Sunday, April 20, 2014


Good points:
Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.
1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are tradeoffs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.


maxutils said...

Thanks for summarizing the book I'm currently writing. :( The last one, though, is wrong. Stock prices are exactly like betting on football. Except when I bet on football, I kind of know the Raiders are likely to lose. Stock price rises or falls sometimes have reasons ... but largely don't. Overall, there's usually a rise ... but diversity is the key.

allen (in Michigan) said...

1. I wonder. If you separate feasibility from desirability then yeah. But yearning for the impossible doesn't make it more desirable and it is a waste of time.

2. Do tell.

3. Yeah, but they also have different motivations than you do.

4. See 2 and 3.

5. Umm, I think this one requires a bit of context.

6. Not even close. We're never satisfied with our choices as evidenced by pretty much all economic activity. We reflexively want "it" to be better, faster, smaller, bigger and, above all, cheaper. We'll select from among our extant choices as a matter of necessity but the instant a new choice shows up that's in any regard superior we'll all crowd up to the window and press our noses against the glass.

7. Of course I'll respond to incentives in the future. Like I do today and did yesterday. One of those incentives is to promise big, deliver small and have a plan in place to get away with it. Hardly requires the insights I'd associate with a Nobel Prize winner to understand.

8. Sigh. Apparently belaboring the obvious is a sign of intellectual depth.

9. Feasible? Hell, the real problem's how to convince people that sticking the next generation with the bill for the current generation's conceits isn't a good idea. In fact, it's an excellent idea if you have no sense of responsibility, a state which typifies the emotionally immature.

10. See 8.

11. See 8.

12. I'm no mathematician but I believe an introduction to the rudiments of chaos theory's in order. Maybe a couple of teaspoons of Heisenberg's Uncertainty Principle as well. Some phenomena are just inherently difficult/impossible to predict depending on the chosen time frame and precision.

I can predict with a reasonable degree of certainty whether it'll rain tomorrow and I can't make the same prediction for two weeks out. But I can be pretty sure it'll be warmer two weeks from now then it is today.