Ten things every economist should know

Taxes change behaviour

Taxes on goods and services, including labour, make them more expensive. Other things being equal, on the margins people will tend to consume less of them. Official estimates of what the tax might raise are often falsified by people buying less or by trading down to cheaper alternatives.

Imports enrich, not exports

Many politicians seek to boost exports, thinking that this will make us wealthier. The reality is that exports are what we must do in order to buy the imports that make us richer. When we buy things cheaper from abroad, we are left with money in our pockets. As P J O’Rourke put it, “Imports are Christmas morning; exports are January's MasterCard bill.”

Incentives matter

Shopkeepers large and small know that incentives are designed to persuade people to buy. Discounted prices and two-for-one offers are part of that. Incentives matter because people respond to them, trying to maximize their advantage. Changes in interest rates, mortgage rates and tax rates change the incentives, and people respond accordingly.

Talent is mobile

It is difficult but not impossible to move a factory, but the skilled talent on which much of the modern economy depends can up sticks and move to a more attractive jurisdiction. This limits what governments can do. Some of those who resent such limits often argue for world agreements to prevent this, but are unlikely to succeed because there will probably always be places keen to prosper by attracting such talent.

Jobs are a cost not a benefit

We are often asked to support projects because it is claimed they will create new jobs. But the end of all production is consumption, as Adam himself said. China does not mine coal to create jobs for miners. It does it to supply the energy for its industries. Jobs are part of the production costs we must do to gain the consumption we desire. Growth and wealth are created by having fewer jobs to gain the same output. Fewer jobs mean lower costs.

It is investment, not spending, that boosts growth.

The supposition that increased spending leads to economic booms misses the point. It is investment in anticipation of future spending that boosts the economy. People put money into new ventures or to expand existing ones in order to achieve gains later. That investment goes to work now financing firms to expand, to build the factories, to buy the equipment and supplies, to recruit the talent. The anticipated spending comes further down the road.

Protectionism makes industries uncompetitive

Putting barriers in the way of foreign competition can indeed protect producers in the domestic market, but by removing some of the competition, it removes the incentive for them to operate with maximum efficiency, to innovate with new ways to satisfy consumers. The result is to make the protected industries uncompetitive in world markets.

Modelling has limitations

Some economists like to produce neat clean models of how economies work. The problem is that the real world is not neat and clean; it is messy. Moreover, the economy is not a ‘thing’ that can be accurately modelled. It is a process, changing from minute to minute as people in their millions input their decisions and change it. Every model simplifies, and in doing so loses information that matters. The only successful model is the whole economy. All of it is needed to explain its constantly changing nature.

There is no equilibrium

People talk of an equilibrium when supply satisfies demand. In the real world it never does because it is changing all the time. Shortages lead to price rises that lead consumers to buy less and producers to step in with extra supply to benefit from those prices. It is a dynamic process with no static points, no equilibria.

Tariffs are paid by domestic consumers

Populist politicians talk of ‘punishing’ foreign firms by putting tariffs on their goods. But foreign firms do not pay those tariffs. They are levied and collected by governments, and they raise the prices of imports. Domestic producers might gain by not being undercut, but it is domestic consumers who pay the higher prices that result.