With that kind of encouragement, why study economics? Economic issues are central to many elements of our lives, including not only jobs and income, but also health care, education, retirement prospects, and America’s future position in the world economy. If you’re going to participate in the great social conversation about economics, a conversation that is happening all around us, you need the ability to “talk the talk.” Maybe you’ve already discovered this the hard way: You’re having a friendly argument over the minimum wage, or the budget deficit, or national health insurance, and at some point the other person sniffs and says, “Well, even the most basic economics shows that . . .” and then repeats whatever his or her argument is. Now, in my experience, people who make assertions about what “basic economics” shows have only a fifty-fifty chance of being correct. But if you don’t know any economics, basic or otherwise, you can’t dispute the claim. All you can do is nod or shrug. As British economist Joan Robinson (1978, p. 75) once wrote, the reason to study economics is “to avoid being deceived by economists.”

How much economics do you really need to know to participate in such conversations, whether socially or professionally? Brace yourself for a shock: Herb Stein (1991, p. 6), who worked in various roles as a U.S. government economist for almost fifty years, noted that “Most of the economics that is usable for advising on public policy is about at the level of the introductory undergraduate course.” All right, maybe that advice wasn’t a huge shock: we do live in cynical times. But the point is that you don’t have to be eligible for that tenured chair in economics at Harvard or Stanford to hold your own in most everyday economics debates. You just need to understand the economist’s way of thinking.

Let’s lay some groundwork, beginning with the three basic questions of economics:

These three questions are fundamental to every economic system and indeed every society: capitalist or socialist or communist, low-, middle-, or high-income. It’s useful to think of the possible answers to these questions as falling along a spectrum. At one end of the spectrum is total government control: government institutions determine what is produced, how it’s produced, and who gets it. At the other extreme, you can imagine a society in which individuals make all the decisions about what, how, and who. In the real world, of course, very few societies occupy either extreme.

Let’s think about what it would mean to move along this spectrum. Putting aside pure anarchy, we could start at one end with a society in which the government provides only the basics for a market economy: prosecuting theft, enforcing contracts, and providing minimal infrastructure such as national defense. This is sometimes called the “night watchman state.” Farther along the spectrum, you can imagine a society with a slightly broader scope for government, adding public services such as roads and education to the night watchman’s responsibilities. The next step might be taking on what’s sometimes called a social safety net: a system of national pensions (such as Social Security) and nationalized health care. An even broader government might be responsible for supporting or even partial ownership of certain industries, such as steel or agriculture; it might control the distribution of food or basic consumer goods, such as housing. At the other extreme, you could imagine a government that hands out all the jobs, all the housing, all the food; one that determines what everyone makes and what everything costs.

In the great debate between government control and individual freedom, there’s a long tradition of treating the people at the other end of the spectrum as if they were idiots—or monsters. But modern economics recognizes both that markets have their strengths and that, in some situations, markets don’t work especially well and the government may have the ability to do something genuinely helpful. Modern economics also recognizes situations in which government intervention hasn’t worked well and in which it would probably work better to let the market have a go. To think like an economist, you have to step beyond the ideological arguments about market versus government and get pragmatic. It’s necessary to dig down into understanding how markets really work and what to do, in practical terms, when they don’t work well.

With this idea of what economics is, it’s useful to clear away some misconceptions about what economics is not. For one thing, economics is not about predicting the future. It’s a common complaint that economists can’t say when a recession is going to start or end, or when the stock market will rise or fall. But economists aren’t fortune-ellers, able to predict every factor that might affect consumption or production in an economy.

Economics is also not about taking political sides. A lot of people ask me (often in a polite and coded way!) whether I’m a Republican or a Democrat or a Libertarian or a Green, but in teaching basic economics, political affiliation isn’t relevant. Economics is not about supporting business or labor, or Democrats or Republicans. Economics is a framework for thinking about the questions.

As an entrée into how economists think, let’s consider some statements that most economists would view as obvious but many noneconomists wouldn’t.

Trade-offs should be taken seriously. Well, everybody believes that, right? Actually, no, they don’t. Think about the question of whether, if a government needs to raise additional revenue, it should raise the tax on individuals or on corporations. In public discourse, this tends to boil down to asking, “Which do you care about, corporations or people?” But an economist sees the bigger picture. If you raise taxes on corporations, where do the corporations get the money? They could raise the prices of their products sold to consumers; they could cut the bonuses of top executives; they could cut the dividends they pay to stockholders—all of which would mean less money in the pockets of some actual person. My point here is not that corporate taxes should or shouldn’t be raised, but that any sensible discussion of corporate taxes should focus on which actual people are likely to end up paying the tax. Similarly, when the media report on economic issues, they tend to start their stories with a person. Perhaps it’s Joe, who just got laid off from a job at a failing company, or Susan, who depends on a social program that’s being cut. This is sometimes called “putting a face on the news,” and it’s effective journalism. But when I hear about Joe or Susan, I always wonder about all the people who aren’t in the news story but who are affected in one way or another by the same issue. As economists sometimes say, the plural of “anecdote” is not “data.” Many economic choices have the characteristic that they help some people and hurt others. Economists care about all the statistical people who are hurt or helped, not just the individual faces in a news report.

Self-interest can be an effective way of organizing a society. If you ask a number of people, “What would happen if everyone in a society behaved in a purely selfish way?” most of them would reply that it would lead to chaos. But many everyday market exchanges rely on self-interest: shopping around for the best deal, waiting for a good price before selling your house, and so forth. Adam Smith (1776, pp. 484–85), arguably the founder of the discipline of economics, wrote:

The idea of the “invisible hand” is that in pursuing your own self-interest, you may benefit others. By producing a better product, for example, you’re improving the life of the person who uses it. Adam Smith knew perfectly well that the invisible hand is not a magical cure for all an economy or a society’s woes. But economists view self-interest as a powerful force, which when appropriately directed, can provide broad social benefits.

For example, if you wanted to get people to conserve energy, how might you go about it? You might develop a huge public relations campaign and get the word out on TV and in the school curriculum. But an economist is more likely to say, “You want people to use less oil? Tax it; they’ll use less. You want firms to develop more fuel-efficient cars? Subsidize that technology; the firms will then do the research and development that will make it happen. You want people to use more solar power in their homes? Give them a tax credit; they’ll put the extra money toward the installation.” If there’s something you want less of, discourage it with a tax; if there’s something you want more of, encourage it with a subsidy. Such choices in any individual case may be wise or unwise public policy for a variety of reasons (discussed in more detail later in this book), but at least they work with incentives, rather than ignoring them.

All costs are opportunity costs. When you make a choice, the thing you didn’t choose is what economists call an “opportunity cost.” For example, if you want to hire someone to clean your house, let’s say it will cost you $150 per cleaning, two cleanings per month. So you could say it costs you $3,600 a year to have your house cleaned, or you could say it costs you a week’s vacation at a beach resort in Mexico to have your house cleaned. The true cost is not the money you’ve spent; it’s the thing or things you give up. Thinking in terms of opportunity costs includes costs that aren’t measured in terms of money. If you attend college full time, you are giving up time you could spend doing something else—including working for pay. That opportunity cost is part of the cost of attending college.

Prices are determined by the market, not by a producer. In everyday conversations, you’ve probably heard someone make a comment such as “my landlord raised my rent” or “those big oil companies raised fuel prices” or “the banks raised my interest rate.” But when, say, gasoline prices drop, you probably don’t hear anyone say, “Oh, those generous oil companies. So nice of them to give us hardworking folks a break!” Or when interest rates are low, people don’t say, “Those generous banks—how sweet of them to give me more for my money.” To an economist, the basic premise behind both the blame and the praise in these statements is faulty. Economists certainly agree that landlords and gas companies and bankers are greedy and are trying to make the most money they can, but they’re greedy all the time. They raise rents and prices and rates not because they want to—they always want to—but because market conditions of supply and demand shift in a way that allows them to do so.