The Armchair Economist (revised and updated May 2012): Economics & Everyday Life

In fact the whole point of prices is that they adjust quickly to market conditions, and that’s a good thing. Even a purely altruistic convenience store owner who refuses to profit from a crisis would be well advised to raise the price of water and donate the proceeds to charity, rather than allowing all the water to be snapped up by whoever happens to arrive first or manages to elbow everybody else out of the way.

Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.

An economist who understands why teams punt knows what will happen if you change the rules; an economist who understands why people buy cereal knows what will happen if you give out free cornflakes; and an economist who understands why people accept certain job offers knows what will happen if you manipulate the inflation rate. That’s why we need stories—ideally, stories that are simple enough to understand, but complicated enough to bear some relation to the true story of the world we inhabit.

A famous professor of finance once lectured a group of successful investors on how markets behave. His talk painted a profound vision of how the world works but offered little in the way of practical investment advice. The audience, which had come seeking not wisdom but wealth, grew restless. When the professor invited questions, the first was overtly hostile and entirely predictable: “If you’re so smart, how come you’re not rich?” The professor (who was in fact the richest person in the room, but that’s another story) responded, “If you’re so rich, how come you’re not smart?”

Each profession has its drawbacks. Doctors get emergency calls in the middle of the night. Mathematicians spend months stuck in blind alleys. Poets worry about where their next check is coming from. And economists get asked to forecast interest rates.

I have a colleague who deals with this most onerous of questions by adopting the deliberative demeanor of a very wise man, pausing for effect, and then pronouncing, “I think they’ll fluctuate.”

When you are deciding how much to bid for a piece of land, the right question is not “Given what I know now, would I be happy to buy this land for $50,000?” Instead the right question is “Given what I know now, and assuming also that no other developer was willing to bid $50,000, would I still be happy to buy it for $50,000?” These are very different questions. Those who frequently buy goods at auction must learn to appreciate that difference and to adjust their bids accordingly.

Pressing the government into service as an enforcer is not so different from hiring an enforcer with a whip. (There is, however, a significant difference between the bargemen and the butchers: When bargemen conspire to work harder, they form a victimless conspiracy. When butchers conspire to offer less service, they conspire against the public.)

The economically correct argument is the most politically in correct argument imaginable.

The best argument for keeping new technologies legal is not that they benefit manufacturers but that they benefit their customers. Analogously, the best argument for keeping cosmetic breast implants legal is not that they guarantee freedom for women but that they gratify men.

In societies that allow polygamy, it is almost invariably men who take multiple wives, rather than the reverse. Males drunk on testosterone might imagine that their lives would be better in such societies, but if the fantasy were realized most of the fantasizers would be disappointed. For each man with four wives, there must be three with no wives at all. You can change the laws of marriage, but you can’t repeal the laws of arithmetic.