Monday, 17 October 2016

The most important economic idea in the world?

 

Economist David Henderson has been pondering the single most important idea in all of economics – the one you most wish you could explain to everyone on earth. Between him, his commenters, and Steve Horwitz (whose questioner on Reddit prompted the discussion), there’s quite a list of candidates for The Most Important Economic Idea:

Economist Steve Horwitz: The idea that prices are knowledge surrogates. Prices aren't mere numbers--they are [a] form of communication that goes beyond language and math. Without them, we are blind and deaf in figuring out how to make choices and allocate resources. It is the price system that enables us to be as rational as we are and is a key part of what McCloskey calls "The Great Betterment."

Price signals. Crucial, and much misunderstood. Good choice.

Other commenters have suggested:

  • Arrow's impossibility theorem: why “voting systems are so flawed”
  • Opportunity costs matter: i.e., “anticipate that people who bear such costs will invariably find ways to circumvent your best policy intentions (i.e., there will be unintended consequences)”
  • TANSTAAFL, i.e.,There Ain't No Such Thing As A Free Lunch.
  • The Broken Window Fallacy: The parable of the seen and the unseen…
  • Don Boudreaux’s candidate: “The fact that even something as ordinary to us moderns as a familiar commercial-grade pencil requires the creativity of thousands of people and the work effort of hundreds of million others - all spread out across time and space - yet an American in 2016 can purchase a pencil for about ten cents (a small fraction of an ordinary American worker's hourly wage). And what is true for a pencil is true, in an even greater magnitude of 'wowness,' for nearly everything else that we moderns regularly consume.”
  • Adam Smith’s point about the importance of large markets to the division of labour – “to choice, both in goods and in types of employment (career paths) we choose, and so, ultimately, to civilisation.”
  • There is no free stuff from government.
  • Adam Smith’s Invisible Hand? i.e., by seeking our own gain, in a market system, we help others

All good nominations.

For my own part however, I say that the most important lesson economics can teach is far more fundamental—important in a far wider sense than even most economists care to know; it’s the lesson that economics can and should teach every philosopher and every student of philosophy: that, as Bastiat famously put it,

All men’s impulses, when motivated by legitimate self-interest, fall into a harmonious social pattern.

What economics can best teach philosophers and everyone else (and what Bastiat can still teach economists) is that other human beings need neither be a burden nor a threat, neither a hell nor a horror, but a blessing.

This is the greatest lesson economics can teach: that in a society making peaceful cooperation possible we each gain from the existence of others.

What a great story to tell everyone on the planet!

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1 comment:

  1. yes... I agree price as the most important economic idea. price is a form of communication.... throw in the idea of supply/demand.... and I think I understand the most important parts of economics.. :)

    Which makes one wonder about the contrived nature of interest rates.

    I've always accepted Hayeks view that interest rates is a "price"... and therefore "communicates".
    What it communicates is the information needed to balance consumption, savings and investment..
    Malinvestment is the result of contrived interest rates..??

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