President Ronald Reagan once said that if there was an edition of the popular board game Trivial Pursuit for economists, the game would include only 100 questions but would have 3,000 answers.
But I think he got that wrong. No matter how many questions, there are about seven answers that always apply. Here they are:
1. There’s no free ride. There are only tradeoffs. We can have cleaner air or a stronger military. Or more resources dedicated to social security pensions or cancelled student debt, but not both. The tradeoffs go on and on. Since we don’t always agree on priorities, the political chatter will continue.
2. People are rational actors. What this means is they respond in predictable ways to incentives. There are two basic kinds of incentives, taxes and subsidies. Tax something and you’ll get less of it. Subsidize something and you get more.
Let’s consider an example. Say government decides to tax rich people to allow for more generous welfare payments to poor people. Taxing income is a disincentive to work. Extending aid to the poor is also a disincentive to work. The net result could be more poor people, not less. And fewer rich people too. Which brings us to our next topic.
3. There are often unintended consequences. And they can be hard to predict. In our example above, the government had good intentions. In a rich country like ours, how can we remain idle while others suffer in poverty? Yet the final outcome was an increase in the ranks of the poor.
4. Trade is good. For most of history, transportation was severely limited or completely unavailable and nearly everyone was mired in a subsistence existence. Then technological advancement made trade first possible and then commonplace. That means the producer that enjoys better access to raw materials can outperform competitors who are not equally as fortunate. Cheaper, better products can find a bigger market. Or it might be that circumstances led to a particular population figuring something out first and maintaining a competitive advantage through continued experience. Advanced optics are an example. Gutenberg invented the printing press around 1440 AD in Mainz, Germany. As literacy flourished, it was discovered that oldsters like me couldn’t always read the fine print. The optical industry solved the problem and it shouldn’t come as a surprise that Germany dominated the optics industry well into the 20th century.
5. Competition is vital. An interesting case study is an individual often cited for stifling competition, John D Rockefeller. Rockefeller’s motto was, “the best… at the lowest price.” Over twenty years, employing the latest and best available technology, Rockefeller drove down the price of oil from 58 cents to eight cents per gallon, a reduction of 86%. Competitors were driven out by lower prices much like Main Street retailers were wiped out by Walmart decades later. Rockefeller became the country’s richest man but the benefits that accrued to all mankind was more.
Today, all kinds of cars burn that Rockefeller oil – Chrysler, GM, Toyota, Ford, Nissan and more. This competition results in an array of excellent choices. Take away competition and you get the Trabant, what some have called the worst car in the world. The Trabant was East Germany’s flagship car first produced in 1957. It would remain mostly unchanged until German reunification in 1989. It had a two-stroke anemic engine designed to burn oil. It was loud and underpowered. There was no fuel gauge. Despite the awful design and performance, it was the only car available in East Germany, so the waiting period to get one of these beasts could be as long as 12 years. And the cost was exorbitant – in 1989 a Trabant was $12,000 Marks, the equivalent of about $55,000 in 1989 dollars.
6. Regulation is a double-edged sword. We can all agree that we don’t want children doing dangerous factory work. And we want our food and water supply to always be safe. But should we be mandating electric vehicles? Regulation is another example of No Free Ride. There are not only tradeoffs, there are unintended consequences as well. Economist Sam Peltzman found that drivers responding to seat belt mandates felt safer and were thus inclined to drive more aggressively. The result is reduced motor vehicle deaths offset by increased pedestrian and cyclist fatalities.
7. Things look clearer through the long lens of history. Today, we worry about losing manufacturing jobs. And there’s no doubt that manufacturing employment has declined. But the wrong statistic is being considered. Manufactured output has remained steady. The decline in employment reflects an increase in efficiency. That increase in efficiency is necessary to survive, just ask Mr. Rockefeller.
The log lens of history helps us see this better. No one laments the loss of farming jobs. It wasn’t long ago that most of our population was engaged in agriculture, yet we were net importers of food. My dad grew up plowing a field behind a horse. Thankfully, those days are gone. Today we produce and export more food than ever employing less than two percent of the population. That’s progress and prosperity.
Manufacturing has already gone this way and will continue to do so. As already observed, there are fewer manufacturing jobs. The jobs that remain are better, safer jobs employing increasing numbers of knowledge workers guiding machines versus workers engaged in brute force manual labor.
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The future has never been brighter. Come back next time to find out about The Future of Garbage. Now that should be interesting!
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