Did you ever wonder what economists believe? Probably not, unless you are seriously short of things to think about. But economics is a big part of our world, so perhaps it isn’t a waste of time to consider what drives the economic mind. So here, to a modest round of applause, are my “top 10” economic principles.
Economics exists only because resources are limited: The “economic problem” is simple: We can’t have everything we want because our resources are limited. We have limited money and limited time. Therefore, we have to make choices, and economics helps us establish a framework for how to make choices.
Prices communicate value: Most of us don’t like prices, because they represent what we have to give up in order to have something. Yet to economists prices are important because they communicate value and, just as important, they allow consumers to individually adjust to changes in value. So when the price of gasoline rises, that tells drivers each gallon of gasoline is more valuable, and thus drivers are motivated to conserve and use less. But no central authority tells us how much less to use — we each make our own decision.
Specialization plus trade equal progress: Especially in today’s complex world, even the smartest and most vigorous person can’t do everything. We specialize, meaning people select those things they do best and then trade for the other things needed. So, I specialize in teaching, and then indirectly trade with the farmer for food. We’re both better off compared to a situation where the farmer and I each tried to teach and produce food.
Nothing is free: Even clean air costs what is spent on pollution control and prevention. There’s a cost for everything valuable, because all valuable resources have many potential uses.
Profits tell businesses what to produce: Like prices, profits have a negative meaning for most people. But in economics profits are what motivate businesses to produce the products consumers need. Rising profits are the green light for businesses to produce more, and falling profits are the red light for businesses to produce less. High profits in today’s oil market have sparked a rush by oil companies and others to find more oil or to find oil alternatives. Energy users will ultimately be the beneficiaries.
Competition is the consumer’s best friend: Competition, meaning there are many companies vying for consumers’ business, keeps profits in line and buyer desires met. There’s nothing like the fear of losing customers to motivate a business to cut costs and provide what a customer wants.
Income is earned by giving people what they want: Workers who are successful at giving people more of what they value will earn the highest incomes. Bill Gates has earned billions of dollars because millions of people value his computing software. Economics has nothing to say about the subjective importance of these values. That’s for individuals and society at large to determine.
Costs and benefits have big influences on behavior: Economists aren’t so self-centered as to believe that all that matters is the “bottom line,” but we do think that costs (“sticks”) and benefits (“carrots”) are important considerations in most decision making. Increasing benefits or reducing costs will cause people to do more of something, while decreasing benefits or increasing costs will cause them to do less.
Time affects value: When in time a resource is received or given affects its value to the user. Since most people would rather have things now rather than later, a resource loses value the farther it is pushed into the future. To realize this, just ask yourself this: Would you rather have $10,000 now or $10,000 10 years in the future?
Unintended consequences frequently occur: Much of economics deals with what occurs later from an action today. For example, how will changing tax rates today affect tax revenues in five years? Often the future result will be different than the current one. Economics teaches us to look at the long run.
Maybe economists aren’t that strange after all!
Dr. Michael Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.