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April 16, 2003

Econ for Morons

Friedrich --

A young 2Blowhards visitor recently took note of a posting some months ago in which I made the claim that -- despite being a math-o-phobe, and a chart and graph-o-phobe too -- I'd finally managed to "get" economics. He wrote me and asked for some advice. Fool!

Nonetheless, despite my inadequacies, I have spent a lot of time trying to crack the subject, and I do have moments when I think that, in some vague-but-pleasing way, I've gotten the hang of it. I'm certainly no one to pay attention to, but I may by now qualify (on a good day) as a decently-informed fan. So, thanks to our visitor's prompting (and the fact that I co-manage this blog and can do as I please), I've indulged myself and devised this little course of study: Econ for Liberal-Arts Idiots.

It's now time for all of you who really understand math and econ to click over to another posting, preferably one where we aren't disgracing ourselves too badly.

OK, it's just us idiots? Well, then, an introductory note: Economics is great fun once the light starts to dawn. It really it is -- and I say this as a wildly impractical, arty guy. It's like philosophy only with built-in real-world checks. (Which doesn't seem to prevent many academics from floating off into the nowheresville academics seem to spend most of their time in.)

One key thing to understand is that "getting" economics isn't going to make you rich. Learning how to see things from the economic point of view is fascinating, but it ain't about predicting the future.

Another key thing to understand is the distinction between econ as a general subject and what's called personal finance. Econ is like history or lit -- enlightening in its own right. Personal finance is about being not-too-stupid where your own checkbook is concerned.

So: The Michael Blowhard Guide to Econ as a General Subject.


  • Start with this Timothy Taylor lecture series on audio from the Teaching Company, buyable here. I know I've been sounding like a salesman for the Teaching Company in recent days, but this is another one of their first-rate efforts. It's a history of economic thought, told via the lives and thoughts of the major economists, with the ideas presented and explained in plain English. Super-well done, enthusiastically presented, and absurdly inexpensive. It's the best way I know of for a lib-arts mush-head to begin to get the hang of econ.
  • Follow up with another Timothy Taylor/Teaching Company lecture series, this one about the subject of economics itself, buyable here. Just as well-done as the previous series. By the end of it, you'll actually understand what I consider to be the key economic conundrum: why do price controls lead to shortages? Think of Nixon's efforts to keep prices of oil low in the 1970s. Think of cities trying to keep housing affordable by passing rent-control laws. What's the inevitable result? In the first place, shortages of gas. In the second, shortages of housing. How can this be so? Hey, now even I can explain it. I once ran across an online review of Taylor's economics series that described them as smarty-pants-ish and superficial. Perplexed, I poked around -- and discovered that the reviewer was an MIT grad. Ie., someone who likes math. Well, if "smarty-pants" and "superficial" suits you OK, as it does me, you're likely to find these two tape sets pretty terrific. Again, an absurdly low price, especially when you realize it'll do a better job for you than any college class. Plus, heck, when you're done with the tapes, you can give them to a friend.
  • If you're one of those people who needs to buy a book in order to feel serious about a subject, try Todd Bucholz's From Here to Economy: A Short Cut to Economic Literacy (here), and New Ideas From Dead Economists (here). First-class, brainy without being technical, and plain fun to read too. But if you've listened to the Taylor lectures series, you can skip these.
  • When things are slow at work, or if you're at home and have a fast connection, watch this webcast (yes, from PBS -- I wish I weren't recommending something from PBS, but even they get off a good one once every decade or so) of the Daniel Yergin documentary The Commanding Heights, about the battle between market forces (Hayek!) and government forces (Keynes!) during the 20th century. You can watch it in five-ish minute bursts here. Are we better off letting experts do the steering or letting individuals make their own choices? This show lays out the history of this argument, and the ideas and people on both sides of it.
  • It's an eye-opener to have a wrestle with Milton Friedman -- whether you come away convinced or not, you'll be twice as smart as you are now. Both of his famous, for-beginners books are short, brainy, good reads -- and he's got a wonderful writing style, something important to pleasure-centric, sensitive souls like us. Capitalism and Freedom (here) and Free to Choose (here) are both helpful and fun.
  • A mystery your English or art prof never quite got around to explaining is, How did European and Euro-derived countries get economically so far ahead of the rest of the world for so long? Who knew, but it turns out there are reasons for this, and they make good sense. Economic history is cool! Nathan Rosenberg and L.E. Birdzell do a fab job of laying the story out in How the West Grew Rich (here).

Go through these works and you'll get econ, I swear. At least you'll get it as well as a liberal-arts mush-head ever will. Personally, I found it a great feeling. The newspaper started making more sense. The behavior of business people stopped seeming so mysterious. I looked at the world and thought, So that's why things happen the way they do. And I looked at my arty friends and thought, How do they get by in life without knowing this stuff?

Extra added attraction: Michael Blowhard's Guide to Personal Finance.

Well, really, why listen to me of all people? I mean, I barely get by. But, what the heck, I'm making lists and handing out unwanted advice, so why not.


  • The best supersimple intro I've found is Andrew Tobias' The Only Investment Guide You'll Ever Need (here). Tobias is a natty, cute, perky, brainy gay guy. Ie., he's amusing, practical, resourceful, smart, and entertaining. An easy and useful skim.

But who am I fooling? All those hours, all the books I thumbed through and all the friends who patiently explained things to me -- the fact is that most personal-finance tips are for people with futures, who plan on making more next year than they did this year, and who want to risk and save and risk and save and build and grow. Me, well, like I say, getting by suits me fine, and sleeping well takes easy precedence over knowing that my savings are working their hardest for me.. So, for my purposes, what it all has boiled down to is three rules:


  • Have 10% of your salary automatically withdrawn and put into an account either at Schwab or Vanguard. Invest that money conservatively and don't even think of touching it until you're 65.
  • Never, ever buy individual stocks. Always buy plain-vanilla index mutual funds. Playing the market is not for the likes of you or me. If you're ever tempted to think you might get lucky or (heaven forbid) be so smart that you can outthink and outgamble a bunch of brilliant pros, throw yourself off a skyscraper now.
  • Put as much money into IRAs and 401K-style savings plans as you can. The magic of compound interest -- don't ask -- means that starting superyoung makes all the difference. Start now and you'll spend your retirement on a yacht. Wait 15 years and you'll spend your senior years shopping for dogfood.

Forgive the perky tone -- a lame attempt to disarm condescension and criticism. What cracked econ for you? Further tips from readers and visitors appreciated. Hey, folks: what has helped you get econ?

Now, back to our usual programming.

Best,

Michael

FURTHER RESOURCES UPDATE: Ian Hamet and Paul Mansour recommend Henry Hazlitt's "Economics in One Lesson." Ian Berlin suggests the Jeffrey Sachs essays that can be found at this website here, and this "Debunking Economics" website here. Paul Mansour also suggests "Economics for Real People" by Gene Callahan, and DVmaster recommends two books by David Friedman, "Hidden Order" and "Law's Order." Thanks to all.

posted by Michael at April 16, 2003




Comments

Michael,

I actually found that Henry Hazlitt's Economics in One Lesson was the best introduction to the broad outlines of the field. It's a 20th century re-working of Bastiat's brilliant 1849 work That Which Is Seen and That Which Is Not Seen.

(A reading of Bastiat's The Law never hurts, either.)

Posted by: Ian on April 16, 2003 8:40 PM



Howdy, Michael!

Speaking as a guy with a bachelors in economics that he's been ignoring for almost twenty years, I have to say that you acquitted yourself admirably here. You can take that for what it's worth. But perhaps more of my econ classes soaked in than I realized--you mean there are actually people out there who don't understand that rent controls lead to a shortage of rental units?

Oh, dear.

Posted by: Will Duquette on April 16, 2003 9:06 PM



Hey Ian, I haven't tried Bastiat yet -- thanks for the tip. As for Hazlitt, I seem to be the only person on the face of the planet who didn't get much from him. But you're absolutely right, it seems to be one of those books that really makes it click for people.

Hey Will, thanks, and phew. I was wondering whether I could get by with this. And, yes, I find there are tons of people, at least in my zany circles, who have no idea that price controls lead to shortages. Weird, no? Scary, in any case. How did you manage to migrate from econ over in a more lib-arts kind of direction? And how have you found the company over here? I can be pretty arty and moody myself, but I confess there are stretches when I wish everyone in this neck of the woods were just a wee bit more rational and sensible.

Posted by: Michael Blowhard on April 17, 2003 12:04 AM



Michael, I'm afraid you're definitely showing your age if you honestly think that "the key economic conundrum" is price controls. I defy you to come up with a single economy, anywhere in the world, which still practices price controls on any kindd of systematic basis. (All I can think of is tortillas in Mexico, and not only is that one minor thing, but it also doesn't lead to shortages.)

Right now, the key economic conundrum is whether fiscal deficits lead to higher interest rates. Any of your courses care to offer an opinion on that, or at least lay out the facts in a way in which a layman can decide if politicians are trying to put one over on him or not?

As for your three rules of personal finance, #s 2 and 3 are great. #1 is a good idea, but I would qualify it by removing the "conservatively" if you're under the age of 40. If you're not going to touch the money until you're 65, that means you have a minimum 25-year time horizon, which means you're silly being conservative.

One more general question: when do you listen to all these tapes? Are you doing something else at the same time?

Posted by: Felix on April 17, 2003 1:08 AM



You don't mention any online resources whatsoever.

You mysteriously neglect to mention, for example, Brad Delong's economics blog (http://www.j-bradford-delong.net/movable_type/) as a resource for the ignorant. In fact you omit it from the left-hand column under the heading "Politics, Education, and Economics Blogs". That's weird. It's a big blog.

Anyway, still more enjoyable for the uninformed is Jeffrey Sachs. Try any of the essays linked on the page below:

http://www.project-syndicate.org/series/series_list.php4?id=7

Too much study makes economists start to resemble alchemists. So many prescriptions for growth and prosperity, endless arguments over what configuration of fundamentals will fuse to yield health and wealth and happiness for all...then it is best to turn to Steve Keen's Debunking Economics:

http://www.amazon.com/exec/obidos/ASIN/1856499928/104-3200625-8691921

and

http://www.debunking-economics.com/

If you are still interested after all that, well, read anything. Even the most jargon-laden abstractions won't hinder your further economics study.

Of course, you may turn into an intolerable bore, but that is a risk you must run.

Posted by: Ian Berlin on April 17, 2003 4:29 AM



I tend to agree with Felix on the investment advice. I'm in my mid-twenties and definitely a conservative who loses sleep easily over stress. But when my wife & I had the opportunity to buy a flower shop we spent everything to get it going. We're arty types too (wife has an Art History degree; I was fortunate enough to drop out of college when I did my first simple cost/benefit analysis) but owning a business forces you to learn a lot of economic realities fairly quickly. My investment advice to the young is: get yourself self-employed as soon as possible; leverage everything you can get your hands on to do it. The control you get over your own tax & income situation is worth scads of risk. Buy an established business if possible. Then, once you learn how to run your own business, you'll have a better knowledge of what to look for in other companies when you're ready to start investing. Worst case scenario: you go bankrupt and have to wait seven years to get a decent credit rating. That's less time than your friends will spend getting advanced degrees! And at the end of it you'll be a battle hardened businessman ready for more.

Of course I guess the picture changes if you have kids. In that case, invest conservatively, I guess.

Posted by: Nate on April 17, 2003 9:33 AM



Thanks for the input and thoughts, econ dudes.

Let me make one effort to rein the conversation in just a bit, though. On the analogy of riding a bicycle ... Y'all seem to me to be talking about what, to mush-headed "creative" types, is pretty advanced stuff -- where to go, what kind of bike to buy, what's hot in the world of biking. I'm trying to focus on the mega-basic topic of how to get wary (and often snobbish) people up on two wheels for the very first time. Brad DeLong's website -- and many thanks for reminding me of it, Ian -- is a valuable resource, but for mush-headed tyros? I suspect it'd just confuse them, and scare them off. The reason I cite the price controls/shortages thing as key isn't because it's a hot contempo issue, it's because I've found that, for some reason, it's some kind of mental landmark. (Though, Felix, I'm eager to hear about those tortillas.) I've found that people who can follow the reasoning and make it 'round that corner seem to have an open field ahead of them. They're beginning to get it -- they're up on the bike. And, once having had that experience, they can do it again -- they're on their way. People who dig in their feet in the face of the price-controls-and-shortages thing have a lot of work yet to do. They're still quarreling with the whole idea of getting on the bike.

Why that particular question seems to be such a landmark is a good question, but it does seem to be one, at least in my experience. Any ideas? And any further ideas or recommendations? Imagine a visual person, or a performer. (Ie., mush-headed, averse to math, full of the kinds of superstitions and myths "creative" people tend to be full of, wary, but with maybe a spark of curiosity.) And you'd like to give that person the experience of what it's like to think about some phenomenon in economic terms. What kinds of books or web resources would you suggest this person begin to explore?

As for investment advice -- glad to see no one taking me seriously.

I sometimes think I'll have done my good thing in life if I get people seeing audiobooks as a plausible medium. Exercise, commuting, traveling, even doing chores are all great times to drop a tape into the walkman. People who take up audiobooks often turn into fanatics -- there are many stories about wives who look out the window to see hubby in the car, sitting there after driving home, waiting for a chapter to end...

Posted by: Michael Blowhard on April 17, 2003 10:43 AM



If you're talking key landmark concepts the grasping of which means that you're well on your way to being able to understand this stuff, then I'd like to propose another, not in economics but in finance. In my experience, everybody who basically gets finance gets this, and everybody who simply doesn't get finance doesn't get this. What is it? The inverse relationship between price and yield. Get your brain round that, you're sorted.

Posted by: Felix on April 17, 2003 10:57 AM



Yeah, that's another one of those good landmarks.

Posted by: Michael Blowhard on April 17, 2003 11:00 AM



I would once again like to take the opportunity to defend Keynes from those who tar him with the brush of his decendents. Nothing in Keynes's thought implies the kind of socialistic policy that later "Keynsians" persued. And the latest brouhaha about deficits and interest rates is furthur proof that most economists, whether on the left or right, still don't "get" Keynes...

Posted by: jimbo on April 17, 2003 11:20 AM



Felix, have you run across any basic/intro explication of the prices/yield thing that you think our artier friends might find useful?

Jimbo, is there a training-wheel-level explication/defense of Keynes that ultrabeginners might get something out of? Or do you think the whole "what does Keynes have to offer" question is maybe better held off on until the real basics have fallen into place?

Posted by: Michael Blowhard on April 17, 2003 11:31 AM



Felix makes a good point about price/yield and finance, which next to Michael's "landmark concept" of price controls highlighs the differences in finance and economics (which Michael notes in his post)

The relationship between price and yield is a pure (and simple) mathematical concept, fundamental to finance, but not at all critical to understanding economics. Any one who understands the relationship between pi and the circumference of a circle can understand the time value of money.

All economists, of course, understand the time value of money, (though they probably wouldn't make good bankers) but the reverse is not true: An understanding of finance is not a particularly good indicator of an understanding of basic economics.

The issue of price controls and shortages, however, is much deeper and goes to the heart of economics, particularly the concepts of supply and demand, marginal utility, “what is seen and what is not seen”, knowledge and decisions, competition and discovery, innovation, entrepreneurship, and the concept of spontaneous order, indeed, the entire theory of value. Unlike present and future value calculations, none of these concepts can be explained on my venerable HP12C.

Posted by: Paul Mansour on April 17, 2003 12:36 PM



More on topic, I second Ian on Henry Hazlit, and would add "Economics for Real People" by Gene Callahan, of the Mises Institute.

Posted by: Paul Mansour on April 17, 2003 12:44 PM



Paul, you Austrian you! Thanks for bringing up the Callahan, which I enjoyed too. You're reminding me as well of another intro-to book that opened my sorry eyes a bit, Clarence Carson's "Basic Economics." Have you tried that one? He's Austrian, or Austrian-ish, too, or so I remember. Have you tried Sowell's "Basic Economics"? Which I was a bit disappointed by, though I'm a big fan of many of Sowell's books.

Posted by: Michael Blowhard on April 17, 2003 3:23 PM



I highly recommend two books by Milton Friedman's son, David Friedman, to anyone who is interested in the topic. The first one is called "Hidden Order: The Economics of Everyday Life," and it is a great introduction to microeconomics, i.e. the study of actual human behavior. This is not a historical introduction, but one driven by case-study examples from the real world. Economic analyses of crime and marriage are explored. This book has simple graphs in the first chapter, but no math whatsoever. The second is called "Law's Order: What Economics Has to Do with Law and Why It Matters," which is essentially a simplified description of Judge Richard Posner's classic analysis of the realtionship between common law and economics. Here you will learn why you cannot take out life insurance policies on other people or why we don't have horribly painful public executions anymore. HO is partially available, and LO is fully available, on his website.

Posted by: dvmaster on April 17, 2003 4:20 PM



Thanks DVmaster, great suggestions, which remind me of yet another one I found helpful: Gary Becker's "The Economics of Life.

Posted by: Michael Blowhard on April 17, 2003 5:35 PM



Michael,

Re: "How did you manage to migrate from econ over in a more lib-arts kind of direction?"

Fact is, I didn't. I was a math/econ major, went on from there to study something called "operations research", and am currently employed as a software engineer.

But I like to read. :-)

Posted by: Will Duquette on April 18, 2003 10:58 AM



Felix:

In answer to your tortilla challenge, bread is subject to price controls here in Milan.

Well -- okay -- just one particular _kind_ of bread, which every bakery is legally obliged to stock. And -- yeah, okay -- they only stock enough of it to satisfy government inspectors, since no one wants the stuff, which is cheap and crappy.

So, taken all in all, this is not exactly a ringing endorsement of price controls as the hottest thing in economics. But don't tell the Italians.

Posted by: alexis on April 20, 2003 6:33 AM



As a visitor who just found you via your comment on janegalt.net, I'll add my two cents.

A light-hearted, easy-reading novel is "The Invisible Heart" by Russell Roberts. And somewhere along the way, it teaches the basics of free markets.

Posted by: david on November 21, 2003 4:26 PM






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