At Least Four Reasons to Learn Economics
There are many reasons to learn economics, preferably in formal courses and preferably at an age where learning new things is easy. I count at least four.
The first reason is that economics is essential to understand the social universe. Basic economics is necessary to understand how prices are determined by supply and demand, if only on black markets when regular markets are prevented from working. (My EconLog post “A Frequent Confusion and the Yo-Yo Economic Model” can be thought of as short and incomplete introduction.) There is more than that in the social universe. Without some knowledge of economics, one will have problems reading many books of political philosophy or with major political and social implications—say, philosopher Robert Nozick’s Anarchy, State and Utopia, an academic best-seller of the mid-1970s, or Anthony de Jasay’s The State. It is not an acceptable exit for a reader who cannot understand such books to say that the author is wrong.
The second (related) reason to learn economics is that it is otherwise impossible to think in an organized way about public policy or the fundamental issues underlying it, whatever your final opinion will be. For example, suppose that a cost-benefit analysis realized by the government shows that the cost of expropriating low-rent apartment buildings on a given urban block will be $1 million, mainly reflecting the trouble of poor renters forced to move, while the benefits will be $2 million in profits for the owners of the mall to be built there. How can we say that this is a good policy or a bad policy? Can we really compare these costs with these benefits, and if not, why not? Another example of question one cannot seriously answer without some economic reasoning is, What happens if the expected punishment for shoplifting (expected fine or jail term multiplied by the expected probability of being caught) decreases? Gary Becker, laureate of the 1992 Nobel prize in economics, contributed much to the analysis of this sort of issue. (See Becker’s Nobel lecture; see also Jason L. Riley, “San Francisco Has Become a Shoplifter’s Paradise,” Wall Street Journal, October 19, 2021.) In fact, economics, which is a method of analysis, is as useful to study “social” as “economic” issues.
We can relate this to an important point made by James Buchanan, who received the 1986 Nobel prize in economics “for his development of the contractual and constitutional bases for the theory of economic and political decision-making,” as the Royal Swedish Academy of Sciences summarized its decision. In his book Why I, Too, Am Not a Conservative, Buchanan stressed the importance of understanding “simple principles of social interaction”:
Institutionally, classical liberalism depends critically upon the workings of markets, and without either a generalized understanding of basic economics or a widespread willingness to defer to the warnings of those wo do understand, maintenance of any liberal order becomes impossible.
The third reason to learn economics is that it opens a door to the realm of knowledge. Any science or theory-laden field of study opens a door to knowledge because everything is related to everything in some way. One has the choice of which door to use. However, economics is one of the best entrances as it is closely related both to social phenomena we observe daily around us, and to other important fields of social study such as philosophy, political science, history, and statistical analysis.
I would also say that economics is closely related to the realm of aesthetics not only because learning is beautiful, but also because the commercial adventure of mankind has been magnificent. Economics explains how markets liberated individuals from societies based on stifling customs or coercive commands. On this, you may want to read A Theory of Economic History, a small book by John Hicks, another Nobel economist, which also provides an introduction to economic reasoning.
A fourth reason why one should learn economics is that it helps earn a living better than many other fields of knowledge. Some analysts, including George Mason University economist Bryan Caplan, have argued that the main if not the only practical benefit of a college degree (at least outside narrow technical fields such as accounting or nursing) is to signal to potential employers that the new graduate is patient, disciplined if not submissive, and hard-working, not that he actually learned anything useful. But an economics graduate (at least from a good college) did learn something about the “real world,” even if he may not immediately realize it. He or she has acquired useful tools of analysis that help them think about any social (including political, narrowly “economic,” and financial) phenomenon.
The economically literate person cannot easily utter just any social nonsense. Perhaps this should count as a fifth reason to learn economics. My short EconLog post “Logical and Praxeological Impossibilities” gives some simple examples.
It is true that learning economics has a cost: the time, mental energy, and other resources one spends on studying economics cannot be used to pursue other interesting or lucrative activities. This observation points to one of the first lessons of economics, a lesson that becomes more obvious after one progresses in the field. The lesson is that resources (labor, capital, land, time) and what is produced with them are scarce compared to unlimited human desires. It follows that useful or desirable things or activities have what is called an “opportunity cost.” The opportunity cost of something lies in the other opportunities one has to forego to get it or do it. Producing or consuming more of something means that less of something else will be produced or consumed.
There is much more to discover.
Jan 13 2023 at 8:29am
I think your point #2 has an important element, namely that economic action has an aesthetic quality to it. Cost-benefit analysis is helpful as far as it goes, but given the multitude of different ways one can engage in exchange and production, CBA alone cannot tell one what one should do. Ultimately, that appeal is to more “loose, vague, and indeterminate” criteria: what is aesthetically pleasing.
Since beauty is in the eye of the beholder, this sort of aesthetic criteria cannot be scaled up to public policy levels. We can observe a pleasing arrangement by observing the outcome as a whole (the catallaxy, to use Hayek’s term), but one cannot plan it in the same way. A planned order will always reflect the aesthetic sensibilities of the planner. So, policies that may pass a CBA may ultimately fail to achieve their intended results because individual aesthetic sensibilities differ from that of the planner.
One of the major advantages of a liberal economic order (that is to say: free trade, both domestic and international, with law and legislation that outlines broad rules of the game rather than activist selection of outcomes) is that it allows for the multitude of aesthetic judgements to be satisfied (see, for example, David R. Henderson’s recent post on the observations of Peter Lewin).
Of course, none of this is to say that CBA doesn’t have a use. It’s a powerful tool, one which I apply every day. My point is that it cannot tell one what one should do. It is a good starting point to the discussion.
Jan 13 2023 at 2:30pm
Jon: You are right that aesthetics is, like individual preferences in general, a subjective matter. My aesthetic opinion about economics depends on my subjective preferences; and de gustibus non est disputandum. As you suggest, any weighing of costs and benefits accruing to different individuals depends on the individual preferences (and constraints) of those doing the weighing. They will presumably not choose a “public interest” distinct from either their own self-interest. At any rate, public interest would be what they think is the public interest. In a nutshell, I often quote Anthony de Jasay’s statements that directly relate to what CBA as a decision criterion aims to do:
Jan 13 2023 at 1:17pm
Pierre: lovely exposition. I traded in the capital markets for many years as a market maker, hedge fund trader and risk manager. The the shift in market price equilibrium was beautiful to observe in real time. It still is. Spontaneous order, prices transmitting information, utility theory and time varying assumed risk by individuals per Hayek. At my advanced age, I am seriously studying economics and realize there is so much to learn. I am the grateful beneficiary of so many fine minds in the discipline as well as yours.
Jan 13 2023 at 1:54pm
David: Finance is a good way to learn basic economics on the job. As you seem to suggest, it benefits from being supplemented by some formal theory.
Jan 13 2023 at 2:21pm
Pierre: Yes. I am currently working on an arbitrage trading model that incorporates utility theory and Arrow-Pratt risk aversion coefficients. It seems from early data; dividing option gamma by option delta is a nice proxy for the A-P risk aversion coefficient; second derivative U(x)/ first derivative U(x). In the end it may prove to yield an alpha of zero. Still, it is an enjoyable pursuit.
Knut P. Heen
Jan 16 2023 at 6:11am
Just trying to help. An arbitrage opportunity is strictly defined either as a risk-free profit or as a free lottery ticket. In these situations, risk preferences do not matter and that is actually the power of arbitrage pricing theories. The only assumption is that two identical cash flows must have the same price (otherwise there is an arbitrage opportunity). Either the theory is correct or we have found a way to become rich.
Jan 16 2023 at 2:12pm
Knut, right but in my experience as a trader, there are moments in the market where arbitrage opportunities exist and can be exploited. (finding a $100 bill lying on the floor). As I’m sure you know, exploiting those momentary opportunities create long term no-arbitrage moments in efficient markets. So far in real time, our strategy seems to generate returns in excess of risk neutral. We are puzzled as to why. In the long run we may find it does not out perform risk neutral strategies. Of course we are always seeking alpha.
Thank you for your comment.
Jan 13 2023 at 2:41pm
Very good post, Pierre … but,
The first reason is that economics is essential to understand the social universe
More like “to understand the social MULTIVERSE”, right?
Reading Krugman and Cochrane, I very much doubt both are “understanding” the same “universe”.
“But an economics graduate (at least from a good college) did learn something about the “real world,”
Once Warren Buffett said (I was there): “If you have one economist on your pay-roll you have one too many“, and he seems to know a lot about the “real world”.
I don’t know. After so many years and so many “economics graduates”, there is still disagreement among economist on whether or not international commerce is beneficial, on whether or not the minimum wage is beneficial, on what is the most efficient tax policy, even on whether or not cost-benefit analysis should be key in desingning new policies …
And even in the areas where the consensus is wide, public policies are the exact opposite to what the economists advice (see international commerce or rent control …).
It is difficult to imagine physicist discussing if the gravitational force is moving objects towards Earth or away from it, and it is difficult imagining the politicians not listening to engineers when designing a public road.
I don’t know. All this is very confusing to the “non initiated”. Most days, I kind of understand Mr. Buffett’s concern.
Jan 13 2023 at 2:57pm
I think they are. We all have our approaches. We all are trying to understand the same Universe. Sure, we come to different conclusions, but that’s because we all have different views, perspectives, ideas, experiences, etc.
And yet, that is precisely what happens. Within any group, there will always be dissenters. That’s the glory of freedom of science. Dissent fuels advancement. Ideas will arise and fall as they are tested (assuming they are tested freely).
As for politics…politics are what they are. We had an incident in Boston not too long ago. They built the road going to the airport under the harbor. The state’s oversight board forced the construction company to use a particular brand of adhesive for the tunnel’s ceiling tiles (that particular company had won the bid to supply the adhesive). When the construction company objected because the adhesive was water soluble and this tunnel was built under the harbor, the oversight board ignored them and forced them to use the adhesive anyway.*
So yes, politicians will argue with engineers on how to design roads.
*The tunnel ceiling tiles did end up crashing down and killed a woman.
Jan 13 2023 at 3:30pm
“Within any group, there will always be dissenters.”
Jon, the dissent in other sciences does not involved even the very basic conclusions reached (gravity does work downwards, no dissenters on that)
Do you truly believe that the level of dissent on economics is “a la par” with the hard sciences?
Will it, some day, be?
Jan 13 2023 at 3:28pm
Allow me to elaborate on my comment as I fear I may have been unclear.
If your point here is that physicists don’t disagree about fundamentals, then that’s fine. But neither do economists. With very rare exceptions, you’ll not find an economist who disagrees with the fundamentals. Where disagreements arise are in the technical details.
Using the same fundamentals, a minimum wage can reduce employment or increase it. The technical details matter (competitive market versus monopsony, in that case). That’s where the disagreement lies.
Jan 13 2023 at 3:37pm
You were answering the question while I was posting it! … impressive as always!!
But if there is disagreement in the technical details that are key to the validity of the consensus, I can kind of understand the frustration of politicians (and business managers) with economist.
Jan 13 2023 at 3:49pm
Absolutely! That frustration was on public display during the pandemic (and that frustration is why, I think, many individuals tacitly or explicitly endorsed censorship of dissenting opinions on technical details). That whole point is a major part of my research.
A lot of people want nice, simple answers. But science, and reality, ain’t nice and simple.
Jan 19 2023 at 11:29pm
“A lot of people want nice, simple answers. But science, and reality, ain’t nice and simple.”
Yet, this is where John Murphy, Phd comes in. One of your jobs will be to simplify what can be complex. It isn’t enough to get accolades from your academic peers. What truly is needed from you, David Henderson, Don Boudreaux, etc., is the ability to convey economics and the importance of the field of study to the general public just as Sowell and Walter E Williams have done so brilliantly.
Jan 13 2023 at 5:40pm
“More like “to understand the social MULTIVERSE”, right?”
It’s always amazed me how many economic schools and strands there are. Keynesian itself has at least Neo, New and Post. What does that say about the profession?
Jan 13 2023 at 7:05pm
Jose: Don’t forget that opinions on public policy or its fundamental underlying issues depend not only on positive analysis but also on value judgements, that is, on opinions on what is moral or just. It is in large part because of this that economists disagree. If a physicist often felt his personal values or interests were directly threatened by some physical theory (“God doesn’t play dice with the universe”), there would likely be much more disagreement. Or think about biologists’ and public health experts’ opinions on eugenics a century ago?
Economics still provides a method for analyzing public policy in an organized and rational way. And the economists’ efforts to distinguish positive analysis and moral values remain very useful. The same can be said for the analysis of the consequences of good intentions.
Knut P. Heen
Jan 16 2023 at 11:21am
An apple pulls the Earth towards the apple. The effect is simply to small to be measured because of the huge difference in mass, but you may calculate it.
Mountains pull up to some extent (lower gravity below).
Jan 13 2023 at 3:07pm
Jose, “Once Warren Buffett said (I was there): “If you have one economist on your pay-roll you have one too many“, and he seems to know a lot about the “real world”.”
I see your point. Following Hayek, none of us knows enough to plan the the creative actions and plans of others. But…another economist’s voice or another quant’s observations in a hedge fund such as ours was worth hearing. They had real financial skin in the game of immediate P/L and were bonused accordingly. As an aside, I’m curious as to the number of economists working for Goldman Sachs, Bank of America or Costco. It seems economic theory tell us those aforementioned firms believe the marginal benefit of hiring those economists exceeds the firms marginal cost.
Your comments are always interesting.
Jan 17 2023 at 6:13pm
Context matters; and Buffet is speaking more about economic forecasting and not underlying economic principles which is what is the point of this article.
Jan 13 2023 at 5:30pm
And another reason is to help in recognizing bogus economic arguments, especially important in voting. I wish basic economics were a high school graduation requirement.
Jan 13 2023 at 5:43pm
Thank you Pierre, very well stated. I am so sick of the articles and books–some by economists–on how unrealistic, or incomplete, or misleading, or immoral, or inadequate, etc. economic principles are. “There’s no such thing as a perfect market”; “all else is never equal in the real world”; “people don’t have perfect knowledge”; etc. etc. I think it was someone on this site who pointed out that the problem with public policies is very rarely that policy makers take economic principles too literally. They act as though basic economics can be defied, and if things turn out badly well, it’s because of bad people.
I was an English major in college but decided to take economics in my senior year, I guess to round myself out. It was like a veil dropped away and so much that was inexplicable or due to (I had thought) malign forces in the world suddenly made logical sense.
The problem is, it’s not necessary pleasant to have to accept that we are subject to constraints, or that incentives matter more than intentions.
Jan 13 2023 at 8:45pm
Nick: Right. The idea that good things happen thanks to good spirits and bad things because of bad spirits is a primitive idea. The Ancient Greeks, with their multitude of different gods, could not easily escape that idea.
Jan 13 2023 at 8:54pm
“Economics explains how markets liberated individuals from societies based on stifling customs or coercive commands. ”
Mises might regard customs as “stifling” but would Hayek?
Jan 14 2023 at 1:38am
Mactoul: My reference there was more Hicks than Hayek. But your question is good and relates to a fine point. One has to consider which customs are defended by Hayek: they are customary rules capable of sustaining a spontaneous order. These customary rules do not impose concrete goals on individuals, but only impersonal constraints. They permit the functioning of markets and their “creative destruction.” Tribal types of constraints are stifling and very different from that; see my review of Hayek’s The Fatal Conceit.
Jan 14 2023 at 2:18am
The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists. – Joan Robinson
Jan 14 2023 at 11:47am
Outstanding quote. And that applies to much more than economics.
Another quote: There’s a sucker born every minute … and two to take his money.
Jan 14 2023 at 6:02pm
And a government to tax theirs…
Jan 15 2023 at 12:34am
A much broader application would be: to deceive like an economist.
Jan 14 2023 at 11:20am
There isn’t an economist alive that understands money and central banking.
Jan 14 2023 at 1:16pm
Spencer: This is a risky statement to make since some of today’s monetary economists are among the best minds in the history of mankind. What about George Selgin? Larry White? Jeff Hummel?
Jan 14 2023 at 5:22pm
Indeed, Professor, I would have to say Selgin definitely worth listening to and he offers some deep insights.
For those who might be interested I listened to a youtube on Kitco featuring Lyn Alden and George Selgin discussing Bitcoin, but naturally in the context of money.
The Great Bitcoin Debate: Sound money or Tulip mania? Lyn Alden vs George Selgin
Jan 17 2023 at 10:40am
“The purpose of studying economics is not to acquire a set of readymade answers to economic questions, but to learn how to avoid being deceived my economists.”
She was quoted in P.T. Bauer’s superb book, “Equality, the Third World, and Economic Delusion”
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