Table Of ContentThe Common Sense behind
Basic Economics
The Common Sense behind
Basic Economics
A Guide for Budding Economists,
Students, and Voters
Justin Vélez-Hagan
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Thecommonsensebehindbasiceconomics:aguideforbuddingeconomists,students,andvoters/
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Tomytwodaughters,JuliannaandAgnes.Mayyoulearnmorequickly
thanyourfatherthatcommonsenseisn’tsocommon,asmuchasitis
obtainedthrough(very)hardwork.
Contents
Introduction ix
1 WhyisEconomicsSoDifficult? 1
2 HistoryCanBeConfusing 5
3 HowWeMakeEconomicsDifficult 13
4 Man,ThatAin’tTrue 19
5 CommonSenseEconomicsDefined 25
6 EconomiesComeinAllShapesandSizes 27
7 Supply,Demand,andTighty-Whiteys 35
8 Where’dThatPriceComeFrom? 43
9 DoMarketsFail? 53
10 EntrepreneurshipandProfits 63
11 TheBusinessCycle 71
12 Inflation:OneSneakySucker 77
13 Jobs 89
14 TheGreatestEconomyEver(Seriously,Ever) 97
15 ToSaveorNottoSave,ThatistheQuestion 103
16 UncleSam’sVISABalance 109
17 DoWeReallyNeedUncleSam? 115
18 DollarsandCommonSense 127
19 TheGlobalEconomy 133
20 CurrentIssuesinEconomics 143
References 151
FurtherReading 155
Index 157
AbouttheAuthor 161
vii
Introduction
“1InthebeginningGodcreatedtheheavensandtheearth,”2[andmancreated
economicstomessitallup.]—Genesis1:1–2(ConfusedStudents’Revised
Version)
As a first-year economics student, or anyone else trying to wrap your
headaroundwhathasbeencalled“thedismalscience”(Galbraith1977),
you might be wondering if masochism became trendy right around the
timeeconomicswasinvented.
AlthoughitmaysometimesseemlikestudyingtrigonometryinLatin,
economics really is no more difficult than any other discipline. At first
glance, it seems like complete nonsense, but then you learn a little bit
(which means, quite sadly, that you now know more than 90 percent of
yourpeers)andbegintothinkthatyou’resmart.But,ifyouareoneofthe
even smaller percentage of humans that decides to delve a little deeper
into the field, you’re probably going to find what I did: The more I know
the more I realize I don’t know and the more I know that the people I thought
knewdon’tknoweither.
Evenafterspendingyearsasastudentofeconomics,aswellassome
timeteachingit,Ireallydon’tseemyselfasan“expert”inthetraditional
sense of the word, often defined as one who is widely published and
reviewed by his peers in academia and requested to present papers to
audiences filled with other academic superstars, who stroke each other
fortheirrespectivelevelsofgenius.Thereareplentyofmensmarterthan
me out there who have done this for a living over a career spanning
decades.(NowI’mstartingtoquestionifIshouldbedoingthis.)
ImaynotbequalifiedtogarnertheattentionoftheNobelcommittee
(yet),butIamastudentofthedisciplinewhohappenstobeoneofthose
(partially insane) individuals who enjoys reading, studying, teaching,
and writing about the economy. Like the quote suggests, the more I do
learnabouteconomics,themoreIrealizeIneedtolearn.
WHODOESKNOW?
Itdoesmakemefeelalittlebetter,however,knowingthatnearlyevery-
oneelsehassomethingtolearnaswell.Afterall,economicsisarelatively
newacademicdiscipline,whosebeginningssurroundthelatenineteenth
century.Beforethistime,philosophers,professors,andresearchersfrom
ix
x Introduction
otherfieldsspenttimeinwhatwenowconsiderthedistinctandseparate
fieldofeconomics.
Yet, there have been thousands upon thousands of books published
onthetopicintherelativelyshortperiodoftimesince.Evenaquickbook
search for the subject “economics” at Amazon yields 2,106,823 results. If
eachbookhas300pages,whichIassureyoumanyhavemore,andIread
200 pages per day without a day off, it will take me 8,658 years to read
themall!(ExcludingtheseveraldozenorsothatI’veread,itshouldonly
take about 8,657 years.) Even if 99 percent of those books are just recita-
tions of the knowledge presented in the other 1 percent, that leaves me
about eighty-seven years to read all of the books presenting original re-
search and thought on economics. This doesn’t include research papers,
journal articles, Ph.D. dissertations, Wall Street Journal editorials . . . I’ve
gotalottolearn.
Thepursuit ofknowledgecanbeoverwhelming.But,asyou cansee,
so can the presentation of that knowledge. Once someone knows, or
thinks they know something (e.g. this guy), they now have to find a
properandacceptablewayofpresentingit.Unfortunately,thepresenta-
tion can often skew the message. Want to be acknowledged and re-
spected as a highly-reputable academic? Better learn the pedantic and
complexeconomics-speakoftheresearchworld.Scholarlyjournalsaren’t
so keen on contractions, slang, relatable humor, or, well, any type of
writing that isn’t drier than the Atacama Desert (by the way, that’s the
driestplaceonEarth).
Once you learn their language, you begin to realize that they don’t
know as much as you thought they knew. Many so-called scholars are
merely repeating in their own words what they’ve read someone else
writeintheirs,inasensereportingonsomeoneelse’sfindings,thehisto-
ryofeconomics, or attempting toexplain current economies.Thereisso
much room for disagreement in any of these categories that entire re-
searchpapersaredevotedtojustexplaininginterpretations.
If not busy explaining others’ explanations, then scholars attempt to
comeupwithatheory.Youknowwhatatheoryis?Atheoryisbasically
an educated guess. Put all of this together and you begin to realize that
therearealotofpeoplearguingaboutwhatsomeoneelsesaidandalot
of guessing going on. That’s right; many of the smartest people in the
worlddon’tknoweither.
THEBASICFACTS
There are, however, some basic economic ideas that have been so long-
heldthattheyhavebecomewhataveragepeoplewillcall“facts,”which
in the language of the academic is known as “theory” or “principle.”
Even these basics, although rarely disputed, have been misrepresented,
Introduction xi
presentedpoorly,ordenouncedbyother,evenlessknowledgeableindi-
vidualslookingtomakeanameforthemselvesbymakingabigstink.
The basics of economics are among the most misunderstood of any
academic discipline. That’s because most people learn about economics
in one of three ways: 1) In the classroom from a college professor who
addsalotoftheunnecessaryacademicflufftotheconversation;2)From
theeditorialpagesofnewspapers(opinionsfromcablenewsortalkradio
as well); or 3) From their weird Uncle Charles at holiday gatherings. In
thefirst,youwillfindalotofconfusingcharts,graphs,andequations.At
least that’s what most people complain about. Something like “…but
pointb isnotastableequilibrium”isnotsomethingyou’llhearinevery-
1
daylanguage.Ontheotherhand,opinionsfromcommentators,although
sometimeswell-explained,oftenlackatotalunderstandingormisssome
importantpointgiventhelimitedamountoftimeinaparticularsegment.
Nomatterhowmuchyourespecttheirvastknowledge,sometimesenter-
tainment value trumps the necessity for a thorough and accurate expla-
nation.YourweirdUncleCharles,orwhicheverotherinterestingperson-
alityyoucome across,seemstothinkeveryonewantstoknow hisopin-
iononpoliticsandeconomicsinthemostinappropriateofcircumstances,
regardlessofwhetherheknowsanythingaboutanything.
With such misinformation being strewn about, it’s easy to see why
everyoneisconfused.Thetruth,however,isthatbasiceconomicsisactu-
ally quite simple and even more commonsensical, and it should be ex-
plainedthatway.But,itrarelyisandthat’swhyI’vewrittenthisbook:to
explain the basics of the basics in simple and easy-to-understand lan-
guage.
DOESITREALLYMATTER?
Perhapsthebiggestproblemisthatourelectedandappointedleadersare
people too.Manyofthem,althoughwell-educatedandwell-intentioned
people, often lack the basic economic understanding necessary to run a
mom-and-popicecreamshop,nolessyourcity,state,or(helpme,Lord)
country’s finances! It’s not always their fault (though mostly it is); we
expect them to know everything, and we’re disappointed when they
don’t.But,theyshouldknowthebasics,ataminimum.
How will you know if they know if you yourself don’t know? Well,
it’s time you knew. Otherwise the masters of the universe who keep
temporary residences in D.C. will continue their antics with the realiza-
tionthatlittleofthefollowingisunderstoodbytheaveragevoter.Ifyou
the voter don’t understand what our wonderful leaders are doing, you
caneasilybefooledintothinkingthattheyaretheauthoritiesonsubjects
that they themselves don’t even understand, which leads to all kinds of
Washingtoniantomfoolery.
xii Introduction
Therefore, I hope to expose some of our mutual misunderstandings
here, so that neither the politician, nor us mere mortals, can be pushed
over or manipulated to pursue or promote policies that will have unex-
pectedandundesirableeconomicramifications.
COMMONSENSE,BYTHEBOOK
Weshouldfollowour instinctsmoreoften.Just knowingtheverybasics
will show you how legislators ignore economic principle almost as em-
phatically as they try to convince you of what they do know. They will
morelikelywearasuitthatisn’tnavybluebeforeadmittingamistake(or
they will try to convince us that they are right and all economists are
wrong). If only the combined C.Y.A. efforts of Washington, D.C. could
somehow be bottled and sold, we could solve the world’s energy prob-
lemstomorrow.
ToensureIdon’tmakeanymistakesmyself,I’vetriedtomaintainmy
ownopinionsintheirrightfulplaceinsidemyhead.I’vebasedthisbook
onlong-establishedeconomicprinciples,instead.Infact,I’vebasedmuch
ofitonseveralofmyfavoriteclassicbooksandtextbooksoneconomics,
whichyoucanfindinthe“GuidetoFurtherReading”and“References”
sectionsattheendofthebook,yetI’vealsointentionally(perhapssome-
timesunintentionally)leftoutalotsoasnottoboreyoutotears.
In addition, you won’t find any fancy charts, graphs, formulas, or
overly wordy academics-speak. Too many who use obscure language
intendtodistractandconfusetheaveragepersonfromrealizingthatthey
really don’t know what they’re talking about in the first place, or, even
worse, try to hide the fact that they don’t want you to know enough to
participateinthepoliticalprocess.That’swhyI’vebrokenitdownsothat
anyonecanunderstand,inplainEnglish,andsothatnoonecaneversay
toyou,“It’sreallycomplicated.Justtrustme.”
Because we only really understand and remember what we use, I’ve
tried to incorporate much of the basic economic concepts into further
explanations ofwhattheymeantoyou andme.After someofthechap-
ters,you’llfindasectioncalled“FocusonEconomicPolicy,”whichtakes
an example of a policy that D.C. legislators are kicking around and ex-
plains what it is, how it ties into that chapter’s discussion, and what it
means to you. (If you’re too excited to read the next chapter, feel free to
skipthese.)
The following are (for the most part) not contentions or guesses or
what should-bes. These are the principles that any and every economy
has adhered to since the beginning of time. Yet for some reason it has
becometoodifficultformanytounderstand.Itshouldn’tbe.It’scommon
senseandI’mgoingtoshowyouwhy.
