Facts don’t matter, emotions do

Frank H. Knight (1885 – 1972), Univ of Chicago economist, taught economics to Nobel laureates Milton Friedman, George Stigler and James M. Buchanan. Knight said:

“The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.”

What do Economists do?

In a comment, Nithya asked what do economists do. What economists do is hard to define precisely. Just as one may ask what do doctors do. Clearly they provide medical services. But that could mean a lot of things: internal medicine, surgery, pediatrics, primary medical care, etc., etc.

Economists also come in a variety of forms. Some work on broad big questions such as why are some nations rich, some work on narrow issues like what are optimal subsidies and taxes, some on macroeconomic matters like inflation, unemployment, banking and finance, and so on.

The subject matter of economics, in the ultimate analysis, is people. Therefore everything that humans do — everything — falls into the purview of economics. Continue reading “What do Economists do?”

Hayek on the Impossibility of Designing Society

Societies are not machines made of inert matter engineered by designers; societies are ecosystems of organisms that have minds which have volition and act purposefully to achieve their goals.

Social engineering — the deliberate transformation of an entire society according to some design — is doomed to failure because people are not inanimate objects that can be manipulated at will. The basic difficulty boils down to a lack of knowledge and the open-ended nature of the future. Nobody has the required knowledge of the present conditions of every person in society and the future state of the society. Continue reading “Hayek on the Impossibility of Designing Society”

Question on MSP

Vijey asked:

1.Why is MSP (minimum support price) all the rage in India for farm products?
2.Is there no trust in the market mechanism leading to an organic price discovery?
3. Is our Market manipulated by Corporates leading to a distrust in this mechanism , since this seems to be the common discourse in the public domain?

There are various justifications that people provide for laws and regulations, including those related to agriculture. All laws and regulations have consequences that are seen, unseen, beneficial, harmful, intended, unintended, immediate and future. The world is a complicated place and it is hard to do only one thing — which I call the first law of ecology. When you do something, not just one thing happens; lots of other things happen — most of which are hard to anticipate. Continue reading “Question on MSP”

A Bit of Economics — Part 4

{Read part 3 here.}

People produce and consume stuff. Division of labor and specialization require that they consume what they haven’t produced and produce what they don’t intend to consume. The bridge between production and consumption is the opportunity to exchange or trade. Trades happen in markets.

People are constantly being guided in their production and consumption decisions by prices. Prices convey information to all market participants. The price of a good — be it cars or carrots — tells us something about the world. The amount we buy depends on the price, and our willingness and our ability to pay for it. Continue reading “A Bit of Economics — Part 4”

A Bit of Economics — Part 3

{Read part 2 here.}

In ordinary speech we do not distinguish between “demand” and “quantity demanded.” We just say something like, “The demand for apples has gone up” to mean that more apples are being bought by people. But in economics, there is a clear and important distinction. When we say “demand has increased” we mean the relationship between prices and quantities has changed, and that people are willing to buy more than before at various prices.

In economics, demand and supply simply designates the relationship between quantities and prices. We demand specific quantities, not abstract relationships. So when we say “the quantity demanded” we are talking not about some abstract function but quantity of stuff.

If someone were to say, “the quantity demanded has gone up”, we could conclude that the price has fallen because we know that quantity demanded increases when the price falls. But that’s only true in case the demand — the relationship between prices and quantities — has not changed. Continue reading “A Bit of Economics — Part 3”

A Bit of Economics — Part 2

{Read part 1 here.}

The basics of price theory (microeconomics) are simple. First the law of demand. We know without being instructed that when the price of something falls, we tend to buy more of that.

At the grocery store, I may buy donuts at $5 a dozen but may not buy if they were $6 a dozen. At some price, I would not buy donuts, if the price drops, I will buy more and more up to some point. That’s my individual demand for donuts. But other people may buy at $6 and some others may not buy even at $5.

If you aggregate all those individual buying decisions, you notice a pattern: the store sells more when the price is low than when it is high. That’s the aggregate demand function which emerges out of the sum of various individual demand functions. Continue reading “A Bit of Economics — Part 2”

A Bit of Economics — Part 1

This week we will discuss some basic economics. What is economics? It’s the discipline that investigates how we humans go about making a living. Principally the three activities we engage in while making a living are production, consumption and exchange.

We have to produce stuff because we want to consume stuff. Want satisfaction motivates us to produce. Since we all differ in many respects — natural abilities, preferences, training, opportunities, etc. — we select different occupations and produce a variety of goods and services. We specialize to some extent and divide up various tasks. Specialization is a cause and consequence of the division of labor.  Continue reading “A Bit of Economics — Part 1”