea and South Korea are different and how they are the same. The geography, history, and language of these two countries are all very similar. In many other ways as well, though, North Koreans are much worse off than South Koreans. A picture taken from space of the two countries at night shows how different they are: South Korea has many lights, but North Korea does not. South Koreans aren't scared of the dark or North Koreans don't hate power. Rather, most of North Korea doesn't have stable power, so only the wealthy and powerful authoritarian politicians and bureaucrats have steady lighting.
It's also interesting to note that some people who move to the United States become successful business owners while they were not in their home country. This is mostly because our systems are better, which gives us more economic freedom. It is easier to become the next "shark" on Shark Tank in countries with economies that allow private property and profits and have a legal system that protects property rights. These countries do better than those with limited economic freedom, such as those with strict taxes and rules, central planning, and few opportunities to start a business.
7) Competition is Dynamic, Not Static
The process of competition is always changing. Companies are always trying to do better at making things and providing services. The market either has several firms that work together or one company that dominates. Since the market is always changing, neither result is inherently better or worse.
A company can beat out its competitors and even go out of business if it can show that its methods are better and better meet customer needs. On the other hand, a company may become the only one in its business or gain market dominance thanks to special government rights, achieving a true monopoly.
The usual story about perfect competition suggests that things stay the same. Another, better way of looking at it is that the economy is always changing. This means that if a company doesn't get special treatment from the government, its rise to the top or ability to get rid of rivals must mean it's good at what it does. Also, it's important to remember that customers are what made the company successful in the first place. Even if the company becomes the "lone wolf," it can't force customers to buy its product or service.
8) Two Ways to Gain Wealth
James Otteson makes a distinction between two ways to get rich in his book Seven Deadly Economic Sins: extraction and teamwork. Extraction is when someone takes something from someone else by force. It is a zero-sum game. A positive-sum game, on the other hand, is when someone pays a seller for a good or service without being forced to. The buyers win in this case because they wanted the good or service more than the money, and the seller wins because they make money.
When founders become very rich or small business owners make enough money to buy expensive things, it's because they help (i.e., give people what they need or want) thousands or millions of customers. To be successful, a private business doesn't have to take money from customers against their will unless it has an unfair edge because of a government-granted privilege.
Conclusion
Beethoven, an Austrian economist, said, "Economics deals with society's basic problems; it affects and belongs to everyone." It should be the main subject that every person studies. From an economic point of view, we can see that even when people have good goals, things don't always turn out well. Interfering with the way the market works can have bad results that were not planned.
A lot of people have strong opinions about politics and the economy, but they don't always know what those views mean for the economy. It is my hope that this article has shed light on a fact about economics and inspired readers to learn more about it.
