The economic way of thinking

Here’s an excellent column, On Truth’s Side, by George Mason University economics professor Don Boudreaux.  I’ve copied the column in it’s entirety under the fold to save for the future.  This is a keeper.

On truth’s side

By Donald J. Boudreaux, FOR THE TRIBUNE-REVIEW
Wednesday, December 29, 2010

“Why do you give us only one side of the story?”

I get this question sometimes from students in my Principles of Microeconomics class at George Mason University.

It’s a good question. No student should assume that his or her professor is an oracle of pure truth and flawless wisdom. Skepticism — even of (especially of?) widely held doctrines and beliefs — is a hallmark of an enlightened and open society.

If I teach my students only one thing, I hope it is the value of open-minded skepticism.

The importance of open-minded skepticism, however, ought not be mistaken for the adolescent notion that every claim about reality is as good as any other. There are truths. And there are myths. The very point of open-minded skepticism is to enable thinking people to distinguish one from the other.

Any good first-year economics course (and I’m brazen enough to fancy that the course I teach is a good one) introduces students to what the late economist Paul Heyne called “the economic way of thinking.” This way of thinking starts with a few basic truths about reality. Here are some of these truths.

• Nothing is free; to get more hamburgers means that you get fewer hot dogs.

• No one is a saint who can be trusted to govern strangers’ lives as reliably as they govern their own lives.

• Intentions are not results. Government can no more make low-skilled workers as highly paid as high-skilled workers by intending to do so with minimum-wage legislation than I can fly simply by intending to do so with the flapping of my arms.

• It’s always wise to ask, “As compared to what?”

So if I were to give equal time to the “other side” of such truths, I would instruct my students that the world is full of free goodies. I also would propose that humanity has a tribe of deeply informed, saintly people who can be entrusted with the power to tell the rest of us how to live. I would proclaim that all that is necessary for any result to be achieved is that people intend to achieve it. And I would advise my students always to act without considering alternative courses of action and the likely consequences of their actions.

Were I to teach such “other side” nonsense, I would deserve to be fired.

After laying the foundation for the economic way of thinking, the next part of my economics course is supply and demand. This theory is meant to give insight into how prices are set in market economies.

It’s not rocket science. The theory of supply and demand teaches that if consumers (for whatever reason) come to desire a good more intensely, they will try harder to acquire that good — that is, their demand for that good will rise. A consequence of this higher demand will be a higher price for that good.

Another consequence of this rise in demand is that producers of that good willingly supply a larger quantity of it. They do so because the price they can sell it for is higher than before. (If someone raises the price that he offers to give you for your used car, aren’t you more likely to accept that offer?)

Notice the commendable features of this simple process. Suppliers don’t have to know why consumers want more of the good. All they know is that consumers are buying more of the good than before. This fact tells suppliers that it’s safe to raise the price they charge without risking losing too many customers. The higher price, in turn, encourages producers to produce larger quantities of this good.

Consumers want more. The market delivers.

But the good isn’t made with manna from heaven. It’s made with scarce resources such as labor, fuel and raw materials that could be used to make other goods and services. So the higher price of the good — by reflecting the now-higher value that consumers place on it — also signals to producers that it’s worthwhile to shift production from other goods and services into the production of more of the good that consumers now want more intensely than they did earlier.

Similar accounts are told of what happens, say, when consumer demand falls, or when technological improvements cause the costs of production to decrease. In all cases, economists explain how sellers (suppliers) interact in markets with buyers (demanders). These explanations always focus on what happens to price and what incentives the price changes give to both buyers and sellers.

So, you see — I do give “both sides” of the story: the demand side and the supply side.

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.

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