Today I Learn… I make a point of learning something new everyday. This is what I learn each day

1, Apr 11, 2012

Six Foundamental Principles of Economic Thinking, Part II

Filed under: Economy — admin @ 12:40 am

Third principle: No thing is just one thing; there are always at least 2 sides to every interaction. I recently read a column arguing that it was unethical for those of us who had jobs in a period of economic difficulty to continue spending when others are unemployed. But the reality is that every dollar of my expenditure is a dollar of income coming in for someone else. If there’s less total spending, there’s also by definition less total income.

Fourth principle: The law of unanticipated influences. We can see this with a concept from chaos theory called the butterly effect. In chaos theory, hypothetically, a butterly on one side of the world can flap its wings and, through a chain of causation that’s totally unpredictable, cause a hurricane on the opposite side of the world.

This is true in economics: No event ever takes place in a bubble; a change in any one part of an economic system is going to have ripple effects, often in far removed places.

Fifth principle: The law of unintended consequences. In our interconnected world, our actions are always going to have multiple consequences. A number of cities have installed red light cameras, which take a photograph of the license plate of any car that enters an intersection after the light has turned red. The unintended consequence is an increase in accident when cars try to make a sudden stop at the traffic light.

Sixth principle: No one is, and no one ever can be, in complete control. If you apply an incentive to some subset of 6 billion complexly interrelated people, whose interactions are totally unforeseeable and have unintended consequences, and then predict the final result, that would be monumental. To go further and try to control that outcome would be utterly impossible.

Sounds interesting, right? Will share more later.

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