Basic Economics Is Intuitive

The seeming paradox is that you can easily explain these concepts to children. I believe that Sumner even states that kids on a playground intuitively understand comparative advantage. Auction-type markets happen all the time in the lunchroom, so it’s easy to get a feel for supply and demand.

It’s adults, who have built up priors and biases over the years, who seem to have the problem understanding basic economic concepts.

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.

I have real trouble explaining that one in an intuitive manner.

Bryan,

You are not cherry picking so much as ignoring the problem entirely. These beliefs are not held because they are right or wrong or due to some understanding. They are held because they are beneficial to organized interest groups vs. a very large disorganized majority.

#1 Free trade makes countries richer.

Yes, but it also forces a painful redistribution of jobs which job holders (in the cloth, auto, and paper industries for example) would like to dearly avoid.

#2 Strict labor regulation is bad for workers.

Correction: it is worse for new workers. The incumbents are served quite well.

#3 Egalitarian socialism creates poverty.

Once again, egalitarian socialism is to the benefit (short term at least) of the ones who are the recipients of wealth redistribution.

#4 Prices are determined by supply and demand.

Price fixing is definitely a boon to either a small set of customers or an even smaller set of sellers.

In each of these cases, the larger majority simply does not care. They have better things to do. Even if counter productive policies do get passed, the cost to each individual member of the majority is minuscule (per policy). Thus the organized minority spends significant resources on its pet policy while the majority either ignores the issue all together or, after listening to the “reasonings” of the minority, proceeds to act in a complete irrational manner (as you demonstrated in Myth of the Rational Voter). Your arguments, intuitive, correct, or not, are never given an adequate platform in the first place.

PS. If you are continuing your reading on social science, may I recommend Political Parties by Michels and Mind and Society by Pareto (assuming that you have not read them already).

Evan: If the minimum wage was a trillion dollars an hour, do you think anyone would ever get hired for anything?

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

Counter-intuitive claim (paraphrased from Adam Smith):

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

Counter-intuitive claim (paraphrased from Adam Smith):
“The ultimate goal of economic activity is not production, but consumption.”

Are you kidding?

Which would you rather do:

1) Bake a pie, and not eat it

2) Eat a pie, and not bake it

Are you kidding?

I don’t personally find it confusing…but there are entire cottage industries that thrive off of confusing the concept…not to mention politicians who have made careers doing so.

It may have been a bad example, as Bryan dealt with free trade, but it is the first that came to mind (hat tip to Don Boudreaux).

Counterintuitive Claim: The division of National Insurance Contributions into Employers Contributions and Employees Contributions is bogus.

Obviously supply and demand in the labour market are part of the story about how the incidence of taxation is divided up, but it would be nice to see a simple answer to the question: why don’t the employers pass along the whole of their share of the burden in higher prices. It is not as though the customer can shop around and buy more cheaply from the firm that is evading Employers National Insurance contribution.

I want to refine my counterintuitive claim and say: The division of National Insurance Contributions into Employers Contributions and Employees Contributions doesn’t even get the number of parts right. It is a three way split, paying money to the government through 1)lower wages, 2)higher prices, and 3)a lower return on your savings and investments.

Hmmmm…reading Bryan’s and the other commenter’s examples leads me to this conclusion:

Every claim from an economic model can be oversimplified.

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

Hmm… DW brings up an interesting problem with this challenge. Is the goal of the challenge to make any counterintuitive economic claim intuitive, even the ones that whole branches of economists disagree with? I am, of course, referring to the paradox of thrift, of which I’m pretty sure the austrians are not big fans.

Is it possible to make intuitive a claim over which there is vast disagreement? And if you can, can you make it intuitive without tipping your hand as to which side you fall on?

But you’re right that most important economic ideas can/should be explained intuitively. i.e.:

If people at the bottom of the pyramid don’t have enough money to buy things and support productive enterprises, people at the top have no profitable and productive enterprises to invest in. So they manufacture gambling enterprises that endanger the whole edifice.

Gu Si Fang noted that Gresham’s Law, particularly in the case of fiat money that has been declared legal tender, has become unintuitive.

Gresham’s Law was intuitive when money was all coin–with a fixed exchange rate between bad–shaved–coins and good ones. Coin could be shaved down secretly, yet might be taken at the face value stamped on it unless it was weighed. People simply shaved down their coins, reused the shavings; and used the shaved coins–which looked fine–in shops and amongst each other. Gresham’s Law was also intuitive during the years of internationally fixed exchange rates in the mid-1800s through early 1970s, when the promoters of different currencies battled politically and intermittently to have their currencies accepted at face value even when their currency values were known to have been undermined by overprinting.

The trick to understanding Gresham’s Law–that bad money drives out good–is to understand that it only holds when the exchange rate between alternative monies is fixed. The bad coins were only accepted because and only as long as they were believed to trade 1-for-1 with the good ones.

If the exchange rates between several alternative currencies are flexible, there is not a big problem for people to hold and use all those several currencies simultaneously. No single money incessantly drives out the others. The currencies simply trade amongst each other at mutually-agreeable values.

Gresham’s Law is less intuitive now, when for years we have been able to travel abroad and use other monies at flexible exchange rates any time we want. We no longer live in a world of fixed exchange rates. All the same, we do think before we pay about the various interest charges we might incur. Even when one legally-declared currency is required as legal tender over vast areas, the availability of other currencies or other payment options at floating exchange rates makes it less critical to use only that one legally-required currency. Sometimes black markets in other currencies even override local currency use.

A modern and intuitive discussion to Gresham’s Law is available at About the Book and Author, introducing the text of William Brough’s The Natural Law of Money.

The key point for Gresham’s Law is that the currencies in use have to be traded at fixed exchange rates for the bad one to drive out the better ones. The minute fixed exchange rates break down, Gresham’s Law breaks down. Bad money won’t drive out anything but wasps if all you can do is trade it for what it’s worth. It’s only if it trades at a value above its worth–say, by law at its face value–that it drives out any other alternative monies.

I wouldn’t mind if you did a whole essay intuitively explaining interest rates and the Fed. Actually, if you could just write a children’s picture book explaining the specifics of what the Fed is and what it does, I would be sooo happy. Everything about economics seems intuitive to me except when it comes to the Fed.

If the so-called multiplier is greater than 1, then why not spend a 100 trillion dollars tomorrow so we can all be rich.

Counterintuitive: Limits on foreign ownership makes a nation poorer.

This is a Canadian issue. If something of the slightest political interest is put up for sale, a hue and cry about how we are selling out rises up. If the political winds are strong enough, the sale is forbidden.

What this does is put a risk cost on any investment in Canada (what political wind will blow when?), and often limits the selling price to whatever another Canadian will offer, hence decreasing the real value of an asset.

Derek

Oooh, can I play? Counterintuitive claim:

“Luring businesses to your state through targeted tax credits and subsidies is bad for the state’s economy”

My answer: It’s like taking your wife’s purse to the bar to finance your attempts to pick up girls. The girls may let you buy them drinks, but they won’t be impressed.

Taking from the rich to give to the poor doesn’t reduce but increases income inequality and “social injustice.”

I think if people looked at most of these economic claims from an objective standpoint they would slowly reason out the ‘intuitive’ conclusion. However in reality I think the biases like ‘anti-foreign’ and ‘make-work’ that you speak of Bryan are more important in their thinking.
It seems to me people think more like this:

* No labour market regulation means people will have to work for nothing and can be fired without warning

This was certainly the case with Howard’s Work Choices reform in Australia and lost him the election for trying to reduce labor market regulations. I doubt most people’s ability to connect the dots from less regulation to lower unemployment, especially considering their tendency to be emotionally involved. If unemployment is at 6%, then 94% of the work force think they will be made worse off by less labor market regulations – that’s their intuition.

Counterintuitive claim: unless we stop subsidizing recycling, recycling will be bad for the environment.

Intuitive version: Recycling uses resources like energy, time and labor. If it takes more resources to recycle a can than it takes to make a new one, we shouldn’t recycle. If it takes fewer resources to recycle a can, it will be profitable to do so.

And one for you (if you would):

Counterintuitive claim: Subsidizing good things is bad.

Matt:

Highly recommended: How an Economy Grows and Why It Doesn’t, by Irwin A. Schiff. (Click to download PDF.)

An article in the Economist looked at the evolution of hoarding whereby people value things more once they have them. They tested this by offering someone a mug or a chocolate bar, most took the chocolate bar. However when they were given the mug to keep, and then got someone to ask if they wanted to swap it for a chocolate bar far more declined. A similar test was performed on chimps and had the same result.
This shows how we may be inclined to value things more once we have them…such as labour market regulations, or protectionism for uncompetitive industries. So preference for the status quo is perhaps blinding their ability to think intuitively?

Bryan,

I love this post and I love your simple, 6th grade explanations. They are nothing less than brilliant.

Now I get to be a party pooper. How does the fact that these concepts can be explained simply make them intuitive rather than counter-intuitive? According to The Free Dictionary, (http://bit.ly/Jw6Oo) intuition is:

1.a. The act or faculty of knowing or sensing without the use of rational processes; immediate cognition. See Synonyms at reason.
b. Knowledge gained by the use of this faculty; a perceptive insight.
2. A sense of something not evident or deducible; an impression.

Both my personal experience and my history with others confirms that much of economics is, in fact, counterintuitive. For example, people’s intuition tells them that market’s are Zero Sum. Its a fallacy that can be easily overcome with a simple explanation (“Last time you bought that cup of coffee you and the seller were both better off, etc”)

So I remain unconvinced that you have proven your thesis.

But still, I would like you to give me your 6th grade illustration for this counter-intuitive claim:

People make decisions at the margins.

From a Big Fan,

Steve

Here’s a couple:

Counterintuitive claim: Temporary tax cuts do not stimulate the economy, but permanent tax cuts do.

Counterintuitive claim: Labor unions reduce the aggregate wages paid to non-union workers more than they increase the aggregate wages paid to union workers.

Steve Roth says:

Bryan, this is only intuitive because it’s an inaccurate depiction of egalitarian socialism. Sweden is not the PRC;

Sweden is a member of the EU, which is perhaps the most libertarian government in existence.

There’s not a single thriving, prosperous country in the world that doesn’t engage in a huge amount of egalitarian socialism.

We can get all wrapped up in the definition of “country”, but since European labor, capital and goods can freely flow across the borders of the member countries of the EU, they are quite analogous to the US states and make the EU quite analogous to the US federal government.

Why is there not a single prosperous country that operates according to the principles of libertariansism? Shouldn’t one have emerged by now, and left all the others in the dust?

The EU emerged and, if it can avoid collapsing into collectivism or falling apart, is on course for outcompeting the US as its member countries move toward economic liberty. How do you explain that?

I’m not going to present a challenge because what you have posted on your most recent intuitive blog does a good job of demonstrating your idea about counterintuitive basic economic principles. I’m a college student who just now learned and understood the basics in my Microeconomics class. I don’t know if it’s my age of learning or the atmosphere I’m in but when the basic principles were presented to me in a counterintuitive way I understood it perfectly. The Law of Demand has an inverse relationship, Price Ceiling occurs below the equilibrium price while Price Floor occurs above. Many basic ideas just appear backwards to me, but they work and occur in everyday life. Maybe to sixth graders it doesn’t make sense, but for me and my age the original writing of the principles and their explanation counterintuitivity and all worker just fine.