Basic Economics Is Intuitive
Economists often off-handedly remark that basic economics is “counterintuitive.” In one of the papers he presented at GMU, Scott Sumner has a whole appendix on “Why is economics so counterintuitive?” Even my hands aren’t clean here: In The Myth of the Rational Voter, I wrote that “…Smith’s thesis [the harmony of private and public interest] was counterintuitive to his contemporaries, and remains counterintuitive today.” However, the more I think about it, the more I’m convinced that if basic economics seems counterintuitive, it’s being poorly explained. If Bastiat could make econ intuitive, so can we.
To make my prima facie case, I’m going to present a few allegedly counterintuitive economic propositions, then explain them at a 6th-grade level.
1. Counterintuitive claim: Free trade makes countries richer, even if the other countries have big advantages like cheaper labor or more advanced technology.
Intuitive version: We’d be better off if other countries gave us stuff for free. Isn’t “really cheap” the next-best thing?
2. Counterintuitive claim: Strict labor market regulation is bad for workers.
Intuitive version: Employers don’t like hiring people if it’s hard to get rid of them. Suppose you had to marry anyone you asked out on a date!
3. Counterintuitive claim: Egalitarian socialism creates poverty… even starvation.
Intuitive version: If everyone gets the same share whether or not they work, you’re asking people to work for free. People don’t like working for free, especially when the work isn’t very fun. (This is my response to Sumner’s Great Leap Forward Challenge: “But how do we explain to school children that millions had to starve because of a policy that encouraged people to share?”)
4. Counterintuitive claim: Prices are determined by supply and demand.
Intuitive version: If the good were free, consumers would want a lot, but producers wouldn’t feel like making much. If the good cost trillions of dollars, producers would want to make a lot, but consumers wouldn’t want to buy any. In between there’s got to be a price where consumers want to buy as much as producers want to make.
To deflect charges of cherry-picking, I’ll open myself up to a challenge: State any proposition in basic economics in the comments, and I’ll make it intuitive in a follow-up post.