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Mankiw – Chapter 1. “Ten Principles of Economics,” 3-18. A number of economists have their preferred lists of ‘key’, principles, or big ideas in economics. Mankiw outlines his ‘top ten’ in Chapter 1 (3-18) of his text, Principles of Macroeconomics. Gwartney and Stroup lay-out their ‘ten key elements of economics’ in the first section of their book, What Everyone Should Know About Economics and Prosperity (1-29). In a recent Investor’s Business Daily editorial, Paul Craig Roberts presented ‘seven
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   Mankiw – Chapter 1. “Ten Principles of Economics,” 3-18. A number of economists have their preferred lists of ‘key’, principles, or big ideasin economics. Mankiw outlines his ‘ top te n’ in Chapter 1 (3-18) of his text,  Principles of Macroeconomics . Gwartney and Stroup lay-out their ‘ ten key elements of economics ’ inthe first section of their book, What Everyone Should Know About Economics and  Prosperity (1-29). In a recent  Investor’s Business Daily editorial, Paul Craig Roberts presented ‘  seven big economic ideas ’ and three related issues. Finally, in an editorialwritten by Walter E. Williams, entitled “Economics 101’, he identified the ‘ keycharacteristic of economics ’. In order to set the tone for this chapter in Mankiw and allfuture chapters, I can think of no better place to begin than in Williams’ editorial,“Economics 101”: More than anything else, economics is a way of thinking  . At the heart of economics are  several simple and easily observable characteristics of humans and the world in whichwe live. The  first  is that  people prefer more of those things that give them satisfactionand fewer of those things that give them dissatisfaction .  Second  , when the cost of some-thing goes down, people tend to take or do more of it, and when the cost of something increases, people tend to take or do less of it  . Finally , having more of one thing requiresless of something else . Or, as my colleague Professor   Milton Friedman puts it, “There’sno free lunch.” [“Economics 101,” available at: www.townhall.com/columnists/walterwilliams/ww000607, emphasis added] It would be wise to read Williams’ entire editorial to discover how he applies these basic principles to ‘  public policy issues ’. For more about Milton Friedman go towww.dallasfed.org and ‘ click  ’ on ‘  Publications and Resources ’ ( top banner  ); then to ‘E’( extreme upper right  ); and then on ‘  Economic Insights ’. Now, page down to “MiltonFriedman – Economist as Public Intellectual,” Economic Insights, Vol. 7, No. 2; or youmay simply go to:www.dallasfed.org/research/ei/ei0202.Paul Craig Roberts in his editorial has identified the  seven big economic ideas of the 20 th Century (having had the most socio-political influence). He lists: (i)communism (socialism); (ii) Keynesianism and spending or demand-side economics;(iii)Hayek’s identification of “the market system as aninformation network”;(iv)monetarism à la Friedman’s notion “demand is amonetary phenomenon”; (v) supply-side economics;(vi)Coase and transaction cost analysis (“laws and propertyrights” affect economic outcomes, i.e., so-called ‘market failures’; and(vii)Buchanan and ‘public choice’ economics (“policy-makers use public policy to advance their ownself-interests”).  Note that there are explanatory materials devoted to Frederick Hayek, James M.Buchanan and Ronald Coase available on the Dallas Federal Reserve website:1  “Hayek – Social Theorist of the Century,” @www.dallasfed.org/research/ei/ei9901 ; “James M Buchanan – The Creation of Public Choice Theory,” @ www.dallasfed.org/research/ei/ei0302; and“Ronald Coase – The Nature of Firms and Their Costs,” @ www.dallasfed.org/researh/ei/ei03.03. Additionally, an historical evaluation and comparison of John Maynard Keynes andFrederick Hayek and their influence of politics and economics during the 20 th and early21 st centuries may be found on the PBS website relating to one of their programs, “TheCommanding Heights,” especially: ‘Episode One: The Battle of Ideas’ @www.pbs.org/wgbh/commandingheights/lo/story/index. Roberts begins his editorial by stating: “The two most influential – communism andKeynesian economics – proved themselves to be false, but the shadows they cast kept thefive valid ideas in the shade.” He proceeds by examining the ‘seven big ideas’, andconcludes by observing: Government growth is the 20 th century reflected two big ideas that proved to be wrong. If the five valid economic ideas prove to be as influential, the future will bring a contractionof government. In Chapter 1, Mankiw lays out the ‘ Ten Principles of Economics ’ that he perceives to be most important. In many ways Mankiw’s ‘  principles ’ corresponds quiteclosely with the ‘Ten Key Elements of Economics’ that are discussed in the first sectionof Gwartney and Stroup (1-29).  Principle #1 .  People Face Tradeoffs – The ultimate source of the need for tradeoffs is the‘scarcity of (natural) resources’, sometimes this is known as the ‘  Law of Scarcity ’.This is reflected in what  Milton Friedman has characterized as “ There ain’t no such thing as a free lunch ( TANSTAAFL ).” This true since to devote scarceresources to one use, necessarily means that there are fewer resources available toallocate to other, alternative uses. These ideas are best seen in the ‘  production possibilities curve ’, see: Figure 2 (25). This principle applies to individuals(households), as well as to society as a whole. In making a decision whether or not to expend some portion of a household’s (or a nation’s) scarce resources(income) [or GDP] on a particular good/service (public policy), tradeoffs should be taken into consideration, e.g., the benefits derived and the costs imposed byincreasing taxes on households in order to provide  subsidies to farmers (fromhops to tobacco, from wheat, cotton and corn to sugar and ethanol). Resourcescarcities serve as a constraint on economic production in the short-run, but over the longer run the constraint is relaxed as  prices rise . Price increases stimulate new discoveries and older, leaner sources are made more profitable [old copper deposits and oil wells have been made more profitable by higher prices, whilesmall or distant, previously uneconomic deposits, are made profitable].Additionally, as  population grows the potential labor force is expanded; newtechnologies are developed [olive/animal fat lamps, candles, whale oil lamps,kerosene lamps, electric lights] encouraged by rising prices; and substitutes are2  found and developed [fiber glass as a substitute for steel in auto bodies and fiber optic cable replaces copper wire in telecommunications]. This process may beseen in Schumpeter’s ‘  perennial gale of creative destruction ’ driven by theentrepreneur, his/her quest for profit by innovating. [See: W. Michael Cox.“Schumpeter – In His Own Words,”  Economic Insights , Vol. 6, No. 3; or online@www.dallasfed.org/research/ei/ei0103]The ‘  free lunch mythology ’ is clearly addressed by Walter E. Williams in aneditorial he wrote in 2001, “There’s No Free Lunch,” @www.townhall.com/ columnists/walterwilliams/ww20011003. In it Williams introduces several ideasof the 19 th Century French economist, Frédéric Bastiat (1801-1850). [See: RobertL. Formaini, “Frédéric Bastiat – World Class Economic Educator,”  Economic Insights , Vol. 3, No. 1; or online @ www.dallasfed.org/research/ei/ei9801] Williams quotes from one of Bastiat’s pamphlets, “What is Seen and What is NotSeen,” which illuminates the issues discussed by Gwartney and Stroup as their 10 th Key Element of Economics. Bastiat wrote: There is only one difference between a bad economist and a good one: The badeconomist confines himself to the visible effects, the good economist takes intoaccount both the effect that can be seen and those effects that must be foreseen. Walter Williams uses the writings of Bastiat to refute the silly notions regardingthe potential economic outcomes (benefits) of 9/11 – job creation associated with public and private expenditures ‘rebuilding’ the damage. He employs Bastiat’swell-known, but often forgotten, idea of the ‘ broken window fallacy ’ [a childthrows a rock through a shopkeepers window, which then has to be replaced,creating work and income for the glazer ( that which is seen )]. But this is not thewhole of it, since it fails to take into account what the shopkeeper might havedone with this money, it alternative use ( that which is unseen ), say the purchase of a new jacket.] There is in fact a reorientation of spending and income earningaway from the tailor and to the glazer. Williams concludes: “  Property destructionalways lowers the wealth of a nation .”For other examples of the ‘free lunch’ mythology, governmentintervention and applications to contemporary issues, see the following: Thomas Sowell. 2001. “Electricity Shocks California,” @www.townhall. com/columnists/thomassowell/printts20010111.Thomas Sowell. 2001. “Property Rites,” @ www.townhall.com/columnists/thomassowell/prints20010809.Thomas Sowell. 2002. “An Ancient Fallacy,” @ www.townhall.com/columnists/  thomassowell/printts20020527.Walter E. Williams. 2004. “Minimum Gasoline Prices,” @www.townhall.com/columnists/walterwilliams/printww20040331. 3    Sowell, in “Electricity Shocks in California,” points out the role of government,through the use of price controls, in creating shortages and then seeking to shift the blame onto the private sector  . Notice what Sowell writes, In the never-never land of California ideology, it is considered terrible if the publicshould have to pay the full cost of what it wants.In California, prices higher than you like are attributed to ‘  greed  ’ or ‘  price gouging  ’and the answer is either more government regulation or having the government takeover the utility company completely and run it….But  just as there is no free lunch, there is no free electricity . And the idea that thegovernment can run businesses at lower costs flies in the face of worldwide evidence  that whatever enterprise politicians and bureaucrats run has higher costs.Far from lowering the cost of producing electricity, government at all levels has for many years and in many ways been needlessly increasing that cost. (emphasis added) He concludes with: But if we are too squeamish to build a dam and inconvenience some fish or reptiles,too aesthetically delicate to permit drilling for oil out in the boondocks and too paranoid to allow nuclear power plants to be built, then we should not be surprisedif there is not enough electricity to supply our homes and support a growing economy. Mankiw provides an interesting example of  a social tradeoff  that needs carefulconsideration: a tradeoff between efficiency and equity . Notice Mankiw’sdefinition of terms (found in the margin of page 5): efficiency – the property of getting the most  it can from its scarce resources;” and, “ equity – the property of distributing economic property  fairly among members of society.” Please note theinherent disconnect between the two terms: ‘ efficiency ’ is a ‘ technological concept  ’, while, ‘ equity ’ refers to some ‘ moral standard  ’. ‘  Efficiency ’ may bemeasured as an increase in some quantitative variable (output, costs, price) whichraises social welfare, while ‘ equity ’ is a qualitative term , (defined as “somethingthat is  fair  or   just  ”), a term that has as many meanings as there are peopleobserving – what’s fair to me, may be unfair to others (reducing their well-being).Perhaps, as important in understanding these distinctions, is the decomposition of economics and economic analysis first made by John Neville Keynes, father of John Maynard Keynes, in his book, The Nature and Scope of Political Economy .Keynes argued that an individual’s approach to economic analysis may take oneof three approaches: (i)  positive analysis ; (ii) normative analysis ; or (iii) the art  of  practicing economic analysis.  Positive economics involves the study of economic phenomena as they are ( an empirical approach ), while normative economics considers economic phenomena as they ought to be ( implying some ethical  judgment, without specifically identifying whose ethical values are being used asthe standard  ). Further clarification may be found in Chapter 2 (28-9) whereMankiw differentiates the tasks of the economist as: (i) ‘  scientist  ’ (implying4
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