Smart people think alike. Or at least they reach similar conclusions. Take Charlie Munger and me. We reached the same conclusion about the importance of microeconomics. Seriously though, I think it is a crying shame that people in general don’t have even a nodding acquaintance with the basic principles of microeconomic theory.
Over the years I have been conducting a very unscientific survey of the level of understanding of economics by asking people opportunistically their opinion on some simple matters that involve a bit of microeconomic reasoning. The results have been disheartening. It is like asking people what is 2 plus 2 and finding that they are guessing the answer to be somewhere between 22 and 4. I think it is easy to teach people arithmetic. After all, practically every literate person is numerate enough to do sums very competently, even if they cannot quite get their heads around what exactly the normal distribution is good for. So I’m fully convinced that the average human can easily enough be taught the basic principles of micro theory and profit from that without really having to delve deep into esoterica that would gladden a PhD economist’s heart.
I think everyone deserves to know all the foundational truths about the world that have been so painstakingly discovered by some very smart people over the centuries. These are broad unifying principles, found in every major discipline, and every educated person should be totally comfortable in their understanding of them. For instance, regardless of whether you are a stock-broker or a nuclear physicist, you should know what the theory of evolution through natural selection is and how it explains the diversity of life on earth. Another example: one should know, even if one’s work is about literature and art, the atomic theory of matter and that only a hundred or so different kinds of atoms are involved in creating the universe we live in. Even more broadly, one should know what the scientific method is because we live in a world surrounded by artifacts that exist in some sense because the scientific method works.
I think that everyone should be familiar with the basics of economics because it matters in our daily existence. We all live in society and we interact with others. We in a sense create that society and how good that society ends up being depends on how we collectively understand how society functions. Our collective understanding dictates policy which in turn affects us all. Your ignorance of atomic theory does not materially affect you but ignorance of what the market is and how it works has profound consequences.
Knowing the basic elements of economics is good mental hygiene. It prevents infection by ill thought-out idea viruses and bacteria. To put it differently, it inoculates you against appearing stupid and behaving stupidly.
Enough of this. Let me just state what I consider the most important ideas we should all know related to economics. That all voluntary trade is good. It is good for both sides. That prices convey information that is otherwise either impossible or too costly to get. That incentives matter because people are motivated by self-interest. That people have differing abilities and differing preferences; which is why trade is possible. And a few other ideas that we could go into one of these days.
And lastly, it is never too late to learn a bit of economics.
[Go to Part 2 of this post.]