Murphy - Lessons for the Young Economists

ISBN: 978-1-933550-88-6

Copyright 2010 by the Ludwig von Mises Institute and published under the Creative Commons Attribution License 3.0. http://creativecommons.org/licenses/by/3.0.

For information write the Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832. Mises.org

T his book was launched in a meeting with Doug French and Jeff Tucker of the Mises Institute. At every step in its writing, I consulted with Zachariah Crossen, a history teacher who ran the sample chapters by his own (junior high) students to make sure the tone and language were correct.

Brian Shelley and Blake Stephenson provided useful feedback on an early draft. Tim Terrell went through the entire manuscript and provided many suggestions to improve it. Finally Id like to thank Sam Torode for the artwork, which was not only done excellently but also quickly (because I didnt give him much notice).

In this lesson you will learn:

• What it means to think like an economist.
• The types of questions that economics can help explain.
• Why it is important for everyone to understand basic economics.

T his book is a manual for a new way of looking at the world. After you master the lessons contained within these pages, you will be able to understand events in ways that your untrained peers will miss. You will notice patterns that they will overlook. The ability to think like an economist is a crucial component of your education. Only with sound economic thinking will you be able to make sense of how the world works. To make responsible decisions regarding grand political ideas as well as your occupation and mundane household finances, you must first decide to learn basic economics.

Creative and careful thinkers throughout human history have developed various disciplines for studying the world. Each discipline (or subject) offers its own perspective as history unfolds before us. For a complete education, the student must become acquainted with some of the most important findings in each field. Economics has proven itself to be worthy of universal study. A well-rounded young adult will have studied not only algebra, Dante, and photosynthesis, but will also be able to explain why prices rise.

Every subject you study will contain a mixture of knowledge that is deemed important for its own sake, as well as practical applications that may prove useful in your daily life. For example, every student should have a basic understanding of astronomy, since it illustrates the grandeur of the universe; but basic astronomy can also come in handy when guiding a wayward yachtsman who has lost sight of land. For a different example, consider mathematics. The study of advanced calculus is rewarding for its sheer elegance (though some students might consider the reward inadequate for the effort required!). But everyone needs to know basic arithmetic in order to function in society.

We will see the same pattern holds in the subject of economics. It is, in a word, simply fascinating to learn that there are underlying principles or laws that explain the operation of any economy, whether in ancient Rome, the Soviet Union, or a county fair in Boise, Idaho. Yet economics also has much to offer in practical guidance of your daily life. Knowledge of economics, by itself, will not make you rich, but its a good bet that ignoring the lessons of this book will keep you poor.

Economists look at the world in a unique way. Picture the crowds waiting to ride a popular amusement park roller coaster. A biologist surveying the scene might notice that people begin sweating as they approach their turn to get onto the ride. A physicist might notice that the first hill has to be the tallest. A sociologist might notice that the riders are arranged in groups of the same ethnicity. And an economist might notice that the first and last cars have much longer lines than the others, probably because people dont like waiting but they also prefer riding in the very front or the very rear.

The economic perspective is not useful in every situation. On the soccer field or at the prom, the lessons in this book will not prove as relevant. But in your life you will encounter many situations of critical importance when your decisions will need to be informed by sound economics. It is not necessary for everyone to become an economist. It is important for everyone to learn how to think like an economist.

In this book, we adopt the view that economics constitutes an independent science, just as surely as chemistry and biology are distinct fields of study As we go through the lessons in this book, we will do so scientifically, meaning that we will use an objective set of tools for our analysis, that do not rely on particular ethical or cultural assumptions. The principles or laws of economics are the same, whether the economist is a Republican or a communist, and whether he lives in New Zealand or Somalia.

Warning! When we say economics is a science, we do not mean that we conduct experiments to test economic laws, the way a nuclear physicist studies the results of smashing atoms in a particle accelerator. There are important differences between a social science such as economics, versus a natural science such as physics. We will explain this in more detail in Lesson 2, but for now we simply want to caution you that basic economic principles can be discovered through mental reasoning. It wouldnt make sense to go out and test the laws of economics, just as it doesnt make sense to use a ruler to go out and test the various proofs that you might learn in a geometry class. The upshot of all this is that the lessons in this book will stand the test of timethere is no danger that a new experimental finding will overturn them tomorrow. In practice, professional economists make all sorts of conjectures, many of which turn out to be wrong. But the core body of economic theorythe types of laws and concepts contained in this bookis not testable; its simply a way of viewing the world.

Despite the possible confusion of economic science with a natural science, nonetheless we use the term science because its important to stress that there really are objective laws of economics. When politicians ignore the teachings of economics, their programs run into disasterimagine the chaos if NASA ignored the laws of physics!

Its a common misconception for people to think, Economics is the study of money. Yes, economics obviously has a lot to say about money, and in fact one of the basic purposes of economics is to explain the different priceswhich are quoted in units of moneyof various goods and services being sold in the market place.

Contrary to this popular misconception, economics is broader than the mere study of money. In its widest scope, economics can be defined as the study of exchanges. This would include all of the exchanges in a normal market setting, where the seller hands over a physical object or provides a service, and in return the buyer hands over the appropriate amount of money. But economics also studies cases of