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Quotation of the Day…

is my GMU Econ colleague Robin Hanson’s August 30th, 2016, answer to this question at Quora: “What is the most important little-known economic fact or idea?“:

UnknownHonestly, supply and demand.  It is the part of economics with which more people have a passing familiarity, yet where even so a deeper fuller understanding would bring big gains.  Someone who deeply understands just supply and demand understands a great deal.

For example, understanding all of the many ways in which the real world deviates from a supply and demand world can give one a deep understanding of the likely places to expect both market failures and useful innovations.

DBx: Many are the people – indeed, many are the economists – who have only what Robin calls “a passing familiarity” with supply-and-demand analysis.  Such people typically use this analysis far too mechanistically.  And it’s easy from such a low perch to mistake all that you see from there as encompassing all that is and can be revealed by supply-and-demand analysis.  These are the people who, like James Kwak, are fond of writing essays in popular outlets with the mistaken message that ECON 101 offers a wrongheaded basis on which to stand to analyze government policies such as minimum-wage legislation.

Yet as Robin correctly points out, deep knowledge of seemingly simple supply-and-demand analysis – serious pondering of what lies behind demand curves and supply curves, and an appreciation (at once creative and sober) of the role of time and trial-and-error experimentation in bringing about changes in the positions of both curves – is a source of astonishing insights into real-world economies.  (If I were obliged to name the person who I regard as having been best among all at using supply-and-demand analysis in this productive way I would name the late Armen Alchian.)

To really know supply-and-demand analysis and how to apply it to reality is to really know economics.  Anyone who is poor at using supply-and-demand analysis is a poor economist, even if he or she boasts a PhD in the subject from the most highly ranked economics department in the galaxy.  Nothing – absolutely nothing – substitutes for a sound understanding of supply and demand.  And any speculations, theories, or empirical findings that cannot be squared with lessons drawn from a deep understanding of supply and demand are speculations, theories, and empirical findings that are almost certainly bogus.


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