The Basics

Economics, at its foundation, is simply a framework for understanding how people choose to use the resources available to them; whether money, raw physical goods, knowledge, talents or time. Economists can make it very complicated–to the point of losing the economic intuition in the mathematics of the models they use. But at its foundation, economics is based on some very simple premises that don’t take a PhD in economics–or mathematics–to understand and apply to real life. Sadly, too few people understand that–and fewer still use that understanding.

There are three basic assumptions I propose at the beginning of every course I teach. I believe they are sufficient to understand the vast majority of human behavior. And they involve no math:

1) People aren’t stupid. Okay, I know that sounds like a stretch. But let’s start by at least giving them the benefit of the doubt. What I mean here is simply that people behave in ways they think are going to make them happier. Leave it to the econ nerds to debateĀ  hyper-rationality, bounded rationality, behavioral biases and such. And people are not always right and what makes them happy may not be things we (meaning society–or your particular opinion) think are appropriate. But as a general rule, people behave the way they do intentionally with the objective of making themselves happier–even if that’s by making someone else happier.

2) More is better. (Hey, the blog title didn’t just come out of thin air.) Early in my career I had the opportunity to work with a couple Nobel prize-winning economists. I remember Ronald Coase once saying, “You can explain 95% of human behavior with the assumption that people prefer more money to less.” I’d argue it might be higher. And if you allow for things other than money, you get 100%. Yes, there are things that people don’t like, and more of that is not better. But whatever thing a person might value, you can safely assume that they believe more is better than less.

3) More more is less better. (Thank you, David Rose, for your quirky sense of humor.) People generally prefer more of something (good) to less; but the more of it they have, the less valuable it becomes at the margin. It really is possible to have too much of a good thing. So while more might be better, we have to allow for the fact that once they have some more, they may not want as much more–especially if it comes at a cost of having less of something else.

Put those three simple “rules of economics” together and you have a pretty powerful toolkit for understanding incentives–and if you understand incentives, the rest of economics pretty much falls into place.