Sun, 07 Dec 2008

How to Think like an Economist

Economics in One Lesson is the most important book about economics that you may ever read. It will teach you how to think like an economist. This is important, because if you do not think like an economist, then anything you say about economics will be nonsense. Let me repeat that, because many many people think they can fail to think like an economist and still say sensible things. If you do not think like an economist, then anything you say about economics will be nonsense, or it may be sensible, but you will have no way to know the difference.

The one lesson, in its entirety:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Every economic error, every economic fallacy, can be tracked back to a failure of that looking or tracing. The classic broken window fallacy fails to trace the effects of paying to fix the window -- money that could not be spent on something the shopkeeper would have preferred to have.

Knowing this lesson is the equivalent of having a PhD in economics. It means that you're finally ready to start understanding economics, just like having a black belt means that you're finally ready to start understanding martial arts.

Go read Economics in One Lesson, and learn how to apply the lesson to the examples in the book. Then you will be ready to start thinking like an economist, and understanding the world of choice around you. For economics is not the study of money, or trade, or public policy. Economics is the study of choice.

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