Common Sense Economics: What Everyone Should Know About Wealth And Prosperity
Physical Copy:
Audiobook:
By: Gwartney et. al.
Rating: A-
This book is what we all needed in economics class, someone to really dumb it down. A common phrase I use is,“explain it to me like I am 5.” . I truly admire people that understand a subject so completely that they can make it approachable to almost anyone. It seems that now more than ever economic literacy is a necessary skill set to navigate our professional world. This book is a great resource to anyone seeking that basic understanding.
My top 3 favorite takeaways were:
People earn income by providing others with things they value. If you want to earn a high income, you have to figure out how to greatly help others. On the other hand, if you are unable or unwilling to help others in ways they value, your income will be low. The direct link between helping others and receiving income gives each of us a strong incentive to acquire skills, develop talents, and cultivate habits that will help us provide others with valuable goods and services.
Production of goods and services people value, not just jobs, provides the source of high living standards. The foundation of any economy is moving goods and services supplied by one group to another group that values them more. The jobs created are actually producing something people value. On the other hand, destroying goods that people value will make a society worse off. That hasn’t stopped our government from enacting policies that do so (i.e. 1933’s Agricultural Adjustment Act and 2009’s Cash for Clunkers).
When discussing the role of the government: Allocation through political voting is fundamentally different from market allocation. “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
This book is made up of 4 lists:
Twelve Key Elements of Economics
Seven Major Sources of Economic Progress
Ten Key Elements of Economic Thinking About the Role of Government
Twelve Key Elements of Practical Personal Finance
Twelve Key Elements of Economics:
This section was Economics 101 articulated in layman's terms. Read these. What sticks out to you?
Incentives matter: Changes in benefits and costs will influence choices in a predictable manner. As an option becomes more costly, it is chosen less.
Opportunity Costs: Goods are scarce and therefore we have to make choices. Doing one thing makes us sacrifice the opportunity to do something else.
You must maintain adequate profit margins. If we want to get the most out of our resources, options should be chosen only when the marginal benefits exceed the marginal cost.
Trade promotes economic progress. First, the foundation of trade is mutual gain. Trade moves goods from people who value them less to people who value them more. Second, trade makes larger production and consumption levels possible because it allows each of us to specialize more fully in the things that we do best relative to cost. Third, voluntary exchange allows firms to achieve lower per-unit costs by adopting large-scale production methods.
Transaction costs are an obstacle to trade. Physical obstacles like oceans, rivers, and mountains make it difficult to get products to customers. Political obstacles, such as taxes, licensing requirements, government regulations, price controls, tariffs, or quotas do the same.
Law of Supply and Demand. Prices bring the choices of buyers and sellers into balance.
Consumers will not purchase a good unless they value it as much, or more, than the cost to make it. Profits direct businesses toward productive activities that increase the value of resources, while losses direct them away from wasteful activities that reduce resource value.
People earn income by providing others with things they value.
Production of goods and services people value, not just jobs, provides the source of high living standards.
Constant and never ending improvement. Economic progress comes primarily through trade, investment, better ways of doing things, and sound economic institutions.
Market prices bring people's efforts into harmony. The “invisible hand” of market prices directs buyers and sellers toward activities that promote the general welfare.
You must understand as many consequences as reasonably possible to make a sound decision. Too often long-term consequences, or the secondary effects, of an action are ignored.
Seven Major Sources of Economic Progress:
Legal system: The foundation of economic progress is a legal system that protects privately owned property and enforces contracts in an even handed manner. Private ownership involves three things: (1) the right to exclusive use; (2) legal protection against invaders - those who would seek to use or abuse the property without the owner’s permission; and (3) the right to transfer (sell or give) to others. When property is owned by the government or owned in common by a large group of people, the incentive for each user to take good care of it is weakened.
Competitive markets: Competition promotes the efficient use of resources and provides the incentive for innovative improvements.
Limits on government regulation: Regulatory policies that reduce exchange and restrict competition impede economic progress.
An efficient capital market: To realize its potential, a nation must have a mechanism that channels capital into wealth-creating projects.
Monetary stability: A stable monetary policy is essential for the control of inflation, efficient allocation of investment, and achievement of economic stability.
Low tax rates: People produce more when they can keep more of what they earn.
Free trade: People achieve higher incomes when they are free to trade with people in other countries.
Key Elements of Economic Thinking About the Role of Government:
Protect citizens and produce goods that are needed but not supported by the market (i.e. national defense, roads, stable currency).
Prevent Monopolies. When monopoly is present and barriers to entry high, markets will fail to achieve ideal efficiency.
Allocation through political voting is fundamentally different from market allocation. “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.
The economy is far too complex to be centrally planned and efforts to do so will result in inefficiency and cronyism. Unless restrained by constitutional rules, special-interest groups will use the democratic political process to obtain government favors at the expense of others. When governments become heavily involved in providing favors to some at the expense of others, inefficiency results and improper, unethical relationships develop between government officials and businesses. Public goods and externalities result in incentives that may encourage self-interested individuals to undertake activities that are inconsistent with ideal economic efficiency.
Key Elements of Practical Personal Finance:
I didn’t really care for this section. Broad strokes the advice is to:
Cultivate skills that improve your productivity in the marketplace.
Use and live by a budget.
Avoid credit-card debt.
Have an emergency fund.
Invest in index funds.
Conclusion
Our economy operates on a mathematical set of principles. The government operates on a different and oftentimes competing set of mathematical principles. When making decisions in your professional life, it behooves you to use the economic set of math principles.
Recommended.
