1. How Economists Think By Timothy Taylor

Timothy Taylor explores how economists think, addressing common criticisms and explaining key economic questions and concepts.

Key Takeaways

Economics is a complex but essential discipline for understanding societal resource allocation.
Basic economic literacy is crucial to engage in informed debates about policy and economic issues.
Economic systems answer three core questions: what, how, and who gets to consume.
Government involvement in the economy exists on a spectrum from minimal to extensive.
Opportunity cost is a fundamental concept in economic thinking.

What the video covers

Economics is often criticized and misunderstood, with a reputation as the 'dismal science'.
The video opens with humorous anecdotes about economists and their perceived value.
Thomas Carlyle famously insulted economics as 'dreary, desolate, and distressing'.
Knowing economics is essential to participate meaningfully in discussions about economic policy.
Three fundamental economic questions are what to produce, how to produce, and who consumes the output.
Economic systems vary from total government control to complete individual freedom.
The role of government can range from a 'night watchman state' to providing extensive public services.
Economists emphasize opportunity costs and trade-offs in decision-making.
Macroeconomics focuses on broad policies like unemployment, inflation, and economic growth.
Studying economics helps avoid being deceived by economic claims and improves understanding of societal issues.

Chapters

Why is economics often called the 'dismal science'?

The term 'dismal science' was coined by British essayist Thomas Carlyle in 1849, reflecting his critical view of economics as bleak and distressing. This label has persisted as economics often deals with difficult trade-offs and societal challenges.

What are the three fundamental questions economics tries to answer?

Economics focuses on three core questions: what should be produced by society, how it should be produced, and who gets to consume the produced goods and services. These questions apply to all economic systems.

Why is it important to understand basic economics?

Understanding basic economics is crucial to participate effectively in conversations about economic policy and societal issues. Without this knowledge, people are at a disadvantage and may be misled by economic claims.

Full Transcript — Download SRT & Markdown

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My guess is that many of you are starting this series with some trepidation because economics and economists don't exactly have a reputation as the most delightful and enticing subject. In fact, economics may be the most criticized discipline of all.

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which has given rise to any number of good stories. Let me tell you a couple of them. Um, let me tell you the story of Frankenstein's monster. Frankenstein is building his monster and he has it all done except for the brains. So, he

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Which has given rise to any number of good stories. Let me tell you a couple of them. Um, let me tell you the story of Frankenstein's monster. Frankenstein is building his monster and he has it all done except for the brains. So, he

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Those are $20 a pound." And uh Frankenstein says, "Well, that's interesting, but that's not quite right for my monster." Well, I've got some nice physicist brains at $40 a pound.

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goes down to the village to the local brain store to see what they've got in stock. He says, "Hi, you know, what have you got behind the counter?" And the guy behind the counter says, "Well, I've got some very nice English professor brains.

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Frankenstein says, "Well, that's that's monstrous. I mean, you know, $80 a pound. Why are economist brains so expensive?" and the guy behind the counter says, "Do you have any idea how many economists it takes to get a pound

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Those are $20 a pound." And, uh, Frankenstein says, "Well, that's interesting, but that's not quite right for my monster." Well, I've got some nice physicist brains at $40 a pound.

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or um Victor Fuches, a preeminent healthcare economist who's been at Stanford University for many years. He has a wicked sense of humor and and Victor likes to say, "Some people talk in their sleep, but economists talk in other people's sleep." Um,

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Um, well, it's again, it's interesting. It's not quite right for my monster. Um, well, I've got some nice economist brains. Those are $80 a pound.

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what we might call by way of eminence the dismal science and that idea that economics was the dismal science has echoed down ever since.

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Frankenstein says, "Well, that's that's monstrous. I mean, you know, $80 a pound. Why are economist brains so expensive?" And the guy behind the counter says, "Do you have any idea how many economists it takes to get a pound

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talk if you're going to participate in the conversation about economics. Um, you've probably had this happen to you if you don't know any economics.

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of brains?" Or, or my wife's favorite joke, she likes to say, um, "Economists are people who like to work with numbers but don't have the personality to be accountants." Now, that's from a woman who loves me. Um,

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insurance, or maybe we don't go to the same kind of parties, but but those are the sort of things I argue about at parties. And at some point, the other person kind of sniffs and they say, "Well, uh, even the most basic economics

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or, um, Victor Fuchs, a preeminent healthcare economist who's been at Stanford University for many years. He has a wicked sense of humor and Victor likes to say, "Some people talk in their sleep, but economists talk in other people's sleep." Um,

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And I'll just tell you, in my experience, people who make assertions about what basic economics shows are usually wrong. But here's the point. If you don't know any economics, you can't answer.

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perhaps the most famous insult of all for economists is from the British essayist Thomas Carlyle. Uh, he wrote in an 1849 essay about economics and he called it in this essay, quote, a dreary, desolate and indeed quite distressing

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All you can do is kind of nod your head. If you don't know economics, you are not part of the conversation.

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what we might call by way of eminence the dismal science, and that idea that economics was the dismal science has echoed down ever since.

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avoid being deceived by economists." I think that's a profound answer. Economists make a certain claimed expertise, and if you can't decipher that expertise at least a little bit, you're going to be at a severe disadvantage when it comes to talking

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So, uh, after what we might call this little bit of anti-marketing, why should you persevere with this course? Why should you study economics at all? Let me offer you a few different reasons. One is you need to talk the

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Um, he was once asked about what was useful to know about economics if you're a government economist who's been working across the US government for decades and decades. and and Herp said, um, it may seem a shocking thing to say,

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talk if you're going to participate in the conversation about economics. Um, you've probably had this happen to you if you don't know any economics.

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not know very much. Lesson two was other people, including the politicians who make economic policy, know even less about economics than the economists do.

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You're in a conversation someplace, maybe at a party or something like that, and you're having a nice polite argument like you always have at parties, over something like the minimum wage or the budget deficit or national health

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That's a modest goal. That's a moderate goal. Now we can achieve that goal in this lecture series.

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insurance, or maybe we don't go to the same kind of parties, but those are the sort of things I argue about at parties. And at some point, the other person kind of sniffs and they say, "Well, uh, even the most basic economics

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into basically three questions. Question one would be um what should be produced by a society? Question two is how should it be produced? And question three is who gets to consume what is produced. So those three questions what should be

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shows that," and then they repeat whatever their argument is. Now, that person who says that thing about even the most basic economics, they might be right and they might be wrong.

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They they're asked in a market capitalist system. They're asked in a communist system. They're asked in a poor country. They're asked in a rich country. This is not economics that's just for the United States. These sets of questions are very broad and every

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And I'll just tell you, in my experience, people who make assertions about what basic economics shows are usually wrong. But here's the point. If you don't know any economics, you can't answer.

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spectrum. um at one end you could have total government control of answering those three questions. So government would answer the questions of of what is produced and how is it produced and who gets it and all of that would be

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If you don't know the economics, you don't have a basis for responding to that claim. You are shut out of that argument.

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um few societies are are all on one side or the other. Instead a sort of a a mixture from one to the other is common.

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All you can do is kind of nod your head. If you don't know economics, you are not part of the conversation.

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sometimes called the night watchman state. Uh the government would be around just to avoid theft, to enforce private contracts, to make sure nobody just takes your property outright, and to provide for a few things perhaps like national defense. Then you can imagine a

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A famous British economist named Joan Robinson, who did a lot of her best work during the 1920s and 30s and 40s, was once asked why people should study economics. And she answered, "The reason to study economics is to learn how to

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provides support for science. Those kinds of things. Then you can imagine the government taking on a little more.

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avoid being deceived by economists." I think that's a profound answer. Economists make a certain claimed expertise, and if you can't decipher that expertise at least a little bit, you're going to be at a severe disadvantage when it comes to talking

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the car industry or the agriculture industry, start distributing food, start distributing basic consumer goods like housing. And ultimately at at the far extreme, you could imagine the government um handing out all the jobs um handing out all the housing, handing

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about economic policy, regardless of how strongly you hold your beliefs. Um, a well-known economist named Herb Stein, who worked in a variety of capacities as a government economist for almost 50 years, um, died a few years ago in 1999.

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Now, in the great social conversation about whether there should be all government control on one hand or or all individual freedom on the other hand, there's a long tradition on both sides of of treating the people at the other

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Um, he was once asked about what was useful to know about economics if you're a government economist who's been working across the US government for decades and decades. And Herb said, um, it may seem a shocking thing to say,

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hard-hearted social Darwinist who would let people starve in the gutter before you would help them. Or or on the other side of the spectrum, you might say, "Well, you know, what do you mean?

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but most of the economics that's usable for advising on public policy is about at the level of the introductory undergraduate course. Uh, Herb continued, I summed up two main lessons of 50 years as a Washington economist this way. Lesson one was economists do

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kind of hot air in these lectures. Modern economics recognizes that markets have some great strengths. But in other cases, markets don't work especially well. In the cases where markets don't work especially well, there's cases where the government can do something

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not know very much. Lesson two was other people, including the politicians who make economic policy, know even less about economics than the economists do.

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about how markets really work, where they work, and what to do about it in practical terms when they don't work well. We think about economics. It's also useful to clear up some misconceptions about what economics is not. For example, economics is is not

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We don't have to try and make everyone an ace economist ready for that tenure chair in economics at Harvard or Stanford. What we want to do is convey the basic economist's way of thinking.

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criticism of of economics that an economist can't tell you when the next recession is going to happen or or or end or when the stock market will rise or fall. There's an old joke that economists have predicted five of the

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That's a modest goal. That's a moderate goal. Now we can achieve that goal in this lecture series.

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people in other disciplines to predict the future. Nobody says to the biologists what's the next stage of evolution. If you can't predict the next stage of evolution, well I guess biology just isn't a science and no one should

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What is economics exactly? Well, economics takes as its subject material some basic questions about how a society produces and consumes and explores how a society answers those questions. In fact, you can take those questions that they're asked and break them down

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economics takes this burden that people in economics are supposed to be able to forecast the future. You know, you can know a lot about something. You can know a lot about how it works, but the economy and its development is going to

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into basically three questions. Question one would be, um, what should be produced by a society? Question two is how should it be produced? And question three is who gets to consume what is produced. So those three questions, what should be

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taking sides. Uh, it's common when I talk about economics or the economics journal that I run for people to say, well, you know, are you Republican or Democrat? You know, which side are you on here? And the honest answer is that

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produced, how should it be produced, and who gets what is produced are fundamentally the three questions that any economic system has to answer. Now those questions are unavoidable.

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It's not about supporting Republicans. It's not about supporting Democrats. Economics isn't about choosing a set of answers.

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They are asked in a market capitalist system. They're asked in a communist system. They're asked in a poor country. They're asked in a rich country. This is not economics that's just for the United States. These sets of questions are very broad and every

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Uh John Maynard Kanes, one of the top few economists of the 20th century once said um economics is a a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct

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society has to figure out how to grapple with them. Now, there's a range of possible answers to these questions and the questions can be answered in a bunch of different ways. It's useful to think of the answers as sort of a

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about all these problems. Now, as a sort of entree into how economists think, let's consider some statements that most economists would view as fairly obvious, but many non-economists would disagree with. First such statement, economists are people who insist on taking

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spectrum. Um, at one end you could have total government control of answering those three questions. So government would answer the questions of what is produced and how is it produced and who gets it, and all of that would be

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The way that question is usually discussed in public is, well, should corporations pay or should people pay?

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dictated by the government. At the other extreme you can imagine sort of a total freedom society where individuals all make all the decisions about what is produced and how is it produced and who gets it. Now in the real world, of course,

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places that money could come from. For example, maybe it comes from higher prices for consumers. Or maybe it comes from lower bonuses for top executives.

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um, few societies are all on one side or the other. Instead, a sort of a mixture from one to the other is common.

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I just want to say that you have to take the trade-off seriously. You can't just say tax the corporations, not the people. You have to think about who would actually pay. Or think about the argument over the minimum wage. Again,

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So let's think sort of about the spectrum from one end to the other. At one end you can sort of think of something where the government provides only the very basics for a market economy and that would be something like

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workers. It could be that firms have to accept lower prices. Again, my point here isn't to argue over which one of those is necessary. My point is just to say that economists insist on taking the trade-off seriously, that the trade-off

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sometimes called the night watchman state. Uh, the government would be around just to avoid theft, to enforce private contracts, to make sure nobody just takes your property outright, and to provide for a few things perhaps like national defense. Then you can imagine a

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possibility is that there might be fewer jobs as a result. And my friend thought about this for a while and she said,"I just don't like thinking about it in that way." And I sort of thought, well, lots of people um including politicians

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slightly broader vision of what the government would do. Perhaps government did everything I just mentioned in the night watchman state but it also provides some public services like, you know, roads. Uh, maybe it does fire protection. It does education. It

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call statistical people, not real people. Now, what do I mean by statistical people? I'll say that um every economic news story I see on television news or in the newspaper um begins with some person and and I'll just call that person Joe. Um now Joe is

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provides support for science. Those kinds of things. Then you can imagine the government taking on a little more.

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don't mean to make fun of Joe because I sympathize with Joe. Joe is having a lousy time. But here's a fact. You can't set social policy based on Joe.

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For example, it might start taking on retirement programs like Social Security or it might provide national health care like happens in many countries. And a still broader visi

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costs and benefits are. When I hear about Joe, I wonder about all those other people who aren't in the news story but might be affected in one way or another. I believe in those people, those statistical people. I believe in

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them even though I don't know their names and even though I don't know who they are and even though they're not right in front of me in the newspaper.

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Third issue, uh economists believe that self-interest can be an effective way of organizing a society.

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Now what I mean by that concept is that if you ask a lot of people are you what do you think would happen if everyone believed selfishly? If everyone act selfishly in society the the result you get from most people the answer you get

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is well that would be chaotic. If everyone was selfish all the time it would just be crazy. But you know if you look around at the world around you many market exchanges rely on self-interest.

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Uh when you go shopping you try and buy the best deal you can. People who are selling stuff try and sell because it's good for them. Many people are reacting in a way that follows their own self-interest. Uh Adam Smith, who's

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commonly thought of as the founder of the systematic study of economics because of a a book he wrote called the wealth of nations back in 1776, uh had a famous comment to this effect.

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Um Smith wrote, "Every individual endeavors to employ his capital so that its produce may be of greatest value." He generally neither intends to promote the public interest nor knows how much he is promoting it. He intends only his

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own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectually than when he really

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intends to promote it. That idea that there's an invisible hand and that when you're trying to look after your own self-interest, maybe by producing the best possible product you can, you're actually helping everyone who buys that product. And when you're

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trying to buy the best product you can, you're providing an incentive for people to produce that best product. And that a lot of the time when you're looking out for your own self-interest, it's almost as if there's an invisible hand guiding

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you to perform in a way which will benefit society as a whole. Now, of course, this doesn't mean that self-interest always works for the best in all situations and in all times. Um, Adam Smith, bless his hard-hearted economist soul, also wrote about how

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firms would try to get together and raise prices and make consumers suffer. and he wrote about problems of people being forced into unrewarding assembly line jobs and he talked about the need for public services like education. Um, so I'm not trying to say here that

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self-interest is all we need and that it solves all of society's problems. What I am trying to say is that self-interest and selfishness isn't chaos either. It leads to a certain kind of discernable order and a useful set of incentives.

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and those work pretty well at a lot of different tasks that it's important for society to perform.

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Here's a fourth thought. Incentives matter. Um when people or firms are confronted by changes in prices or changes in other conditions, they react.

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They they do something different than they would otherwise do. Now, you might say, well, everyone agrees with that. And I I'm not at all sure that's true. Um, if you ask most people, okay, we should have a goal. We should

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all save energy and conserve more oil because we're worried about dependence on Middle East oil or whatever reasons you want to give. Or we should encourage people to pick up trash and protect the environment or we should encourage

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people to save more or to work more. All those kinds of things. How should we do those things? How should we accomplish those goals? Well, most people tend to say, "Well, let's tell everyone how important it is. Let's let's have some

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advertisements on television and say everyone save energy and everyone pick up their trash. Um let's have a class in the schools to teach people about things. Economists tend to have different advice. Economists tend to say, "Look, you want less of something,

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make people pay more for it. Tax it. You want people to save gasoline, tax it.

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They'll save. You want them to pick up their cans and bottles, put a 5-cent return on it. They'll bring them back.

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or somebody will if there's something you want more of, you want to encourage it, you want more work or more saving, subsidize it, make the return higher, get people so they have more money if they work or more if

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they save. Now, this may sound a little mercenary, I guess, but economists are trying to deal with what works in the real world. We're not dealing with philosophy here and moral exhortation and what would be to be a good person.

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We're we're dealing with what works and what tends to work is to give people hard incentives. A coral area of this thing about incentives is don't use prices when you want to redistribute income. If you want to help the poor,

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for example, by making sure they can, you know, buy housing or buy food or transportation or daycare, um don't don't try and hold the prices of all those things fixed. Instead, you want to help the poor, give them money. That's

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fairly direct. You want to help them, give them money. Let them buy the things they want and let the price system adjust and provide the incentives that it can provide. Um, there's a well-known economist at Princeton University named

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Alan Blinder. And some years back, Blinder wrote, I think, a very nice book. And the title conveys how economists think about a lot of these things. And the book was called Hard Heads, Soft Hearts.

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So, you want to think in a soft-hearted way about who needs help and what needs to happen and what isn't working well for people. But when it comes to analyzing what to do, you want to be rock solid hard-headed.

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Hardheads, soft hearts. Yet another example. Most people believe that individuals or firms set prices.

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Economists don't believe that. If you ask people about their rent, they say, "Oh, well, you know, my landlord raised my rent. I can't believe it." Or or the gas companies, the oil companies, they they raised gasoline prices. The banks,

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they raised those interest rates. Economists certainly agree that oil companies and bankers and landlords are all greedy and trying to make all the money they can, but we believe they're greedy all the time. And sometimes the market lets them charge more. Sometimes

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conditions in the market force them to charge less. If you're going to blame bankers or your landlord or the oil companies for making prices go up, all I ask is that you be fair-minded. If you're going to blame them when prices

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go up, then you have to give them credit when prices go down, right? And so, every time the price of gasoline drops, you have to say, "Oh, those generous oil companies, I guess they just decided to give hardworking people like me a break

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today. Oh, interest rates are higher. Those nice banks, isn't it sweet of them? It's not about their motivations, people. They are what they are. What determines prices in the market is the interaction of supply and demand. It's not the generosity or the selfishness of

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the participants in the market. Another example, all costs should be thought of for economists as opportunity costs. An opportunity cost is if you hadn't acted in one way, what would you have had instead? Now, sometimes you can think

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about that in terms of money, but but not always. Um, let me give you an example. How much does it cost to hire someone to clean your house? Well, you might say, for example, that it costs $150 twice a month to have somebody

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clean your house. So, $300 a month, $3,600 a year. Or you could say, um, what it really cost me to have my house cleaned every year was a week in Mexico sitting on a beach.

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That's the opportunity cost. It's what you really gave up. It's not the money you spent, but it's the thing you gave up. Often when you think about opportunity cost in those ways, it makes the cost look a little bit different.

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Um, for example, imagine you're sitting in a movie and you really hate this movie. It's like the worst movie you've ever seen. Do you sit in it all the way to the end or do you walk out in the

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middle? I mean, your time has some opportunity cost, right? You spent the money. you're not going to get it back one way or the other. Are you going to sit and watch this cruddy movie the whole way through? Or are you going to

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say, "Well, my time is worth something. Anything is better than this movie." And walk out. If you think about the opportunity cost, you may act differently.

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Um, a few years back, businesses noticed a major opportunity cost. Many of the businesses had bought downtown real estate and they owned it. So, they were no longer making payments on it, but it was highly valuable. So if they said,

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"Well, what does our office cost us?" The answer was zero. But what was the opportunity cost of staying there? It was very large because if they moved anywhere else and sold that property, which was extraordinarily valuable, they would be much, much better off. And

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people do the same thing with their houses. Once you've paid off your mortgage, what's the cost of staying in your house? Is it zero? Well, of course not. if you went somewhere else, if you sold the house, you could have more

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money for trips or vacations or or uh time to give the children or the grandchildren something. So, when we think about costs, you don't want to just think about the money out of your pocket. You want to think of the time

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and of the alternative things that you could have gotten. Um, when we think about the study of economics and we think about this course as it's going to evolve, we want to think about it in two big chunks. Those

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two big chunks are microeconomics and macroeconomics. Now microeconomics is the study of how households and firms make decisions in goods markets, in labor markets, in financial capital markets. And it's the study of how those markets sometimes work well and and sometimes how they

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work very very badly. Um, it'll focus on individual decisions, decisions that people make about consuming, about working, about saving.

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It'll focus on decisions that firms make about how much competition exists, about whether there's a monopoly or not. It'll focus on public issues when these firms and individuals come together like what should society do about poverty or the

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environment or technology or education and and when can the government do something useful and when might it not quite be so useful. So microeconomics is the view of the individual actors.

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Macroeconomics on the other hand takes an overall view of the economy and it focuses on policies like unemployment, inflation, uh budget deficits, economic growth, international trade and focuses on how the policies of national governments can affect all of these

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outcomes in a global economy. In fact, what we'll do in macroeconomics is we'll take four main goals. uh we'll take fast growth, low unemployment, low inflation, and a a reasonable balance of trade. And we'll think about how can the

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government pursue those main goals using its budgetary policies and also using the monetary policies that are controlled by the fiscal or by the Federal Reserve. Um when I think about macro and micro together, I sometimes think of the old saying, you can't see

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the forest for the trees. In a way, macroeconomics is looking at the forest and not worrying too much about the trees. Microeconomics is looking at the trees individually, not worrying too much about the forest. But they're both a view of the same overall subject. As

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we think about all these issues and putting them together, um, we want to think about the study of economics as requiring a willingness to put together all sorts of bits and pieces. It should put together theories and logic and

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facts and evidence and history and all sorts of things. Again, let me quote John Maynard Kanes on the master economist. Uh Kaines said, "The master economist must possess a rare combination of gifts. He must reach a high standard in several different

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directions and must combine talents not often found together. He must be mathematician historian statesman philosopher in some degree. He must understand symbols and speak in words.

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He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in light of the past for the purposes of the future. No part of man's nature or

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his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood. As aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

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That's a lofty goal, but we can get a little bit of the way there in these lectures.

Topics:economicseconomic thinkingTimothy Taylordismal scienceeconomic policyopportunity costmacroeconomicsgovernment roleeconomic systemseconomic literacy

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