The Core of What Economics Teaches

0:00Thank you all for coming. It really is encouraging for us to see such a big turnout, and I know maybe some of you, your parents made you come, but in any event, thank you for being born to parents and forced to do that. And what I'm supposed to talk to you today about is, as Doug said, the core of what economics teaches, and I was thinking about this, you know, earlier in the week, like, what am I going to talk about? And I kept saying, okay, this is what the core of economics is, and I said, well, wait a minute, that overlooks something else. My problem is I don't really know what the core is. So what I'm going to do is what students, when I was a professor, I noticed on the exam questions, students who really didn't know what the answer was, they would just list everything they knew about the subject and hope that something stuck. And I would say, yep, that's what I was looking for. So that's what I'm going to do here is I'm just going to run through and give you, it's not really a systematic thing, but just some of the main points, the greatest hits of economics, if you will, given the time constraints that I have.

0:52So, I think one thing you can say is, you know, why should you study economics? What's the big deal? Is that economists really, they have a way of looking at the world. There's things they know about how the world works that people who don't study economics or haven't studied economics, they wouldn't know. Alright, so just to give you an analogy, I'll just make a confession. I don't understand how a toilet works. Like, really understand. I flush it and I see what happens, but I don't understand exactly how it works. I kind of picture there's elves inside and when the handle moves, they pump the water out and then they fill it up, but they're invisible elves because I've checked, I can't see them. And you might be thinking, oh come on, but really, if the water turns up, you can actually get it to flush once if you pour enough water in from another source, it flushes.

1:40So if you're thinking the handle has a lever that opens up in a trap door and that's why you're wrong. The point is that I don't understand how a toilet works, and yet it's kind of an important thing. It's good that some people know how that works, and yet we just take it for granted. Similarly, how does the economy work? There's things about the market economy that happen day in and day out that we just take for granted, and yet are not as important as a toilet, but they're pretty important. Just to sort of motivate this, let me just try to get you to see what I'm talking about here. You know how if you're going to go to see a movie, like you and a bunch of friends are going to go see a movie, and it's a real pain, like it can take a long time to decide, okay, well, what movies do you want to see?

2:25What have you seen? And just to get five people to go to a movie and everyone's happy and everyone's schedule works, I mean, that's kind of an undertaking, right? Just to give you an example, I saw The Mummy 2 about three times in the theaters, and I didn't even like it the first time, right? And the only reason was just because it was such a hassle, and the other people hadn't seen it yet and I was thinking, oh, it's really not, you know, anyway, my point is just it's very difficult to arrange something like that and yet, how does an economy work? You know, you go to the grocery stores, oh, I need, I buy yogurt for my son and I go to the grocery store and he likes this very particular yogurt. It's, what is it? So it's organic and it's vanilla and a lot of times when he asks for vanilla, he's young and people think he's, you know, slurring his speech or something but no, it's

3:08and also we like to get the big container because he goes through it like it's nothing and so if you get the little ones it's more expensive and you're going to the store every other day so recently for some reason the store has just been out of it for like four days in a row and I'm just outraged that the big container of the organic vanilla is out I mean I have to buy the little vanilla and that's just so it was such a hassle right and I can't believe this outrage that the store and I probably could go down the street and the store down the

4:08When the Soviets were dumb and they didn't know about how to produce food, it was that the system that was in place in the Soviet Union was largely what's called a command and control economy or socialism, whereas the United States, at least it used to be the case, the system we had here was free market capitalism and that's less and less true every day unfortunately, but that's what's happening, that's why we just take it for granted, just like you flush the toilet and normally it works and you don't even think about it, whereas a plumber could really tell you what's going on The Theory of Money and Credit

5:38In the last four days, you know, I'm just beside myself that this is an outrage. How could this happen? So you see what I'm saying, that it's very complicated, and yet the stuff just happens automatically. So that's partly what economics is about, is it studies how is it the case that this just sort of magically happens on its own. There's an economist in the 1800s, he was a French economist, and he said that it's a miracle that Paris gets fed. That's the way he summarized this sort of wonder that it's amazing that just all these things happen. You don't see a bunch of Parisians just starving to death, whereas you do in communist countries. You did have mass starvation often, right? That happened in China, it happened in the Soviet Union, and part of it was in the historians and the crowd can discuss this at greater length.

6:28But some of it you could say, well, it was because the people in charge were actually evil and trying to inflict that on their political opponents. But be that as it may, the point is, under communist countries, people literally, sometimes in many cases, millions of people literally starve to death, whereas in capitalist countries, that doesn't happen at all. You're outraged if you're out of vanilla in the big container for four days. So that's part of what economists do, and they study that and they understand how does this system work, whereas the average person who doesn't really know much about economics just takes it for granted, just assumes, yeah, you go to the store and there's food there. So that shows you the importance of studying economics. So one aspect, of course, is that it's important that you have, why is it important to have sound economics for people to understand it? It's because you need to have good economic advisors, right, that they advise the government

7:18and to motivate that. George Carlin one time had a routine where he said, now folks, if you think about it, by the process of elimination, somewhere on the planet there has to be the worst doctor in the World. Just think about it. That person has to exist, and he's seeing a patient tomorrow. Right? And you just, ugh, that gives you the willies. By the same token, somewhere on the world, there is the worst economist in the world. Right? And he's seeing Obama tomorrow. So just think about that. No cock. I was hoping that one would work. All right. So, I was guessing you guys weren't big Obama fans. Okay, so that's part of it, that you need I think they have the economists, you know, you want to have good economics because the economists who advise the government, but actually that's, if that's what our hope was in, or we're in, he's a subjective mood, that would be, there wouldn't be much hope there at all

8:14because there's always economists who are willing to, I don't want to, you know, ruin your day and shock you with these revelations, but there are some bad economists out there and they're on the dark side and they, whether they're just misguided or whether they know full well what they're saying is bad policy but they, you know, win the Nobel Prize and I'm not naming any names because of what they say, you know, get New York Times columns what have you, just throwing out random stuff. They, so there are people who are willing to, you know, with PhDs to get out there and try out certain theories to justify whatever The word is that the government wants to do anyway, to give it this sort of veneer of intellectual respectability. So really, what the important thing to do, and this is partly what the Mises Institute is all about, is to educate the public.

9:00Because the politicians can only get away with this stuff if the public is ignorant of basic economics. And it's not that you have to study real arcane matters of capital theory or monetary velocity and things like that. I know things like, gee, after the housing bubble pops and everybody from the president to the people of the Mises Institute agrees, the problem was there was too much money and too many resources going into housing, that the solution of that is not to give more tax credits to home buyers and to pump more subsidies into Fannie and Freddie May, right? You see that that doesn't make any sense, right? Whereas the politicians will say with a straight face, yeah, the problem was we had too much spending, Americans weren't saving enough, and that's why we want people to go max out their credit cards, which is what they're saying to people. It makes no sense. So, it's important in order for the public to understand when politicians are saying things, it just makes no sense at all.

9:48So, that's part of the reason why everyone should have a basic understanding of economics. Whereas, technically, it doesn't really matter if most people don't understand how toilets work, because if your toilet breaks, you can just call a plumber. You might have to pay more if you don't really know what you're doing, if it just was a quick fix and you have to have a plumber. But it's not that, whereas in economics, if the majority of the public doesn't understand how it works and they vote in politicians who enact horrible policies, even if I know full well it's not going to work, I can't get out of it, whereas if your toilet doesn't work, it doesn't really bother me unless I go to your house for dinner or something, right? But you can kind of take care of your own thing, whereas with economics, if the public in general doesn't have good ideas and the policies are horrible, that brings us all down. So it's sort of like we're all in this together, and that's partly why it's important in economics

11:06Let me give you some aspects of economics that are fairly typical and give you some examples. So one thing that economists do a lot is they will point out what's called unintended consequences of certain government policies. So economists, since they came into vogue, that's what they've been doing. And it used to be the case that economists were sort of a thorn in the side of the political authorities because people in charge like to imagine that they're pretty powerful and they think that, Oh, gee, if there's a recession, well, it's just a matter of us doing the right policy and that'll fix it like that or, you know, if there's massive inflation, well, we just have to crack down on these gougers and these speculators. People are pushing up prices and we'll fix it. So a lot of times the people in power overrate the things they're capable of achieving. And so historically, economists have often served the role of sort of being the annoying person in the corner saying this isn't going to work. And let me tell you why. And you guys are crazy, right? So that's historically how it was. Like I say, in more recent decades, it's

13:04So the question is, well, what's the trap? And usually, the way the argument would work, like if you see people writing letters to the editor, you know, it's, oh, well, I should have the right to be stupid if I want, and the government can't tell me what to do, and then other people would say, well, it's a matter of public safety, and yeah, it's a violation of your civil liberties for the government to force you to wear a seat belt, but come on, that's just, you know, common sense, right? So that's typically the way the arguments would work. Whereas economists, when they came on, you know, into this issue, they would say things like this, they would say, well, wait a minute, There might be unintended consequences. It might not necessarily be the case that if the government all of a sudden starts finding people who don't wear seatbelts and then presumably people start wearing their seatbelts more, that that's going to just be an unambiguous improvement for social health or whatever, reduction in fatalities, and the reason, well let me tell you what actually happened and then see if any of you can guess what the reasoning was. So, like I said, the economist who came up with this theory that I won't tell you what the theory was, but I'll just tell you the outcome. He went and measured this thing.

14:04So he would look at a state that passed the seatbelt law and then compare, you know, and then look at what happened to the fatalities in that state versus the adjacent states that, you know, had the old status quo. They didn't have seatbelt law. And what he found was that the states that would institute the seatbelt law, the fatalities among drivers was about the same. Okay, so the number of drivers per, or the number of deaths per traffic, per driver, whatever it was, would be about the same per year. But the number of accidents went up. And he also found, well let me just stop there. Can anyone come up with why that would be the case? People felt safer when they were driving, so they drove more recklessly

15:44and you're changing that right and then but all of a sudden you're going to pass an 18-wheeler all right and maybe it's raining it's it's it's drizzling i know i do this i stop and i put both hands up and i wait till i pass the 82 and then i go back right you see what i'm saying so it's it's not that you just always drive the same but depending on the circumstances you alter your behavior a little bit to give you another example this isn't going to ring true for you guys but your parents in the other room the safest i have ever driven in my life was the day i drove my I was like this, I was signaling with my hand, I was doing everything. I was driving like I had 20 pounds of nitroglycerin in the trunk, right? Because, you know, there's a newborn baby in the car, okay? So it's not that the days when I didn't have him in the car, I was driving with a death wish, you know, and I was just blindfolded or something, but the point is you do drive differently depending on the situation, and so other things equal. If somebody who before wouldn't have had a seatbelt on now because they're afraid of getting a ticket, they're wearing a seatbelt,

17:11The increase in fatalities was among pedestrians and bicyclists, because they weren't helped by the drivers wearing seat belts more frequently, but they were still getting hit by the people driving more recklessly. So in the states that passed these laws, they found the number of total deaths due to traffic accidents actually went up a little bit, whereas that shocked most people. So not only was the government violating people's rights to drive however they wanted, but they were actually killing people, and the other perverse thing was now the people who were The people who were dying really had nothing to do with it, whereas before the people who were dying were the ones that weren't wearing seatbelts, whereas now it was people who had the unfortunate luck of riding your bike in front of a guy who was driving recklessly. So that's just one type of example to see the sort of things that economists would do. Another example comes with the Endangered Species Act.

18:03So there, the government says, okay, there's certain, whatever it is, there's a certain slug or there's a, what is it called, the red, I don't even know how to pronounce it, cockadated woodpecker or something like that, and there's all these things, spotted owl, these things that you're out in the Midwest or something, you've got a big property, and if this thing is on your property, you cannot build a swimming pool, you can't, maybe you're going to cut down the woods there behind your house and plant some corn or whatever you're

19:02The arguments that might come from, you know, having these animals and preserving them, there's all sorts of untold benefits and, you know, just our job as stewards of nature is to preserve this, and that's kind of where the arguments, you know, butted heads, but then economists would come in and they'd say, wait a minute, what actually, let's look at the incentives, and is it true that passing this sort of, these sort of laws actually protects these species, and what would happen in practice was something called the three S's. Does anybody know what that was? Okay, the three S's in this context were Make sure I get it right. Shoot, shovel and shut up. Okay? So what that means is you're a landowner and you have big plans and you're going to, you know, the backhoe loaders are coming tomorrow, you've spent thousands of dollars and you're going to clear out your land and, you know, build some shopping mall or whoever knows what you're going to do.

19:49And you go out there and you see that there's a spotted owl in a tree. So what are you going to do? Are you going to go call the government? Say, come on in? No, you look You look around, you shoot the spotted owl, you dig a hole, you put this there, and you never talk of that again. You never mention that you ever saw a spotted owl on your land. So the point is that you can see, so it's not merely an issue of, does the government have a right to tell me what to do with my property, but that if your goal is to protect the spotted owl, it's not necessarily the case that passing these laws is the right way to do it. Alright, so that's just to give you some examples. Let's see, another thing economists talk about is what's called opportunity cost. And so here, the definition of that, what opportunity cost means, I'll tell you the definite, it's not really going to mean anything to you until I illustrate it,

20:43but the idea of what an opportunity cost means is it's technically the value of the next best thing that you're not able to do because of a decision you made. So it's not necessarily a cost that you're paying money out of pocket for something, but it means an opportunity that you're forfeiting because you're deciding to do something a certain way. So economists say that that's part of what influences behavior. It's not just how much you're paying out of pocket, it's the opportunity cost. Sometimes if you're missing out on an opportunity, that's a real cost and that influences behavior. Businesses Behavior. So, let me give you one example of that is I was in grad school and the UAW, the United Auto Workers, came in to unionize the economics graduate students, or actually the graduate students at all of NYU, New York University.

21:33Now, if you're going to ask me what the heck did the United Auto Workers have to do with unionizing the graduate workers, to this day I don't know. I was actually briefly a member of the UAW because, you know, they came in and they voted and I had no choice to be a member of the union but they came in so we were being exploited, we had to grade exams and you know your hand gets cramped, there's all sorts of horrible things that happen as a grad student and so anyway they came in to unionize us and the administration of NYU obviously didn't want some huge union in between them and the grad students because when you go to grad school, I realize some of you might not get the context, you actually get paid, right, that you go to, in most places, if you're getting a Ph.D. at least. So I would get a small stipend and I would study and then I would have to grade

22:19exams for a professor or something or sometimes you'd have to teach classes in the summer. And that was the deal. They would pay you because they knew you're already in debt from your undergrad that they had to give you incentives to try to go and get your Ph.D. So technically you were an employee of NYU, right, because they were paying you for services and then part of the compensation package was if you passed your test you got a Ph.D. So it wasn't The U.A.W. wants to unionize us as a collective bargaining unit and so forth and the administration didn't want that to go through obviously and so the provost of the school is going around meeting with the different departments to say why are you guys so unhappy? Why do you want to bring in the union? What's going on? You don't like this arrangement? We're basically paying you to get a Ph.D. Is that really so awful? And so they're asking what he wants to do to make things better and so one guy, and this was someone getting a Ph.D. from NYU which is a fairly highly ranked school

23:12And he said, well, what we want is we want to get subsidies for housing, because what would happen is we would just get a check every month from what our stipend was, and then you live wherever you want. And so this guy was saying, instead of that, we want to get a break on NYU housing if we choose to live at NYU. at NYU, and so the provost said, okay, we can do that, but you understand that the monthly check you get will have to be lower, right? Because there's a certain pile of money that we give you every month and you spend it however you want. If you want us, if you live at NYU housing and you want us to lower your monthly rent, we can do that, but then we're just going to, you know, we're going to have to give you a smaller paycheck for what you spend on others. Do you want us to do that? And the kids said, no, it doesn't cost you anything

23:59because you own those buildings, right? So if you just think through that, and again, This is a kid that's getting a Ph.D. in economics from NYU, and I'm sure he was horrified because then he had to go talk to the drama students, you know, and this is what he's getting from the economists. So I'm sure they're going to say, we want perpetual motion machines, you know, and okay. So just in case I lost some of you, I know if you don't get the joke and people are laughing, you kind of laugh because you don't want to look dumb. The reason that's a mistake is NYU owns those buildings and they could rent them out to and earn whatever the market rent is. Let's say it's $1,000 a month. And so if they're charging NYU students $1,000 a month, and then all of a sudden they say, oh, let's knock it down to $800. Well, yeah, they're still getting money from it. It's not that NYU has

24:47to pay someone $200, but that's $200 less they're getting because of that policy. So that's, in a sense, they're that much poorer. And so yeah, that does cost NYU $200 a month, that subsidy in a very real sense of the term. And that's what the provost was referring in the sky who is getting a PhD just you know he didn't even get that issue he thought no if you own a building you can rent it out for free it doesn't cost you anything okay let's see we how much does anyone know how much time we have here okay let me see I'll do I'll do one other opportunity cost one or let's some of the opportunity guys but a similar thing I had a friend we were we We're going to some event and we parked in a parking garage and we're walking out and he says something like, you know, when I get a little older I'm going to go into the parking garages because that's just the easiest business there is.

25:42You don't have to do anything, you don't have any costs, you just sit there, people just give you money as time passes. And so I think I probably did try to explain something to him and he probably got annoyed. But if you think about it, if that were true, then the world should be covered in parking garages.

26:28and the consequences are, you know, how much does it cost to keep that gate running and the ticket thing running and maybe some electricity for lights but it's really not that big a deal. And the point is though that, no, even beyond those things though, the fact is if it's in a downtown area that's very busy, that land is very valuable, right? So the owner could sell off that land and get whatever it's worth, a million dollars and then have a million dollars to go do something else with it. You could go invest it in the stock market or invest it in mutual fund or something, okay? The idea is, even though you're not technically losing money out of pocket, even if your expenses were zero, if nobody was going to your parking garage or only a few cars per day were going to it and you were in downtown Manhattan, it would be crazy if you were the owner of that place to keep your capital locked up in a parking garage. You'd be better off selling

27:16it to someone else for whatever that land is worth, a million dollars, and then investing

27:50It's called pricing theory. Where do market prices come from? How does a market price originate? And why are prices one number when they could be something else? So here, I'm obviously in five minutes, I'm not going to give you the whole story, but let me just get you to see how to think about the problem. So one idea people have, and this goes back to Aristotle I think even, is that people are thinking there's some objective fact about how valuable a good is. The Theory of Money and Credit

28:49for one thing, right, if the thing's really worth $10, chances are one of us is going to be getting exploited, right, just randomly, you know, if the price is just a penny one way or the other, one of us is getting ripped off, and then even if it does happen to be the case that we charge exactly what the thing's worth, well what's the point, right, that I give you a dollar, you know, a $10 bill that's worth $10 and you give me an item that's worth $10 and we're both, you know, we just swap something of equal value, what's the point? All right, so that, you see there's a problem there. Let me come at it from a different angle. You're going to a grocery store and you're shopping and someone sees something that's on sale, you know, there's hot dogs are, you know, 50 cents or something for the package of hot dogs. Whoa, that's great, a great deal. And they start putting hot dogs in the cart. Well, why do they ever stop? Think about it, right?

29:35I mean, if the hot dog, you know, if the thing is worth more than the price, you should just keep loading your cart up until it overflows or until you run out of money, right? If this thing is worth more than the price these idiots are charging, I'm just going to get as much as possible, right? If somebody had a $10 bill and said, hey, I'll charge you $8 for this, I would buy as many of those things as I possibly could. Think about it. Someone's charging you $8 for a $10 bill. I think some of you are like, wait a minute, I'm not sure. Afterward, let's go out and we'll play some card games and I'll... You can't lose. See what I'm saying? So you think about that, that's odd.

31:16Getting more, your supply of packages of hot dogs is going up, so an additional unit isn't as important to you, and the more you're planning on buying mentally, your stockpile of cash is going down, and so a further 50 cent expenditure becomes more and more onerous, if you will. The remaining dollars you have become more and more important as that happens, so you keep buying, you keep putting them in your cart until the point at which now I'm not going to get one more because that one, which is the eighth package of hot dogs, actually to me is not more valuable than the remaining 50 cents that I have. So that's one way of looking at it. Another implication, another thing I'm thinking is if it really were the case that goods had objective value and it was just a matter of people went out looking for people who were charging the wrong price and were fools, well it's kind of weird then that people coming out of a grocery store all come out with different carts.

32:41and engaging in moral relativism or something. No, we're not saying that, but what we mean is, as economists who explain people's behavior in a market, you start from the fact that people's tastes are different. Some people like hot dogs and some people don't. Some people have more money than others and maybe they're more willing to spend money on certain things. So you see, there's no contradiction. Once you have that idea, then we can solve the problem of why do we ever trade something? Why would anyone ever give me an object for a $10 bill and, you know, it either makes sense to do that or it's not the case that one person's getting ripped off, it's because our valuations are subjective, that if you're selling me whatever it is, a CD for $10, you, the person giving up the CD, you value my $10 bill more than the CD and I'm the person who's buying it, I value the CD more than the $10 and there's nothing contradictory

33:32about that, whereas if we're talking about something objective, like it wouldn't make It doesn't make sense to say, oh, I traded something for something you gave me, and we both walked away with the heavier object. That's impossible. No, one object is objectively heavier than the other, or they're the same. We can't both walk away with the heavier object. But yet, if the valuation is subjective, we can trade things, and we both walk away thinking, I came out ahead on that deal. I gave up something less valuable and got something more valuable, and there's no contradiction there. both agree with that statement and that's the essence of voluntary trade and how it improves everyone's standard of living. Okay, thanks a lot.