Murphy-Lessons for the Young Economist

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Lessons for the Young

ECONOMIST

DRAFT


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Lessons for the Young

ECONOMIST

ROBERT P. MURPHY

LvMIMIses InstItute

DRAFT


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ISBN: 978-1-933550-88-6

Copyright 2010 by the Ludwig von Mises Institute and published under the Creative

Commons Attribution License 3.0. http://creativecommons.org/licenses/by/3.0.

For information write the Ludwig von Mises Institute, 518 West Magnolia Avenue,

Auburn, Alabama 36832.


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v

Contents

Ackowldgm ix

1: Thinking Like an Economist 3thikig Lik a ecoomi 3th scop ad Bodari o ecoomic scic 5I ecoomic a scic? 5Why sdy ecoomic? 8

2: How We Develop Economic Principles 13Prpol Acio vr Midl Bhavior 13th social vr h naral scic 15th scc o h naral scic vr h social scic 17How W Dvlop Baic ecoomic 22

3: Economic Concepts Implied By Action 31Irodcio 31Oly Idividal Ac 32Idividal Hav Prrc 36Prrc Ar sbjciv 37Prrc Ar a Rakig, no a Marm uig nmbr 39Dir Idividal Prrc Ca B Combid 42

4: Robinson Crusoe Economics 49Irodcio 49Cro Cra Good Wih Hi Mid Powr 50Comr Good vr Prodcr Good 52Lad, Labor, ad Capial Good 53

Icom, savig, ad Ivm 55Good Ar Vald ui by ui 59Pllig I All toghr: Wha shold Cro Do Wih Himl? 61


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vi | Lessons or the Young Economist

5: The Institution o Private Property 71sociy Rqir Rl 71Capialim: thi I Priva Propry 73th Mark ecoomy ad Fr erpri 74

6: Direct Exchange and Barter PricesWhy Do Popl trad Wih each Ohr? 81Dirc exchag ad Barr Pric 81Dirc exchag / Barr 82Pric 83How Pric Ar Formd i Barr 84

7: Indirect Exchange and the Appearance o Money 99th Limiaio o Dirc exchag 99th Advaag o Idirc exchag 101th Advaag o Moy 104Who Ivd Moy? 106

8: The Division o Labor and Specialization 113th Diviio o Labor ad spcializaio 113Why spcializaio Mak Labor Mor Prodciv 115erichig evryo By Focig o Comparaiv Advaag 117

9: Entrepreneurship & Competition 125erprrhip 125Compiio Proc Comr 127Compiio Proc Workr 128

10: Income, Saving, and Investment 135Icom, savig, ad Ivm 135Ivm Icra Fr Icom 136How savig ad Ivm Icra A ecoomy Fr Op 141

11: Supply and Demand: The Purpose 147spply ad Dmad 147Dmad: I Diio ad I Law 148spply: I Diio ad I Law 153uig spply ad Dmad o explai h Mark Pric 155

uig spply ad Dmad o udrad Pric Chag 159

12: Interest, Credit, and Debt 175Ir: I Abo tim 175savig, Ivm, ad ecoomic Growh 177Commo Crdi traacio 180th Pro ad Co o Db 183


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Contents | vii

13: Prot and Loss Accounting 191Pro ad Lo Gid erprr 191Ir Vr Pro 193th social Fcio o Pro ad Lo Accoig 195th Limi o Pro ad Lo Accoig 199

14: The Stock Market 205th sock Mark 205Why I sock? (Db vr eqiy) 206th social Fcio o sock spclaio 209

15: The Failures o SocialismTheory 219th Viio o Pr socialim 219socialim Iciv Problm 221s oc i a l i m C a l c l a i o Prob l m 2 2 7

16: The Failures o SocialismHistory 237ecoomic thory ad Hiory 237Commim v Facim 239socialim Body Co 240

18: Price Controls 253th Viio o Irvioim 253Pric Cilig 254Pric Floor 259

18: Sales and Income Taxes 269G o v r m s p d i g 2 6 9How Govrm Fiac I spdig 273sal tax 275Icom tax 277

19: Taris and Quotas 285Mrcailim 285th Gral Ca or Fr trad 287tari 291Impor Qoa 297

20: The Economics o Drug Prohibition 303D r g P r o h i b i i o 3 0 3Drg Prohibiio Corrp Govrm Ocial 305Drg Prohibiio For Violc 312Drg Prohibiio Rdc Prodc say 318


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viii | Lessons or the Young Economist

21: Money Infation vs. Price Infation 323Ifaio 323How Govrm Mak Pric Ri 327th Dagr o Govrm Pric Ifaio 334

22: Government Debt 343G o v r m D c i a d D b 3 4 3Govrm Db ad Ifaio 348Govrm Db ad Fr Graio 351

23: The Business Cycle 359th Bi Cycl 359How Govrm Ca h Bi Cycl 361th Iviabl B Followig a Aricial Boom 366th Ca o Ma umploym 367


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ix

Acknowledgments

Thi book wa lachd i a mig wih Dog Frch ad J tckro h Mi Ii A vry p i i wriig, I cold wih

Zachariah Cro, a hiory achr who ra h ampl chapr by

hi ow (jior high) d o mak r h o ad lagag wr

corrc

Bria shlly ad Blak spho providd l dback o a

arly dra tim trrll w hrogh h ir macrip ad providd

may ggio o improv i Fially, Id lik o hak sam torod or

h arwork, which wa o oly do xcllly b alo qickly (bca

I did giv him mch oic)


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Part I

FOUNDATIONS


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3

In this lesson you will learn:

What it means to think like an economist.

The types of questions that economics can help explain.

Why it is important for everyone to understand basic economics.

Thi book i a maal or a w way o lookig a h world Ar yo

mar h lo coaid wihi h pag, yo will b abl o

drad v i way ha yor raid pr will mi Yo

will oic par ha hy will ovrlook th abiliy o hik lik a

coomi i a crcial compo o yor dcaio Oly wih od co-

omic hikig will yo b abl o mak o how h world work to

mak rpoibl dciio rgardig grad poliical ida a wll a yor

occpaio ad mda hohold ac, yo m r dcid o lar

baic coomic

Craiv ad carl hikr hrogho hma hiory hav dvl-opd vario dicipli or dyig h world each dicipli (or b-

jc) or i ow prpciv a hiory old bor For a compl

dcaio, h d m bcom acqaid wih om o h mo

L e s s o n 1

Thinking Like an Economist

Thinking Like an Economist


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4 | Lessons or the Young Economist

impora dig i ach ld ecoomic ha prov il o b worhy

o ivral dy A wll-rodd yog adl will hav did o oly

algbra, Da, ad phooyhi, b will alo b abl o xplai why

pric ri

evry bjc yo dy will coai a mixr o kowldg ha i

dmd impora or i ow ak, a wll a pracical applicaio ha

may prov l i yor daily li For xampl, vry d hold

hav a baic dradig o aroomy, ic i illra h gradr

o h ivr; b baic aroomy ca alo com i hady wh gidig

a wayward yachma who ha lo igh o lad For a dir xampl,

coidr mahmaic th dy o advacd calcl i rwardig or i

hr lgac (hogh om d migh coidr h rward iad-

qa or h or rqird!) B vryo d o kow baic arihmic

i ordr o cio i ociy

W will h am par hold i h bjc o coomic I i,

i a word, imply aciaig o lar ha hr ar drlyig pricipl

or law ha xplai h opraio o ay coomy, whhr i aci

Rom, h sovi uio, or a coy air i Boi Y coomic alo ha

mch o or i pracical gidac o yor daily li Kowldg o co-omic, by il, will o mak yo rich, b i a good b ha ignoring h

lo o hi book will kp yo poor

ecoomi look a h world i a iq way Picr h crowd wai-

ig o rid a poplar amm park rollr coar A biologi rvyig

h c migh oic ha popl bgi waig a hy approach hir

r o g oo h rid A phyici migh oic ha h r hill ha o b

h all A ociologi migh oic ha h ridr ar arragd i grop

o h am hiciy Ad a coomi migh oic ha h r ad la

car hav mch logr li ha h ohr, probably bca popl do

lik waiig b hy alo prr ridig i h vry ro or h vry rarth coomic prpciv i o l i vry iaio O h occr

ld or a h prom, h lo i hi book will o prov a rlva B

i yor li yo will cor may iaio o criical imporac wh

yor dciio will d o b iormd by od coomic I i o c-

ary or vryo o become a coomi I i impora or vryo o

lar how o hik lik a coomi


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Lesson 1: Thinking Like an Economist | 5

I hi book, w adop h viw ha coomic coi a idp-

d science, j a rly a chmiry ad biology ar diic ld o

dy A w go hrogh h lo i hi book, w will do o scientically,

maig ha w will a objciv o ool or or aalyi, ha

do o rly o pariclar hical or clral ampio th pricipl or

law o coomic ar h am, whhr h coomi i a Rpblica or a

commi, ad whhr h liv i nw Zalad or somalia

Warig! Wh w ay coomic i a cic, w do not ma ha w

codc xprim o coomic law, h way a clar phyici

di h rl o mahig aom i a paricl acclraor thr ar

impora dirc bw a ocial cic ch a coomic, vr a

natural cic ch a phyic W will xplai hi i mor dail i Lo

2, b or ow w imply wa o caio yo ha baic coomic pri-

cipl ca b dicovrd hrogh mal raoig I wold mak

o go o ad h law o coomic, j a i do mak o

a rlr o go o ad h vario proo ha yo migh lar i

a gomry cla th pho o all hi i ha h lo i hi book will

ad h o imhr i o dagr ha a w xprimal dig

will ovrr hm omorrow I pracic, proioal coomi mak

all or o cojcr, may o which r o o b wrog B h cor

body o coomic horyh yp o law ad cocp coaid i hi

booki o abl; i imply a way o viwig h world

Dpi h poibl coio o coomic cic wih a aral ci-

c, ohl w h rm science bca i impora o r

ha hr rally ar objciv law o coomic Wh poliicia igor

h achig o coomic, hir program r io diarimagi h

chao i nAsA igord h law o phyic!

I a commo micocpio or popl o hik, ecoomic i h

dy o moy Y, coomic obvioly ha a lo o ay abo moy,

ad i ac o o h baic prpo o coomic i o xplai h dir

Is Economics a Science?

The Scope and Boundaries o Economic Science


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pricwhich ar qod i i o moyo vario good ad r-

vic big old i h mark plac

Corary o hi poplar micocpio, coomic i broadr ha h

mr dy o moy I i wid cop, coomic ca b dd a h

dy o xchag thi wold icld all o h xchag i a ormal mar-

k ig, whr h llr had ovr a phyical objc or provid a r-

vic, ad i rr h byr had ovr h appropria amo o moy

B coomic alo di ca o barter, whr h radr xchag

good or rvic dircly or ach ohr, wiho ig moy a all

Phig i o h xrm, coomic v ha a lo o ay abo ca

whr a single, isolated person ak acio o improv hi or hr iaio

thi i o calld Cro coomic, ar h cioal characr Rob-

io Cro who wa hipwrckd o a (apparly) drd ilad

W will dy Cro coomic i Lo 4 I will b clar ha v a

iolad pro bhav coomically bca h ak wha ar ha

giv him ad exchanges h a qo or a virom ha h hop

will b mor plaa

th commo hm rig hrogho all o h xampl o xchag

i h cocp o scarcity scarciy ca b ccicly xplaid by h

obrvaio ha hr ar limid rorc ad limid dir evBill Ga ac tradeos; h cao lirally do whavr h wa I h

ak hi wi o o a acy rara, h ha rdcd hi opio (vr o

lighly) ad ha dimiihd hi abiliy o by ohr hig i h r

W ca dcrib h iaio by ayig, Bill Ga d o economize o

hi rorc, bca hy ar i

I i h ivral ac o carciy ha giv ri o wha popl hav

rmd h coomic problm: A a ociy, how hold w dcid which

good ad rvic o prodc, wih h limid rorc a or dipoal?

I Lo 5, w will how h iiio o priva propry olv hi

problm B i i scarcity ha ca h problm i h r plac

Warig! ecoomic do not dy a hypohical coomic ma,

who car oly abo acqirig marial poio or arig moy

thi i aohr commo midradig o wha coomic i all abo

uoraly, hr i om rh o hi royp bca may coo-

mi acally do bild modl o h coomy ha ar lld wih ciio

popl who ar vry lh ad will oly ac alriically i hy ar orcd


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o do o B i hi book, yo will o b larig ay hori o ha fa-

vor Iad, h lo i hi book do o dpd o popl big py-

pichr; h law w will dvlop i h pag apply o Mohr thra

a mch a hy apply o Doald trmp

ecoomic cic, a agh i hi book, do not ll workr ha hy

hold ak whavr job pay h mo moy, or do i ll bi

owr ha hy m coidr oly acial i wh rig hir

opraio th poi will b mad clarr drig h bq l-

o hmlv, b w m r p ro ha hr i o coomic

ma i h ollowig pag; w ar alway dicig h pricipl haxplai h choic o ral popl i h ac o carciy th pricipl

ivolv h ac ha popl have dir i h ac o limid rorc, b

h pricipl ar broad ogh o covr popl wih ay dir

The Economics o Real People

Economics deals with the real actions o real men. Its [ laws] reer neither

to ideal nor to perect men, neither to the phantom o a abulous eco-nomic man (homo oeconomicus) nor to the statistical notion o an average

man. . . . Man with all his weaknesses and limitations, every man as he lives

and acts, is the subject matter o [economics].

Ludwig von Mises, Human Action (Auburn, Ala.:

Ludwig von Mises Institute, 1998), pp. 64647.

ecoomic di ad ri o xplai how popl mak xchag A

hipwrckd ailor wa o xchag om ick ad wo rock or a

cracklig r, whil a miioary wa o xchag hi lir im or

a grlig rip o a rmo jgl whr h rid hav vr a

Bibl A compl hory o xchag m covr h yp o ca oo,

o j h mor amiliar xampl o a brokr xchagig 100 ock har

or $2,000


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O rao o dy coomic i ha i imply irig Wh

yo op ad hik abo wha happ vry day i a modr co-

omy, i hold ak yor brah away Coidr h blig mropoli

o Mahaa: Millio o popl work o hi iy ilad ha i l ha

23 qar mil i lad ara Obvioly hr i o ogh ood prodcd

o h ilad il, o d h hord A r om radr may o

drad hi claimom o h rara i h world ar i

Mahaa! B h xqii rara rly o vdor o giv hm

h raw marial o prodc hir obcly xpiv dih I ivadig

Maria placd a imprabl plaic bbbl arod Mahaa (wih

mall hol i h plaic o allow or vilaio), wihi wo moh h-

drd o hoad o nw Yorkr wold b dad rom arvaio

Y i h ral worldwhr o Maria bbbl obrc radarm

prodc, rd gaoli, ad ohr im ar hippd io Mahaa o a

daily bai, allowig h ihabia o o oly k o a bar rvival, b

acally o hriv th workr o h iy ilad o Mahaa raorm

h marial a hir dipoal io om o h mo highly vald good

ad rvic o h plahik o h xpiv jwlry, clohig, a-cial rvic, lgal work, ad Broadway prormac prodcd i Ma-

haa Wh yo coidr h icrdibl complxiy o h proc,

i i a wodr ha i opraio i ormally o fawl ha w ak i or

grad th lo i hi book will hd om ligh o how h mark

coomy achiv ch a, day i ad day o

Aohr rao o dy coomic i ha i will hlp yo mak dciio

i yor proal ad proioal li O cor, h lo i hi book

will o by themselves mak yo rich Rahr, hy will giv yo a ram-

work o hlp aalyz yor pla o ha yo ar mor likly o achiv yor

objciv For a aalogy, dyig gomry alo will o allow yo obcom a proioal gir, digig or-la bridg B obody

wold wa o driv o a bridg digd by omo who i igora o

gomry

Byod i iriic bay ad pracical applicaio o yor ow li,

coomic i a crcial opic bca w liv i a ociy plagd by a

acivi govrm ulik ohr ciic dicipli, h baic rh

Why Study Economics?


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o coomic m b agh o ogh popl i ordr o prrv oci-

y il I rally do mar i h ma o h r hik qam

mchaic i a hoax; h phyici ca go o wih hir rarch wiho

h approval o h avrag Jo B i mo popl bliv ha miimm

wag law hlp h poor, or ha low ir ra cr a rcio, h h

raid coomi ar hlpl o avr h damag ha h polici will

ific o ociy

For hi rao, i i h yog adl dy o lar baic coomic th

lo i hi book will how yo how


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Lesson Recap

This book will teach you to think like an economist. Differentsubjects (chemistry, biology, etc.) oer dierent perspectiveson the world. Some perspectives are more useul in certainsituations than others. Economics is a distinct eld, or science,

and it has important insights on how the social world works.

Economics is the study of exchanges. In a modern economy,the most amiliar exchanges involve money, but economicprinciples apply to any type o exchange.

Every citizen should understand basic economics because ofthe danger o destructive government policies that ignore thelessons in this book.


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n e w T e r m s

Barter: A iaio whr popl xchag good ad rvic dircly,rahr ha ig moy i a irmdiary raacio

Scarcity: th codiio o dir xcdig h availabl rorc oaiy hm scarciy i a ivral ac rqirig popl omak xchag

Tradeos: th ora ac (cad by carciy) ha makig ochoic ma ha ohr choic bcom availabl


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s T u d y Q u e s T i o n s

1. Can economics make you rich?

2. Is economics a science? Why or why not?

3. Does scarcity aect everyone?

4. Do the laws o economics still work inside a maximumsecurity prison?

5. *Isnt it just as important or the average person to understandparticle physics, since much o the unding or this researchcomes rom government grants?


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13


The difference between a purposeful action versus mindless behavior.

The difference between a social science and a natural science.

Why the methods used to develop basic economics are different from

those used in physics or chemistry.

Wh w look a h world ad ry o mak om o i, o o

h mo baic ad crcial diicio w all makally wih-

o v ralizig ii h dirc bw prpol acio

vr midl bhavior Wh dcribig h rajcory o a baball,

w migh mio hig lik ma, vlociy, ad air ricio W dont ay

ha h baball wa o mov i a parabola, or ha h ball g bord

wih fyig ad vally dcid o lad thi wold b o alko modr ar, ad wold rik a vry ciic B ppo ha

iad o a baball, w ar dcribig h moio o a j aircra I ha

ca, w wold hav o problm ayig ha h pilo wa o avoid h

rblc or ha h i rig low o l ad dcid o lad

L e s s o n 2

How We Develop Economic Principles

Purposeul Action versus Mindless Behavior


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thi dirc i how w dcrib h wo v rfc a dam-

al dciio w mak wh irprig h world arod Wh w

obrv v, w ca ihr arib hm o aral law, or w ca

xplai hm (a la i par) by rrc o h intentions o a cocio

big I hor, w ca choo whhr o bliv ha aohr mind i a

work

W ar hr ochig o om vry dp philoophical qio, ad

obvioly w ar o goig o giv yo h al word i hi hor lo

B i ordr o mak o coomic hory, o giv i a olid odaio,w d o b awar o h diicio bw purposeul action vr

midl bhavior th law o coomic apply o h ormr, o o h

lar A w will i Lo 3, coomic alway ivolv h opraio

o a la o mid, maig a illigc ha ha cocio goal ad

will ak p o ifc h marial world i ordr o achiv ho

goal

th dirc bw prpol acio vr midl bhavior i

o imply h dirc bw hma big ad iaima mar

Vario movm o a hma big phyical body ca b xampl o

midl bhavior, oo For xampl, i I ll yo, Ill giv yo $20 i yo

rai yor righ lg, h w wold irpr yor bq bhavior a

a iioal rpo, whr yopurposely movd yor lg bca yo

wanted h moy B i yor docor whack yor righ k wih a ham-

mr o yor rfx, h rlig movm i yor lg wold o

b a xampl o prpol acio Alhogh yor rvo ym ad

brai wr ivolvd, w wold rally ay ha yor mind wa ivolvd

(no ha brain ad mind ar vry dir hig, ad ha dirc i

crcial o hi lo)

th lo i hi book apply o prpol acio prormd bycocio popl who hav goal i mid somim h bodary li

bw wha i cocio acio ad rfxiv bhavior ca b blrry,

b ha wo rally drac rom h pricipl i hi book I r, a

baball oldr migh o b lly awar o h mal opraio h

prorm wh hrowig h ball o cod ba B h i vry dily

ryig o hrow o h rr, bca h wa hi am o wi h gam


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Lesson 2: How We Develop Economic Principles | 15

ev i h micalcla ad ovrhrow h ba, all h lo i hi

book apply o hi iioal acio, bca h i a cocio big ryig

o xchag o iaio or a dir o ha h hik will b mor

dirabl

th coomic pricipl i hi book ar o cod o prcly

raioal popl th lo i h pag apply o ral popl who

hir mid o mak xchag i h ral world

ecoomic i a ocial cic, maig ha i di popl ad

apc o ociy Ohr ocial cic icld pychology, ociology, ad

ahropology th aral cic, o h ohr had, dy apc o h

aral world th aral cic icld phyic, chmiry, biology,

aroomy, ad morology

Bca o hir dir bjc mar, h ocial cic oc o

prpol acio, a dcribd i h prcdig cio, whil h aral

cic oc o midl bhavior ev hogh h migh o v b

awar ha h i doig i, h ocial cii xplaaio ad hori a

la implicily rly o h hypohi ha hr ar ohr mid a work,

ifcig v I harp cora, wih h oabl xcpio o biol-

ogy, h aral cii ypically do rr o a cocio illigc

wh xplaiig v i hi ld o xpri

thi awar o ohr mid, ad h ac ha ohr hikig hma

hav hir idividal moivaio, prvad h ocial cic I o

cod o h ormaio o hori o xplai v, ihr: ev h

raw ac o h ocial cic ar hmlv mal hig, ad oprly aral or phyical For xampl, a ociologi migh com p wih

a hory rlaig a icra i h crim ra wih h icra i h ra

o divorc B i ordr or h ociologi o v collc daa o hi

hory, h d o g iid ohr popl mid i ordr o kow

which v hold b classied a crim ad divorc i h r plac;

h ar o mr br ac o ar

The Social versus the Natural Sciences


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Even the Facts o the Social Sciences Are

Related to the Mind

Take such things as tools, ood, medicine, weapons, words, sentences, com-

munications, and acts o production. . . . I believe these to be air samples o

the kind o objects o human activity which constantly occur in the social sci-

ences. It is easily seen that all these concepts . . . reer not to some objective

properties possessed by the things, or which the observer can nd out about

them, but to views which some other person holds about the things. These

objects cannot even be dened in physical terms, because there is no single

physical property which any one member o a class must possess. . . . [T] hey

can be dened only by indicating relations between three terms: a purpose,

somebody who holds that purpose, and an object which that person thinks

to be a suitable means or that purpose.

Friedrich A. Hayek, Individualism and Economic Order

(Chicago: University o Chicago Press, 1948), pp. 59-60.

For xampl, i sally r hr car ovr Jo ad h di, hi may or may

o co a a homicid I sally had a har aack v cod bor h

crah, i wa probably o a crim, b rahr j a accid O h ohr

had, i h cop arriv a h c o har sally yllig, tha h la

im yoll cha o m! h i im o rad sally hr righ noic ha

limaly i i sally mind ha mak h dirc; h ociologi d

o mak g abo what Sally consciously intended i ordr o kow i a

crim occrrd no amo o phyical dcripio pr ca dcid h

mar, xcp ioar a h dcripio hd ligh o what Sally was think-

ing wh h car rck Jo Hr mal will ha h powr o raorm a

rglar car io a murder weapon to r h poi o la im: nohig

phyical chag i h compoiio o h car drig hi raorma-

io; h phyici ad chmi wold oic ayhig happig o

h molcl ormig h car O h corary, wh w ay ha sally

rd h vhicl io a mrdr wapo, w ar rdrig a jdgm


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cocrig h iagibl, dircly obrvabl a o sally mid th

phyical movm o sally had ad a h corolld h car ar

o h crcial i; i i hr cocio intentions ha drmi whhr

w d o add o mor homicid o h rig oal

A h xampl o sally hiig Jo wih hr car illra, v h raw

ac o h ocial cic ar igd wih or dradig o ohr po-

pl mid I cora, ypically i h aral cic ihr h raw

ac, or h hori dvlopd o xplai hm, rly o a apprciaio

o h iio o ohr hikig big th aral cii ca look

o po h phyical world ad ry o com p wih xplaaio o imidl bhavior

thr i a harp dirc bw cic ch a phyic, chmiry,

ad biology o h o had, vr cic ch a pychology, ociol-

ogy, ad ahropology o h ohr Popl rr o h ormr a hard

ad h lar a o, adpcially amog h hard cii!hri a gral lig ha h o-calld hard cic ar mor rigoro ad

idd ciic ha h o-calld o cic Grally pakig, h

mar ad mo clbrad cii i h world ar od i h hard

cic; bid h obvio ico o eii, h phyici Richard Fy-

ma ad sph Hawkig hav alo caprd h poplar imagiaio

I cora, i i o arly a prigio o wi award i pychology, ad

w popl cold v name h op ociologi o h la cry Whil

om popl migh codm h pariclar phyici who hlpd cra

aomic wapo, v o h ovrwhlmig majoriy pporphysics il

Y i aohr harp cora, may popl ar kpical ad v hoil oom o h ocial cic, pariclarly coomic ad pychiary

Wha i goig o hr? I w had kow h awr alrady, w migh

hav xpcd hig o b h rvr, whr pblic opiio rvrd h

cii who didpeople ad o midl paricl

O poibl awr i ha h ocial cic hav jid om pry

awl hig, ch a lcrohock hrapy or popl icarcrad agai

The Success o the Natural Sciencesversus the Social Sciences


28/385


hir will, ad h govrm-poord laghr o millio o pig dr-

ig h Gra Dprio whil Amrica arvd so mayb h yp o

piod ar h rao may popl dir pychiari ad coomi

B agai, why do popl alo d o blam phyici or Hirohima, or

h chmi or gpowdr?

W gg h rao i ha h phyic ad chmiry bhid powr-

l wapo ar right th phyici aid o h miliary, I yo drop hi

objc rom a airpla, i will idc a io racio ha will rla a

icrdibl amo o ha Ad h phyici wr prcly accra i

hir prdicio I harp cora, h pychiari old h cor, Giv ahoriy o imprio popl w hik ar mally ill, ad allow

o ijc hm wih drg ad prorm ohr xprim o hm thi

will mak hm wll, ad yild a ociy wih adjd popl who do o

xhibi abrra, ai-ocial bhavior May o h ppodly op-och

coomi oo old govrm drig h 20h ad 21 cri: Giv

corol o h priig pr, ad w will par h world ay mor rav-

agig dprio ad rampa pric ifaio Obvioly, h rack rcord

o h pychiari ad mo ifial coomi i o arly a lad-

abl a ha o h aral cii

For om rao, i m ha v h mo accomplihd gi ih ocial cic ca lad hir dicipli dow dad-d, whr mor

ad mor o h xpr i h ld (a wll a h gral pblic) bgi o

pc ha h a o h ar i a wa o im May popl wold

agr ha pychiary wa doig all righ il sigmd Frd, or ha,

ecoomic ook a major wrog r wh Joh Mayard Ky cam o

h c Y almo obody wold ay, Iaac nwo did a lo o gra

work i phyic, il ha job eii cam alog ad rid i

O impora rao or hi gl bw h cc ad prig o

h aral cic o h o had, vr h mdiocr rl ad ho-

iliy o h ocial cic o h ohr, i ha h objc o dy i haral cic ar airly impl, ad hir bhavior m o b govrd

by a coci o rl Coqly, h hard cic ca (ypically) rly

o controlled experiments o vala hir hori thi i why i mch l

likly ha phyic will go dow a cl-d-ac h way may popl hik

Frdia pychology or Kyia coomic did Phyical hori mak

prdicio abo objc i h marial world I wold b vry dicl


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or a wagld y limaly irior hory o wp h proio i

a hard cic (ch a phyic), bca i irioriy wold b dmo-

rad rpadly i xprim eii amoly rid om o h

philoophical implicaio o qam hory, b o phyici (icldig

him) cold arg wih h accracy o h hory prdicio abo xpr-

imal marm mad o baomic paricl

sic baomic paricl do (a ar a w kow) hav mid, i ordr

o drad hir bhaviori ordr o xplai baomic paricla

hory i phyic ca b akd o do ayhig mor ha o prdic, wih

grar ad grar prciio ad accracy, wha h paricl will do ivario circmac now w hold poi o ha i acal pracic,

hig ar o o impl i day-o-day phyic O hory may yild br

prdicio i a w xprim, whil aohr hory may b implr ad

mor lga som phyici may bliv i h mor lga hory,

ad arch or poibl faw i h xprim ha ca dob o hir

prrrd hory ev o, i h log r a hory i h hard cic ha

ymaically ad ambigoly yild br prdicio will v-

ally diplac i rival

Mo proioal i h ocial cic hik ha h am mhod

h ciic mhodhold b d i hir ld a wll Howvr,h problm i ha, qi lirally, h objc o hir dy hav mid

o hir ow I ha provd dihly dicl o com p wih a o

coci law ha accraly prdic h bhavior o popl i vario cir-

cmac I h ocial cic, pcially coomic, hig ar o mch

mor complicad ha i may ca i i imply impoibl o prorm a

rly corolld xprim

to illra hi impora dirc bw h aral cic ad

coomic, r ppo wo grop o phyici ar argig abo h

rgh o h lcric charg o a crai paricl Ar codcig a

xprim ig a clvr w chiq, o grop i Aralia aocha h prvio ima d o b rvid Howvr, h rival grop

o phyici arg ha h Aralia xprim i fawd, bca h

laboraory proximiy o h soh Pol diord h marm thy

l h dip by codcig h am xprim a vral dir

laid, o i h mard rl mov clor o h prvio ima

a h laboraory g clor o h qaor th crcial ampio bhid


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all o hi rarch ar ha h drlyig law govrig h paricl ar

h am, ad ha h xprimr ca hold vry ohr (rlva) ac-

or coa whil iolaig h c o h magic charg maaig

rom h arh pol th ory w j old giv a ida o why phyic

m o work o wll; hr rally i good rao o ppo ha ovr

h yar, h phyici will dvlop hori wih grar ad grar

accracy i prdicig how h phyical world work

thig ar o arly a raighorward wh wo grop o econo-

mists arg ovr rival hori For xampl, o grop o coomi

h Keynesiansbliv ha h Gra Dprio wa cad by a col-

lap i aggrga dmad, ad ha Prid Hrbr Hoovr ad h

Frakli D Roovl hold hav phd hrogh maiv govrm

decitspdig borrowd moyo corac h lmp A dir

grop o coomih Austriansdiagr rogly, ad iad hik

ha h iiial crah i 1929 wa cad by a prcdig boom gird

by h Fdral Rrv, which i h us cral bak ablihd by h

govrm Accordig o h Aria, Hoovr ad Roovl mad h

Dprio drag o or mor ha a dcad wih hir migidd ir-

vioi polici th Aria dip h Kyia dci hory,poiig o ha Hoovr ad FDR ra wha wr a h im record high

(pacim) bdg dci drig hir admiiraio, which coicidd

wih h low ad mo agoizig rcovry i us coomic hiory

th Kyia cor ha, larg a h dci wr, h govrm

obvioly did borrow ad pd enough, a provd by h ligrig

mploym

A hi arly ag o h book, w hav o y mard h cocp

o procd rhr wih hi acal dip (I bq lo, yo

will lar h ool yo d o br apprcia h wo id o h

argm) For ow, h poi i ha h dispute remains unresolved, vhogh proioal coomi hav b argig abo h ca o h

Gra Dprio or mor ha vy yar th corovry wo di,

bca h xac codiio o h world coomy i h la 1920 wr

iq ecoomi ca h Kyia hory by, ay, holdig vry-

hig l coa xcp doblig h us dral bdg dci i 1932,

i ordr o obrv h c o h mploym ra


31/385


Federal Budget Defcits vs. Unemployment, 1930 1939

1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

Budget Defcit

(% o GDP)-08%(rpl)

06 40 45 59 40 55 25 01 32

UnemploymentRate

89% 159 236 249 217 201 170 143 190 172

sorc: th Amrica Pridcy Projc (hp://wwwpridcycbd/daa/bdgphp) ad h Bra o Labor saiic

Economists Cant Agree on the Right Medicine

[T] he proper injunction to government in a depression is cut the budget and

leave the economy strictly alone.

Austrian School economist Murray Rothbard

Just as we saved our way into depression, we must squander our way out of

it.

Business Weekeconomist Virgil Jordan, writing in 1932

Source: Quoted in Robert P. Murphy, The Politically Incorrect Guide

to the Great Depression and the New Deal(Washington, D.C.:

Regnery, 2009), pp. 52,57.

I i o dob r ha coomi who, or moral or poliical rao,

dor largr govrm pdig, will d o bcrib o h Ky-

ia argm abo h ca o h Gra Dprio I i alo r ha

oppo o Big Govrm will d o b aracd o coomic doc-

ri ha r h b o low axaio ad lim govrm bdg


32/385


B i i h iabiliy o prorm corolld xprim ha allow h pr-

ic o ch diamrically oppod coomic hori, wih boh camp

rmly covicd ha hy ar righ ad hir oppo ar ihr diho-

or loppy th paio ar o a mch ighr lah i h hard aral

cic, bca i ho dicipli h ac pak or hmlv o a

mch grar dgr ha i h ocial cic

Foraly, all i o lo ev hogh h mhod o h aral ci-

c ar o limid i coomic, hr ar ohr way o dicovrig

coomic pricipl or law, rlyig o chiq ha ar o availabl o

h phyici or chmi A yo mar h lo i hi book, yo will

gradally dvlop a w ramwork or irprig h world thig ha

md icohr bor will mak prc o yo Ad a yo will

, h lo i hi book will not appal o xprimal or v hi-

orical rl o prov hir validiy Oc yo hav grapd h ial

poi o ach lo, hy will b yor orvr Yo may dcid ha h

cocp ar mor or l l o yo, b yo will vr d worry ha

wly pblihd coomic rarch will rdr hmalse How i hi po-

ibl? W xplai i h x cio

A w dicd abov, coomic hori ac wo hg problm: h

objc o hir dy hav mid o hir ow, ad i i mch hardr o pr-

orm a corolld xprim i coomic ha i a aral cic ch a

chmiry th dirc parly xplai why h o-calld hard cic

joy a mch br rpaio or objciviy ad cc ha h o ci-

c, icldig coomic

Howvr, h coomi do hav o ormo advaago ovr

h aral cii: h coomic hori i himl a hikig big, wihcocio goal Bca h ha a iidr viw o acig i h coomy,

h coomi ca mor aily drad h moivaio ad corai

acd by ohr acor i h coomy I cora, h paricl phyici

do hav ay ida wha i lik o b a qark, ad o h phyici

m rly xclivly o h amiliar mpirical chiq o gai iigh

io h bhavior o qark

How We Develop Basic Economics


33/385


earlir i hi lo w ocd o h impora diicio bw

prpol acio vr midl bhavior, bca hi dirc i ky

o dvlopig l coomic pricipl th coomic pricipl w will

dvlop i hi book ar all logical implications o h ac ha hr ar ohr

popl wih mid who ry o achiv hir ow goal I ohr word,

i w a ocial cii dcid o commi o h hory ha hr ar

ohr mid opraig i h worldj a ach o ca dircly xpri-

c hi or hr own mal awarh ha hory ar piig

o ohr pic o kowldg ha ar coqc o i Yo will prob-

ably b rprid i Lo 3 wh w how j how mch o coom-

ic i packd io h impl obrvaio ha, Joh Do i acig wih a

prpo i mid Righ ow w wo li ay o h rl, bca

yo hold r drad xacly wha i i yoll b doing a yo work

hrogh Lo 3

Rahr ha lookig o phyic or chmiry or gidac o how o

dvlop good coomic pricipl, a mch br rol modl i gomry

I adard (i, eclida) gomry, w ar wih om baic d-

iio ad ampio ha m raoabl ogh For xampl, w

d wha w ma by apoint ad a line, w xplai wha w ma by h

angle ormd a h ircio o wo li, ad o orh

Oc w hav or arig diio ad ampio i had, w ca

hm o ar bildig horm, which i a acy word or h logical

deduction o h coqc o or origial diio ad ampio

A gomry xbook will ar wih h mo baic horm, ad h

ach w rl o ddc omhig v mor complicad For xampl,

arly o a impl horm may r lik hi: Iw ar o wih or li

ha orm a rcagl, then w ca draw a w, h li ha divid h

rcagl io wo idical riagl Oc ha (vry impl) horm i

provd, i ca b addd o h oolbox, ad bq, mor dicl ho-rm ca ivok hi arlir horm i o o hir p

th procdr or mhod o gomry i qi imilar o wha wll do

i hi book o bild p baic coomic pricipl I h x lo wll

d om cocp (ch a pro ad co) ad how hir rlaio o

or baic ampio ha v i h ocial world ar driv by prpo-

l acio A w go hrogh h lo, w will coi o add w


34/385


iigh, by bildig o h prvio lo ad by irodcig w c-

ario whr w ca apply or arlir rl

A hi ag, hr ar wo impora obrvaio yo hold mak

abo h xampl o gomry Fir, oic ha i do mak o

ak a mahmaicia o go o ad h horm i a gomry x-

book For xampl, coidr h Pyhagora thorm, which i probably

h mo amo o all gomrical rl th Pyhagora thorm ay

ha i yo hav a riagl wih a 90-dgr agl, ad yo labl ach id

wih a lr, h h ollowig qaio will hold:

a2 + b2 = c2

Oc yo hav a acal proo o h Pyhagora thorm, yo

drad ha i must b r to am yorl, yo ca ak a rlr

ad a compa (d o mar agl) ad h horm o o

riagl ha yo draw o a pic o papr Howvr, yoll d ha i

pracic h horm wo appar o b xacly r; yo migh d ha

h l-had id o h qaio add p o 102 ich whil h righ-

had id com o a 101 ich Y i yo g ch alicaio o h

horm, ad poi hm o o a mahmaicia, h will xplai ha h

riagl yo wr marig did o rally hav a xacly 90-dgr agl

ar all (mayb i wa 899 dgr), ad h rlr yo d o mar

h li wa a imprci ool, ic i oly ha o may och o i ad

i pracic yo wr yballig how log ach li wa o om x

a

b

c


35/385


th impora poi i ha h mahmaicia kow ha h Pyhagora

thorm is r, bca h ca prove it ig idipabl, p-by-p,

logical ddcio rom h iiial ampio

thi i a good aalogy or how w driv coomic pricipl or law

W ar wih om diio ad h ampio ha hr i a mid a

work, ad h w bgi logically deducing rhr rl Oc w hav

provd a pariclar coomic pricipl or law, w ca p i i or back

pock ad i i h r o hlp i provig a mor dicl rl

Ad i omo ak whhr h daa corm or rjc or coomic

pricipl, w ca rpod ha h qio i o A appar ali-caio o h coomic law wold rally j ma ha h iiial amp-

io wr aid For xampl, w will lar i Lo 11 h Law o

Dmad, which a ha ohr hig qal, a ri i pric will lad o

a drop i h qaiy dmadd o a prodc or rvic now i w ry

o h Law o Dmad, w will craily b abl o com p wih

hiorical piod whr h pric o omhig ro, v hogh popl

bogh mor i o h good thi dig do blow p h Law o

Dmad; h coomi imply cocld, Wll, ohr hig m o

hav b qal

W ow mov o o h cod impora obrvaio yo hold akaway rom or dicio o gomry: J bca omhig i logi-

cally ddcd rom arlir diio ad ampio (omim calld

axioms), h rlig propoiio migh ill coai impora ad -

l iormaio abo h ral world W r hi poi bca may

popl hik ha a ld o dy ca b ciic ad provid iorma-

io abo h ral world oly i i propoiio ca, a la i pricipl,

b rd by xprim or marm thi rqirm i obvioly

o llld i h ca o gomry, ad y vryo wold agr ha

dyig gomry i craily useul A gir who o o bild a

bridg will hav a mch br ho i h ha prvioly did h logical,ddciv proo i a gomry cla, v hogh (i a ) all h ho-

rm i h xbook ar mrly raormaio o h iormaio ha

wa alrady coaid i h iiial ampio

th am i r (w hop!) or h coomic pricipl ad law co-

aid i hi book Yo will o d o go o ad h propoiio o

i hyr r, bca ay appar alicaio wold imply ma


36/385


ha h pariclar ampio d i h proo wr lackig a h im o

h Howvr, yo will d ha gaiig hi armchair kowldg

hrogh carl iropcio ad logical raoig, will acally allow yo

o mak o h ral world i all i complxiy Yo will do mch b-

r avigaig h coomy, ad makig o i ocom, oc yo

hav mard h logical (y -abl) lo i hi book


37/385


Lesson Recap

A purposeful action is performed by a conscious being with amind, who is trying to achieve a goal. Mindless behavior reersto motions in the physical world that are the result o merenature and not the intentions o another thinking being.

The natural sciences include elds such as physics, chemistry,and meteorology. They study the natural world and try todeduce the laws o nature. The social sciences include suchelds as sociology, psychology, and economics. They studydierent aspects o human behavior, including our interactionswith each other in society.

The natural sciences develop theories that try to predict thebehavior o mindless objects with better and better accuracy.They enjoy success because these objects seem to obeya constant set o airly simple rules, and because in manysettings they can perorm controlled experiments. In the socialsciences, including economics, the objects o study haveminds o their own, and controlled experiments are muchmore dicult to perorm. To develop economic principles, theeconomist relies on his own experience o purposeul action,and deduces the logical implications rom it. In this respect

economics is closer to geometry than to physics.


38/385


n e w T e r m s

Purposeul action: A aciviy drak or a cocio rao; bhaviorha ha a goal

Keynesian economics: A chool o hogh (ipird by Joh MayardKy) ha prcrib govrm bdg dci a a way oli h coomy o o rcio ad ror ll mploym

Budget decit: th amo h govrm m borrow wh i pdmor ha i collc i ax ad ohr orc o rv

Austrian economics: A chool o hogh (ipird by Carl Mgr adohr who happd o b Aria) ha blam rcio ogovrm irrc wih h coomy, ad rcommdax ad pdig c o hlp h coomy drig a rcio

Logical deduction: A orm o raoig ha ar rom o or moraxiom ad mov p-by-p o rach a coclio

Axioms: th arig ampio or odaio i a ddcivym For xampl, h mhod o corcig a raigh li

bw wo poi cold b a axiom i a gomry xbookAxiom ar o provd, b ar amd o b r i ordr oprov ohr, l obvio, am


39/385



1. I someone sneezes when pepper is thrown in his ace, is thata purposeul action?

2. Does purposeul action include mistakes?

3. *Arebrain andmindinterchangeable terms?

4. Can we perorm controlled experiments to test economictheories?

5. **Would you classiy Intelligent Design theory as a natural orsocial science?


40/385


41/385


Why only individuals, not collectives, can make choices.

How economists usepreerences to explain individual choices.

The proper way to think about preferences.

I h prvio lo w rd h diicio bw prpol

acio vr midl bhavior ecoomic di h ormr; vry-

hig i coomic i limaly cocd o h ac ha w, a oid

aaly, ar impig conscious motives bhid h v w ar ryig o

dcrib W ca v claiy a phyical objc a moyl alo giv

a xplaaio o i prchaig powrl w g iid h had

o h popl who ar paig arod vario pic o hi objc (Ar

all, popl pa grm arod oo, b w do claiy hm a moy!)

ecoomic i h mhodical, or ciic, dy o xchag A

xchagi h ha w i i hi booki vry dily a

prpol acio I hi lo, w ar goig o pi o om o h logi-

cal implicaio o or dciio o dy xchag to rpa h mag

rom h prvio lo: no ha w ar o goig o mak a bch o

prdicio rom or hory ha popl gag i cocio xchag,

ad h go h prdicio agai or obrvaio o h world

L e s s o n 3

Economic Concepts Implied By Action

Introduction

31


42/385


no, yoll ha all wr rally doig i hi lo i packig h

kowldg ha wa alrady coaid i h vry oio o prpol

acio i h r plac I yo by io h claim ha w ca lly

dcrib ohr popl a gagig i goal-kig bhavior, h yo will

arally drad or laboraio o ha ida i h pr lo

O h ohr had, i yo rid o apply h cocp i hi lo o a

prly mchaical proc, ch a a rock allig o a cli, h i wold b

obca i j do m hlpl o xplai a rock bhavior

a d o prpol acio

I w a coomi ar goig o xplai a v by rrrig o a pr-

pol acio, hi obvioly impli ha hr i some individual prorm-

ig h acio Ar all, o ay ha a cocio illigc ifcd

v, impli ha hr m b om illig big o whom h co-

cio belongs

now w do hav o acally kow h prci idiy o h idivid-

al, i ordr o cocld ha a idividal ha ak a prpol acioA dciv ca look a a blood-oakd kich ad ay, sombody killd

hi poor womaha bchr ki did ab hr hrogh om rak

accid th dciv ca h xplai h phyical arragm o h

kich, by ppoig ha om ohr, illig idividal cocioly

cho o ac o kill h vicim thi i a prcly good hypohi, v

hogh h dciv (a y) do kow ayhig l abo h acal

killr B h does kow ha h killr had a goal i mido mar wha

h xaig circmac may b, obody i goig o bliv him i h

ay, sr I wa holdig h ki wh hi happd, b bliv m i

wa a accid

J o mak r yo rally drad h cocp, w o ha h

idividal bhid a acio do carily d o b a hma

big thr ar ply o popl who claim ha hir b xplaaio or

wha happd o hm wa ha hy wr abdcd by ali ad b-

jcd o all or o plaa ory xpric Agai, or rl hold:

th popl ar blamig ar or wha happd, hy ar iad

ayig ha illig big ifcd v For whavr rao, h

Only Individuals Act


43/385

Lesson 3: Economic Concepts Implied By Action | 33

ali had h goal o probig Billy Bob a h drov hi pickp rck hom

o dark igh, ad h ali acd o ha dir For a dir xampl,

a rligio pro migh irpr h dd rmiio o hr cacr a

d o h irvio o God I hi ca, h oo i xplaiig v i

h phyical world by rrc o h prpol acio o a illig

idividalo who i hi ca do po a phyical body

Wh w dcid o irpr a v a a prpol acio, w ar

carily ppoig ha hr m b a illig idividal carry-

ig o h acio (thr ca b a acio wiho a acor) so h co-

cio bw a acio ad a acor i a logical o, fowig o o hvry cocp o prpol acio il now i pracic, or amp o

link up a pcic acio wih a pcic acor i bad o mor ha impl

logic For xampl, wh h dciv dcid hi i a homicid, h i

logically implyig ha hr m hav b (a la o) killr B h

migh aly DnA o d p arrig h wrog gy so w ,

hr i mor ha a logical ddcio ivolvd, wh ryig o arr h

acal killr B h impora poi or or prpo i ha h dciv

dciio o claiy a bloody kich as a crime scene carily ma ha

hr m b a killr (or killr) B goig rom hi logical coclio o

h x p o idiyig a pariclar pro a h killr, rqir morha mr logic

to driv hom h bl ircocio o logical ad mpirical ra-

oig, w ca coidr a mor acil xampl sppo a pychiari

ca h l had blogig o o o hi pai a i grab a p ad

bgi pradig ik oo a chck th pychiari clai hi a a pr-

pol acio, ad h logically h m alo bliv ha hr i om

cocio idividal prormig hi acio Howvr, h pychiari

migh hik, tha my w pai sally payig m or hi wk r-

vic a I hlp hr wih hr pli proaliy ydrom, wh i raliy i

i sally alr-go, sippy, who i llig o h chck a all b iad

i wriig YOu ARe tOO nOsY!! o h papr bor hadig i ovr

o him I hi xampl, w agai hav o kp i mid h limi o logi-

cal ddcio Oc h pychiari dcid o irpr h movm o

h had ad p apurposeul actiona oppod o a mr rfxh

h logically m cocld ha hr i a illig big wih a moiv

who i movig h p i ordr o achiv om goal Howvr, i h py-

chiari jmp o h coclio ha h illig big i h proaliy


44/385


h kow a sally, ad ha h i movig h p i ordr o giv him

paym or hi rvic, h h pychiari i goig byod h rag o

logical ddcio, ad h migh b wrog

A h xampl illra, i vryday li w do a lo mor ha

imply rly o logical ddcio oc w dcid o irpr a v a

a prpol acio W all or o mpirical vidc o r or

dradig o wha w obrvd B coomic hory oc o h

kowldg w ca ddc mrly rom h ac o prpol acio il,

wiho h ohr mpirical vidc i a giv ca ha may or may o

lad o a llr xplaaio

Barrig odd ca ch a mlipl proalii or hypoic corol,

grally pakig w aocia ach hma body wih o pcic mid

(ad vic vra) so wh w h phyical body aociad wih Bill

porig a ca o oda dow i hroa, w arally dcrib hi by ayig,

Bill wa hiry o h dcidd o drik omhig Alhogh w do

ally op o hik abo i, wh w alk lik hi w ar rrrig o a

iagibl, cocio will calld Bill ha ri o g i way by ifc-

ig h compo o h glob o cll ha w labl, Bill body

W ar brhig p agai dp philoophical i oc agai, whichgo ar byod h cop o a book o coomic pricipl I hi cio,

w oly d o mak o mor poi: Bca a prpol acio i ao-

ciad wih a igl idividal (amly, h acor), i ma ha wh a

coomi ri o xplai a v by rrc o prpol acio, h

limaly m brak i dow io h moivaio or goal o h idi-

vidal ivolvd thi am od obvio, b i i rpriig how

caally poplv rpcd ocial ciiigor h rl

For xampl, a hioria migh wri, I 1941 Japa aackd h uid

sa sricly pakig, hi i o Japa i a idividal ad

o ca ak prpol acio (ch a bombig Parl Harbor) IdividalJapanese pilots fw pla ad aackd hip blogig o h us navy

th am sali occpid ea Grmay i a la ibl (ic

sali i a idividal), b i ohl miladig i irprd lir-

ally Really wha happd i ha Joph sali gav ordr o hi bordi-

a, who i r rlayd hm o their bordia ad o o, ch ha

may may oldir chose to obey ho ordr ad carrid o purposeul


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acio ha rld i a w (ad cary) poliical iaio or h popl

livig i ea Grmay

I may ca hi loppy o lagag i ; hr i o dagr o

coio wh a por a yll o rom hi oc cbicl, Chicago j

kickd a ld goal o i h gam! evryo kow wha h ma by

ha am; o o will b mild io blivig ha omhow a lil

gographical locaio maagd o block brly m log ogh o propl

a pigki bw wo po

Only Individuals Act

The rst truth to be discovered about human action is thatit can be under-

taken only by individual actors.Only individuals have ends and can act to

attain them. There are no such things as ends o or actions by groups, col-

lectives, or States, which do not take place as actions by various specic

individuals. Societies or groups have no independent existence aside rom

the actions o their individual members. Thus, to say that governments act

is merely a metaphor; actually, certain individuals are in a certain relationship

with other individuals and act in a way that they and the other individuals

recognize as 'governmental'.

Murray Rothbard,Man, Economy, and State

(Auburn, Ala.: Ludwig von Mises Institute, 2004), pp. 23.

Howvr, i may ca hi loppy o lagag i vry dagr-

o, ladig popl o rach h wrog coclio abo h world For

xampl, may popl wold dor h ollowig am: Ma or

govrm i o icomp ad dmb! O h o had i pay armro grow obacco, whil o h ohr had i pay ad agci o dvlop

ai-mokig campaig Mak p yor mid!

I raliy, hr i o ch hig a h govrm ha ha a mid

o i ow ad ca prorm prpol acio Iad, hr ar individ-

ualspoliicia, jdg, bracra, cblogig o h govrm

who joy pcial privilg bca o hir a Dir combiaio


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o (om o) h idividal mak cocio dciio o r ax dol-

lar oward obacco armr ad ai-mokig campaig th impliic

approach o viwig h program a acio ak by h govrm

i o oly chically iaccra, b i i acally dagroly miladig

Ar radig h lo i hi book, yo will raliz ha hr ar pr-

cly ibl rao or h acio o govrm ocial thir acio

o do mak ay when compared to the ocial justications given or

the actions, b hr a impl xplaaio or ha oo: govrm o-

cial roily li (noic ha lyig i il a prpol acio)

Bid h (obvio) poi ha a acio rqir a acor, w ca draw

rhr ddcio Wh w ay ha a idividal prorm a purpose-

ul acio, w ma ha h ha a prpo or a goal i mid Rmmbr,

w do ay ha h baball wa o all back o h grod B w

would ay, th pilo ladd h hlicopr bca h wad o h

bahroom

so w ha wh w dic prpol, iioal acio by oh-r, w ar implicily ayig ha hy hav opiio or dir abo how

h world hold old I coomic, w h word preerences o

dcrib h lig; popl ac h way hy do bca hypreer h

world o old o way, rahr ha aohr For xampl, wh w ay,

Bill drak h oda bca h wa hiry, w ar aomaically also ay-

ig (v i w do pak h word), ad Billpreers o o b hiry

Ar all, i wold mak mch o ay, Bill drak h oda bca

2+2=4 th rao i does mak o ay, Bill drak h oda bca h

wa hiry, i ha w ca rad bw h li, a i wr, ad ll i h

pok claim ha Bill i happy wih hi codiio o big hiry

A yo may hav oicd, hr i aohr pok rh ha i packd

io or impl am abo Bill chggig o h oda Wh w

dcid o claiy hi bhavior a a prpol acio, w ar alo dcidig

ha Bill himsel must believe ha drikig oda ca rliv hir Ar all,

i a ca o oda ll o o a airpla io a primiiv villag, h popl

who dicovrd i migh hav o ida ha pcrig h hard hll ad

porig h dark liqid io hir moh wold rliv h plaa

Individuals Have Preerences


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lig o hir (Ad hy craily wold raliz how mch i wold

ro hir h) Iad, hy migh coidr h ca acrd (ic hy ll

rom a gia fyig objc ha hy had vr bor), or hir mi-

cia migh icorpora hm io ohr orm o prpol acio, havig

ohig o do wih hir

I impora o raliz ha a pro bli ca b wrong, ad y

ill moiva a prpol acio For xampl, i w w back i im

ad obrvd docor i h 1800 placig lch o pai, w wold

ay, thy ar doig ha o prpo, bca hypreer h pai o b

halhy rahr ha ick, ad bca hy believe ha blood-lig i aciv ram (O h ohr had, omo armd wih mor acc-

ra mdical kowldg migh plac lch o hi my bca h pre-

ers him o b wak ad h bliv ha drawig away blood will achiv

hi goal)1

W will dvlop h poi mor lly i h x lo, b hr w

mio ha popl par o h world i ordr o achiv hir goal

Philoophr dcrib hi by ayig popl means o achiv hir ends

ecoomi dcrib hi by ayig popl goods ad services o aiy

hir prrc

Bca prrc ar id o pcic idividal, w ay ha prr-

c ar subjective Looly pakig, h dirc bw a bjciv

vr a objciv am, i aki o h dirc bw a opiio

vr a ac I mak o ay, Mary prr vailla ic cram o choc-

ola, b Joh prr chocola ic cram o vailla th wo am

ar prcly compaibl, bca prrc (i hi ca, prrc or

ic cram favor) ar bjciv ad ca dir rom pro o pro

I cora, i do not mak o ay, th ic cram ha 300 calori

or Mary, b 280 calori or Joh th amo o calori i a rvig o

ic cram i a objciv ac; i ca dir rom pro o pro Mary

ad Joh migh disagree wih ach ohr abo how may calori h ic

1thr ar apparly rar ca i which v modr docor wold rcom-

md blood-lig a a civ ram, b clarly h arlir pracic wa

o, i gral, good or h pai

Preerences Are Subjective


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cram ha, b i ha ca a la o o hm i imply mistaken Y boh

o hm cold b imlaoly corrc wh Mary ay, Vailla a

br ha chocola, whil Joh ay h oppoi to rpa, Mary ad

Joh ca diagr wih ach ohr abo which favor o ic cram a

brwih ihr o or h ohr big wrogbca prrc

ar bjciv thr i o ac o h mar cocrig which ic cram

a br, h way hr dily i a objciv way o dmora

how may calori ar i a rvig

Warig! May criic o coomicboh rom h progriv l

wig a wll a h rligio righ wigoally midrad wha

coomi ma by ayig ha prrc ar bjciv th criic

hik ha coomi ar omhow dorig moral rlaivim, or ha

hy ar ayig o o ca jdg h acio o ayo l B h com-

plai ar wiho mri, bca coomi ar ayig ho hig a

all!

Rmmbr, w ar imply racig o h logical implicaio o or

dciio o claiy obrvd bhavior a prpol acio I w Mary

go p o h cor ad choo vailla ic cram, whil w Joh go p

o h cor ad ordr chocola, w wo g aywhr i or dr-adig l w raliz ha Mary ad Joh hav dierent tastes wh i

com o ic cram favor A w will mor clarly i Lo 6, h oly

aiacory way o xplai mark pric i o r rcogiz ha prr-

c ar bjciv thi rcogiio i o way condones h prrc o

pariclar idividal

For xampl, a coomi ca poibly xplai h pric o obacco

wiho ackowldgig ha om popl prr o pd hir moy o

cigar, rahr ha o ohr prodc Ar h coomi a hi

ac, h cawih prc coicyh grod hi ag o wh

h cach him mokig i h garag wih hi hooliga rid I yorill o ig h diicio bw proioal aalyi vr pr-

oal bli, org abo coomic ad coidr a FBI prolr to rack

dow a rial killr, h prolr d o hik lik h killr, ad ry o

drad wha dir ar caig h killr o ac h way h i Obvi-

oly hi aalyi do ma ha h prolr i ral wih rgard o

h acio h killr ak, or ha mrdr i a proal choic


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to m p: Wh popl gag i prpol acio, hy ar moi-

vad by dir ha ar o carily idical rom pro o pro

I ordr o xplai xchag, coomi m rcogiz ha prrc

ar bjciv

Bca prrc ar id o a pro xchag, h prrc ca

oly rval a ranking o goal Wh Mary choo vailla ovr chocolaic cram, hi prpol acio oly idica ha h prr vailla W

cant drmi how mch Mary prr vailla ovr chocola; idd,

ha am do v mak i rm o ric coomic logic

I vryday covraio, w all kow wha i ma o ay ha Mary

really prr vailla ovr chocola b hr ir Ja oly slightly prr

vailla o chocola B i impora or yo o ha hi yp o alk

mak o i rm o hpreerences ha w i coomic rao-

ig2

Ar all, wha do i rally marom h adpoi o pr co-

omic logico ay ha Mary ha a prrc or vailla ovr chocola?

All i ma i ha, acd wih a choic bw h wo favor, Mary

wold pick vailla B ha i h am hig w ca ay abo hr ir

Ja, who rid wold iy ha h ha oly a ligh prrc or

vailla Ja oo, wh acd wih a choic, wold pick vailla ovr choco-

la so i rm o logical ddcio ha w ca mak bad o a pro

prpol acio, all w ca ay a coomi i ha boh girl xhibi a

prrc or vailla ovr chocola

W ca ak hi rai o hogh rhr o driv hom h lo ev i

Ja aoc, I j barely prr vailla o chocola! ha wold giv

a coomi h abiliy o cocld ha hr prrc or vailla i l

2Wr o ayig popl ar ig lagag i a loppy mar i vryday

covraio, wr mrly poiig o ha h rmpreerences ha a vry prci

maig i coomic By aalogy, i phyic h rm work ha a vry prci,

ciic maig a wll, ad i do ovrlap prcly wih h vryday

o h rm work i covraio

Preerences Are a Ranking,Not a Measurement Using Numbers


50/385


i ha Mary no, i wold mrly allow h coomi o cocld

ha Ja prrrd o yll ha pariclar c, vr yllig om-

hig l or kpig hr moh h Rmmbr, w ar ig h oio

o a pro bjciv prrc o xplai h cocr actions ha h

pro ak I omo r a am, ha iorm coomi abo

h pro prrc all righ, b oly bca h rac il i a

prpol acio!3

to hlp yo rmmbr h poi o hi lo, coidr h aalogy

oriendship For xampl, sally migh hav hr rid, ad o w cold

ay ha i hr mid h hold lig o ridhip or ach o hm W

ca ph i rhr ad ak sally o rank hr rid sh migh ay ha Bill

i hr b rid, ha Mary i hr cod-b rid, ad ha Jo i hr

hird-b rid sch alk i prcly maigl

B wha i w h akd sally how much better a rid Bill wa ha

Mary? now hig ar o od a lil rag Ad i w akd hr, Do

Bill po a la 30% mor ridhip ha Jo? w wold hav rd

h ralm o h abrd th moral o hi ory i ha i mak o

rak rid, b v o hr ill o ch hig a a objciv i o

ridhip bhid h c, drivig or rakig

th am i r wih prrc i gral, a la a w hm

i coomic A yo will lar i pcomig lo, o drad ad

dcrib xchag, w d o am ha popl hav a ranking o goal

or d Popl ak acio o aiy hir mo impora prrc, or o

achiv hir high goal W do not hav o ay ha popl hav a mah-

maical iliy cio ha hy k o maximiz, v hogh ch

alk i commoplac i ohr coomic xbook thi alra approach

i oly l i comig p wih pcic awr o corivd mrical

problm; i do acally hd mor dradig o h proc o

xchag I ac, h o mahmaical iliy cio i vry harml

wh larig baic coomic pricipl, bca i o ca h -d o org whr h oio opreerence com rom i h r plac

3A hi ag o h book, h xampl may m dio, b i impora

or yo o grap h poi ow, bor w xplai how pric ar ormd i lar

lo


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An Alternate ViewEven proessional economists do not always heed the principle that preer-

ences are a ranking, not a measurement. For example, economists oten use

the term utility to describe how much pleasure or satisaction a person gets

rom a particular situation. Thereore they might describe our scenario by

saying, Mary chose vanilla ice cream because it gave her more utilitythan

the chocolate ice cream would have given her.

So ar, so good. But then many economics textbooks push it urther and

start assigning numbers to measurehow much utility, so that (say) Mary gets

55 utils rom vanilla but only 34 utils rom chocolate, and so in order to

maximize utility she obviously chooses the vanilla. I you are tak ing a Ph.D.-

level class, the textbook will explain that utils dont really exist, the way

kilograms are an objective unit o weight and meters are an objective unit

o height. Instead, the Ph.D.-level textbook will explain, economists can use

mathematical utility unctions just as a convenient shortcut to describing

preerence rankings. So when the unction assigns 55 utils to a bowl o

vanilla ice cream but only 34 utils to the chocolate, all that really means is

that Mary would choose the ormer over the latter. The utility unction could

just as well have assigned 18.7 utils to the vanilla and 2.3 utils to the

chocolate; the important thing is that Mary acts as i she is maximizing this

arbitrary mathematical unction.

In this book, we willnotbe using the conusing terminology o utils, and

we wont be perorming calculus on utility unctions the way other eco-

nomics textbooks do. These practices, though common, are dangerous

because they can mislead you into thinking that we are measuring the

amount o psychic satisaction an individual derives rom particular actions.

It may be that one day neuroscientists come up with an objective way toquantify various degrees of happiness, such that they can coherently talk

about Mary being three times more satised than Bill. But even i this hap-

pens, our point here remains the same: In the eld o economics, such talk is

meaningless. In economics, we use terms like preerences as a way to


52/385


explain or describe the purposeul actions o individuals. When someone

chooses one thing over another, all we can conclude is that the person pre-

erred the chosen item over the discarded item. Psychologists or neurosci-

entists (or even common sense) might shed more light on the event, but

economic logic per se can go no urther. The economist isnt claiming to have

all the answers; ar rom it! The economist is actually being humble here by

admitting thelimits o what economic reasoning can say about a given event.

In Lesson 6, we will see how subjective preerence rankings interact to yield

objective market prices. At that time, you will understand better why we are

stressing these points in this lesson.

I prrc ar bjciv o ach idividal, ad cao v b

mard or qaid or ach idividal, h obvioly i wold mak

o a all o ry o combi or aggrga idividal prrc io

ocial prrc uoraly, v proioal coomi ogag i j hi yp o raoig May popl (ry o) jiy progres-

sive income taxation, or xampl, by claimig ha a dollar ma mor

o a poor ma ha o a rich ma th ida i ha akig $1 millio rom

Bill Ga wo lowr hi iliy vry mch, whra hadig o $1,000 o

a hoad dir homl popl will graly boo ach o hir ili-

i thror, h ypical argm go, oal or ocial iliy ha b

icrad by h rdiribio o om o Bill Ga walh

I Lo 18 w will xami h coqc o progriv icom

axaio For ow, w poi o ha h ypical jicaio or i i abrd

Yo ca add p dir amo o iliy rom vario popl I ac,i yo h alra rmpreerences i will b mor appar why com-

biig hm rom dir popl i a impoibl ak I mak o

ak, Wha i h oal wigh o h poplaio? or Wha i h avrag

ag o h poplaio? I do not mak o ak, Wha i h oal

prrc o h poplaio? or Wha i h avrag amo o iliy

pr pro?

Dierent Individuals Preerences Cant Be Combined


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to mak r yo drad j how oical i i o (amp o)

prorm arihmical opraio o dir popl prrc rakig,

oc agai l wich o h aalogy o ridhip sppo ha sally ad

Larry hav h ollowig ridhip rakig:

Friendship Rankings

Sally Larry

1 (b): Bill 1 (b): Jo

2d: Mary 2d: Bill3rd: Jo 3rd: (o)

4h: tom 4h: (o)

5h: Adria 5h: (o)

Bor coiig, mak r yo drad h abl: sally ha v

rid oal Hr b rid i Bill, hr cod-b rid i Mary, ad o

o Larry, o h ohr had, oly ha wo rid Hi b rid i Jo, ad

Bill i hi cod-b rid noic ha v amog hir hard rid,

sally ad Larry do hav h am rakig ordr sally hik Bill i a b-

r rid ha Jo, whil Larry hik ha Jo i a br rid ha Billthr i ohig rag abo hi, bca prrc ar bjciv4

now ppo a bybody chool admiiraor com alog ad ay,

thi i rribl! Poor Larry do hav a may rid a poplar sally!

I hav a gra ida o mak hig airr Ill wri a o i sally hadwri-

ig ha ay, Yo mll! ad p i i Adria lch bag thi will ca

a big gh bw Adria ad sally, o h wo b hr rid aymor

th Ill arrag i o ha Adria i ar Larry o h chool b thy

will vally bcom rid I ca prdic whhr Adria will bcom

Larry 1, 2d, or 3rd-b rid, b o mar wha, h will b rakd

4to xplai h dirc i ridhip rakig, w do v hav o am

ha Jo ad Bill ac dirly dpdig o whhr hy ar wih sally or Larry

ev i Jo ad Bill ar ach h am pro whhr hagig o wih sally or

Larry, i ill prcly ibl or hm o b rakd dirly bcayo

gd iprrc ar bjciv Mayb Jo i alway makig gro oi

wih hi armpi, ad sally hik i digig whil Larry hik i hilario


54/385


highr a a rid o Larry ha h wa a a rid o sally throgh my

bvol irvio, I will hav icrad h oal amo o rid-

hip amog h childr

Obvioly h abov ory i qi illy B w hav d a illy ory o

dmora h illi o ryig o add p bjciv, idividal prr-

c Hoplly yo ca ow ha ryig o icra ocial iliy by

akig moy rom a rich ma ad givig i o a poor ma, i imply o-

ical Prhap propo o progriv axaio ca jiy i o ohr

grod, b appalig o h coomic cocp o prrc (or iliy)

do g h job do


55/385


Lesson Recap

Once we decide to classify certain events as purposefulactions, we can make urther logical deductions. For example,or every action there must be an actor, an intelligentperson who perormed the action. Although people can

act in combination with each other, any particular action isperormed only by one person.

We interpret someones action by saying he or she haspreerences. These are the goals that a person tries to achievethrough actions.

Economists say that preferences are subjective, meaning thatthey are unique to each person. To call preferences subjective

doesnt condone or applaud them, it simply recognizes thatpeople have dierent tastes.


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n e w T e r m s

Preerences: A idividal goal or dir ecoomi irpr apro acio a amp o aiy hi or hr prrc

Goods: scarc phyical im ha a idividal val bca hy cahlp o aiy hi prrc

Service: A pro prormac o a ak ha aohr pro valbca i hlp o aiy prrc srvic ar h goodha popl cra hrogh hir labor powr

Subjective: uiq o ach idividal; i h y o h bholdr

Utility: A rm commo i coomic xbook o dcrib how mchval a pro g rom a good or rvic

Progressive income taxation: A ym ha ax idividal or

corporaio a highr ra bad o h lvl o icom


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1. Why is it questionable to say, Germany attacked France?

2. Why do statements about a mans actions (implicitly) involvehis belies as well?

3. Can purposeul action be based on a aulty belie? Giveexamples.

4. What does it mean when economists say preerences aresubjective?

5. *Does economics say you shouldnt give money to charity?


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How even a one-man economy illustrates economic concepts and

categories.

The importance of saving and investment.

How economists explain individual choices.

I h r hr lo yo lard ha coomic i h dy o

xchag, ad yo alo lard ha h apparly impl dciio o

claiy hma bhavior a prpol acio lad o may iigh

ha will hlp xplai how modr mark coomi opra I Par

II o hi book, w will bgi or ll-blow aalyi o a mark coomy

wih byr ad llr ig moy i hir raacio thi i wha mo

popl probably hik ha a book o coomic i ppod o do!

Y bor w div io h dp d, i h pr loh la o

or Fodaio ciow will kch o om o h baic coomic

rh ha apply v i h vry impl ca o a igl pro o a rmo

ilad thr ar a rpriig mbr o coclio w ca draw v i

hi xrmly limid ca

L e s s o n 4

Robinson Crusoe Economics

Introduction

49


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Ovr h yar, may criic hav dridd hi o-calld Robio Cr-

o coomic, amd ar h hipwrckd marir i Dail Do

amo ovl1 Obvioly, w ar o ayig ha a iolad pro i a

accra dcripio o a modr coomy Rahr, w ar ayig ha beore

we can analyze an economy composed o billions o interacting people, w hold

ar wih j one pro ad mak r w drad wha mak him

ick

A yo will , i hi lo w ar dvlopiggeneral pricipl abo

a idividal prpol acio i h ac o carciy th gral

pricipl will ill hold r, v wh Cro i rcd ad rrd ocivilizaio B o avoid ovrwhlmig d a p o, w ar hr

arig o wih h implr ca i which Cro i (iiially) all by him-

l ad m ac o improv hi iaio, giv hi circmac

All alo o hi ropical ilad, Cro qickly raliz ha h do

lik h way hig ar dvlopig Hi omach i arig o rmbl, hi

hroa i dry ad ichy, ad h do ay aral hlr rom h hor-ric raiorm ha m occaioally rik h ilad Rahr ha rig

himl o hi a, Cro dcid o take action o alr h oldig o

hiory, o ha v rapir i a mar mor o hi likig

Bor h ca mak a ibl dciio o how o procd, Cro r

d o wha h ha o work wih H climb o h op o a hill ad

rvy h ilad Cro o ha hr ar ply o coco r, a

wll a om mall ram o rig war i h diac thr ar v-

ral rock o varyig iz, a wll a rog vi Cro mid bgi

whirrig a h dcid wha o do r

A hi poi w ca op ad dcrib h iaio i rm o coomiccocp Yo probably ralizd, wih Cro, why h pariclar im

miod i h prvio paragraph wr relevant o hi iaio, ad

wold b amog h ac ha yo wold coidr i yo od yorl i

1Modr radr migh idiy mor wih tom Hak characr i h 2000

movi Cast Away

Crusoe Creates Goods With His Mind Powers


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Lesson 4: Robinson Crusoe Economics | 51

Cro plac I coomic jargo, Cro ook a ivory o h goods

a hi dipoal tha i, h appraid himl o h ockpil o phyical

im availabl or hi ha xhibid scarcity

Ar all, Cro cold hav rhlly aid, Hmm, hi ilad i b-

jc o h arh graviaioal pll, maig I wo dri o io or

pac ad rz o dah thr i a plil pply o oxyg hr, ma-

ig I wo oca Ad h prc o a amophr i vry good or

ramiig od wav, o ha I ca har a orm approachig th

arib o h ilad ar alo xrmly l o Cro, ad corib

o h achivm o hi goal B Cro wold oc o hm whormlaig hi pla, bca hy ar scarce Cro do d o

economize h gral, backgrod codiio h way h d o xr-

ci wardhip ovr h coco, vi, c

th diiciv mark o carciy i ha hr ar tradeos ivolvd uil

h d aohr orc o ood (ch a h ar h corc om ool),

Cro d o mak r h do a hi coco oo qickly (H

alo wold br dow a bch o coco r j or kick) I h

dcid o crai rock i ordr o mak a hlr, Cro ca imla-

oly ho am rock wh bildig a r Ad v i h pply

o vi i biqio, v o Cro m b coidra wh cighm dow o mak a hig , bca i ak him time o walk dpr

io h jgl ad g mor vi

A h xampl all dmora, Cro d o think through the

consequences o his actions whvr hi pla ivolv h rock, vi, coco-

, ad o o Bca h im ar carc, Cro migh lar regret

h ifc o hm, bca hi will impair hi abiliy o aiy goal i

h r Im ha ca hlp a pro achiv hi or hr goal, ad cold

hlp h pro achiv v mor goal i hr wr mor o h im

availabl, ar calldgoods I cora, backgrod codiio lik graviy

ad oxyg ar o (ypically) good i h coomic , bca o

acio Cro ak will rdr hm l l o h achivm o hi

goal Cro do d o worry abo priig oo a ad hrby

ig p all h oxyg, ad h do ac ay rado i rlyig o

graviy wh kockig dow coco wih a log ick2 Frhr, hr

2I Cro br h ick a kidlig, h h ca kock dow coco wih

i B graviy will ill opra j h am, rgardl o hi acio


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ar ay goal ha Cro cold accomplih, i oly h had mor oxy-

g or mor graviy so alhogh oxyg ad graviy ar cary or

hi vry li, Cro do hav o coomiz o hir , ad hc hy

ar o claid a coomic good

I impora o raliz ha a objc bcom a good wh a pro

icorpora i io hi pla A coco o h ropical ilad i o a good

bca o i phyical characriicper se, b rahr bca (a) i ca

rv o allvia hgr, (b) Cro wold prr o o l hgry, ad

(c) Cro i aware o poi (a) I Cro wr igora o h ac ha coco-

ar dibl, h h migh o coidr hm a good For a dir

xampl, crai pla o h ilad migh hav mdicial propri, b

i Cro do kow i, h ho pla will o aai h a o

coomic good

now ha w drad wha good ar i gral, w ca bgi o

mak om diicio O h o had, Cro rcogiz ha hr arcarc im ha ca hlp him o dircly achiv hi goal For xampl,

h rig war i h ram ca dircly qch hi hir, ad h coco-

ca dircly aiy Cro hgr ecoomi call h consumer

goods

O h ohr had, hr ar im ha ar craily l, ad which

wold allow Cro o achiv mor o hi goal i h had mor ch im

hc hy ar goodb hy ar o directly l o him thy ar oly

idircly l bca hy hlp Cro o obai mor consumer good

For xampl, a log ick, i ad o il, do do ayhig or Cro,

ad i i wr h oly objc o h ilad, Cro wold o coidr ia good a all B bca hr ar coco hagig o rom o

which ar o o Cro rachddly h ick acqir val indi-

rectly Cro ow coidr h ick o b a good, v hogh i do

dircly aiy hgr, bca i idircly hlp him o achiv hi goal

ecoomi call im ch a h hypohical ick producer goodsor ac-

tors o production or means o production

Consumer Goods versus Producer Goods


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A wih good i gral, h diicio bw comr vr pro-

dcr good i i h mid o h acig idividal For xampl, i h

Icrdibl Hlk hold wah p o Cro ilad, h migh coidr

h ick a gra dvic or crachig ha hard-o-rach po bw hi

holdr blad to h Hlk, h am phyical ick wold b a comr

good

ev wihi h cla o prodcr good, w ca mak mor diicio

tho prodcr good ha ar h dirc gi o ar ar ypically calld

landor natural resources th icld omwha prma im cha a fowig ram, or a r ha will yild a fow o coco idily;

b alo icldd ar dplabl rorc ch a a mall dpoi o i ha

Cro ca o mak cookig pa ad h hook

th igl mo impora ad vrail prodcr good i Cro ow

labor, which i h fow o prodciv rvic Cro prorm wih hi

body I rm o h logic o coomic pricipl, i wold b prcly

Land, Labor, and Capital Goods


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ibl o grop labor alog wih ohr aral rorc ha providd a

idi fow o rvic (wih adqa maiac) Howvr, coo-

mi hav hiorically accordd labor pcial ram, bca labor i h

o acor o prodcio ha vry idividal po, ad alo bca

labor i h o prodcr good ha i rqird or vry prodcio pro-

c Wh Cro dvo hi phyical or oward h indirect ai-

acio o goal, h i gagd i labor O h ohr had, i h achiv

dirc aiacio o goal hrogh corol o hi had, brai, c, h

coomi call hi leisure Cro will alloca hi body powr amog

labor ad lir acivii, i ordr o aiy h goal h coidr moimpora Hiorically, coomi hav rrrd o h disutility o labor

o drcor h ac ha idividal dircly joy lir, ad will oly

dvo om o hir carc im o labor i i allow h achivm (idi-

rcly) o mor impora d ha h lir big acricd3

Fially, capital goodsar ho acor o prodcio ha wr crad by

popl4 evry capial good i prodcd rom h combiaio o (a la

o) aral rorc ad labor Mo capial good ar alo prodcd wih

h hlp o (pr-xiig) capial good5 For Cro o hi ilad, xampl

o capial good wold b a hig ha h corc o o vi ad

hi labor, ad a hlr ha h cra o o rock, brach, md, lav,ad hi labor

3noic ha leisure do carily imply logig arod o h bach,

ad labor (or work) do carily imply phyical xrio Cro migh lov

wimmig i h oca, which giv qi a good worko ad ca v lav hi

mcl or h x day B bor h ca joy himl i hi aciviy, h r

gag i h xrmly borigb phyically dmadigak o gahrig

mall wig or h igh r

4

Boh compo o hi diio ar impora I Cro crad good hawr not acor o prodcio, hy wold b capial goodhy wold b

comr good Ad i Cro had good ha wr acor o prodcio, b

which h had crad, h hy wold b capial good ihriad hy

wold b aral rorc

5Logically pakig, h vryrst capial good vr prodcd i hma hiory,

m hav b mad wh omo d hi labor o raorm h raw gi o

ar io a acor o prodcio


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W ow kow ha Cro ca para hi world io vario yp o

carc objc, i h cagori o aral rorc, labor, capial good,

ad comr good (which icld lir) Cocig all o h i

h fow otime, ad Cro dradig o how hi acio now ca

alr hi happi i the uture spcically, Cro ca choo o av ad

iv oday, i ordr o rai hi r icom

Income rr o h fow o w comr good (ad rvic) haa idividal ha h poial o acqir drig a priod o im 6Saving

occr wh omo com l ha hi icom; i i livig blow

o ma Investment occr wh igrdi o prodcio ar

dvod o r icom, rahr ha immdia compio

I Lo 10 w will dic i mch grar dail h rlaio bw

icom, avig, ad ivm i a modr mark coomy, i which

mo xchag ivolv moy For ow, w qickly illra ha h

advacd cocp hav hir aalog v i h impl Cro coomy

I ai o xplai wih a mrical xampl Obvioly h ollow-

ig mbr ar cho or impliciy, ad rv oly o mak h cario

cocr ogh o ha yo ca rally hik hrogh h yp o rado

Cro ac I ha ligh, ppo ha wih hi bar had, Cro ca

d a appropria r o climb ad kock dow 1 coco pr hor I

Cro dvo 10 hor pr day o work, whil lavig h r or lir

(which icld lp), ha ma hi raw labor ca xrac 10 coco pr

day rom h aral rorc availabl o him o h ilad Foraly,

aig 10 coco pr day provid ogh orihm o maiai Cr-

o i dc halh B workig 10 hor pr day, wih o wkd, i

hardly a idal liyl Bid h grlig chdl, Cro kow ha

i h hold vr bcom ick or ijrd, h cold aily di bca o h

vlrabiliy o hi had-o-moh xic

6tchically, gross income rr o h maximm amo o compio dr-

ig a pcid im irval, whra net income i h maximm amo o co-mpio poibl, ar ci ivm ha b mad o maiai x

priod gro icom a h am lvl

Income, Saving, and Investment


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thr i a olio Cro i a diciplid ad rorcl ma, ad

raliz ha h abiliy o av ad iv ca graly improv hi adard

o livig soo ar aig hi iaio o h ilad, Cro bgi

avig 20 prc o hi icom vry day I ohr word, Cro coi-

o work 10 hor pr day, day i ad day o, gahrig (arig) 10

coco pr day B h oly eats (com) 8 coco ach day, ad

aid (av) 2 coco o o ach day icom

Ar livig blow hi ma i hi ahio or 25 day, Cro ha

accmlad a ockpil o 50 coco From ha poi o, h oc agai

rm aig 10 coco pr dayh com hi ll paychck vryday, a i wr th mai rao Cro oppd accmlaig addiioal

coco i ha h dicovrd hir a bgi o r v day ar

big kockd dow rom h r thror, Cro ha ld io a

comorabl roi: evry day h pick a rh bach o 10 coco ad

add hm o o id o hi ockpil Drig h day, h a h oldest 10

coco rom h ohr id o hi ockpil Wih hi roaio, Cro ill

joy a ll 10 coco (which ill a pry good) pr day, b h alo

ha a avig d o 50 coco ha h ca draw dow i ca o mr-

gcy For xampl, i Cro hold com dow wih a ropical ill ha

mak him abl o work, h ha ogh avd p o a or day ohal-raio7 Bca o hi willig o p i hard work ad av i

(liral) ri, Cro ha graly hacd hi marial poiio compard

o hi origial iaio Rahr ha livig o h dg o arvaio, Cr-

o ow ha a br o day

th impl ac o avig ad accmlaig compio good i vry

l, b Cro raliz h ca do mch br Ar rvyig h

marial a hi dipoal, Cro o o invest hi avig i a log-

rag vr, which h xpc will prmaly icra hi r fow

o daily icom Rlyig o hi ockpil o 50 coco, Cro dcid o

ak wo day o rom climbig r o kock dow w coco or hockpil

B or hro i akig a mch dd vacaio! O h corary, Cr-

o pd h r dayall 10 horwadrig h ilad, gahrig

7W ca am ha h coco do a arly a good, b ar ill dibl,

by h h day ar big kockd dow rom h r


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brach o h appropria lgh ad hick th proc i low-goig,

bca wh Cro pi a good cadida, h d o a harp rock

o aw away a h brach, bor h ca aly ap i o h r wiho

riig i8 Drig hi day, Cro a 10 coco, rdcig hi ockpil

dow o 40 ev hogh h ha workd all day, h ha o w coco o

how or i Iad, h ha oly a collcio o rdy ad log brach,

which h ha raormd rom hir origial hap ad locaio

Drig h cod day, Cro pd aohr 5 hor ig harp rock

o rhr prpar h brach th h pd 2 hor cig dow vi

ad brigig hm back o camp Fially, i h rmaiig 3 hor o hcod workday, Cro l

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Murphy-Lessons for the Young Economist

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