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Getting the Point of Economics

Cafe patron Stephen Schmalhofer sent this e-mail to me today.  I post it here in full, with Steve’s generous permission.

I hated freshman economics at Yale.  It was the only C I ever received. Taught in a massive lecture hall, the professor posted endless equations and formulas.  It wasn’t real.   My father was the CEO of a poultry company in rural Pennsylvania.  I wandered the plant as a child and saw chickens raised in Pennsylvania, fed soybeans from Brazil, transported by trucks assembled in Detroit and Kentucky, processed by special machinery built in the Netherlands and operated by workers from Mexico, Honduras, Guatemala and finally shipped around the world.  (Even the feet were sold to China)  This is economics and it isn’t boring!  It’s gorgeous, like the spontaneously coordinating steps of a couple on the dance floor, a flock of birds or a school of fish.  It’s the delightfully humanizing marketplace- that virtual site of exchange where a man from Chile trades with a woman from France as though they are neighbors.

I’ve often annoyed friends by repeating my view that “Prices are beautiful.”  We have a tendency to view prices as deception, a trick played on consumers to scam us into paying more than we like.  Prices are information.  Like ants tracing pheremones, prices provide signals for the billions of buyers and sellers that we call “the market.”  These prices guide our savings, our production and our consumption.  Isn’t it marvelous how we can use a price to evaluate all 3 of those functions?  Prices are like a universal language!  (But far superior to Esperanto)

Our preferences conflict as multiple people want the same item.  How do we resolve this?  You could take it by force.  You could plead your case before a judge.  You could lobby a Senator for a favor.  You could stand in line and submit a request to a bureaucrat.  Or you could express your desire for the good directly to the person selling the item you desire.  The seller can then compare the intensity of your desire to that of other interested buyers.  We express the intensity of our desires (and our willingness to sell) with little tags of information called Prices!

Why study economics?  Ask someone in Times Square and he might say: “To learn how to build a business.”  Curiously, the study of economics reveals the opposite:  we learn how little we can create.   Economics will humble you.  Think you’re smart?

You cannot even make a pencil.

Just some thoughts,

Recommended:  Russ Roberts on The Price of Everything: A Parable of Prosperity and Possibility.

Very well-said, Stephen.

I am unfailingly saddened when I reflect on how principles of economics is generally taught today – taught as if gaining an understanding of the mathematics of equations and graphs that feature variables with economics-sounding names such as “price,” “quantity,” “utility,” and “imports” is to gain an understanding of the logic of the operation of real-world economies.

Now I myself, in my principles-of-economics courses, use graphs and some equations.  These can be useful – indeed, in the case of supply-and-demand graphs, damn near indispensable.  But to make them useful requires that they be always related to real-world phenomena, and related deeply and compellingly with stories, anecdotes, metaphores, examples.