Lessons from Economics

Too ignorant to know that planning fails
The Road to Hell

The fundamentals of economics is fun to learn. They are also somewhat counter-intuitive, until you internalize them and then it becomes part of your intuition.

Friedrich von Hayek held that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Social engineering and economic planning fails precisely when social scientists, instead of being students, presume to be able to intervene into things that are not amenable to design. The worst offenders in this regard are ignorant politicians. They push the country into needless poverty.

From CafeHayek, here are a few basic lessons that a study of economic teaches.

    • Goods and resources are scarce relative to human wants, and therefore nothing is free; while it might be worthwhile to produce more guns, there’s a price to pay in the form of less butter.
    • Reality isn’t optional, and life is a series of inescapable trade-offs. Just because some option has an upside does not mean that it should be pursued, and just because some option has a downside does not mean that it should be avoided. The most foundational question that the competent economist asks is: As compared to what?
    • Prices and wages set on markets are not arbitrary; they reflect underlying economic realities.
    • Prices and wages set on markets weave the self-interested choices and efforts of billions of individuals into a globe-spanning and largely invisible web of remarkably productive social cooperation—a web neither designed nor operated by anyone.
    • Individuals respond predictably to incentives: raise the cost to Jones of sunbathing and Jones will do less sunbathing; increase the benefits to Jones of saving money and Jones will save more money.
    • Preferences are subjective: the details of Jackson’s responses to incentives differ from Jones’s responses.
    • Almost all choices are incremental: do I want to drive a safer car or not? If so, I can improve my car’s safety incrementally by putting on new tires or changing my brake pads; I don’t have to buy a tank or even a new, top-of-the-line Volvo.
    • Choices are made only by individuals. Although individuals often choose to join with others in organizations such as clubs or political groupings in order to make collective choices, choices are never made by collectives as such; choices are never made by abstractions such as “the market” or “the People.”
    • The consequences of almost every human action extend not only beyond those that are intended by the actor, but also beyond those that can be foreseen. Therefore, intentions are not results, and results can neither be predicted nor fully understood by examining intentions.
    • And perhaps most importantly of all: The complexity of a modern economy is so vast that no human can begin to grasp it in any detail, and much less to ‘plan’ it or any large part of it. The best we can do is to understand the economy’s basic logic and record, humbly, some of its empirical manifestations.

Unfortunately for India, the politicians are incapable of learning. Their ignorance is matched by their hubris. It’s all karma, neh!

Author: Atanu Dey


One thought on “Lessons from Economics”

Comments sometimes end up in the spam folder. If you don't see your comment posted, please send me an email (atanudey at gmail.com) instead re-submitting the comment.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: