'What makes [economics] most fascinating is that its fundamental principles are so simple that they can be written on one page, that anyone can understand them, and yet very few do.' Milton Friedman, quoted in Lives of the Laureates. THE above statement by Friedman got me thinking: is it possible to summarize the basic principles of economics in a single page? After all, Henry Hazlitt gave us a masterful summary of sound principles in Economics in One Lesson. Could these concepts be reduced to a page?
Friedman himself did not attempt to make a list when he made this statement in a 1986 interview. After completing a preliminary one-page summary of economic principles, I sent him a copy. In his reply, he added a few of his own, but in no way endorses my attempt.
After making this list of basic principles below, I have to agree with Friedman and Hazlitt. The principles of economics are simple: Supply and Demand; Opportunity Cost; Comparative Advantage; Profit and Loss; Competition; Division of Labour. And so on.
In fact, one professor even suggested to me that economics can be reduced to one word: 'price'. Or, maybe, I suggested as an alternative, 'cost'. Everything has a price, everything has a cost.
Additionally, sound economic policy is straightforward: let the market, not the state, set wages and prices. Keep government's hands off monetary policy. Taxes should be minimized. Government should do only those things private citizens can't do for themselves. Government should live within its means. Rules and regulations should provide a level playing field. Tariffs and other barriers to trade should be eliminated as much as possible. In short, government governs best which governs least.
Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research and mathematics. The dismal state of the profession was expressed recently by Arjo Klamer and David Colander, who, after reviewing graduate studies at major economics departments around the US, asked `Why did we have this gut feeling that much of what went on here was a waste?' (Klamer and Colander, The Making of an Economist).
This is my attempt to summarize the basic principles of economics and sound economic policy. (Suggested improvements are most welcome.)
ECONOMICS IN ONE PAGE
1. Self Interest: `The desire of bettering our condition comes from us with the womb and never leaves till we go into the grave' (Adam Smith). No-one spends someone else's money as carefully as he spends his own.
2. Economic Growth: The key to a higher standard of living is to expand savings, capital formation, education and technology.
3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain. Therefore, an increase in trade between individuals, groups or nations benefits both parties.
4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict.
5. Co-operation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals-labourers, landlords, capitalists and entrepreneurs-must work together to produce valuable goods and services.
6. Division of Labour and Comparative Advantage: Differences in talents, intelligence, knowledge and property lead to specialization and higher productivity in some activities than in others by each individual, firm and nation. …