LONG RUN VS. SHORT RUN: It’s appalling, but economists take even perfectly obvious terms like “long run” and “short run” and try to invest them with scientific meaning. The short run refers to a period of time too short for economic inputs to change, and the long run refers to a period of time, as you may have guessed, long enough for all of the economic inputs to change. The terms are important when you get to thinking about how individuals or companies try to adapt to circumstances—and whether or not they can do it. For some economists, the long run, in particular, comes in handy when defending a pet theory. For example, during times of economic downturn and high unemployment, economists might argue against any form of government intervention, saying that in the long run the marketplace will adjust to correct the situation. The problem, of course, is that most people live in the short run, and that, as economist John Maynard Keynes once cautioned, “In the long run, we’re all dead.”
MACROECONOMICS VS. MICROECONOMICS: Further evidence of the tendency of economists to see things in pairs. Here, “macro” is the side of economics that looks at the big picture, at such things as total output, total employment, and so on. “Micro” looks at the small picture, the way specific resources are used by firms or households or the way income is distributed in response to particular price changes or government policies. One problem economists don’t like to talk about is the difficulty they have in getting the two views to fit together well enough to have any practical application.
MARKET FAILURE: This is one of a number of terms that economists use to put down the real world. Here’s the way it works: When things don’t go the way economists want them to, based on the laissez-faire system (see above), the outcome is explained as the result of a “market failure.” That way, it’s not the economists’ fault—they had it right, it’s the market that got it wrong.
MIXED ECONOMY: Another term for economic reality, the “mixed economy” is the middle ground between the free market (the good guys) and the planned economy (the bad guys). When you look around a country like the United States and see the government manipulating the price and availability of money and energy, legislating a minimum wage, and so on, you have to conclude that ours is not really a free market. But neither is it a centrally planned economy. Grudgingly, economists have decided that what it is is a mixed economy, a kind of economic purgatory they will have to endure while they pray for ascension to the free market.
OPPORTUNITY COSTS: The idea behind the old line “I could’ve had a V8.” In economics, there is a cost to using your resources (time, money) in one way rather than another (which represented another opportunity). Think of it this way: There is an opportunity cost associated with your studying economics instead of a really useful subject like podiatry.
PRODUCTIVITY: Another of the big words in the field, productivity, simply defined, is a measure of the relationship between the amount of the output and that of the input. For example, when you were in college, if it took you two days (input) to write your term paper (output) and it took your roommate one day to hire someone to write his term paper, your roomie’s productivity was twice yours—and he probably got a better grade.
PROFIT: To get a firm grasp of profit and its counterpart, loss, you might consider the biblical quotation, “What does it profit a man if he gain the world but lose his soul?” For an economist, the correct way to answer this question would be to calculate the revenues received from gaining the world and subtract the costs incurred by losing one’s soul. If the difference (known as “the bottom line”) is a positive number, you have a profit.
SUPPLY AND DEMAND: Supply is the amount of anything that someone wants to sell at any particular price; demand is the amount that someone wants to buy at any particular price. Economists have a lot of fun making you guess what happens to the relationship between supply and demand when the amounts or the prices change. More on this game later.
VALUE ADDED: A real comer in the world of economics, the value added is a measure of the difference of the value of the inputs into an operation and the value of the product the operation yields. For example, when Superman takes a lump of coal and compresses it in his hands, applying superforce to turn the coal into a perfect diamond, the value added, represented by Superman’s applied strength, is significant. The term explains how wealth is created; it’s also what people use to justify all those hours they put in on the super pullover machine.
VALUE-ADDED TAX: Like the name says, a tax on the value added. At each stage of the value-added chain, the buyer pays, and the seller collects, a tax based on the value of the services added at that stage. The tax is rebated on exports and paid on imports. The VAT is a lot like a sales tax in that it’s a tax on consumption (as opposed to income) and the consumer pays in the end, but it’s less direct. All Western European countries have it, but in the United States the mere mention of a possible VAT, which does tend to hit the poor harder than the rich, is considered grounds for lynching the nearest politician.
Eco Think
Now that you can talk like an economist, the next step is to learn to think like one. The good news here: Economics is a closed system; internally it is perfectly logical, operating according to a consistent set of principles. Unfortunately, the same could be said of psychosis. What’s more, once having entered the closed system of the economist, you, like the psychotic, may have a hard time getting out.
THE FOUR LAWS OF SUPPLY AND DEMAND: Economics as physics—something like the laws of thermodynamics brought to bear on the study of wealth. Basically, these four laws say that when one thing goes up, the other thing goes down, or also goes up, or vice versa, depending. When demand goes up, the price goes up; when demand goes down, the price goes down; when supply goes up, the price goes down; when supply goes down, the price goes up.
THE THEORY OF PERFECT COMPETITION: If the four laws of supply and demand are economics as physics, this is economics as theology. The theory holds that firms always seek the maximum profit; that there is total freedom for them both to enter into and to leave competition; that there is perfect information; and that no business is so large as to influence its competitors unduly. It is, according to economic dogma, a situation in which neither firms nor public officials determine how resources are allocated. Rather, the market itself operates like an “invisible hand” (see “Adam Smith,” on the next page). And if you buy that one, there’s this bridge we’d like to talk to you about.
THE PRINCIPLE OF VOLUNTARY EXCHANGE: Comes under the heading how-to-make-even-the-simplest-idea-sound-important; also known as people buying and selling to get what they want.
THE THEORY OF COMPARATIVE ADVANTAGE: The basis for much of our thinking about international trade. Most simply, it says that everyone’s economic interests are served if each country specializes in those commodities that its endowments (natural resources, skilled labor, technology, and so on) allow it to produce most efficiently, then trades with other countries for their commodities. The classic example: Both England and Portugal benefit if England produces woolens and Portugal produces port and the two countries trade their products—rather than both countries trying to produce both products. Once you’ve arrived at an understanding of the theory of comparative advantage, the next thing to think about is how it is that Japan—without natural resources, native technology, or capital—ever became dominant in steel, cars, motorcycles, TVs, and Nintendo. The answer may tell us more about the theory of comparative advantage than it does about the Japanese.