A Good Economics Textbook

One of the deficiencies of my college education was not taking an economics course. I recently fixed that by spending 15 minutes each morning reading Principles of Microeconomics by Gregory Mankiw. Everyone should read this book (or something similar). Microeconomics is mostly common sense but, unfortunately, it seems that too many people – especially our politicians – don’t know these lessons.

Short aside: It’s amazing how much you can learn by just reading 15 minutes a day. In this case, it took me about six weeks to read a 500 page textbook that will be useful for the rest of my life.

This book had far too many concepts to summarize in a single blog post, but a few big things jumped out at me. I believe these will help you make better decisions in life. They will also help you understand why people behave the way they do and why the world works the way it does. I will try my best to expand on some of these concepts in future blog posts because some are so cool and/or so important.

1. Incentives matter. They matter waaaaay more than you think. Even if you think incentives are a big deal, you’re still underestimating them. A quote from the book: “[Economics is how] People respond to incentives. The rest is commentary.”
2. Trade-offs. All decisions involve trade-offs. These trade-offs aren’t always obvious when you make a decision, so beware of unintended consequences.
3. Opportunity cost. This is just a fancy way to say trade-offs but economists love it. Phrased another way, “What could you be doing with your time/money instead of what you’re  doing right now?” How much is that other option worth (in terms of money, enjoyment, etc).
4. Comparative advantage. If you’re better at doing two things than someone else, do the one you are much better at and let them do the other one. Don’t do them both yourself. This concept isn’t immediately intuitive but it is awesome once you understand it.
5. Externalities and the Tragedy of the Commons. Many people love free markets but they ignore an important problem with unfettered markets: companies can do things that have a cost to society but no direct cost for them. Two obvious examples: Water and air pollution.
6. Free markets are the best way to organize an economy. Life is too complex for a central authority to consider all the first, second, and third order effects or know what everyone  really wants. Free markets solve this problem in a pretty good way – most of the time.
7. Government intervention is crucial in making free markets work properly for society because of externalities. Items #6 & #7 are clearly in tension.
8. Productivity gains are the only real way to grow an economy. Other indicators may rise faster than productivity for awhile, but they MUST fall below productivity gains later because, in the long run, the economy can’t grow faster than productivity. Watch this great video by Ray Dalio on the subject.

Again, there are tons more insights that you should learn from this book (like dead weight loss, moral hazard, elasticity, etc), but I’m out of time today.

Bottom line: Take an economics course.