David R. Henderson  

The Most Important Economic Idea

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Questioner: If there was one economic idea you could explain to everyone on earth, what would it be?

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."

This is from Steve Horwitz's "Ask Me Anything" session on Reddit.


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CATEGORIES: Economic Education




COMMENTS (14 to date)
Matthew Moore writes:

Arrow's impossibility theorem.

My original reaction to this was literally disbelief that voting systems were so flawed

Cowboy Prof writes:

Opportunity costs matter.

They are part of the "great unseen" in the world of policymaking. Try to determine what these opportunity costs are the best that you can, but still anticipate that people who bear such costs will invariably find ways to circumvent your best policy intentions (i.e., there will be unintended consequences).

john hare writes:

TANSTAAFL,* There Ain't No Such Thing As A Free Lunch. Or in my native redneck, you can't get something for nothing, somebody has to pay.

*The Moon is a Harsh Mistress by Robert Heinlein.

Capt. J Parker writes:

Steve Horowitz has a good one. How does it fit in the Ten Pillars of Economic Wisdom? Would anyone buy this modification?: 4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use where value is measured by market prices.

Don Boudreaux writes:

Here's my 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.

Thaomas writes:

A great truth but it sometimes obscures a second truth; prices also determine the consumption possibilities of people.

WalterB writes:

What is seen and what is not seen...my home state is voting on single-payer health care and a rise in minimum wage, and this idea permeates the debates.

David R. Henderson writes:

@Capt. J Parker,
Steve Horowitz has a good one.
Horwitz.
Would anyone buy this modification?: 4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use where value is measured by market prices.
No, I would not. The value you place on the typical you buy is somewhat above the market price. Think about why.

Tiago writes:

I don't know if my candidate counts as fundamentally different from Steve Horwit's, but I would say that an understanding of the weak Efficient Market Hypothesis could greatly improve public debate.

Capt. J Parker writes:

@ David R. Henderson, You said:

No, I would not. The value you place on the typical item you buy is somewhat above the market price. Think about why.

I agree that value I place on an item I buy is at least marginally above the market price. If it wasn't then I wouldn't be benefitting from the exchange and I'd have no incentive to make the exchange. When I buy something the market price I pay is the measure of the lower valued use. My ownership (or consumption) is the higher valued use. How would I measure the value of this higher valued use? One way (I'm tempted to say the only way) would be to determine the market price at which I would become a willing seller of the item.

If I were engaged in production, wouldn't the market prices of my production inputs and my outputs be the fundamental measures which would determine if I were moving resources from a lower valued use to a higher valued use?

(my apologies for botching Steve Horwitz's name)

David R. Henderson writes:

@Capt. J Parker,
When I buy something the market price I pay is the measure of the lower valued use. My ownership (or consumption) is the higher valued use. How would I measure the value of this higher valued use? One way (I'm tempted to say the only way) would be to determine the market price at which I would become a willing seller of the item.
Yes.
If I were engaged in production, wouldn't the market prices of my production inputs and my outputs be the fundamental measures which would determine if I were moving resources from a lower valued use to a higher valued use?
Yes.
(my apologies for botching Steve Horwitz's name)
He gets that all the time.

John G Strong writes:

Steve Horwitz choose my favorite: informational content of prices. But my second choice would be the importance of *large* *markets* to the division of labor, to *choice*, both in goods and in types of employment (career paths) we choose, and so, ultimately, to civilization.

Hana writes:

There is no free stuff from government.

Charley Hooper writes:

How about the Invisible Hand? When we are acting within certain systems, such as a market economy, by seeking our own gain, we help others.

How true and yet unintuitive is that?

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