Ask a D.C. insider what’s the best way to solve the debt crisis. Nine times out of ten, they’ll recommend taking on more debt. That’s how things operate in the Potomac swamp. Up is down, right is left, digging yourself into more debt is the best way to get out of it. But it wasn’t always like this. In fact, there used to be common sense when it came to the economy. So where did it all go wrong?
Politicians talk about the uninsured. Special interests argue on behalf of those with pre-existing conditions. But why is no one wondering how doctors are affected by the new law? They’re the ones on the frontlines dealing directly with new patients, as well as the red tape that makes bureaucracies go round.
Politicians proclaim the benefits of small business while on the campaign trail. But when they meet in the seedy halls of Congress, they have no problem doing whatever they can to stifle, regulate, and subdue their progress. Instead of siding with entrepreneurs, these politicians often side with political allies and cronies that helped put them into office.
Just because you’re retired doesn’t mean you have to stop working. Especially now that you have all the time in the world to do what you really want. Entrepreneurs don’t only come out of Silicon Valley. They come from all walks of life, from all different ages. If you’re retired and want to stay active while you relax, then find out the steps you need to take in order to start, manage, and grow your next small business.
Austrian economics does more than tell you what happens when the government disturbs market forces. In the hands of knowledgeable investors and entrepreneurs, it can tell you exactly what to expect from the market. Market behavior depends on how people behave. And how people behave is central to the Austrian perspective.
The U.S. dollar has been the world's reserve currency for almost a century, and already there are signs it may be in decline. But that doesn't mean it's not still valuable. On the contrary... As Chris Mayer explains, there are many reasons the U.S. dollar will remain relevant on the world stage for years to come. Read on...
World War II might have dragged the country out of the Great Depression, but it did so at a great price. Central planning took center stage, and politicans and bureaucrats suddenly knew what was best for America, the economy, and your life. On top of that, they replaced the free market with a new economic system… Creditism.
If you’re good at something should you be penalized so others have a chance at success? Should award winning actors and actresses be barred from future Oscar ceremonies to give other men and women the chance to succeed? Success should always be rewarded and encouraged. But what happens when you have a government that wants to even the playing field and take away the spoils of success. Gregory Bresiger finds out...
Practical people often pooh-pooh fiction reading as a time wasting dalliance, dominated by a Marxist coloring of the world. However, fiction readers were given a scientific reason recently for spending hours absorbing fanciful figments of someone’s imagination.
Argentina is suffering the ravages of government debasement of the currency -- i.e., inflation, the process by which government pays for its ever-increasing debts and bills by simply printing more paper currency. The expanded money supply results in a lower value of everyone’s money, which is reflected in the rising prices of the things that money buys.
When government expansion is allowed to continue unabated or when it casts a heavy regulatory shadow on America’s entrepreneurial spirit, the freedoms that we’ve come to know, and perhaps take for granted, slowly begin to slip away.
Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.
Baron Rothschild, the famous French financier, was once heard to say that he knew of only two men who really understood money -- an obscure clerk in the Bank of France and one of the directors of the Bank of England. “Unfortunately,” he added, “they disagree.”
The new reality of Obamacare’s tax credits has left finance reporters to pen articles warning readers to “take care” when considering a tax credit and providing strategies for how best to “protect yourself.” So what do finance reporters know that the White House doesn’t?
Nihilo ex nihilo fit. Out of nothing, nothing comes. First put forward by ancient Greek philosopher Parmenides in the fifth century B.C., Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a “first mover” to get things going. Even if the whole thing began with some kind of “Big Bang” moment, it still needed a banger to bang it. Who? God, of course.
Economic theories don’t lend themselves to laboratory testing, so the work of a national appraisal firm is especially enlightening. A new study lends support to the Austrian business cycle theory, which says that the less government is involved, the faster a market will recover.
What positive steps can we take? The energy that is now expended by well intentioned, freedom-seeking individuals on the destructive course of politics can be turned into powerful steps that will have a positive effect on the future. All are moral, right and just. None require aggressing. Consider the following...
The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
Finally, my obsession comes to an end.
For a full week, I’ve thought about not much else besides the economic concept of “marginal utility.” It has consumed me completely. I’ve come to realize how much it pervades my thinking about virtually everything.
I first heard about the notion in college, but one book revived the whole topic for me. It is Philip Wicksteed’s The Common Sense of Political Economy. It’s a book that makes economic logic real in our lives.
The Common Sense of Political Economy is an excellent example of a rediscovered classic — a book of profound importance in its time that came to be lost in the shuffle for no good reason. I read it for the first time only recently, and the importance of the book overwhelmed me. Here is a treatise on economics written at the dawn of the discovery of the great principle of modern economics: marginal utility.
It is as mighty and significant as Adam Smith’s Wealth of Nations or Ludwig von Mises’ Human Action, and like these books, it is not just a dusty old tome, but one that speaks directly to the great issues of our time.
This is why I’m thrilled that Laissez Faire Books is the publisher of this new edition, the first modern edition with American spellings, correct graph placements, cleaned-up citations, and perfect navigation. Also, a great teacher of modern economics has written a great introduction to it. He is Peter Boettke of George Mason University. He writes as if the author is an old friend and the ideas he is discussing are at the front of his mind always.
Wicksteed’s clarity exceeds any other presentation I’ve read, mainly because it is not a translation, but in English originally. Wicksteed’s enthusiasm, even love, for the topic itself is obvious on every page. He is like a tour guide in a great castle who turns on lights in room after room and proceeds to explain everything in each room with precision and excitement. The reader can detect this in his prose.
Why does he put the phrase common sense in the title? There are two meanings. He sought to bring a certain unity to the opinions and debates within economics at the time. The principle of marginal utility had been written about and taught for several decades. It was the great discovery within economic theory of the last half of the 19th century, but was only then becoming the full consensus of the science itself. Wicksteed sought to make the marginalist way of thinking the “common” way.
The second way he uses the term is to capture the effect of marginalist thinking on the human mind. Once you get the principle, the functioning of the world becomes clearer to you. What was previously mysterious now seems rather obvious. What had previously baffled you now seems perfectly clear. The marginalist way of thinking becomes, in the most colloquial use of the phrase, “common sense.”
Wicksteed writes with the passion of a hobbyist (he was actually a Unitarian minister in “real life”), but with a precision that exceeded all the professional economists of his time. It still stands as the most elaborate, detailed, and extensive exposition of the idea ever written.
If you stick with his argument from beginning to end, your thinking will be permanently affected. You will see marginal utility all around, in every economic action. It will provide new ways of thinking of prices, resources, and human behavior. You will have an impenetrable edifice against the fallacy of thinking of the value of whole classes of goods and services, and instead will see value as exclusively attached to the incremental choice of the acting person.
What is marginalism? It is the notion that economic value extends from the incremental choice one unit at a time. Why does this matter?
Let me give the nearest example at hand. I have a cup of coffee in front of me. I made it with my Keurig coffee maker. Each Keurig cup costs 50 cents. Is that too much or too little? On the one hand, it is crazy expensive. I could pay $4 for a full can of coffee and make probably 40 cups, paying only 10 cents per cup.
Why don’t I do this? Because my choice is made at the margin. I’m not evaluating a whole stock of a good. I’m making my value judgments on just the one cup of coffee that I want to drink right now. This is the relevant unit, not some abstraction concerning how much coffee is at the store or on the ships coming from Africa or the whole stock of coffee growing in plantations all over the world. What matters to me in making the choice of whether the coffee is “worth it” is the cup right in front of me.
The classic puzzle that marginal utility sought to solve was this: Why are diamonds so much more valuable in the market than water, even though water is obviously more necessary for life? Just on the face of it, shouldn’t it be the reverse? Marginalism solves the issue. The choice for one or the other is made on the incremental unit, not on anyone’s opinion on the value of the whole class of goods.
From the point of view of human choice, water is usually far more plentiful and available than diamonds, whereas diamonds are much less so and, therefore, have a much higher value per unit. The situation could reverse itself in a different social context. A man dying of thirst in the desert will pay far more for water than diamonds. This is how prices come to be: The choice at the moment of decision-making for or against the increment of what is available right now.
Marginal utility theory solves many other seeming mysteries. Why are movies that cost tens of millions of dollars to make available for download for only a few bucks or even for free, while video games that might cost only a few thousand dollars to make priced $50 and $100? The answer is that the user is not making judgments based on the cost of production, but only on the use value of one unit to him or her at the point of decision making.
Marginalism helps explain wage puzzles too. Why do plumbers make so much more money than baby sitters, even though baby sitters are guarding and protecting human lives and plumbers are only unstopping drains? The baby sitter might indeed have great total utility to society, but the market makes judgments on the margin. Baby-sitting services are much easier to come by, whereas plumbing services are relatively scarcer. Consumers do not care about total utility; they care about obtaining the service in the one instance in which they need it. That decision is what determines the price.
This insight further addresses wage issues that would otherwise mystify people. Why does a basketball star, who would seem to provide nothing necessary to human life, make so much more money than a reading teacher, who is teaching a crucial skill? Again, it is not the total utility of the task that matters for economics, but the utility of the incremental choice of the acting person.
Why, on holidays, are restaurants open but banks closed, when surely banking provides a more unique service to society and anyone can cook stuff at home anytime? The answer is that restaurants make higher profits on the margin on holidays, when people want to go out to eat, whereas the banks have discovered that their profit margins are best served by opening when people tend to do their banking, which is not on holidays.
Marginalism helps illuminate many other economic concepts, such as opportunity cost (the real cost of anything is the thing you give up to get it), subjective value (economic value resides in the human mind, not the physical good), diminishing marginal utility (the more of each additional unit you buy, the less you are willing to pay for it), and the relationship of cost and price (the cost of a good never dictates its market prices; indeed, the reverse is true). It provides insight in nearly every aspect of human behavior.
Once you begin to think about the margin, the scales truly do fall from your eyes.
You will notice the book is gigantic. But it is also a joy to read, because Wicksteed’s own enthusiasm is infectious. Maybe you will be like me and truly come to admire and genuinely like the man behind the prose. I appreciate his spirit of discovery and exposition. It’s absolutely marvelous that he can speak to us again, a full century and two years after his masterpiece first came out. It’s a big, but worthy task to go on this tour of economic reality with him. Marginalism will become your “common-sense” way of viewing the world when you’ve finished.