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"The authors tell us what everyone should know about economics in language we can all understand. It's refreshing when four of the best in the profession avoid the all-too-common practice of writing in a code that only other economists can comprehend." ---Robert McTeer, former president of the Federal Reserve Bank of Dallas
With the global economy recovering from a steep recession, those who fail to grasp basic economic principles such as gains from trade, the role of profit and loss, and the secondary effects of government spending, taxes, and borrowing risk falling behind in their professional careers--even their personal lives. Common Sense Economics discusses key principles and uses them to show how to make wise personal and policy choices.
This new edition of a classic from James D. Gwartney, Richard L. Stroup, Dwight R. Lee, and Tawni H. Ferrarini, with reflections on the recent recession and the policy response to it, illuminates our world and what might be done to make it better.
- Sales Rank: #99427 in Books
- Published on: 2010-08-03
- Released on: 2010-08-03
- Original language: English
- Number of items: 1
- Dimensions: 8.38" h x .89" w x 5.72" l, .73 pounds
- Binding: Hardcover
- 240 pages
Review
“Economic Journalism is often based on slip-shod analysis; scientific treatises are analytically coherent but unintelligible. This book is an effort to bridge the awesome gap between these levels of discourse. It is solid economic analysis, simply presented.” ―Nobel Laureate James Buchanan
“If this book had been written a century ago the wasteful experiments with command economies might have been avoided. After my college-age children read this new edition, their understanding of how markets create social cooperation and wealth and how they can personally be guided in their finances sharply advanced.” ―Gary M. Walton, Professor of Economics, University of California, Davis and President of the Foundation for Teaching Economics
“I gave a copy of Common Sense Economics to one of my colleagues who teaches accounting here. He read it this weekend and thought it was so good that he is considering paying his students (half the cost) to read it. We both think the lessons are perfect.” ―Kelly Hunter Markson, Ph.D., Instructor of Economics, Wake Technical Community College
“My high school students really enjoy this book. It is easy for them to understand and it presents important economic concepts in plain language using clear, often clever, examples. They read the whole book, and we discuss it page by page during class discussion. I believe they get more out of it than their regular text.” ―David Gardner, Principal and Teacher, Frederica Academy (Georgia)
“Common Sense Economics is about both personal prosperity and the wealth of nations. It explains how and why ordinary people are able to accomplish extraordinary things when they are economically free and when the policies and institutions of their government are supportive of that freedom.” ―Wayne Angell, Member, Board of Governors of the Federal Reserve System (1986–1994)
“Common Sense Economics makes economic principles as obvious and simple as they can be. By weaving careful reasoning with memorable examples and clear writing, the authors explain how economies grow (or don't grow); how prices coordinate economic activity; and how governments promote or deter economic progress. This is an extraordinary contribution to economic education.” ―Kenneth G. Elzinga, Robert C. Taylor Professor of Economics, University of Virginia
“Economics is not only fun and exciting, it's mostly plain common sense. The authors have done a yeoman's job in proving just that. Common Sense Economics is not only a fun, readable read but can serve as a handy and important reference for students, teachers, businessmen, members of the media, politicians, and trained economists.” ―Walter E. Williams, John M. Olin Distinguished Professor of Economics, George Mason University
“Common Sense Economics takes the economic way of thinking to the next level. If every high school graduate understood the principles in this book, people would make wiser choices as consumers, producers, and citizens and the United States would be more prosperous.” ―John Morton, former Vice President for Program Development, National Council on Economic Education
“In a time when public policy is being influenced primarily by need, greed, and compassion, this text sets out, in laymen's terms, the most basic understanding of how the economy really works. Common Sense Economics is a must-read for anyone interested in the truth about wealth creation and effective public policy.” ―J. R. Clark, Probasco Chair, The University of Tennessee and Executive Director, Association of Private Enterprise Education
About the Author
James D. Gwartney holds the Gus A. Stavros Eminent Scholar Chair at Florida State University and is the director of the Stavros Center for the Advancement of Free Enterprise and Economic Education.
Richard L. Stroup is the author of Eco-Nomics and an adjunct professor of economics at North Carolina State University.
Dwight R. Lee is coauthor of Getting Rich in America and holds the William J. O'Neil Chair of Global Markets and Freedom at Southern Methodist University.
Tawni H. Ferrarini is the Sam M. Cohodas Professor of Economics and the Director of the Center for Economic Education and Entrepreneurship at Northern Michigan University.
Excerpt. © Reprinted by permission. All rights reserved.
Introduction
Life is about choices, and economics is about how incentives affect those choices and shape our lives. Choices about education, how we spend and invest, what we do in the workplace, and many other personal decisions will influence our well-being and quality of life. Moreover, the choices we make as voters and citizens affect the laws or “rules of the game,” and these rules exert an enormous impact on our freedom and prosperity. To choose intelligently, both for ourselves and for society generally, we must understand some basic principles about how people choose, what motivates their actions, and how their actions influence their personal welfare and that of others. Thus, economics is about human decision making, the analysis of the forces underlying choice, and the implications with regard to how societies work.
The following section introduces twelve key concepts that are crucial to the understanding of how our economy works. The reader will learn such things as the true meaning of costs, why prices matter, how trade furthers prosperity, and why production of things people value underpins our standard of living. In a fraction of the time devoted to Economics 101, you can pick up most of its important lessons. In subsequent sections you will use these concepts to address other vitally important topics.
1. Incentives Matter.
All of economics rests on one simple principle: Changes in incentives influence human behavior in predictable ways. Both monetary and non-monetary factors influence incentives. If something becomes more costly, people will be less likely to choose it. Correspondingly, when an option becomes more attractive, people will be more likely to choose it. This simple idea, sometimes called the basic postulate of economics, is a powerful tool because it applies to almost everything that we do.
People will be less likely to choose an option as it becomes more costly. Think about the implications of this proposition. When late for an appointment, a person will be less likely to take time to stop and visit with a friend. Fewer people will go picnicking on a cold and rainy day. Higher prices will reduce the number of units sold. Attendance in college classes will be below normal the day before spring break. In each case, the explanation is the same: As the option becomes more costly, less is chosen.
Similarly, when the payoff derived from a choice increases, people will be more likely to choose it. A person will be more likely to bend over and pick up a quarter than a penny. Students will attend and pay more attention in class when the material is covered extensively on exams. Customers will buy more from stores that offer low prices, high quality service, and a convenient location. Employees will work harder and more efficiently when they are rewarded for doing so. All of these outcomes are highly predictable and they merely reflect the “incentives matter” postulate of economics.
This basic postulate explains how changes in market prices alter incentives in a manner that works to coordinate the actions of buyers and sellers. If buyers want to purchase more of an item than producers are willing (or able) to sell, its price will soon rise. As the price increases, sellers will be more willing to provide the item while buyers purchase fewer, until the higher price brings the amount demanded and the amount supplied into balance. At that point the price stabilizes.
What happens if it starts out the other way? If an item’s price is too high, suppliers will have to lower the price in order to sell it. The lower price will encourage people to buy more—but it will also discourage producers from producing as much, since at the new, lower price it will be less profitable to supply the product. Again, the price change works to bring the amount demanded by consumers into balance with the amount produced by suppliers. At that point there is no further pressure for a price change.
Remember the record high nominal gas prices in the summer of 2008? While a lot of people felt the pain of higher prices at the pump, there was no panic in the streets or lines at the gas pumps. Why? When the higher prices made it more costly to purchase gasoline, most consumers eliminated some less important trips. Others arranged more carpooling. With time, consumers also shifted to smaller, more fuel-efficient cars in order to reduce their gasoline bills. As buyers reacted to higher gas prices, so did sellers. The oil companies supplying gasoline increased their drilling, adopted new techniques to recover more oil from existing wells, and intensified their search for new oil fields. The higher price helped to keep the quantity supplied in line with the quantity demanded. Eventually, the prices of both crude oil and gasoline fell as supply expanded over time.
Incentives also influence political choices. There is little reason to believe that a person making choices in the voting booth will behave much differently than when making choices in the shopping mall. In most cases voters are more likely to support political candidates and policies that they believe will provide them with the most personal benefits, net of their costs. They will tend to oppose political options when the personal costs are high compared to the benefits they expect to receive. For example, polls indicated that nonunion members were overwhelmingly opposed to exempting union members from health care taxes that non-members and others were required to pay. Similarly, senior citizens have voted numerous times against candidates and proposals that would reduce their Medicare benefits.
There’s no way to get around the importance of incentives. It’s a part of human nature. Interestingly, incentives matter just as much under socialism as under capitalism. In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass they produced. Because their revenues depended on the weight of the glass, most factories produced sheet glass so thick that you could hardly see through it. The rules were changed so that the managers were compensated according to the number of square meters of glass they could produce. Under these rules, Soviet firms made glass so thin that it broke easily.
Some people think that incentives matter only when people are greedy and selfish. That’s not true. People act for a variety of reasons, some selfish and some charitable. The choices of both the self-centered and altruistic will be influenced by changes in personal costs and benefits. For example, both the selfish and the altruistic will be more likely to attempt to rescue a child in a shallow swimming pool than in the rapid currents approaching Niagara Falls. And both are more likely to give a needy person their hand-me-downs rather than their best clothes.
Even though no one would have accused the late Mother Teresa of greediness, her self-interest caused her to respond to incentives, too. When Mother Teresa’s organization, the Missionaries of Charity, attempted to open a shelter for the homeless in New York City, the city required expensive (but unneeded) alterations to its building. The organization abandoned the project. This decision did not reflect any change in Mother Teresa’s commitment to the poor. Instead, it reflected a change in incentives. When the cost of helping the poor in New York went up, Mother Teresa decided that her resources would do more good in other uses.1 Changes in incentives influence everyone’s choices, regardless of the mix of greedy materialistic goals on the one hand and compassionate, altruistic goals on the other, that drive a specific decision.
2. There Is No Such Thing as a Free Lunch.
The reality of life on our planet is that productive resources are limited, while the human desire for goods and services is virtually unlimited. Would you like to have some new clothes, a luxury boat, or a vacation in the Swiss Alps? How about more time for leisure, recreation, and travel? Do you dream of driving your brand-new Porsche into the driveway of your oceanfront house? Most of us would like to have all of these things and many others! However, we are constrained by the scarcity of resources, including a limited availability of time.
Because we cannot have as much of everything as we would like, we are forced to choose among alternatives. There is no free lunch. Doing one thing makes us sacrifice the opportunity to do something else we value. This is why economists refer to all costs as opportunity costs.
Many costs are measured in terms of money, but these too are opportunity costs. The money you spend on one purchase is money that is not available to spend on other things. The opportunity cost of your purchase is the value you place on the items that must now be given up because you spent the money on the initial purchase. But just because you don’t have to spend money to do something does not mean the action is costless. You don’t have to spend money to take a walk and enjoy a beautiful sunset, but there is an opportunity cost to the walk. The time you spend walking could have been used to do something else you value, like visiting a sick friend or reading a book.
We often hear it said that some things are so important that we should do them without considering the cost. Making such a statement may sound reasonable at first thought, and may be an effective way to encourage government to spend more money on things that you value and would like others to help pay for. But the unreasonableness of ignoring cost becomes obvious once we recognize that costs are the value of forgone alternatives. Saying that we do something without considering the cost just says that we should do it without considering the alternatives.
The choices of both consumers and producers involve costs. For consumers, the cost of a good, as reflected in its price, helps us compare our desire for a product against our desire for alternative products that we could purchase inst...
Most helpful customer reviews
7 of 7 people found the following review helpful.
Avoid common misconceptions by reading this book
By Daniel Estes
I'd say a healthy interest in economic math and data tables is a good prerequisite before diving into Common Sense Economics. It's not a long book nor overly wordy. It's just, well, about economics. Not exactly a thriller novel. The value here is that the principles discussed affect the lives of everyone everywhere. The laws of economics, similar to the laws of physics, are visible all around us, and to understand them is to understand part of what makes the world turn.
Those familiar with libertarian viewpoints will recognize that much of the book is themed that way. If you happen to disagree with libertarian thinking, and yet are open to challenging your beliefs, then I recommend trying to understand Common Sense Economics through the lens of logic and math and not from the all-too-common vantage point of political ideology.
9 of 10 people found the following review helpful.
Every American Should Read This Book
By Morgan Polotan
Common Sense Economics should be read by every person in the world. It is that important.
Four economics professors (Gwartney, Stroup, Lee, Ferrarini) set out to make economics easy to understand for the layperson, and with Common Sense Economics they have succeeded. This is the book that I will give to my Mom, who wants to understand how markets work but has no interest in reading through the dense academic treatises of Mises. This is the book that I will give to my friend who wants to gain a deeper understanding of the objective facts of economics, but doesn't want the "free market biases" associated with Hayek. This is the book that I would recommend to other college students that want specific examples of how they can use economic analysis to evaluate current public policy decisions without traveling 70 years into the past with Hazlitt to commiserate on FDR's New Deal policies.
Common Sense Economics is split into four parts, titled: (1) Twelve Key Elements of Economics, (2) Seven Major Sources of Economic Progress (3) Economic Progress and the Role of Government, and (4) Twelve Key Elements of Practical Personal Finance. In this review I will cover the first three.
In Twelve Key Elements of Economics, the authors present the basic, fundamental rules of economics. They introduce the key concepts of incentives, marginal analysis, trade, division of labor, specialization, prices, profits and economic institutions. They also use this section to debunk popular economic fallacies; most notably, the myth of the free lunch, and the belief that more jobs, not increased productivity, raise living standards.
In Seven Major Sources of Economic Progress, the authors answer the question, "Why are some countries rich and others poor? They describe how the legal system, competitive markets, limited government regulation, an efficient capital market, monetary stability, low tax rates and free trade are requirements for prosperity. By the end of this section even the Marxist will realize why North Korea is poor and Hong Kong rich.
Economic Progress and the Role of Government is my favorite section because the authors specifically describe the features of government that lead to economic prosperity and the actions it can take to hinder it. Most notably, I learned that certain "public goods", are not easily provided by the market, and that government must do the job. To learn which goods are public goods, you'll have to read the book, but I'll give you a hint: they're not health care and education.
My favorite part of the book comes at the end of this section, when the authors propose eight constitutional amendments that would compose an Economic Bill of Rights. They argue that the Constitutional safeguards on government powers have been imperfect and ineffective, and that only through an amendment process are we to escape the doomed march towards default or hyperinflation. Instead of simply pointing out problems, these suggested amendments give me concrete solutions that I can use as talking points when discussing economic issues with my peers.
I do believe that everyone in the world should read this book, because even if you don't live in a country with free markets, this book will convince you of their merit. However this book is especially important for Americans to read. Consider it a course in economic literacy. Most of our population, and alas, many of our political leaders, are economically illiterate. If every voter had a solid grasp on the ideas presented here, there would be a vast shift in the political discussion. No longer would taxpayers be fooled into supporting the American auto industry or bailing out its banks. No longer would we tolerate pork barrel legislation and restraints on free trade. No longer would we trust the government to control our health care and education industries. No longer would we tolerate the welfare state. No longer would we be ignorant to the dangers posed by soaring budget deficits, a bloated national debt, and runaway inflation.
Instead, Americans will learn again the lesson that many of us have forgotten; that the founding principle of this country is not unrestrained democracy in which the majority votes away the rights of the minority, but a limited government charged with protecting the rights of the smallest minority there is: the individual.
5 of 5 people found the following review helpful.
Common Sense Economics made easy!
By Robert J. Jordan
This book was very helpful in the understanding of economics. It helps people get a better perspective on personal finance, democracy, and especially macroeconomics. I think this book should be a required textbook for government and economics classes because it gives you a down to earth understanding of all the different aspects in economics. The authors of this book made it simple for anyone of any age to comprehend the material. There is an abundance of concepts and detailed information to assist people with their struggles in understanding economics.
In each part of the book the reader can grasp specific information on personal finance, economic progress, economics in our government, and lastly basic economics itself. This book helped me understand how the American government system worked and it clarifies liberal thoughts that conservatives should see. There are parts that describe competition and that is very important. My generation needs to understand that college needs to be a necessity because we are going to competing for our jobs and futures with other very well educated people from various intelligent countries. The book expands on investing and saving and those are both crucial actions that need to be done by future college attendees like myself.
There are several aspects of this book that I will keep with me. This booked has helped me better understand the flow of money, political problems in our economy, and the elements of economics that I have previously learned in my Econ class. I would suggest this book to anyone who doesn't fully understand economics or anyone who is just interested in a good read.
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