Why is it important to understand economics?
First, watch this short video:
Mostly from article: Why it's Important to Understand Economics
William Walstad, University of Nebraska , December 1, 1998
George Stigler, a Nobel Laureate in economics, probably stated it best almost three decades ago when he wrote:
"The public has chosen to speak and vote mainly on economic problems, so the only open question is how intelligently the public speaks and votes."
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In Stigler's view, economic literacy is special because it contributes to two classes of knowledge.
#1 First, it serves as a "means of communication among people, incorporating a basic vocabulary or logic so frequently encountered the knowledge should be possessed by everyone."
#2 Second, it is a "type of fundamental knowledge frequently needed and yet it is not susceptible to easy transmission from experts."
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Re #1 Economic literacy and communication.
People like to think and talk about the economic issues that affect them as consumers, workers, producers, investors, citizens and in other roles they assume over a lifetime.
Economic literacy gives people the tools for understanding their economic world and how to interpret events that will either directly or indirectly affect them.
Nations benefit from having an economically literate population because it improves the public's ability to comprehend and evaluate critical issues, in both the short run and long run.
This understanding is especially important in democracies that rely on the active support and involvement of its citizens.
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Re #2 Fundamental knowledge is frequently needed.
For some economic decisions, such as buying a home or investing in the stock market, it is possible to hire professional or technical help when making a choice.
But in most cases it is neither economical nor practical for an individual to hire a skilled professional every time an economic decision needs to be made.
Even when such advice is given, the final choice must be made by the individual, not the adviser.
What this means is each person must ultimately serve as his or her own economist in making many economic choices.
This is whether those choices involve buying a product, getting a loan, voting on candidates and economic issues, and many more.
Economic literacy improves the competence of each individual for making personal and social decisions about the multitude of economic issues encountered over a lifetime.
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However, whether there is a case for economic literacy is not the most important question that needs to be answered.
The more essential question to be asked is: How can we improve economic literacy in our society?
Answering that question naturally turns the focus to economic education.
The development of economic literacy must begin in the schools.
Even young children are capable of learning basic economic concepts that help them understand their economic world.
In the secondary years, that initial foundation can be expanded to include instruction in a broader set of economic ideas and concepts.
This additional education gives students greater capacity to understand more complex personal or national economic issues.
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Given the situation of fewer than half of high school graduates take a course in economics it should not be surprising many studies show there is widespread economic illiteracy among youth and the American public.
In one such study covering basic economic concepts administered to 11th and 12th grade students nationwide and found students supplied correct answers to less than half the questions.
The question that can be asked at this point in the discussion is "So what?" Why does it matter whether a student has taken an economics course or knows something about basic economic concepts?
The answer is economic knowledge has a direct and substantive effect on people's opinions about economic issues.
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The development of basic economic literacy is an important goal for a democratic society that relies heavily on informed citizenry and personal economic decision-making.
To achieve that goal will require the significant gaps in the economic education of youth be closed by giving economics a more central place in the school curriculum.
More economics coursework at the precollege level sets a foundation for economic literacy.
(end of article section)
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Re the scarcity problem discussed in the video:
As the economy grows, caused by increasing business profits, more products are developed, then improved and prices are lowered, all due to the profit motive and competition.
As a result of business profits our living standards increase, each generation lives better than the previous one.
Large intergenerational improvements in living standards did not begin until the 1800s as wealth-increasing capitalism replaced wealth-hording mercantilism.
See Figure 1 for the effect of this change.
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What are the differences between mercantilism and capitalism?
ChatGPT:
Mercantilism (1500s–1700s)
Core idea: National wealth = stockpile of precious metals (gold, silver).
Goal: Maximize exports, minimize imports to keep gold and silver flowing in.
Trade policy: Heavy use of tariffs, subsidies, monopolies, and colonial control to protect national industries.
Role of government: Very strong intervention — the state directed trade and granted privileges to certain merchants or companies, like the British East India Company.
View of wealth: Fixed amount — nations competed in a zero-sum game - one country’s gain was another’s loss.
Capitalism, the 1700s onward.
Core idea: National and individual wealth = productive capacity, including factories, technology and human capital.
Goal: Encourage free exchange, competition, and private enterprise to maximize efficiency and innovation.
Trade policy: Generally free trade, with minimal restrictions. Comparative advantage result is both trading partners can gain.
Role of government: Limited — protect property rights, enforce contracts, control market failures including pollution, but otherwise allow markets to guide resource allocation.
View of wealth: Expanding — production, innovation, and exchange can grow wealth for all, a positive-sum game.
Summary:
Mercantilism = government-controlled trade to hoard wealth: zero-sum.
Capitalism = market-driven production and trade to expand wealth: positive-sum.
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How do business profits grow the economy and improve living standards?
Example, for Company A:
Per product unit costs are $100, mostly wages for workers.
The product unit created from those inputs sells for $110.
Where the economy had $100 of wealth before, it now has $110.
Where the economy had 100 businesses it now has 110.
Where the economy had 100 employees it now has 110.
Where the workers made $90 before they now make $99.
The $110-$100 = $10 difference is:
-mostly re-invested to improve and grow the company
-some goes to Company A owners as a reward for their entrepreneurship including risk-taking
The owners in turn either re-invest their earnings or spend it, both increasing amount of jobs and wages and the size of the economy.
In capitalist societies everyone is welcome and encouraged to become an owner/entrepreneur.
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