How to Think about the Economy

Conclusion:
Action and Interaction

Nothing about the market economy is magic. As I have attempted to show, the market is quite real and mundane. It functions in a certain and knowable way; it has a specific behavior, which emerges from and arises out of people’s actions and interactions.

We refer to this behavior as economic laws, which are laws in the same sense as the laws of physics. There is no way to escape them. They are immutable.

Critics claim markets have no nature, there are no economic laws or they do not always apply. They sometimes claim markets are or must be designed and work in an “institutional vacuum.” But this is a misunderstanding. Changing circumstances will change the outcome of the market process, but markets do not function differently regardless of the institutional setting.

The specific goods and services produced, the number of job opportunities, the distribution of value created, and so on are not caused only by economic laws. But they certainly are subject to those laws. All else equal, a higher price for a good means less of it will be sold than otherwise would be the case. This does not mean other influences have no effect.

For example, if the government required everyone to buy some good this coming month, the quantity demanded would increase even as that good’s price rose. The same would be the case if instead of an imposed requirement, a new fad made a lot of people eager to purchase that good. In neither case are economic laws being evaded or out of play. On the contrary, both outcomes are well in line with economic laws but contingent on the specific change.

Therefore, we must understand economic laws to understand the market economy and the evolution of the market process. It is only through proper economic reasoning that we can uncover the economy’s actual workings and make sense of the market process. If you now understand that, then I have been successful.

Specific outcomes are impossible to understand— not to mention predict—unless we first understand how markets work. This means economic literacy is a necessary starting point for effective policy making. Regulations, which we discussed in chapter 9, must take economic laws into account.

If we do not understand the market economy, we cannot understand the effects regulations will have— and chances are they will not only be ineffective but destructive.

Economic literacy is the antidote to destructive policy. But it is so much more. Economic literacy is mind-opening because it allows us to truly understand how the world works.