Thursday, August 12, 2010

What I wish everyone knew about economics

  • Economics is the science of decision-making. It has nothing to do with money, except incidentally as a proxy measure for decision-making behavior.
  • Human beings do not make decisions on a rational basis in MANY situations. We are very heavily influenced by things we are totally unconscious of.

  • Adam Smith postulated that a free market could be the most efficient allocator of limited resources if it had three things: Perfect Information, Perfect Competition, and Perfect Mobility. Perfect Information means that all producers and consumers know everything about all the products. Perfect Competition means that no ONE producer has the power to influence prices market-wide. Perfect Mobility means that all consumers can choose among all producers in a particular market.

    We have NONE of these things. HOWEVER... pretty much any government regulation of markets is in the interest of moving us *closer* to these things. Ingredients lists on food? Perfect Information. Anti-trust laws? Perfect Competition. No sales tax on out-of-state sales? Perfect Mobility (in that, when the law was created, it was prohibitive to interstate transactions to require the correct allocation of sales taxes between the buyer's and seller's state, and requiring sales taxes would have basically shut down interstate retail transactions).

  • There are market failures. These are circumstances where the market cannot efficiently allocate a resource. Health care is one; as the price someone is willing to pay for a procedure or medicine that may save their life is effectively unlimited, we cannot rely on demand to have a regulating effect on prices. As emergency medical situations require the fastest action possible, people cannot shop around to the ER that best meets their needs. These are failures of Perfect Competition and Perfect Mobility that simply can't be resolved by any amount of regulation; they're embedded in the product and demand itself.

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