The Importance of Economics (And Economic Thinking)

When I was a young socialist (yes, you read that right), I had a lot of opinions about what people and society should do with their money. But I didn’t know a single thing about actual economics. No, not one thing. I was completely ignorant even that I should know things about economics, I was deep into the realm of Rumsfeldian “unknown unknowns.” I didn’t know what I didn’t know, and this meant that there was no way for me to learn on my own and teach myself to a better understanding. I was ignorant of my ignorance, which I now know is itself a well-understood and studied phenomenon: part of the condition of being ignorant is that you don’t know you’re ignorant. It’s kind like how part of being crazy is that you don’t know you’re crazy.

There’s even a fancy name for it:

This is a topic worthy of discussion in its own right, but I just want to mention it to paint a picture of where I myself have been regarding the topic of economics. This abstract basically describes my level of economic understanding in my 20s:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

In essence, we argue that the skills that engender competence in a particular domain are often the very same skills necessary to evaluate competence in that domain—one’s own or anyone else’s. Because of this, incompetent individuals lack what cognitive psychologists variously term metacognition, metamemory, metacomprehension, or self-monitoring skills. These terms refer to the ability to know how well one is performing, when one is likely to be accurate in judgment, and when one is likely to be in error.

For example, consider the ability to write grammatical English. The skills that enable one to construct a grammatical sentence are the same skills necessary to recognize a grammatical sentence, and thus are the same skills necessary to determine if a grammatical mistake has been made. In short, the same knowledge that underlies the ability to produce correct judgment is also the knowledge that underlies the ability to recognize correct judgment. To lack the former is to be deficient in the latter.

If you would like to know more about the Dunning-Kruger Effect, you can read the Wikipedia article here, view and download the full paper here, or read it online in html here.

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So there I was, Dunning-Krugered as hell about economics. So what happened? What always happens with me: I started arguing with people. I took my DK’d self with my DK’d ideas, and brought them all cocky and manly like to other nerds and wonks, and got my ass severely kicked and handed to me over, and over, and over again, in debate after debate. I literally cannot count the number of debates I lost, and how many times I didn’t just lose a debate, but basically got woodshedded like a red-headed stepchild.

[This was in my mid-20s, after a five year stint in the army, while an undergraduate at Columbia University]

But two things have saved me in life from having this sort of thing destroy me and ruin my self-confidence: one, that I can take a loss, and two, that I can learn from one. I would walk home from an argument outside of class or outside a bar, swearing and muttering to myself all the way home (on the inside, I hope). Mostly for being so stupid and so wrong, and occasionally, for being so arrogant. And each time, mad as I was, I was even more grateful, for having been so violently and suddenly disabused of such erroneous ideas. As Sam Harris once said: I don’t want to believe a wrong thing for one minute longer than I have to. So I welcome intellectual challenges and people who can teach me something, or better yet, correct any wrong ideas I currently have.

Of course, as time went on, I sought to educate myself. Once I realized this was an intellectual weakness of mine, I read an uncountable number of articles on economics, sought out people who knew more than me (now to ask questions, rather than debate), and read a few foundational econ books. I realized through the course of these conversations that while I considered myself a policy wonk and a politics nerd, I was lacking a fundamental pillar of understanding these issues: that of basic economics. I realized that I was functionally illiterate in one of the core areas necessary to understanding our world, and to having an educated opinion on political topics. It was one of the most humbling intellectual realizations of my life, and maybe the first real moment and topic where I found myself sitting in silence with an awareness of my own profound ignorance of something so obviously important, if you actually knew anything about the world.

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The reason I’m writing this essay is that I have come to realize that my own ignorance, while shameful and appalling, is not unique. In fact, I think it is the norm. Now just like I recently stated that I’m no mathematical genius, I’m also no economics genius. I’m not an economist, even by hobby, let alone trade. I’m no expert on economics or economic theories, even a lay expert or hobbyist. But here’s what I’ve come to fear/realize: I simply know basic economics very well, and that means I know more than 95% of people I meet. And I don’t mean 95% of people in the mountains of Arkansas. I mean 95% of college educated people with otherwise sophisticated and nuanced understandings of the world. I mean that just as I made it through high school and college without a single day of economics education, so does pretty much everyone else. Literally everything I’ve learned about economics has been self-taught. And in that regard, I think “the system,” whatever that means, our education system, society writ large, whatever, has failed me, and continues to fail current and future generations of Americans. I mean that you literally cannot have a reasonably educated and sophisticated understanding of politics and society without an understanding of basic economics. This is a disservice to all of us as a general citizenry, when most of our educated, voting adults pretty much know nothing about economic fundamentals.

And it’s not just politics. It’s personal. Understanding basic economic concepts has drastically improved my thinking and decision making in exponential, innumerable ways. I literally cannot imagine my life, thinking about politics, analyzing situations, or making decisions without knowing about things like opportunity cost, marginal utility, economies of scale, or comparative advantage. I cannot imagine how I could effectively analyze or understand pretty much anything about the world without these conceptual tools. Economics is in a very real sense an exercise in pure logical thinking. It’s about as close as you can get without using Actual Math or formal logic. That’s because it requires logical formulations and connections to make sense. It requires definitions and axioms (for example supply and demand and their effect on each other). It requires clear formulations and connections that can be reduced to formal logic terms such as “If A, then B” or “If A, then not B” (ceteris paribus reasoning, for example). You have to logically connect concepts and conditions to understand how they work together. It’s not a matter of interpretation, there is a right and wrong answer, and the strength of your logic determines your ability to find the right one, or to be as accurate as possible based on the available data. This is the beauty, the elegance, and the power of economic thinking.

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A couple of examples from one of my favorite authors:

1. That which is seen, and that which is unseen

A very common economic fallacy, as well as general human cognitive error, is to evaluate a choice or an action by a very obvious (usually positive) effect, but to ignore a less obvious (usually negative) effect, which may precisely offset or even be greater than the apparent effect/benefit. Here’s an example: a trade policy, tax policy, subsidy, or other government action that benefits one group of people, let’s say farmers. Giving a generous tax break or subsidy or trade protection to this one group, on its face, at first blush, seems like a great thing…look at all the farmers we’re helping. Look how much better off they are. Isn’t it wonderful? How can you be against it? Do you hate farmers…?

What most people don’t see, because they’re not used to economic thinking, is that the benefits are obvious because they’re focused on a (relatively) small, discreet, graspable group of people, but the costs are distributed to everyone else in society. We may enact a policy that will help farmers, but the cost of that policy is that the cost of their goods rises for everyone else, or that the rest of us pay for their subsidies in other ways, perhaps in higher taxes. This is a tradeoff, and perhaps it is one we want to make, but most people are not even aware that we are making it, and therefore the tradeoff is not debated or factored in when crafting this policy. And we certainly ought to discuss if we do in fact want to make any of the necessary tradeoffs for any particular policy.

Again, benefits are focused, but costs are disbursed. We have to realize this whenever we craft any sort of economic policy. Everything has to be paid for. Yes, everything. Literally, everything. And we rarely ask what the costs are for our particular pet projects, and are typically discouraged from doing so if we try to bring it up. This actually raises another point, that everything has a cost, and we can’t just do everything that we’d like or that seems like a good idea, because we can’t afford it. That’s its own issue, but related to this one. If more people thought about the tradeoffs and costs involved in any particular policy, I believe most people would be a lot more conservative in their pet projects designed to help this or that particular group.

This is a long essay discussing this topic, but you can understand the principle well enough just reading the introduction and Part I.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come — at the risk of a small present evil.

In fact, it is the same in the science of health, arts, and in that of morals. It often happens, that the sweeter the first fruit of a habit is, the more bitter are the consequences. Take, for example, debauchery, idleness, prodigality. When, therefore, a man absorbed in the effect which is seen has not yet learned to discern those which are not seen, he gives way to fatal habits, not only by inclination, but by calculation.

This explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters — experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.

2. Comparative advantage

One thing you will find in common with all professional and lay economists is a universal disapproval of trade barriers, tariffs, and protectionism. This is not because they don’t value the farmers, merchants, and tradesmen of their own country, or that they do not have proper patriotic feelings. It is because they understand basic and universal economic maxims. One such maxim is that every country, society, and culture has its own unique advantages for producing goods, and we all benefit when everyone uses them as freely and as maximally as possible. Conceptually, there is a bit of “what is seen and unseen” in this as well, but has the additional condition of specific advantages residing in each discreet group of people.

A very easy example of this is the environmental conditions for growing natural produce. It is probably possible to grow oranges, for example, in Minnesota. You could grow them for a few months in the summer, and conceivably build indoor facilities to grow them indoors year-round. But though such a thing is economically possible, it is not wise. We could do it if we tried, but it is obviously much more advantageous to everyone if oranges are grown in a climate naturally suited to their thriving, all year long, say in Florida.

As The Man Himself put it:

Labor and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labor that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.

Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labor withstand the competition of foreign labor when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition?

To take another example: When a product—coal, iron, wheat, or textiles—comes to us from abroad, and when we can acquire it for less labor than if we produced it ourselves, the difference is a gratuitous gift that is conferred upon us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Simply put, every society and region has its own economic advantages, whether it be advantages of nature, a particularly developed and sophisticated industry, a highly skilled workforce (generally or in specific areas), cheap labor, the list is endless. When we do not restrict trade between all of these splendidly diverse regions and people, we all benefit, by everything being cheaper and more readily available in greater quantities than would be if we institute tariffs or other trade barriers to protect our own “hard working, indigenous” whatevers. Protectionism is, economically speaking, always bad, because it raises the cost and limits the supply of everything it touches. Again, this is not advanced, mathematical economics, accessibly only to calculus geeks. This is basic, common sense knowledge that allows us to maximize everyone’s economic and material well-being, and saves us from costly errors harming not just society in general, but the very people we seek to protect with trade barriers.

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As I said, I’m no economic genius. I couldn’t calculate a supply and demand curve to save my life. But I know what one looks like, and have seen plenty of them. I can’t punch up a formula to calculate producer surplus or consumer surplus, but I know what they are, conceptually, and this basic economic knowledge allows me to rationally analyze the world around me, political decisions, and economic decisions on both a personal level and a societal level. I don’t consider my economic understanding to be advanced, but it is still greater than almost everyone I encounter when I discuss economic subjects. I think my grasp of economics is the bare bones baseline required to understand our world, and I think it’s a crime that we seem not to care about it as a society, and that we completely neglect it in the education of our young people. To have a functional, rational society, everyone should have at least a basic understanding of democratic and republican principles, our constitutional history and framework, and the core economic principles that dictate the success, failure, and cost of our political policies.

If I could snap my fingers and change one thing about our society, it would be to require at least two years of basic economics in high school and one in college (non-math intensive for the math-challenged), as a pillar of being an educated citizen with an ability to fulfill your basic civic duty. Until we make basic economic literacy a pillar of our education system and civic culture, we are likely to continue the economic and political deterioration of the last few years, and eventually, the consequences are going to catch up to us, in dramatic and painful fashion.

“I was surprised to find myself so much fuller of faults than I had imagined, but I had the satisfaction of seeing them diminish”

Ben Franklin

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I leave you with this: a great text, from The Great Man Himself. I have a few other recommendations for economics reading, more short essays with great economic realizations and truths that you can get through in one sitting, but I’ll save those for later.

Farewell, until next time.

Economic Sophisms PDF

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