Common Sense Economics

Ten Key Elements of Economics
1. Incentives matter.

2. There is no such thing as a free lunch.

3. Decisions are made at the margin.

4. Trade promotes economic progress.

-Trade moves goods from people who value them less to people who value them more.
-Trade makes larger outputs and consumption level possible because it allows each of us to specialise more fully in the things that we do best.
-Voluntary exchange makes it possible for firms to achieve lower per-unit costs by adopting mass production methods.

5. Transaction costs are an obstacle to trade.

6. Profits direct businesses toward activities that increase wealth.

7. People earn income by helping others.

8. Economic progress comes primarily through trade, investment, better ways of doing things and sound economic institutions.

-Investments in productive assets (tools and machines, for expample) and in the skills of workers (investment in "human capital") enhance our ability to produce goods and services.
-Improvements in technology (the use of brain power to discover new products and less costly methods of production) spur economic progress.
-Improvements in economic organisation can promote growth.

9. The "invisible hand" of market prices directs buyers and sellers toward activities that promote the general welfare.

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can demand. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society. . . . He intends only his own gain, and he is in this as in many other cases, led by an invisible hand to promote an end which was not part of his intention. --- Adam Smith

10. Too often long-term consequences, or the secondary effects, of an action are ignored.

A person: . . . must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not the effects on some special group but the effects on everyone. --- Economics in One Lesson by Henry Hazlitt

Seven major sources of economic progress
1. Legal system: The foundation for economic progress is a legal system that protects privately owned property and enforces contracts in an evenhanded manner.

A private property regime makes people responsible for their own actions in the realm of material goods. Such a system therefore ensures that people experience the consequences of their own acts. Property sets up fences, but it also surrounds us with mirrors, reflecting back upon us the consequences of our own behaviour. ---Tom Bethell

-Private ownership encourages wise stewardship.
-Private ownership encourages people to use their property productively.
-Private owners have a strong incentive to develpo things that they own in ways that are beneficial to others.
-Private ownership promotes the wise development and conservation of resources for the future.

2. Competitive markets: Competition promotes the efficient use of resources and provides a contiunous stimulus for innovative improvements.

Competition is conductive to the continuous improvements of industrial efficiency. It leads . . . producers to eliminate wastes and cut costs so that they may undersell others. . . . It weeds out those whose costs remain high and thus operates to concentrate production in the hands of those whose costs are low. --Clair Wilcox

-Competition places presuress on producers to operate efficiently and cater to the preferences of consumers.
-Competition gives firms a strong incentive to develop better products and discover lower-cost methods of production.
-Competition also discovers the business structure and size of firm that can best keep the per-unit cost of a product or service low.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages. ---The Wealth of Nations by Adam Smith

3. Limits on government regulation: Regulatory policies that reduce trade also retard economic progress.

-Many countries impose regulations that limit entry into various businesses and occupations.
-Regulations that substitute political authority for the rule of law and freedom of contract will tend to undermine gains from trade.
-The imposition of price controls will also stifle trade.

4. An effieient capital market: To realise its potential, a nation must have a mechanism that channels capital into wealth-creating projects.

5. Monetary stability: Inflationary monetary policies distort prices signals, undermining a market economy.

6. Low tax rates: People will produce more when they are permitted to keep more of what they earn.

Taxes are paid in the sweat of every man who labours. If those taxes are excessive, they are reflected in idle factories, in tax-sold farms, and in hordes of hungry people tramping streets and seeking jobs in vain. ---Franklin D. Roosevelt

-High tax rates discouraging work effort and reduce the productivity of labour.
-High tax rates will reduce both the level and efficiency of capital formation.
-High marginal tax rates encourage individuals to consume tax-deductible goods in place of nondeductible goods, even though the nondeductible goods may be more desirable.

7. Free trade: A nation progresses by selling goods and services that it can produce at a relatively low cost and buying those that would be costly to produce.

Free trade consists simply in letting people buy and sell as they want to buy and sell. Protective tariffs are as much applications of force as are blockading squadrons, and their objective is the same--to prevent trade. The difference betweeen the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. --- Henry George

-The people of each nation benefit if they can acquire a product or service through trade more cheaply than they can produce it domestically.
-International trade allows domestic producers and consumers to benefit from the economies of scale typical of many large operations.
-International trade promotes competition in domestic markets and allows consumers to purchase a wider variety of goods at lower prices.

Ten elements of clear thinking about ecomomic progress and the role of government

1. Govenment promotes economic progress by protecting the rights of individuals and supplying goods that cannot be provided through markets.

A wise and frugal govenment, which shall retrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvements, and shall not take from the mouth of labour the bread it has earned. This is the sum of good government. --- Thomas Jefferson

2. Government is not a corrective device.

3. The costs of government are not only taxes.

-There is the loss of private-sector output that could have been produced with the resources that are now employed producing the goods supplied by the government.
-The second type of cost is the cost of resources expended in the collection of taxes and the enforecement of govenment mandates.
-There is the cost of price distortions resulting from taxes and borrowing.

4. Unless restrained by constitutional rules, special groups will use the democratic political process to fleece taxpayers and consumers.

5. Unless retrained by consitutional rules, legislators will run budget deficit nad spend excessively.

The attractiveness of financing spending by debt issue to the elected politicians should be obvious. Borrowing allows spending to be made that will yield immediate political payoffs without incurring of any immediate political cost. --- James Buchanan

6. Govenment slows ecnomic progress when it become heavily involved in trying to help some people at the expense of others.

The tool of politics (which frequently becomes its objective) is to extract resources from the general taxpayer with minimum offense and to distribute the proceeds among innumerable claimants in such a way to maximise the support at the polls. Politics, so far as mobilising support is concerned, represnts the art of calculated cheating, or more precisely, how to cheat without being really caught. ---James R. Schlesinger

7. The costs of government income transfers are far greater than the net gain to the intended beneficiaries.

-An increase in govenment transfers will reduce the incentive of both the taxpayer-donor and the transfer recipient to earn income. Economic growth will thereby be retarded.
-Competition for transfers will erode most of the long-term gain from the intended beneficiaries.
-There is a third reason for the ineffectiveness of transfers: Programs that protect potential recepients against adversity arising from their imprudent decisions encourage them to make choices that increase the likelihood of the adversity.

8. Central planning replaces markets with politics, which wastes resources and retards economic progress.

The man of system is apt to be very wise in his own conceit. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have not another principle of motion of its own, although different from that which the legislature might choose to impress upon it. If those two priciples coincide and act in the same direction, the gmae of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or dofferent, the game wil go on miserably, and the society must be at all times in the highest degree of disorder. ---Adam Smith

-Central planning merely substitutes politics for market verdicts.
-The incentive of government-operated firms to keep costs low, be innovative, and efficiently supply is weak.
-There is every reason to believe that investors risking their own money will make better investment choice than central planners spending the money of taxpayer.
-There is no way that central planners can acquire enough information to create, maintain, and constantly update a plan that makes sense.

9. Competition is just as important in government as in markets.

10. Constitutional rules that bring the political process and sound economics into harmony will promote economic progress.

The predominant teachings of this age are that there are no limits to man's capacity to govern others and that, therefore, no limitations ought to be imposed upon government. The older faith, born of long ages of suffering under man's dominion over man, was that the exercise of unlimited power by men with limited minds and self-regarding prejudices is soon oppressive, reactionary, and corrupt. . . . Men may have to pass through a terrible ordeal before they find again the central truths they have forgotten. But they will find them again as they have so often found them again in other ages of reaction, if only the ideas that have mislead them are challenged and resisted. ---Walter Lippmann

Twelve key elements of practical personal finance
1. Discover your comparative advantage.

2. Be entrepeneurial. In a market economy, people get ahead by helping others and discovering better ways of doing things.

-Providing others with goods and services that are highly valued compared to their cost is the key to financial success.

The financial success of self-employed entrepeneurs stems from four major factors.
-First and foremost, their success reflects entrepeneurial talent: an ability to discover innovative new products, cost-reducing production methods, and profitable opportunities that have been overlooked by others.
-Second, self-employment is more risky than working at a job and greater risk and higher returns go together.
-Third, a high saving rate adds to the wealth of entrepeneurial individuals.
-Fourth, business owners typically work long hours.

3. Spend less than you earn. Begin a regular savings program now.

"My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.'" Chales Dickensns, David Copperfield

-First, if you don't exert the willpower to save now, it is unlikely that you will do so later.
-The second problem with putting off a saving program is that it is extremely cotly in terms of the money that you will end up with at retirement.
-Even though a savings program will require some reduction in surrent spending, there are many creative ways to spend a little less.

4. Don't finance anything for longer than its useful life.

5. Two ways to get more out of your money: Avoid credit-card debt and consider purchasing used items.

6. Begin paying into a "real-world" savings account every month.

7. Put the power of compound interest to work for you.

8. Diversify--don't put all of your eggs in one basket.

9. Indexed equity funds can help you beat the experts without taking excessive risk.

10. Invest in stocks for long-run objectives; as the need for money approaches, increase the proportion of bonds.

11. Beware of investment schemes promising high returns with little or no risk.

-If it is too good to be true, it probably is.
-Deal only with paries that hae a reputation to protect.
-Never purchase an invetment solicited by telephone or e-mail.
-Do not allow youself to be forced into a quick decision.
-Do not allow friendship to influence an investment decision.
-If high-pressure marketing is invovled, grab your checkbook and run in the opposite direction.

12. Teach you children how to earn money and spend it wisely.

By James Gwartney, Richard L. Stroup and Dwight R. Lee