Economic Principles and Immunity from Silly Ideas

A reasonable way to think about any subject — science, engineering, technology, economics, etc etc — is to base the analysis on fundamental principles. It’s like using maths, starting with axioms and logically deriving theorems that can then be said to be true within that axiomatic system. If you know the underlying bits, you can work out the rest yourself — or rely on the work of others who have worked out the maths.

We know that there are fundamental principles, whether we know them or not. Some people do know, and they use that knowledge to make stuff that we find useful. I know precious little fluid dynamics but I know that those who design airplanes understand fluid mechanics, and I fly around in airplanes that are the result of various people’s understanding of various different scientific principles or truths.

Economics also has discovered certain “truths”. These relate to property, division of labor, exchange and subjective theory of value. These ideas are not generally known by people, and understandably so. They don’t need to. They get by very well without knowing them, thank you very much.

The laws of motion or thermodynamics are very useful in thinking through engineering problems. The lay person is also generally ignorant about them. Fortunately their ignorance does not affect their ability to go about their daily business. But they can get fooled. Someone can demonstrate a perpetual motion machine to the average layperson and the layperson would not be able to reason from thermodynamic principles to dismiss that nonsense.

In a similar sense, if one knows the fundamental principles of economics, one can almost through pure reason understand the big matters such as “why socialism/communism fails” or “why government run organizations are inefficient” to the smaller matters like “why rent control and minimum wage laws are bad ideas” and why CSR appears to be an excellent idea but is really insanely stupid.

The fact is that it is quite easy to become familiar with those basic principles of economics, just like the average person can learn the basic principles of the physical sciences without having to get an undergraduate degree in them. The average teenager is mentally equipped to comprehend them. But he has to be interested in learning them. They generally aren’t and therefore are unable to comprehend the world to the degree that they potentially could.

It is distressing that too much time in schools is devoted to the physical sciences and consequently too little to the social science known as economics. A basic understanding of economics matters a lot more than knowing how electrons occupy shells around atomic nuclei or the properties of sulfuric acid. I remember learning them in school. I have learned a vast collection of scientific facts in school — and I would have not been any worse off had I not learned them. Knowing the principles is important but too much time is spent in the teaching and learning of science.

But I was never exposed to even the most rudimentary ideas of economics. Had I known them, it would have prevented me from entertaining very stupid ideas. I am embarrassed now how little I knew, and how ignorant I was of my own ignorance. Knowing economic principles helps one avoid traps when grappling with matters that arise in our daily lives.

Economic principles matter because we are humans and economics is human-scaled. Contrast that with physics. The fundamental principles of physics don’t matter to us as much because the scale is different. With the exception of gravity, we are insensitive to the other forces. We are huge compared to atoms and its constituent particles.

Physics is hard, economics is easy. I have argued before that we intuitively understand the physical world but physics is hard. And following that, I have argued that economics is easy.

To gain immunity from a large number of silly ideas — rent control, minimum wage laws, corporate social responsibility, professional licensing — one needs to understand the basic principles of economics. They are not hard. But until you learn them, it is hard to appreciate how much clarity it brings to your view of the world we live in.

Author: Atanu Dey

Economist. View all posts by Atanu Dey