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Unit 2 Notes

Mankiw's 10 Principles of Economics

Dr. Gregory Mankiw is a professor at Harvard University and was the Chair of the Council of Economic Advisors in the Pres. G. W. Bush administration.   So while it would be fair to consider him a conservative or Republican, these points are generally accepted by economists in the US of all political persuasions.  

  1. People face trade-offs
  2. The cost of something is what you give up to get it
  3. Rational people think at the margin
  4. People respond to incentives
  5. Trade can make everyone better off
  6. Markets are usually a good way to organize economic activity
  7. Governments can sometimes improve market outcomes
  8. A country's standard of living depends on its ability to produce goods and services
  9. Prices rise when the government prints too much money
  10. Society faces a short-run tradeoff between Inflation and unemployment.

Please read this Brief Article Links to an external site. at Wikiversity that expands a bit on these points.

To add a bit, for Point 5, the large consensus of economists accept that trade is beneficial, and support what is usually called "free trade."  Conversely, people who dwell on "the balance of trade" as a problem probably don't really understand economics.  

For Point 6, recall that possible economic systems are traditional economies, command economies, and market economies. In the 21st century, most highly developed countries have mixed economies, which are mostly market economies with some element of command.  Political debates often are about what "usually" means, and how to balance market and command elements to find the right blend.  (As an aside, despite some US politicians using the term "democratic socialism," that is really a misnomer, and a better term --used in Europe--is "social democracy.")   

About Point 9, Mankiw uses the term "prints money" metaphorically.   As we will see, most of the US money supply does not consist of currency (printed money).  I'd reword Point 9 as:  Inflation occurs when the money supply grows faster than the economy.  

Continuing Mankiw's line of thought, I offer two more points: 

Point 11:  Economies evolve through a process of Creative Destruction 

Since the Industrial Revolution began, about 250 years ago, economic changes can be described as following a path of Creative Destruction:  As new technologies are developed, old technologies are pushed to the side.  To use music as an example, 100 years ago, pianos and sheet music were popular, then came record players, then 8-tracks, then cassette tapes, then CDs, and now iTunes and streaming music.  So today, few people own pianos, although record players (aka vinyl) have a niche following.  I bought a car last year, and I asked my friend--who has the same exact model--if it came with a CD player.  "I have no idea," she said.  She listens to music via iPhone Bluetooth connection to the car's audio system. 

Today, you might hear talk of "automation" taking away jobs, but keep in mind that has been going on for 250 years.  People learn new jobs, and the new jobs are often better than the old jobs.  My great-grandfather raised and trained work horses, the sort that pull carriages and wagons. That industry was destroyed by the automobile, and now we can use the Internet to do things -- like take a college class -- that does not depend on physical transportation, whether by horse or car.  I much prefer teaching online classes than I would training work horses. 

Point 12: Economic behavior can sometimes be understood using tools like Game Theory, System Dynamics, and Power Relationships

Although Point 4 maintains that people respond to incentives, that behavior can get really complex.  In situations with two or more "players," economic behavior can sometime be analyzed using Game Theory, especially when there is a sort of stalemate, and people won't budge from their positions.  Consider a businessman who is more concerned with "winning" than profitability.  In other cases, a small change or innovation can create substantial economic changes down the road.  When the Internet was allowed to provide commercial use 25 years ago, that was the "beginning of the end" for companies like Sears and K-Mart.  (System dynamics.)  And keep in mind that asking "who benefits?" can explain some economic outcomes.  So far in the 21st century, the income of the top 1% in the US has increased much more than middle and lower income workers, and that is owing, at least in part, to the power those at the top have in our political system.  As the saying goes, "The rich get richer."