1.1 A Principled Approach to Economics
Economics is not just about money, nor is it just about business or even government policy—though it can be helpful for understanding each of these. Rather, it’s a way of thinking, and the economic approach can also help you understand politics, families, careers, and just about every aspect of your life. The economic toolkit that will help you better manage your money, your employees, and your business will also help you better manage your time, your energy, and your relationships. It’ll provide you with guidance as you make both small decisions such as whether to walk out of a bad movie (you should), and the big ones, such as whether to buy a new car (it depends). Once you learn to think like an economist, you’ll find yourself constantly discovering new ways in which it can be useful.
Ultimately all of economics is built on a small set of principles that together define what it means to “think like an economist.” If you learn these core principles, you’ll be able to do this too. Following this principled approach means that rather than memorizing facts about the economy, you’ll learn a systematic approach to thinking about the world.
The Economic Approach
One famous definition of economics describes it as the study of people “in the ordinary business of life.” I like this definition because it hints at the idea that the same principles that you might use to analyze business decisions will also be useful for analyzing the decisions that arise in everyday life. But rather than memorizing this specific definition, I want you to learn to do economics. That’s what this chapter is all about. Think about economics as a toolkit, and this chapter as an introduction to actively using these tools.
We’re going to start with the four core principles that comprise the foundation upon which all economic reasoning is based. They aren’t about any specific market or any particular decision. Rather, they define an approach to analyzing individual decisions and how they interact. Wrap your head around these ideas and connect them to the difficult choices you confront, and you’ll be doing economics. You’ll be translating basic economic principles into carefully considered actions. As you learn to employ the tools of the economist’s trade, you’ll quickly see how these principles can help you make better choices in both your personal life and your professional life. Internalize these principles, and you’ll find yourself doing economics every single day.
Think of the task ahead this way: In this chapter, you’ll learn the four core principles of economics. The rest of your study of economics will be about applying them. It’s an approach that’ll guide you through both microeconomics, in which you’ll study individual decisions and their implications for specific markets, as well as macroeconomics, in which you’ll trace through their broader implications across the whole economy.
A Systematic Framework for Making Decisions
Should you stream one more episode? It’s an economic decision.
The atom is the basic unit of matter, and so physicists begin by trying to understand the atom, and from that, build their insights into the functioning of our physical world. Biologists start with the cell, the basic building block of all living things, and build from there to understand how different organisms live. And for economists, individual decisions—choices—are the foundation of all economic forces. Your decisions, and those of others, collectively determine what’s made, who gets it, and whether it yields fair outcomes. Because these broad economic outcomes are the product of many individual choices, economic analysis always begins by focusing on individual decisions.
This is where the four core principles come in. Together, they provide a systematic framework for analyzing individual decisions. In particular, through the rest of this chapter, we’ll see that whenever economists evaluate a decision:
- We consider the costs and benefits of a choice. (The cost-benefit principle.)
- Before making a choice, we consider the alternatives, asking: “Or what?” (The opportunity cost principle.)
- We think at the margin, always asking whether a bit more or a bit less of something would be an improvement. (The marginal principle.)
- And we are particularly attuned to understanding how different decisions depend on each other. (The interdependence principle.)
Sounds straightforward, right? The challenge is going to be applying these ideas—which we’ll analyze through the rest of this chapter—to the wide array of decisions you’ll face in your life.
This systematic approach provides insight into just about every decision you face. Going shopping? Apply the core principles of economics, and you’ll likely make better choices about what to buy. Trying to decide whether to do further study? We’ll see that the core principles can help you sort out whether that’s a good idea. Thinking of starting your own business? Apply these principles to figure out whether that’s your best choice. Settling down, and trying to decide how many children you should have? Again, apply these principles.
If you get in the habit of thinking about economics through the core principles, you’ll develop a sharper understanding and make better decisions. Speaking of which, you now face an important decision: You have to decide whether to keep reading, or not. Thousands of my past students can attest that the benefit of learning to think like an economist far exceeds the cost. And as you’re about to discover, when the benefits exceed the costs, the first of these principles tells you that it’s a choice worth making.