How To Interact With The News Logically

I’ll be truthful, I have a hard time interacting with people. I’m an introvert that would really like to be an extrovert, but only occasionally. In economics, it’s very important to consider how we interact with people, and when we think about a larger scope this also applies to how businesses interact, and even countries. Later on in this blog, I’ll apply current events to this category, but for right now it’s important to know that the economic principles that I’ve been talking about (writing about?) this week will apply to discussions later on.

So I will keep this brief tonight and give an example or two about how these principles apply to current events.

Principle number 5 is that trade benefits everyone involved. There have been lots of heated debates this past year about international trade and there are some concerns about whether it’s beneficial for the United States or not. While it may be true that there could be too much international trade, I think that when we look at it from a rational perspective, if the US extremely limited trade, then it would have a negative impact on the American people, and especially the lower-income Americans. If we remember from principle one, there are trade offs to everything, but the opportunity cost, what we give up if we took an extreme opposition to trade would result in higher prices for Americans to pay. Think about it. Americans, all of us, want to be paid higher wages, and we definitely want to be paid higher than what workers in other countries are paid. The consumers here would have to pay more for products to be produced domestically.

Of course, there are many perspectives to this issue, but if we look strictly at the principles, and the mathematics, trade makes everyone better off.

Principle number 6 is that markets are a good way to organize economic activity. It sounds like there’s a lot to be unpacked from this principle, but my job with this blog is to make it simple for you and me!

If we didn’t organize the economy by markets then, we are not able to get an accurate view of the economy. Maybe the stock market looks good, but the housing market isn’t. If we chose to organize the economy without markets then that results in a centrally planned economy, of which most centrally planned economies fail. At one point or the other, they will fail. An advantage of organizing the economy by markets is that we get to view Adam Smith’s Invisible hand. That theory says that there’s an invisible force that drives the economy because people work in their best interests. By working towards your own self-interest you are increasing or decreasing different markets in the economy.

Think about it this way: Gas prices are high. If they stay high then, the market for gasoline powered cars goes down and the market for eco-efficient cars goes up. This way of looking at an economy – by markets – is essential to accurately understanding different parts of the economy. This allows you to think independently beyond the news if you can analyze the economy in this way.

Principle number 7 says that governments are sometimes useful in the market place. You can refer to this post for more details, but I think what applies to this category the most is that most any government policy either promotes efficiency or equality. The invisible hand is powerful, but it’s not always present and sometimes people acting in their own interests can harm other people. That is when governments need to enforce rules and institutions, like the police force, in order to help keep order in an economy.

The biggest take away from this principle is that I want you to think like this: next time you see a policy come up on the news think about it with these principles. Is it promoting efficiency or equality? What are the trade offs? What are you giving up to get this? Is it a rational marginal change or is it a leap of logic? What’s the incentive for you? Will the trade make both parties better off? What market is this for and is it organized properly?

That’s all the principles we have covered so far that you can apply to every single day of your life. Tomorrow we’ll cover the very last three! See you tomorrow!

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