On the Ten Pillars of Economic Wisdom - General Points

[danieldwilliam]

I was pointed in the direction of the Ten Pillars of Economic Wisdom by widgetfox and she asked for my thoughts on them.

Here are Ten Pillars

The Ten Pillars of Economic Wisdom
By David R. Henderson
1. TANSTAAFL: There ain't no such thing as a free lunch.
2. Incentives matter; incentives affect behavior.
3. Economic thinking is thinking on the margin.
4. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.
5. Information is valuable and costly, and most information that's valuable is inherently decentralized.
6. Every action has unintended consequences; you can never do only one thing.
7. The value of a good or a service is subjective.
8. Creating jobs is not the same as creating wealth.
9. The only way to increase a nation's real income is to increase its real output.
10. Competition is a hardy weed, not a delicate flower.

Here are my thoughts on them as a group.

Broadly, I agree with them as a body in the spirit in which they are intended. I think that the spirit in which they are intended is not as the Gospel of Economic Truth. I think they are intended in two ways.

Firstly, they are Economic Wisdom for Students. I think they function well as a list of things economic neophytes should remember and which they should use as a filter to view any case studies they are looking at whilst they gain a foundational understanding of economics.

I think Henderson is saying, Hey, whilst you are learning about the science of economics here are Ten Things you should remember. Try reading them before each lecture or before each day’s reading. If you think you’ve found an exception or situation that falsifies one of them have a really good think about whether you’re right or not before you send off for your Noble Prize. Maybe sleep on it for a few nights.

Don’t stand up in class and say “X is the case. Doesn’t this disprove such and such a pillar”. A more valuable starting question for you, the student to ask, is “In this situation, how or why does such and such a pillar apply?” Perhaps follow up with “Are there any situations where it doesn’t apply?”  You’ll look like a dick who is trying to impress the cool kids less often. Bearing in mind that you’re in an economics lesson trying to impress the cool kids isn’t a strategy with good returns. Remember, 3 and 6.

I think the second use of Ten Pillars is a Field Guide for the Economic Anthropologist.  If you, the economically literate (or numerate) citizen is going about your daily business and you find a situation you don’t understand, this list functions as a quick and dirty prompt to work out what is really going on.

Take my recent gripe about Amazon for example.  

Amazon could sell me more books if they curated their offering better.  However, curating their offering better requires them to get over the cost hurdle implicit in Pillar 5. Remembering my Michael Porter and thinking about Amazons generic strategy I realise Amazon are in the Cost Leadership mode. Taking on the costs of building a system to gain more knowledge doesn’t help them with 99% of their sales but adds costs that have to be paid for. So, Pillar 2, they won’t bother with my list of ways to improve their curation. Someone else might. (And if it's you, let me know and we'll do business.)

So, it’s a useful starting point for students or for those trying to understand specific real-life situations from an economics point of view.  For more on this I’d recommend Tim Hartford and his book, The Undercover Economist. 

It’s not the Bible of Economics. (For a start there are no charts with curvy lines on them anywhere. You call that a religion science. When you don’t even have any curvy lines crossing anywhere. What are you? A biologist?) Is it the case that all Ten Pillars hold true in all cases. Probably not, but I’d not bet against any of the Pillars being wrong in any particular situation without giving it considerable thought.

Is this the only useful list. Not at all.  There are other toolkits out there.  I'm going to find some and I may one day produce my own.

What is useful about this list, well, Pillar 5, again. If you don't already have a degree in Economics this list might help you out.

Finally, I’d add two of my own, for my own use as an Economic Anthropologist.

11 If the solution is not either elegant or brutal it is probably not the optimal solution.

12 You should be able to reason from the psychology of the individual through micro-economics and up to macro-economics and back down again.

Someone else’s from comments on the various discussions that I’d add  would be

13 Any cost (or revenue) not accounted for in an entity’s books is passed on to society.

Some people agreed with me up to a point on this.

Comments

[f4f3.livejournal.com]

Calling Economics a science always bothers me, slightly. I think of a science as a tool for making testable predictions (amongst other things, granted). And yet, if you put two economists in a room, you get three opinions.

It's as if you get ready to drop a ball, and ask a panel of physicists for their predictions:

1. The ball will drop.
2. The ball will stay where it is.
3. The ball will float upwards.

And then you drop the ball, and you ask the scientists for their prediction next time. 2 and 3 will be right out of it.

And yet, in Economics, getting it wrong doesn't seem to matter. In fact, you'll find that 2 and 3 weren't actually wrong at all. In a weightless situation, 2 would be spot on. If you were in Australia, 3 would be right (ok, I haven't tested this hypothesis, but common sense confirms it).

What does the Dismal Science predict? Or does it only explain?

[andrewducker]

The problem is that economics is mass psychology, which means it's built on a science that only really became scientific over the last forty years.

And it's studying a subject that has the power to make people that understand it well insanely rich. Except that if you know the rules well enough to make that much money then you are also changing the rules.

It's like studying fluid dynamics from the view of a civilisation of fish that can build tiny dams and _really_ want to have the most water. Working out the answers changes the game.

[f4f3.livejournal.com]

I love that answer. Especially given Einstein's views on fluid dynamics.

[danieldwilliam.livejournal.com]

I like Andrew's answer too.

My own, longer response is here.

http://danieldwilliam.livejournal.com/57389.html