no graphs/equations, notes only on website (http://www.tsowell.com), but: real life examples + 100+ questions;

1. ECONOMICS: economics: study of the use of scarce resources which have alternative uses; scarce: what everybody wants adds up to more than there is; economic decisions: consequences/incentives are more important than goals/inventions

2. PRICES: prices: messengers conveying news; losses: force producers to stop producing what consumers don’t want; lower prices != less greed but changed circumstances; seller’s feeling independent of buyer’s willingness to pay; price anyone is willing to pay for ingredient = price others are forced to pay for the same; resources tend to flow to their most valued uses; cost of anything: value it has in alternative uses (not only money: eg cost of watching TV = value of other things that could have been done instead); Karl & Engels foresaw dangers of centralized economy; ppl tend to buy more/less at lower/higher prices & sell more/less at higher/lower prices; economically available current supply != ultimate physical supply (eg there is a lot of oil but it’s not worth extracting at current prices); shortage/surplus depends on current price; objective “real value” doesn’t exist; prices ~ water seeking its own level (but there are still fluctuations ~ waves); unfairness to individuals makes economy at a whole more efficient (eg saddle makers going bankrupt after switching to cars); under need: inevitable due to scarcity; just because there is unmet need doesn’t mean it should be met (eg demolish hospital to make more parking space), it’s about trade-offs not solutions (-> politics more popular than economics)

3. PRICE CONTROLS: shortage/surplus depends on current price; price fluctuations allocate scarce resources which have alternative uses; price controls limit fluctuations & reduce incentives for individuals to limit their own use of scarce resources desired by others (eg rent control: less ppl will rent/maintain their property bc it’s not worth it, more abandoned houses, less incentive to build new houses, net effect: shifting resources to luxury houses which are not controlled -> incentives vs inventions); price controls almost always produce black markets, lead to quality deterioration and surplus being destroyed; government subsidies will help others as well (who don’t need help) who will make it politically difficult to end such programs even if they are not needed anymore; in emergencies, rationing is less effective than raising prices

4. OVERVIEW OF PRICES: economics is not about moral values; reason for high prices in low-income neighborhood: higher costs (insurance, smaller quantities) not personal greed/exploitation, real problem of high prices: criminals not business owners; benefits of competition: ppl don’t think of each other as rivals (vs government subsidy); subsidies: reduce incentive for self-rationalizing; common form of non-price rationing: waiting until what you want becomes available; making sg artificially cheap -> it will be wasted; prices != costs; price ceiling: refusal to pay the full costs; prices summarize complex reality in a single number

5. BUSINESSES: <50% survives 4 yrs

6. PROFITS & LOSSES: profits: not just “unnecessary charges added on to inherent costs”; visible cost of capitalism: profit <-> invisible cost of socialism: inefficiency; profit: price paid for efficiency; profits on sales != profits on investment; Economies of Scale: lower costs per unit as number of units increase (-> marketing can reduce costs); Diseconomies of Scale: costs per unit increases as enterprise grows (-> more difficult to monitor/coordinate); ability to pass on higher costs/savings depends on competition; middlemen: exists because they can do their phase of the operation more efficiently; limiting factor: poverty of consumer (can only buy small quantities); socialism: idea of self-sufficiency -> bigger inventories -> bigger costs; geography can also increase inventory costs (eg unpredictable transportation due to rainfall)

7. BIG BUSINESSES: limited liability: permit huge economic activities with limited risk; separation on ownership & management: ppl can invest without the headache of managing; fraud/mismanagement: happens in noncorporates too; too much CEO salary: it’s even higher for private corporations (where owners have the freedom to set the salary to what they want); severance packages (golden parachute): important to get rid of bad CEO ASAP, delays within company/courts would cost the company more; monopoly: uses resources inefficiently -> economy loses as a whole; government intervention can prevent monopoly’s profit rate from being reduced by competition; cartel: successful only if they can check on each other

8. REGULATION & ANTI-TRUST LAWS: regulatory commissions: ideally set prices corresponding to completive market -> no way to know; reality: commissions often metamorphose into agencies trying to protect existing regulated firms & prevent new ones; anti-trust laws: difference between original rationales vs what they actually do; company’s action “threaten competition”: confusing existence of competition with number of surviving competitors; protecting competitors in the name of protecting competition; company has “control” over percentage sale; market size artificially narrowed down to increase market share, doesn’t include substitutes (which can even belong to different industry!); a company which cannot keep competitors out is not a monopoly even if they have 100% market share at given time; “predatory pricing”: theory without evidence, risky strategy (new entrepreneur can buy equipment/skills at discount -> more dangerous competitor); destroying competitor != destroying competition; anti-trust laws: intend to rein in big business but in fact cushioned business from the pressures of competition; cushioned capitalism ~ socialism

9. MARKET/NON-MARKET ECONOMIES: monopoly: enemy of efficiency; government-run institutions are almost always monopolies; business sells not just physical product but reputation too; capitalism = consumerism: consumer calls the tune, businesses have to learn to dance to it; winners and losers: fortunes and misfortunes may be closely related as cause and effect -> preventing bad effects can prevent good effects too; people/regions/industries being “left behind”: not necessary a problem with a political solution; government can only help them by taking away resources from advancing sectors; solution instead: realize that changes (and the need to adjust) are inevitable, try to prepare for it as much as you can

10. PRODUCTIVITY AND PAY: payment: way to allocate scarce resources which have alternative uses; depends on supply & demand + how much they add to a company’s earnings; productivity: depends not only on you but on circumstances (quality of equipment, management, other workers); pay differences: age is key factor (more experience -> higher income); “rich” vs “poor”: often same people at different stages of life; income != wealth; “income distribution”: there is no collective decision by “society”; household income != individual income; proportion of ppl who work & household sizes are different in top/bottom 20%; household sizes change over time; genuinely poor/rich ppl exist but much rarer than income statistics suggests; most “poor” don’t stay poor, most “rich” were not born rich; “rich are getting richer, poor are getting poorer” -> implicit assumption: people in given bracket = enduring “class” <-> relationship between brackets is not necessarily between the same people! 95% of bottom 20% in 1975 moved out by 1991; skills: physical strength less important -> age of peak earnings shifts up + reduce inequality between sexes, increase inequality between ppl with/without skills & ppl who work/don’t work -> welfare system allows ppl to live without work guarantees increasing inequality! higher skills are more in demand/more highly rewarded; job discrimination: members of different groups have been treated differently for thousands of years across the world; equal treatment is recent phenomena & not universal; discrimination != difference in qualifications/performances; women: interruptions in carriers -> less experience -> less payment (can earn more if experience is same); difference in those who are mothers vs not; men tend to work more hazardous jobs (-> higher pay): 54% of workforce is male yet 92% of job-related deaths are men; differences between racial groups: difference is much smaller if you control for age and experience/IQ; employers who discriminate lose opportunities (jobs unfulfilled longer) -> means extra costs!; discrimination by government is greater than competitive market; minimum/maximum wage laws reduce/increase cost of discrimination for employer; “Rosie the Riveter” -> maximum wage control during WWII (shortage of workers -> employers hired more women/blacks); capital: scarcer/more expensive in poorer countries; labor: scarcer/more expensive in richer countries; repairs: cheaper to replace in rich countries (costs too much labor unlike mass production) -> poorer countries pay for used products (labor is cheaper -> worth repairing it)

11. MINIMUM WAGE LAWS: creates surplus among workers; tend to increase unemployment, especially among poor & low-skilled workers; not only lose pay but work experience to (more important long-term); labor unions: use minimum wage laws to force non-union members out of competition; minimum wage studies: common problem: survival bias (only surveying business that survived both periods) ~ you can similarly show that Russian roulett is harmless 😀; minimum wage good for those inside looking out but not for ppl looking in; Europe: more low skilled jobs have been substituted (eg parking attendants) compared to US despite lower technological progress; members of unpopular racial/ethnic groups disproportionately affected (wide gap between unemployment rates between black & white teenage males used to be similar before 1950s -> impact cannot be explained by less education/lack of skills/racism as they were worse during earlier period)

12. SPECIAL PROBLEMS: unemployment: ppl can choose to be not part of the labor force; strong job security laws: more difficult to find job; houses -> cars: no net losses (ppl moved to different jobs); working conditions: more attractive to workers, more costly to employers; cheaper to work existing employees longer than hiring new ones (no fix costs eg health-care benefit); working conditions tend to improve over time even without laws; child labor laws: circumstances changed (air-conditioned offices instead of dangerous factories); beneficiaries: labor unions (keep children out of workforce) & teachers (keep children longer in school); third world countries: worse working conditions compared to prosperous nations but real question: what are the local alternatives ($2 in factory vs $0.75 picking garbage)? competition improves indigenous businesses too; labor unions: good for ppl looking out but not for ppl looking in, reduces employment; exploitation: what do you mean? higher prices/lower wages than expected? -> that’s emotional reaction; true exploitation: prevention of competition, barriers to enter/exit; exploited low-paid workers: understandable tendency, but “The real problem of poverty is not a problem of ‘distribution’ but of production. The poor are poor not because something is being withheld from them but because, for whatever reason, they are not producing enough.” (Henry Hazlitt) -> solution more difficult, many factors beyond the control of the poor (eg past); job security: every modern industrial nation faces issues; job security laws: purpose: reduce unemployment <-> actual effect: increases it; US: moving from one job to another instead of relying on job security; laws do not lead to net increase in job security but makes job insecurity more concentrated on ppl outside looking in; licensing: valid for physicians lawyers but extended to other circumstances (eg taxi drivers); demand to require license comes from existing practitioners to protect themselves from competition

13. INVESTMENT: investment: sacrificing real things today to have more real things in the future; more schooling != more human capital; no financial institutions -> wealth cannot be collected & concentrated; one of largest investment: raising children, repaying investment of previous generation; kinship based societies: less incentive to generate wealth (cannot charge interest to close friends/relatives, deadlines are not important); interest rate = time delay + processing costs (relatively larger for smaller loans) + cost of risk; payday loans: higher rate due to fix processing costs; lower interest rate ceiling -> more reliable borrowers -> guarantees disparities; speculator: relieves other people from having to speculate & reduces risk (~ insurance company); gambling: create non-existing risks <-> speculation: reduce existing risks; speculator: better equipped to deal with being wrong, both financially & psychologically; inventory: substitute for knowledge; too much/too little not good (eg soldier with too much/too little equipment); present value: anticipated future benefits discounted to today; natural resources: how much we have depends on how much it costs to know (exploration only happens when it’s worth it); “we are running out” -> unlikely in the near future (~ “sun grows cold”); wager between Julian Simon (economist) and Paul Ehrlich (environmentalist)

14. STOCKS, BONDS, INSURANCE: capital gain: value increase of asset; taxing capital gains is difficult; bond: legal commitment to pay fix amount; stock: share of business, no guarantee; venture capital: investment in risky business; investment in human capital: bond (student loan) or stock (future earnings of unknown actors/boxers); insurance companies: reduce inherent risks by using large (-> more predictable) sample; moral hazard: insured people can be more risky; adverse selection: likelihood of event much smaller in population than in insured sample; government regulation not effective: forced deposit insurance increase moral hazard, forcing unisex policies increase overall premium (one sex subsidizing the other); government “insurance”: not real insurance, losses payed by taxpayers, cheap coverage motivates risky behavior (eg build house next to ocean), slow response due to lack of competition

15. SPECIAL PROBLEMS OF TIME & RISK: risk is calculable, uncertainty (eg political policy change) is not; time is money -> ability to delay = ability to impose costs; slow government bureaucracies (environmental impact report): accept bribe to speed things up; increase retirement age: impact: more difficult for younger workers to move up; “mandatory retirement”: only political rhetoric, free to apply for jobs, only employer no longer committed to employ them (but this could always be waived); economic adjustments take time (eg governmental pension -> not enough money set aside); speculators: presented as enemies (only when they win, not when they lose); yesterday’s prices are history, today’s prices are economics; “rustbelts”: real question not why jobs are disappearing (happens everywhere) but why new ones are not created? policy goals != incentives

16. NATIONAL OUTPUT: fallacy of composition: what applies to a part applies to the whole (eg. layoffs in sectors -> increase in overall unemployment), interactions are ignored (you can always save jobs in specific sectors but at what cost?); income (=money) vs real income (=what money can buy); total real income = total national output; country’s total wealth (~integral) != national output (~derivative); GDP: sum total of everything produced within a nation’s borders; comparing GDPs challenging over time (same words mean different things); inflationary bias: 3% inflation -> actually only 2%; comparing GDPs challenging internationally (different products, qualitative differences, age differences: lower medications/treatments in younger population, official vs actual exchange rates, low-value products overvalue outputs of socialist economies); statistical trends: depends on base year; economic activities moving from family to marketplace (eg childcare); lower infant mortality rate -> more poor people survive -> higher percentage of population

17. MONEY & BANKING SYSTEM: Gresham’s Law: bad money drives good money out; inflation: general rise of prices (increase in money without increase in supply); gold standard: limits paper money, can narrow but cannot prevent inflation/deflation (new gold deposits -> inflation); printing money: constant temptation for governments to create & spend money (raising tax: dangerous); inflation: hidden tax for everyone; deflation: output grows faster than gold supply, more difficult to pay debts; inflation: people spend money faster <-> deflation: people hold on to money longer; depression: raising interest rates is not a good approach, wage rates should be reduced (keeping it at the same level only effective until you lose your job); banks: store deposits & provide loans; fractional reserve banking: 1) holds only fraction of deposits as reserve 2) adds to total money supply; deposit insurance: can create risk (risky customer behavior); Federal Reserve: central bank run by government to control all private banks, never been robbed, decides what fraction of deposits must be kept in reserve, lends money to banks, chairmen speak vaguely

18. GOVERNMENT FUNCTIONS: enforces contracts, sets standards, collects taxes, provides framework of law and order; doing “nothing” economically takes centuries to achieve; “law’s delay”: imposes costs, opportunity for corruption, real cost: missed opportunities; lower income ~ higher corruption; bureaucracy: can also stifle business (eg Aditya Birla); laws must be reliable (discriminatory laws can promote development if transparent); mountainous areas: difficult to police -> lag in economic development; property rights: create self-minoring (cheaper & more efficient than third party monitoring); rich people can be outbid by aggregate of non-rich population (middle-class homes instead of mansions); social order: honesty & reliability: major economic factor -> reduces costs; “radius of trust”: family businesses -> limit on company size; rent control laws: widens gap between honest & dishonest owners (landlord arsons); laws making honesty costly -> promoting dishonesty (<-> free markets tend to punish dishonesty); there are things that government can do more efficiently: external costs/benefits (effects on third parties), indivisibles (benefits that cannot be divided eg military defense); popularly elected government’s political incentive: do what is popular; political time horizons: shorter than economic (eg education); “clean water”/”clean air”: categorical phrases, don’t exist (never have), impossible to achieve 100% cleanness, costs escalate out of proportion to benefits (98%->99% much more expensive than 97%->98%); safety measures can create other risks (airbags killing children); powers (laws) do not expire when the crises that created them have passed

19. GOVERNMENT FINANCE: people change behavior in response to government regulation -> higher tax rate may not lead to higher tax revenue; tax revenue (for current costs) vs selling bond (for future costs); sales tax: regressive (higher percentage for low income ppl) <-> income tax: progressive (targeting high income ppl); but: income != wealth -> progressive income tax tend to hit ppl who reached their peak earnings years (rather than genuinely rich ppl); inflation: might increase tax rate even without changing law; government bonds: borrowing money to be repaid from future tax revenues; subsidizing everybody to help a fraction of the population (“poor”) -> less efficient; Keynesian solution for depression: spend more than tax revenue to reduce unemployment <-> markets can restore employment better; government budget: only plans, depends on - mostly optimistic - assumptions

20. SPECIAL PROBLEMS IN NATIONAL ECONOMY: government vs marketplace: voting less often, “package deals”, finished products vs promises, single vote vs influence of wealth (but: wealth creates more time for political activities!); politicians: urge to rescue of particular industry, benefits represented as net benefits to the country; pressure on government to “do something” <-> history shows economy can recover is own; private annuities: creates real wealth by investing premiums vs. government pensions: no real wealth, only use current premiums to pay current pensioners -> enable current politicians to make promises which future politicians will have to keep; imperfections of market: must be compared against imperfections of government (different incentives & constraints: less incentive to avoid mistake - tax prayers will pay for it - even less to admit it, much easier to admit someone else’s mistake & take credit for correcting them)

21. INTERNATIONAL TRADE: rising prosperity -> ppl buy more -> more jobs; export surplus “favorable”, import surplus “unfavorable” -> misleading, emotional words; rising tariff barriers after Great Depression to save jobs -> consumers couldn’t buy at lowest price; international trade: both sides gain (otherwise no transaction); absolute advantage (one county can produce some things cheaper/better than other) vs comparative advantage (ppl of every nation can produce some products relatively more efficiently than other products): eg eye surgeon shouldn’t be washing cars even if he does a better job than anyone else; exports -> economies of scale -> lower costs than domestic sales; high wage fallacy (domestic goods cannot compete with goods produced by low-wage workers in poor countries): but: wage rates != labor costs != total costs, shift of jobs != net loss of jobs; saving jobs by raising tariffs: but: other countries retaliate, immediate relief comes with long-term costs; protecting “infant industries” temporarily: rarely happens in practice; national defense: valid exception; “anti-dumping” laws: protects domestic producers at the expense of domestic consumers, assumes foreign producer selling goods below production costs (hard to check); retaliating tariffs with tariffs: both lose even more benefits; free trade: wide support among economics, low among the public, economists don’t bother to respond

22. INTERNATIONAL TRANSFERS OF WEALTH: remittances (money sent back to family, main sources of outside money, but fraction of the wealth they created), investments (rich countries tend to invest in other rich countries -> less risky), foreign aid; international trade: has to balance economically (goods and services), but: in accounting only goods considered -> trade deficit not necessary bad, doesn’t tell much of economy’s condition; economic transaction: not zero-sum activity (<- economic fallacy), they create wealth; emigration of educated people: serious loss of national wealth; imperialism: colonies economically not significant; investment != exploitation (Marx); international trade increases inequality between rich & poor nations: top/bottom countries not the same! (same countries: inequality decreased!); foreign aid: a priori assumption: it aids the economy; recipients are government’s, not private enterprises -> risk of political abuse; rebuilding physical capital (eg Europe after WWII) is easier than creating human capital (eg Third World countries); official aid: more likely to retard development (Peter Bauer); poor countries: lot of physical wealth not recognized legally; “strong”/”weak” currency: emotionally loaded words, don’t tell much about economy (eg strong currency = prices of export increased in other countries)

23. INTERNATIONAL DISPARITIES IN WEALTH: Fundamental question: was there any realistic chance that the nations of the world would have had similar prospects of economic development? NO because of: geographic factors (fertile land, rain, sunshine natural resources), navigable waterways (harbors, deep waters, drinking water), mountains (benefitial for lowlanders but isolates highlanders ~ cultural islands), animals (horse, ox), location, happenstance (right place at right time), culture (rule of law, honesty, work attitude, seeking progress, openness to learn from other cultures), human capital » physical capital; ethnic resentments (immigrants brought more human capital than indigenous population); population density: does not automatically makes a country rich or poor (<-> Malthus’ overpopulation theory); just because there is a finite limit of resources/people that the planet can feed, it does not automatically mean we are nearing these limits; imperialism: little evidence that current economic disparities can be explained by a history of imperial exploitation

24. MYTHS ABOUT MARKETS: market: not a thing but people interacting; price: not tolls or barriers keeping things away from people (assumption: investors’ income > their value of contribution); different price for the “same” thing: they are not the same (real estate prices, cost of inventory, customer support etc can vary); “reasonable”/”affordable” prices: unreasonable expectation (should economic realities adjust to our budget?); prices: not costs but what you pay for costs; refusing to pay all the costs leads to reduction of quality or quantity or both; brand names: substitute for specific knowledge, reduce uncertainty, allows users to distinguish, forces producers to take responsibility; non-profit organizations: tendency to use resources for themselves, little pressure to achieve institutional goals; difficult to make sure foundation sticks to original purpose

25. “NON-ECONOMIC” VALUES: economics: not a value by itself but: way of weighing one value against another; it doesn’t tell you what to do with your wealth; economists: no free lunch, no solutions but trade-offs -> politicians more popular; wealth saves lives (eg more resilience by stronger buildings, better infrastructure) -> anything prevents national income from rising costs lives; human life might have infinite value in Trudy but not in practice (self-estimate: 5-10 million USD eg by compensation for high-risk jobs); private water system: Argentina (less infection); belief: politicians make better decisions than private third parties; expectation: others should subsidize my own values (eg rescue journalism by investing other people’s money despite lower return) <-> why not beneficiaries carry the burden (eg higher price for newspapers, less salary for journalists, higher rates for advertisers etc)? special dispensation for one group will have to be paid by other groups; false depiction: only one side is human (Mary vs the “marketplace”); why force others to pay for someone else’s values (instead of the ones demanding it)?; taxing away what other people earned = humanitarian act <-> giving the freedom to ppl to make their own choices = greed; institution conveying outcome != causation (eg high mortality rates in advanced hospital -> they didn’t cause it); what happens in any economy is not necessarily caused by it; income differences may be due to discrimination OR internal factors (age differences, education) OR individual’s chosen behavior (dropping out of school, drugs); market economies allow ppl to make decisions for themselves based on their own moral values; question is not whether moral values should guide market economies but whose values should be imposed on/subsidized by others; privileges (at other’s expense) != achievements (benefit for everybody); achievements create economic disparities among individuals, groups, nations; life is not fair (doesn’t provide everybody the same factors to prosperity) but not all sources of unfairness have moral dimensions (eg nature); mere statistics is not enough to distinguish between achievements and privileges, deeper analysis is needed; transferring wealth is easy, developing human capital is not; attempts to help the “poor” might be counterproductive (no distinction between genuinely poor vs juniors, blanket benefits can make it unnecessary to work & gain experience, minimum wage laws can make it harder to find a job)

26. HISTORY OF ECONOMICS: beginnings: 1776: Adam Smith: Wealth of Nations; even earlier: Thomas Aquinas (morally acceptable profit: compensation for risk & transportation costs); mercantilism: wealth = gold -> export should exceed import, goal: national competitive advantage, nation != population (eg slaves); Adam Smith: nation = all people, economic activity != zero-sum process; wealth = goods & services (not gold); market economy: spontaneously self-equilibrating system; government intervention: creates more problem than it solves; David Ricardo: comparative advantage in international trade; Say’s Law: “supply creates its own demand” -> no inherent limit national output (fear: if too much, people can’t buy it); modern economics: recent development, specialty but not career; “marginalist revolution”: prices determined by combination of supply and demand (Alfred Marshall -> social reformers need both “cool heads” and “warm hearts”), increased use of mathematics; equilibrium theory: ~ “water seeks its own level”, real world rarely an equilibrium; micro- (particular markets) and macroeconomics (inflation, unemployment, total output): affect each other; Keynesian economics: rationale for government intervention to fine-tune the economy, trade-off between inflation and unemployment (Phillips Curve) <-> challenged by Chicago School: 1970s both increased, reliance on market rather than government, market more rational than Keynes assumed; economics ~ meteorology, not about personal intentions but systemic results, ideological bias less harmful (“advocacy does not imply lying”)

27. PARTING THOUGHTS: more general scepticism about phrases in media & politics; don’t confuse wage rates per time and labor costs per product, tax rates and tax revenues, what sounds good and what works; economic fallacies: 1) economy: zero-sum process 2) ignore competition 3) ignore long-term consequences; _**need to stop and think!; price/rent control: shifts resources from controlled products to uncontrolled products (bread & butter -> champagne & caviar, ordinary housing -> luxury housing); history: powerful antidote to contemporary arrogance; market economies: not money economies but knowledge economies.