Economists haven't done a good job of making economic theory accessible to the ordinary person. If we did a better job, there'd be fewer Americans falling prey to promises of free lunches, equating profits to evil or seeing capital gains tax cuts as handouts to the rich. Economic theory is simple and fun, and it has tremendous ex- planatory power.
The first postulate of economics is humans prefer more of those things that give them satisfaction. It might be more homes, more cars, more love and peace, more charity or more war. The limits to human wants seldom reveal themselves. This postulate yields at least two important behavioral predictions: People will seek the cheapest way to achieve a particular goal; and as the cost of something rises, they'll take less; as it falls, they'll take more. Then there's that unpleasantness associated with the human condition: Every benefit has a cost.Let's try out these ideas, keeping in mind that we're explaining human behavior, not saintly behavior. Suppose I placed a higher value, and was willing and able to pay $200, on a service you provided. Another person was willing and able to pay only $25. Assuming you prefer more to less, I'd be your customer. However, buyers have a way of concealing the value they put on services; therefore, sellers face the challenge of dis-covering who places higher values on their service. Airlines, for example, get a handle on this by a person's length-of-stay on a trip and whether there's a weekend included. Businessmen have fewer travel day options, are more likely to travel on short notice and are willing to pay higher prices than tourists.
Lest you conclude airline price discrimination is evil, needing congressional attention, consider the following: Suppose you saw a beautiful young lady married to a fat, old, ugly, cigar-smoking man. What prediction would you make about that man's income? If you're like most, you'd predict it's pretty high. That beautiful young lady, like airline executives, is practicing price discrimination. She knows he has fewer choices just by looking at him.
How about the hoopla accompanying the lifting of the federally mandated 55- mph speed limit? Opponents claimed "55 saved lives." I'm sure that if 55 saved lives, 35 would save even more lives, and highway fatalities would be unimaginable if the mandated speed limit were 5 mph. Surely, there'd be an enormous benefit to a 5-mph speed limit; the problem is, there'd be an even more enormous cost. Saving all those lives wouldn't be worth that cost in time and inconvenience. If we only look at benefits and ignore costs, a 5- mph speed limit or any other decision is wonderful.
American workers earn more than Chinese workers. It's not because we have caring employers, wonderful labor laws and wonderful unions. We earn higher wages because we're more productive. We're more productive because we have more capital (machines, tools and education) working alongside us. The reason workers who build roads using earth-movers and bulldozers earn higher wages than workers using shovels and wheelbarrows is because they have more capital working with them. Increases in the rate of capital formation lead to increases in productivity and, hence, wages. Capital gains taxes and other harebrained tax laws raise the cost of capital; less is formed, and wages are lower than otherwise.
Economics is easy, fun and important to understand. If you come across a person who says he took an economics class and found it boring and complicated, he had a bad teacher. He should have taken Williams' class.