The Economic Way of Thinking, Part 1

This is the first of an eight-part series designed to introduce the general reader to economics. None of these essays will contain a single graph or make any use of complex equations or higher mathematics. These essays will explain fundamental economic principles in plain language that anyone will be able to understand. This first essay in the series will introduce the reader to economic thinking through the following steps: (1) I will offer a definition of the term economics; (2) I will explain two fundamental economic concepts, scarcity and choice; (3) I will relate scarcity and choice to the way in which every human being unavoidably ranks his options; and (4) I will discuss the difference between free goods and economic goods.

What Is Economics?

It is a mistake to think that economics deals only with the making, spending, saving, and investing of money or with the creation, development, and management of wealth. Economics covers a much larger territory. Economics is best understood as the study or systematic investigation of the principles of human action.

“Human action” refers to actions resulting from an intention or choice.

To understand the meaning of the term human action, it is helpful to contrast different types of things humans do. All of us know what it is to sneeze, yawn, or hiccup. These are not instances of human action. When someone sneezes, yawns, or hiccups, what he does is not a result of some decision or act of will. Sneezes, yawns, and hiccups are spontaneous, unwilled, and unplanned acts. “Human action” refers to actions resulting from an intention or choice.

Consider what happens when someone—an actor in a play—pretends to sneeze, yawn, or hiccup. In every such instance, the person decides to sneeze or makes a decision to act as though he is yawning. In such cases, his act is a human action, because it is the result of his intention or choice. While economics is not typically concerned with unwilled acts like blinking one’s eyes, it is interested in all conscious, human behavior that results from thought, planning, intention, and decision. If I decide to have dinner in an Italian restaurant, that is an example of a human action. What my digestive system does with that food after I swallow it is not. That is not specifically a human action. 

Scarcity and Choice

To get more specific, economics studies the choices human beings make with regard to scarce resources. If there is any such thing as bedrock in economics, it rests in these two fundamental concepts: scarcity and choice.

Human beings have to rank their alternatives to satisfy those wants—first choice, second choice, and so forth, and make choices among their available options.

Scarcity is an unavoidable feature of human existence. Since human wants and desires are always greater than the resources available, we can never have everything we want. Therefore, human beings have to rank their alternatives to satisfy those wants—first choice, second choice, and so forth, and make choices among their available options. The human actions that are the subject of economics are conscious human choices with regard to individual goals.

Each Individual’s Personal Scale of Values

One of the first mistakes many people make when thinking about economics is assuming that it is only the scarcity of money that counts in economics. Economic decisions may have little to do with money. Imagine a very busy person faced with many demands on his time. Suppose further that this person is given the opportunity to do several new things that he regards as more important than some of his other tasks. Since this person can only do so much in the time available to him, he begins to rank his options. He then uses his scarce time to pursue those goals that he has ranked highest. In this example, the person is engaged in a typically economical activity, even though his primary focus has little to do with money. Because of scarcity (in this case, scarcity of time), he has been forced to make conscious choices.

Sometimes choices between competing alternatives involve a trade-off between time and money. Suppose I want to buy tickets to an important baseball game that 50,000 people want to attend. I have two choices: I can either spend hours in a long line waiting to buy the tickets myself for $15 each; or I could pay someone else to stand in line for me, in which case the tickets would cost $25 each. If I value my time more than the extra $10, I would select option two. If I value the $10 more than the time required to wait in line, I’ll choose the first option.

It is a mistake to think of cost exclusively in terms of money. The cost of achieving some goal might include physical pain or a sacrifice of time and effort that might have brought me other goods.

The attainment of any goal involves some cost. But it is a mistake to think of cost exclusively in terms of money. The cost of achieving some goal might include physical pain or a sacrifice of time and effort that might have brought me other goods. The cost I incur to attain any good is the next most valuable good that my money, time, and effort might have secured.

Economic Goods

The word good is used in a number of different ways. In economics, the word refers to anything that some human being desires or values. If some person prefers having more of some thing to a situation in which he has less, that thing for him is a good. The term good is not used in a moral sense in economics. Some people fail to distinguish the fact that some person desires something from the quite different question of whether that thing is desirable. When we say that something is desired, we are reporting what is the case. When we say that something is desirable, we are prescribing what ought to be the case. Statements about whether or not something is desirable are normative claims, not descriptive statements.

Failure to note that the word good is sometimes used with reference to what people do as a matter of fact desire—even when that thing perhaps ought not to be desired—can produce some confusion. Sometimes economists describe the fact that someone desires or wants something or regards that thing as a good by saying that for such a person, the item has utility. It should be remembered that when an economist says that something is a good or has utility (in this economic sense), all he means is that someone wants it, desires it, or values it. To say that something is a good (in this economic sense) does not imply that it is the sort of thing that the person ought to want.

Economists contrast economic goods with what they call free goods. A free good is something which can be obtained without any sacrifice. In more technical language, a free good is one that humans can obtain in quantities sufficient to satisfy their wants at a zero price. A free good is so readily available by nature that its quantity supplied exceeds quantity demanded. There is more than enough to go around, to satisfy the quantity demanded. An example of a free good might be fresh air in the country.

It is important to distinguish between demand and quantity demanded. The word demand refers to a relationship that economic texts indicate by a curve showing the different quantities of some good or service that buyers will freely purchase at different prices, other things being equal. Quantity demanded is a specific point on that curve; it is a specific quantity that buyers will demand at a specific price. A similar distinction must be made between supply (another relationship indicated by a curve) and quantity supplied, a specific point or value on the curve. Demand and supply always refer to a schedule, not to a single quantity.

An economic good is one that humans cannot obtain in quantities sufficient to satisfy their wants at a zero price. Because quantity demanded exceeds quantity supplied, an economic good always costs something.

In contrast to free goods, economic goods are characterized by scarcity. Something is scarce if people want more of it than they can freely have. An economic good is one that humans cannot obtain in quantities sufficient to satisfy their wants at a zero price. Because quantity demanded exceeds quantity supplied, an economic good always costs something. In order to obtain a quantity of any economic good, something else must be sacrificed. For people who live next to an unpolluted lake, water might be a free good. But for someone traveling through a hot desert, water (because of its scarcity) is an economic good. In fact, it is not difficult to imagine circumstances in which water might become so desired that a thirsty person faced with the prospect of dying might be willing to sacrifice almost anything to secure some. In most cases, air is a free good. But for people living in an area where the air is polluted, clean air might become an economic good for which they would be willing to make some sacrifice or pay some price.

Economists point out that both free goods and economic goods possess utility. People place a value on air; it just happens that in most cases, the quantity of breathable air supplied exceeds the quantity demanded. But things may be valued in two different ways. Some things like air and water are very valuable in use, but usually have no value in trade. Diamonds have a great deal of value in trade, but less value in use. Economic value is always in the eye of the beholder. 

Conclusion

In this first of a series of essays on the economic way of thinking, I have defined economics as the basic study of human action, that is, of conscious, purposeful human behavior. I have identified the two main elements in any economic study as scarcity and choice. The unavoidable presence of scarcity in human life forces human beings to rank their available options and make conscious choices among those alternatives. I have also explained the important difference between free goods and economic goods. Because they are available in such abundance, free goods involve no costs and require no choices. But every economic good that has standing in our personal scales of values will necessarily be an object of valuation and choice. The conscious pursuit of goals leads humans to exchange things they desire less (such as time or money or some possession) for things they desire more.