Sunday, January 12, 2014

A slight redefinition for Economics

When I walk our dog Indy, I often listen to books on tape or podcasts.  Econtalk is a favorite of mine - last year the host interviewed Ronald Coase.   Coase is one of those seminal figures in Economics and the interview was wonderful.   The current book I am listening to is Basic Economics by Thomas Sowell.

Sowell begins the book with a common flaw.   He argues that Economics is the study of scarcity.  That is not an uncommon opinion.  Check out 100 textbooks and I will bet you will find all of them starting in the same manner.

But here is where I think the starting point is wrong.   Many commodities in society are approaching the status of limitlessness.   And yet even if we were to achieve that for all the necessities of life we would still need to think about economics.   Stefan Linder, a Swedish economist, in a book that is sadly out of print, argued that as commodities become more ubiquitous we still have to make choices - time becomes the issue to solve not products.

So for me, rather than beginning with the idea of scarcity and going through a series of supply and demand curves we should begin the discussion of the subject about choices.  This offers a lot of improvements in results.   First, we begin to understand that life is about making the right choices among alternatives, many of which are easy to obtain.   Second, as we think about those choices we might be less inclined to substitute feelings for judgment.   Many of our political choices are based on feelings - "everyone should get healthcare" (without any explicit understanding about what healthcare is or what it will cost) or we have a "right" to this or that.    A third benefit, and perhaps the most important, is that one does not naturally devolve many decisions to a governmental solution.   Many in society ask us to believe that by producing something on the government side of the ledger that we inherently defeat the problem of scarcity.   But as the deficits in public pensions and entitlement programs suggest - that is pure nonsense.

As James Buchanan pointed out many years ago - if you begin with the benefits of trade (people establish relationships for mutual benefit) rather than the concept of scarcity - you ultimately have a sounder basis to discuss economics.  The same could be said for starting with the idea of choices and their consequences.

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