Bryan Caplan  

Intuitive Econ Challenge

PRINT
My First Day of Class... From Poverty to Prosperity<...
In a recent post, I posed a challenge:
State any proposition in basic economics in the comments, and I'll make it intuitive in a follow-up post.
Now I'm back to keep my promise.  Fortunately for me, many of the 55 comments don't require a response because they (a) didn't take up my challenge, (b) overlapped, (c) stated false propositions, (d) went beyond basic econ, or (e) answered their own challenges.  But I've still got my work cut out for me.  Here goes:
Evan writes:

Counterintuitive claim (falls under the strict labor market regulation claim, but even more counterintuitive):

Restricting private employers from paying employees below an arbitrary point is bad for the average worker and growth because it inhibits the number of possibly available jobs.

Intuitive version: Average workers are going to have to pay higher taxes to provide for the low-skilled workers who aren't worth hiring at the minimum wage.  That clearly hurts average workers, and growth will probably take a hit, too.
Matthew Gunn writes:

Counter-intuitive claim: A steady flow of around a million immigrants per year taking jobs in the United States doesn't increase the unemployment rate of natural born Americans.

Intuitive version: We grow a lot more food per person than we used to, but it doesn't mean that we let grain rot in the fields.  It means that grain gets cheaper.  The same goes for immigrants.  They may reduce wages for (some) natural born Americans, but there's no reason for them to cause unemployment.

Gu Si Fang writes:

I'm in desperate need of an intuitive explanation of Gresham's law : good money drives out bad, except with legal tender laws.

Don't you mean "especially with legal tender laws"?  In any case:

Intuitive version: If merchants can't tell good money from bad - or if the law forces them to pretend they can't see the difference - people will pay their debts with bad money, and squirrel good money away.
Artturi Björk writes:

Counterintuitive claim:

Motives don't matter, competition does.

We are better of as consumers if selfish people compete with each other who will get to be of service to us rather than being served by altruistic person who doesn't face competition.

To be honest, I'm not convinced this is generally true.  I give my kids much better service than the market ever has.  But I'll try to restate what you're getting at.

Intuitive version: With competition, selfish people can't get ahead unless they make their customers happy.  And unless you're lucky, the most competent person who loves you won't do as good a job as the most competent person who wants your business.  After all, billions of people want your business, and you're lucky if ten people alive love you.
Nilkas Blanchard writes:

Counter-intuitive claim (paraphrased from Adam Smith):

"The ultimate goal of economic activity is not production, but consumption."

I'll outsource this to greenish:

Which would you rather do:

1) Bake a pie, and not eat it

2) Eat a pie, and not bake it

Greg Ransom writes:

Counterintuitive Claim: during a recession it is _not_ a good thing when natural disasters give the government a reason to hire people and build things to replace what has been destroyed.

Intuitive version: If there hadn't been a disaster, the government could have taken that money and paid people to make something new.  And where did the government get that money in the first place?

Joe Cushing writes:

Counterintuitive Claim: Commodity speculators reduce volatility and cannot drive prices to their advantage.

Intuitive version: Speculators' goal is to buy low - which keeps prices from falling even more - and sell high - which keeps prices from going even higher.  And while a speculator can try to drive prices to his advantage, other speculators are usually around to meddle with his plan.

Joe Cushing writes:
Counterintuitive Claim: Eliminating jobs by increasing productivity is a good thing. Likewise, creating jobs by reducing productivity is a bad thing. --Usually the part about productivity is left out of the political discussion but I wanted to be clear where I was coming from on this.

Intuitive version:  Higher productivity means that the same number of people can produce more stuff - and the people who lose their jobs move on with their lives and eventually find something better to do.  If we didn't let productivity "destroy jobs," we'd still all be farmers.

Alan Crowe writes:

Counterintuitive Claim: The division of National Insurance Contributions into Employers Contributions and Employees Contributions is bogus. [he also has a refined version, but I think it goes beyond basic econ]

Intuitive version: If the government passed a law requiring your boss to give you free football tickets, what do you think he'd do?  He'd cut your pay - or at least your raises - to make up the difference.

Lode writes:
Counterintuitive claim: Regulation of drugs can have negative effects on our health.

Intuitive version: If you delay a drug that saves 10,000 lives a year for 7 years, how many people did regulation kill?  What is 7 times 10,000 again?  Right, 70,000.

DW writes:

1. coase theorem

2. paradox of thrift

I don't think the paradox of thrift is even true, and in any case it's far from basic econ.  The Coase Theorem is on the border of basic and advanced econ, but I'll take a stab at it anyway:

Intuitive version: If finding and making deals cost neither money nor time, whoever cared the most in dollar terms would pay everyone else to give him his way.
Mark writes:

Self-interest: By acting in their own self-interest, individuals without intending to do so, serve the interests of others.

See my reply to Artturi Björk, above.
Eric H writes:

Counter-intuitive claim:

Interpersonal comparisons of utility are not possible.

Since I think interpersonal comparisons of utility are possible, I can't help you. :-)
dkite writes:

Counterintuitive: Limits on foreign ownership makes a nation poorer.

Intuitive version: Some owners run businesses better than others.  Limits on foreign ownership are affirmative action programs for domestic business owners who couldn't make it on their merits.

OK, I'm done.  How'd I do? 

P.S. My apologies to anyone who feels overlooked.


Comments and Sharing





TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2377
The author at The Liberal Order in a related article titled Self-Interest writes:
    Bryan Caplan asked for examples of paradoxes of the economic way of thinking for which he would then provide intuitive explanations for the paradoxes. I asked Bryan to provide an intuitive explanation for how self-interested behavior serves the interes... [Tracked on October 3, 2009 9:53 AM]
COMMENTS (28 to date)
Hoover writes:

Counterintuitive claim: That there are two types of money - bad money and good money.

Counterintuitive because as far as I'm concerned, as a consumer and non-economist, I've never had any problems exchanging my money for goods or services. Is some of my money good, and some bad? If so, how do I tell?

Kurbla writes:
    Bryan: Intuitive version: If the government passed a law requiring your boss to give you free football tickets, what do you think he'd do? He'd cut your pay - or at least your raises - to make up the difference.

If he has freedom to cut my pay as he wishes, then my wage would be $5 per month already. So, I'm pretty sure he'll find at least part of the money for my tickets in his profit. Maybe he'll sell his car, I don't know.

    Bryan: Intuitive version: Average workers are going to have to pay higher taxes to provide for the low-skilled workers who aren't worth hiring at the minimum wage. That clearly hurts average workers, and growth will probably take a hit, too.

Not only workers will pay taxes for that purpose, but capitalists as well. All that increased tax money, collected from both workers and capitalists, will go to unemployed workers. Workers (counting employed and unemployed) win, capitalists lose. Growth? Loss of profit will increase competition between capitalists. Sounds OK for me.

Eric H writes:

Bryan--

Can you tell us why you think interpersonal comparisons of utility are possible? Or at least give us some links to old blog posts where you spelled this out, or to other online sources that substantiate this view? Is my hunch that you talk about this in your paper "Why I am Not An Austrian Economist" correct? I haven't read all of it yet :)

wesley writes:

I thought you did well with the Coase Theorem. Not so well with this one: "Intuitive version: If there hadn't been a disaster, the government could have taken that money and paid people to make something new. And where did the government get that money in the first place?"

Solomon Stein writes:

Kurbla, if your employer unilaterally cut your pay to $5 an month, you'd move on to a job that paid you more than that, and so assuming your produce more than $5 a month to your company (seems reasonable), he'd be foolish to do so. Competitive wages are a way of keeping valuable employees. To anticipate the normal objection to such an idea, even in an unregulated labor market some sort of hiring cartel is going to be impossible to sustain.

Imagine if you did have some sort of wide-scale cartel on wages. Then, any given firm could have their pick of the best individuals in the entire labor market merely by defecting and paying a marginally higher wage. If this behavior was observed or even suspected by the other firms, they would have to raise wages as well in order to retain their most talented workers, and the cartel breaks down into a functioning labor (black) market.

This competition does not need to be based on pure wage to make any given job more attractive, either. If we're all being paid (by government-sanctioned and enforced cartel) $5 a month, one firm could again gain total hiring freedom if they offered good enough perks. In fact, that's one of the ways salaries with lower wages compete against high-wage paths for skilled employees at the moment. Professors get a lot of perks that make it a good job, but they're trading a lot of income to get them.

David R. Henderson writes:

Bryan,
Tough crowd. I read about the first two thirds and I thought you did great.
David

Jake Russ writes:

I'll take a stab at responding to Kurbla as well:

I own a fictional boat shop. We make boats, but I can't do it by myself, I need people who are competent enough to help me make boats. I would like to pay them nothing, keeping all the money for myself. But for some reason, no one shows up when I offer zero pay. My want to make/sell boats exceeds my want to pay my workers zero. So I must compromise by paying wages at a level where competent people show up to help, instead of staying home asleep or working for the other boat guy.

Wesley:

Bryan is correct about the natural disaster.

I would read "What is seen and what is not seen" by Bastiat. Medium-length essay. Breaking a window puts a window repairman to work (Seen). But it also makes the shop keeper poorer because he had to pay for a broken window, instead of doing something else with that money (Unseen). Recognizing the employment gains to the repairman without recognizing the lost opportunity to employ those resources elsewhere is no way to do analysis.

If this we not true, I'd be out breaking A LOT of windows right now. The economy could certainly use it.

Lauren writes:

Hi, Hoover.

I think what Bryan means is a claim that is true about economics, yet counterintuitive. A false claim, however common it may be, cannot be made intuitive. Asking for an intuitive explanation of why the moon is made of cheap green cheese instead of the best quality Manchego leads to a whole different level of explanation. The moon is not made of cheese!

There are not two types of money--bad or good. If you can spend the U.S. dollars you have in your pocket at your local stores without those stores' weighing them or saying they are worth only 90% of their advertised prices or asking you to fork up another 10% over their advertised prices (even beyond taxes), your money is good.

In the United States, you are not required by law to accept at face value monies that could become "bad"--for example, Argentinian or Fijian currency. If those moneys were to experience hyperinflations and become poor financial assets to hold or accept relative to the U.S. dollar, even then they still could not drive out the "good" U.S. dollar because they would simply trade at lower exchange rates.

It is only if those currencies were also legal U.S. fiat monies traded at fixed exchange rates in the United States--required to be accepted at face value with no discount by U.S. citizens, businesses, and the government as payment for taxes--that they would drive out the "good" local money.

We have not had fixed exchange rates in the United States since 1972. Bad money cannot drive out good money without a fixed exchange rate. The only thing that could happen is that people could vote by holding their bank accounts and doing daily transactions in currencies other than the U.S. dollar, were the dollar to devalue relative to alternative international currencies. If you want to hold other currencies in your pocket because they are more stable in value than the U.S. dollar, I certainly don't discourage it. But they won't get you any interest, and they are probably as likely to depreciate in value as the U.S. dollar. The relative expected depreciation rates you personally expect for alternative currencies are the only relevant next questions you should ask yourself. There are no bad monies or good monies when exchange rates are flexible. It's up to you to decide if you want to hold U.S. dollars or some other country's currency.

David writes:

wesley, Bastiat did a good enough job on the broken window fallacy in 1850.

[Bastiat's essay is also available free online in translation at "What Is Seen and What Is Not Seen", in his Selected Essays on Political Economy. --Econlib Ed.]

wesley writes:

I don't understand what Bastiat's broken window fallacy has to do with a natural disaster during a recession. We're going to have natural disasters whether or not we're in a recession; we certainly don't manufacture them to create jobs. I thought the person posed a pretty interesting question that combined ideas about recessionary spending with ideas about gov't insurance.

But maybe "natural disaster" means something other than what I thought it meant.

Kurbla writes:

Solomon, I agree with you. When I wrote "If boss has freedom to cut my pay as he wishes, then my wage would be $5 per month already" i didn't mean that state prevents him from cutting my wages. Market does. Or union. Or fear from sabotage or revolution. The point is, boss cannot cut my pay "to make up for difference" just because he wants that.

John Thacker writes:
Average workers are going to have to pay higher taxes to provide for the low-skilled workers who aren't worth hiring at the minimum wage. That clearly hurts average workers, and growth will probably take a hit, too.

Not sure that this is intuitive enough, or that you're explaining the reasoning enough. I would also stress that by working low-skilled workers can gain skills.

I would say something like: "We're not going to let anyone starve. But it makes more sense for low-skilled workers to work and be supplemented a little by the EITC than it does for them to not work at all and get higher benefits in welfare. Not only does this cost the average worker less in taxes, but it's better for the low-skilled workers, who have a better chance to improve their skills and make more by working than they do by being on welfare."

But maybe that's not worded simply enough.

David writes:

wesley, you really can't see a natural disaster as a whole bunch of broken windows?

Nacim writes:

I fully support this endeavor to make economic ideas more intuitive and think you have some great examples. A few quibbles...

"Intuitive version: Average workers are going to have to pay higher taxes to provide for the low-skilled workers who aren't worth hiring at the minimum wage. That clearly hurts average workers, and growth will probably take a hit, too."

This would be more likely to confuse the audience than anything as you're making several assumptions about the situation without explaining them, as well as coming off as unassertive (i.e. growth will probably take a hit).

Here's my shot at this:
Unskilled workers tend to already have higher jobless rates than any other group. How does making them even more expensive to hire help them?

I also think your immigration example needs more work as it is rather muddled and unclear at the moment. Perhaps that fallacy needs to be attacked from the 'finite number of jobs' angle?

dullgeek writes:
OK, I'm done. How'd I do?
As an econ wannabe, I think I'm in a good position to judge whether or not the intuitive claims actually hit their mark. I suspect that some of you are so familiar with the concepts behind these claims that the non-intuitive version already makes sense to you, so the intuitive version is a home run.

But as someone who has a comparative advantage at something other than econ (but who nonetheless is really fascinated by econ), if the intuitive version doesn't make sense to me, I think it's a good indicator that the conversion didn't work.

And I think a number of the conversions didn't work. My general objections are that you didn't do a very good job of getting the reader to relate to the side that you're trying to convey. For example:

Intuitive version: Higher productivity means that the same number of people can produce more stuff - and the people who lose their jobs move on with their lives and eventually find something better to do. If we didn't let productivity "destroy jobs," we'd still all be farmers.
The listener/reader is going to relate to the people who lose their jobs, not to the benefits of productivity. I think a better way to make this intuitive would be to get the listener/reader to relate to being the beneficiary of production, e.g.

Which would you rather get:
2 bags of groceries with $10
5 bags of groceries with $10
Don't you think we should reward those who can produce more for the same price? Do you ever think its a good idea to reward those who produce less? Shouldn't you give your money to those who produce more even if it means that those who produce less have to learn to be more productive?

greenish did a good job of doing exactly this, and you immediately outsourced to him. That said, I think greenish's conversion still failed. Because clearly a baker would rather bake a pie and not eat it than the other way round. Or he wouldn't trade. Here's how I would have translated that particular counter-intuitive claim:

Assuming that both require the same production efforts, what would you rather do, eat an apple pie or a worm pie? The production efforts of the worm pie are wasted. The production efforts of the apple pie are valuable. It's consumption that determines which is which.

RubberCity Rabble writes:
Brian wrote: Intuitive version: Higher productivity means that the same number of people can produce more stuff - and the people who lose their jobs move on with their lives and eventually find something better to do...
Here in the rust belt, many people who lost well-paying manufacturing jobs did not find something better to do (taking you to mean "better" in the economic sense). Many have not even found something comparable. As Arnold Kling pointed out, when industries dispense with workers who have only high school education, "the job losers have almost nowhere to go."

Increasing productivity can produce structural unemployment. In the overall economy there can well be more gained than lost, but for job-losers individually (especially older workers) the outcome can be a lower standard of living. People who've experienced this outcome or seen it happen to a family member or neighbor can't ignore this reality. The job losers' intuition might conflate Bob Seger with one of the other posts above -

Would you rather be:
1) young and sure and makin' thunderbirds
2) old and doubtful and bakin' pies (fries?)
Might a more complete final version be: Higher productivity means you can produce the same amount of stuff with fewer workers. Cutting some workers reduces your labor costs, so you can reduce the price of the stuff you produce (good for consumers) and/or increase your profit (good for you and your investors). Even when some of the displaced workers never re-achieve their previous wage, the good for the overall economy exceeds the individual bad results for the people who lost their jobs.

dullgeek writes:

I hope that I'm not too late to get a conversion request in:

Counterintuitive claim: Despite the fact that there is a finite quantity of oil in the world, we will never run out. (You can substitute oil with any good.)

Russ Roberts did a great job of converting this, but it took a story. Can you do it in a sentence or two?

Jacob writes:

Great job Bryan. It was very insightful. Thanks.

In order to answer the employer contributions question, I always find it easiest to explain the situation from the firm's point of view only. Imagine the firm pays $50K for your salary because that is what it believes is the market rate for your skills. Then throw in a 15% tax, half on the employer and half on the employee. The firm doesn't care what the split is on "who pays what" in the tax. It just cares about how much is the total cost for your services. If the market rate is $50K, then it's total cost to keep you on board will stay $50K, and your take home pay will drop accordingly. (Of course, I'm making assumptions on elasticity of the labor market, but I've found that the general idea is pretty intuitive.)

John Thacker writes:
Increasing productivity can produce structural unemployment. In the overall economy there can well be more gained than lost, but for job-losers individually (especially older workers) the outcome can be a lower standard of living.

Not structural unemployment in the long-term, but it's certainly true that the job-losers, especially older workers, may be worse off permanently because they have skills that are no longer useful. They'll get other jobs, but they might not be as good jobs. Other, younger people will be more likely to get the good jobs.

However, do you think it's fair to ask young people, who have less wealth, to accept worse jobs so that older people who have had good jobs all their lives can keep them? The older people were younger with good jobs once, the now young people deserve that chance. Is it fair to take from the poor to give to the rich? (Viewed over a lifetime, for some of the same reasons why young people paying higher premiums now to subsidize the elderly isn't really fair, even if they benefit from it when old. Not all young people will live to be old, and it seems cruel to punish most the young people that will never get to be old to help older people who got to experience a full live.)

ThomasL writes:

Hoover,

The quintessential example of good and bad money is cigarettes in prison camps. "Good" money is a real factory cigarette, and "bad" money is a cigarette which has been re-rolled to produce more from the same amount of tobacco.

When you conduct transactions in cigarettes sticks, it is to every buyer's advantage to try and dispose of their bad money and keep their good.

It is never to the seller's advantage to take hand-rolled cigarettes instead of the real thing, so you have a friction between the two parties, but at least you have an understanding, and probably an established exchange rate after a while.

Wandering outside the prison camp, when governments pass laws that require sellers to accept the money at face value no matter what, the buyers suddenly have a tremendous advantage and will dispose of "bad" money as much as possible on those forced to take it, and save their "good" money for other purposes.

When those laws don't exist, everyone tends to gravitate to the more desirable asset, good money. Everybody wants good money, only some people are willing to deal in bad money, so you're always better off holding good money vs bad.

Kevin Burke writes:

Could someone provide an intuitive explanation for

1) why we should use educational vouchers rather than government-provided schools

2) why vouchers won't leave poor kids "abandoned" in crappy schools?

I try to explain vouchers to my friends but it's really difficult

ThomasL writes:

KevinB,

Why should we eat at restaurants we pick instead of eating gov't provided food? Why should we live in houses we pick instead of gov't provided houses?

Even with redistributionist programs like food stamps, people are allowed to choose their food rather than being forced to eat at gov't provided soup kitchens.

ThomasL writes:

KevinB,

From another angle, people often choose where to live based on the availability of good schools. Wouldn't it be tremendously more efficient if instead of moving your entire family and house to use a particular school you could just drive your kid there? Maybe efficiency isn't the argument to make, but it seems like any system that begins with a justification of "Take it; take it and thank me for it," can't be that hard to criticize.

odinbearded writes:

Bryan, excellent work. I'm going to have to bookmark this for further reference.

However, I'm having trouble with the immigration comparison. Maybe it's just me, and someone can clear things up, but the analogy doesn't seem to work as well as the others. Weren't there times when grain was left to rot (see U.S.S.R.) because of artificial overproduction? And couldn't we make a comparison that illegal immigration adds an artificial growth to the workforce? (As opposed to limited immigration and normal population growth)

Eric H writes:

RubberCity Rabble--

In a world minus the minimum wage, there would be work enough for everybody. If I lost my job and needed to pick-up a few extra bucks, I could wash cars or rake leaves or whatever at whatever rate the untrammeled market would bear and not worry about breaking the law.

Structural unemployment is a fact of life; masses of people made jobless because their skillsets are worth less than $7.25 an hour are avoidable.

Mike Gibson writes:

Awesome post Bryan.

M. Roh writes:

great post bryan! by the way, i also thought that the myth of the rational voter was the smartest book that i've read in a while. and i thought that your EconTalk argument that americans are happier than europeans was pretty funny, and persuasive.

RL writes:

Not bad Bryan.

One quibble and one serious problem:

1. You wrote: Gu Si Fang writes:
I'm in desperate need of an intuitive explanation of Gresham's law : good money drives out bad, except with legal tender laws.

Don't you mean "especially with legal tender laws"?

No, Gu is stating it correctly. Note he switched "good" and "bad".

2. You write, in an effort to explain that drug regulations have a negative effect on health: "If you delay a drug that saves 10,000 lives a year for 7 years, how many people did regulation kill? What is 7 times 10,000 again? Right, 70,000."

I use this example all the time myself, to explain that drug regulations HAVE A COST. But your goal was stronger; to prove that drug regulations have a cost THAT EXCEEDS BENEFITS. So far, you haven't done that.

Comments for this entry have been closed
Return to top