Preface: The Economics of Everyone#
The charm of economics lies in its commitment to studying the patterns of interaction among strangers. Human cognition and judgment are still primarily driven by intuition and short-distance interpersonal relationships, yet our bodies and circumstances have long been placed within the intricate cooperation of large-scale strangers.
You buy this book not because you want to become an economist, but because you want to be an informed person living in modern society, to break free from the control of intuition and experience, to understand the rules governing the operation of the economic society, to overturn the common sense and mental models you have accumulated over the years, and to respond appropriately to this society formed by a vast number of closely connected strangers.
Economics helps you cultivate an appreciation for economic reasoning. Weighing a viewpoint, especially a well-considered one, often involves standards of high or low, light or heavy, rather than simply right or wrong; observing experts in action and discerning the flow of ideas can enhance your insight, boost your confidence, and improve your appreciation of theory.
Humanity faces four fundamental constraints: insufficient resources, limited life, mutual dependence, and the need for coordination.
Chapter 1: Scarcity - Why Business is the Greatest Charity#
The Real World | An Economic Perspective#
01 Lecture | Economic Organization in Prison Camps#
An article by Redford titled "Economic Organization in Prison Camps" describes some economic activities that occurred in German POW camps during World War II, including price fluctuations, Gresham's law, inflation, and deflation, illustrating that market economies adhere to economic laws, even China's market economy.
“The significant improvement in a prisoner’s material enjoyment level is not achieved through their ability to seize necessities, but through the exchange of goods and services.”
- Redford
“Even if the total amount of material does not change, as long as people can trade, happiness can emerge from nothing. And that bag of food the pastor holds is proof of his creation of happiness.”
Where there is trade, there are prices; where there are prices, there will be price fluctuations.
02 Lecture | The Manure Dispute Case#
The real case of the manure dispute reflects the relationship between fairness and efficiency, emphasizing that encouraging wealth creation leads to positive societal development, while justice is often a consideration of efficiency.
The story of the manure dispute case
This case occurred on April 6, 1869. The plaintiff hired two helpers to collect horse manure on the street. They worked from 6 PM to 8 PM, piling up 18 heaps of manure. After piling it up, they found it too heavy to move and went back to get a cart, planning to return the next day to transport it. However, they did not mark the 18 heaps of manure.
The next morning, the defendant saw the manure and asked a nearby patrol officer if it had an owner or if anyone was going to take it away. The patrol officer said he didn’t know. After hearing this, the defendant thought the manure was unmarked and ownerless, so he took it home and spread it on his field.
By noon that day, the two helpers returned with a cart, only to find the manure gone. Upon inquiry, they learned that the defendant had taken it. A dispute ensued, eventually escalating to the courtroom.”
- “Thomas Haslem v. William A. Lockwood, 1871”
“In court, several viewpoints clashed.
One was the “origin theory.” Some argued that the true owner of the manure was the horse, as it was produced by the horse; one could further argue that it belonged to the horse's owner. But the problem is that the horse's owner abandoned ownership of the manure by leaving it on the road.
Another was the “location theory.” The defendant claimed that once the manure fell onto the road, it became part of the road, which is public property, so anyone could take it. The plaintiff had the helpers pile it up, merely changing its location without altering its ownership, thus the manure did not belong to the plaintiff.
There was also the “marking theory.” Some in court argued that the key was whether the plaintiff had marked the manure; if not, it was not fair to blame others for taking it away.
Lastly, there was the “labor theory.” The plaintiff insisted that the helpers had expended effort to pile the manure, so it should belong to the plaintiff.”
Any result of human labor is wealth; all wealth has an owner; wealth with an owner is protected by law. Respecting others' wealth means not taking it without permission. As long as there is such a consensus, and this consensus becomes tradition, people in this village will not need to exert much effort to protect their wealth, and they will be more proactive in creating and accumulating wealth. Fifty or a hundred years later, this village will become prosperous.
Respecting others' wealth means not being tempted to take what isn't yours; this is a universal view of justice that every responsible parent teaches their children. However, behind this view of justice lies a consideration of efficiency—efforts to protect property rights consume resources, and the greater the consumption, the lower the net value of resources; the more societal moral norms can help reduce this consumption, the more wealth society can accumulate.
When we discuss issues of justice, the underlying implication is often: this aligns with efficiency standards. The rules that encourage everyone in society to accumulate wealth, or those that allow society to develop healthily, are the just rules. In other words, effective means fair.
When others debate whether fairness or efficiency is more important, those who have studied economics understand that fairness often involves considerations of efficiency—not just individual efficiency, but the efficiency of overall societal long-term development. Fairness and efficiency are often two sides of the same coin.
03 Lecture | The Visible and the Invisible#
The broken window theory is a fallacy. Economics is a discipline that studies comparison and choice; the difference between good and bad economists lies in the ability of good economists to weigh visible consequences against inferred results, while the invisible side relies on imagination, which should be fully considered in decision-making.
The broken window theory
A mischievous child breaks a window, and the window's owner must buy glass, stimulating glass production. Once the glass workers complete their orders and earn money, they can buy bread, and the bakers can buy clothes. This pushes a series of production. Supporters of the broken window theory argue that destruction leads to progress; adversity strengthens a nation, and destruction itself is good.
This kind of thinking is very common in society. Every time society experiences a disaster, whenever there are hurricanes, earthquakes, or tsunamis, some economists will stand up and say that although disasters cause significant harm, they also create opportunities for the next round of employment and GDP growth.
Variants of the broken window theory:
- National Development
“Some countries have taken a long detour and made many mistakes, but looking back, they find that it was those mistakes that led to later development. For example, Germany experienced World War II, and Japan was bombed with atomic bombs, which is why they developed rapidly afterward.”- Employment for Workers
“If older workers do not retire early and do not vacate their positions, young people will not have jobs; if machines are too good, they will replace workers, leaving them without work. Thus, it is evident that older workers working too long or advanced machines are detrimental to social development.”- Saving Resources
“Steven Levitt from the University of Chicago wrote a popular book titled Freakonomics (2005), which includes an example: many environmentalists oppose using a lot of plastic bags to package food because it causes significant waste. However, this economist argues that the more plastic bags are used, the longer food stays fresh, reducing food waste. What we need to see is not just how many plastic bags are used, but how much food would be wasted if plastic bags were not used. Therefore, the critical question is: should we waste more plastic bags or more food?”
Seeing the invisible requires imagination
In these variants of the broken window theory, the visible aspects are the employment opportunities and resources spent due to natural disasters, human destruction, aging, and outdated tools; the invisible aspects are the hidden net losses caused by alternative scenarios.
If no natural disasters occur, no human destruction happens, if people live healthier lives and machines are more advanced, the resources that remain undamaged and the time and labor saved could have been used to produce other more effective things; and if more plastic packaging is used, it could save more food and preparation time.
The difficulty in recognizing the fallacy of the broken window theory lies in the fact that even economists often cannot clearly articulate what new work and production the saved time, labor, and resources could be used for, and how much hidden benefit the additional resources spent would bring. To understand this issue well, a bit of imagination is necessary.
Of course, it is essential to clarify that it is not to say that everything invisible is more important than what is visible. Rather, it means that whenever we make decisions, we must fully consider those factors that are temporarily invisible or even permanently invisible.
04 Lecture | Distinguishing Wishes from Outcomes#
Good intentions do not necessarily lead to good outcomes; economics studies objective laws that are not subject to human will, examining phenomena that contradict intentions.
“May God protect us from the attacks of friends—if the attack comes from enemies, we can defend ourselves.”
/- Kant
“God teaches us how to identify bad thoughts among friends. We can recognize and resist the thoughts of enemies, those that are easily discernible as good or bad. However, it is the thoughts wrapped in good intentions that are more challenging to identify.”
Economics does not study the issue of “good people doing good things and bad people doing bad things,” but rather examines those phenomena that contradict intentions. It asks why sometimes good intentions lead to bad outcomes. For example:
(1) The minimum wage law, intended to protect the poor, ultimately worsens their situation;
(2) The equal pay law, intended to protect the interests of vulnerable groups, ultimately harms their interests;
(3) The welfare system, intended to provide support for the helpless, ultimately worsens their situation;
(4) Various laws protecting endangered species have led to a decrease in those species despite the protections.
The government’s legislation is not the endpoint of problem-solving
Whenever we see various injustices and unsatisfactory phenomena in society, many people's first reaction is to call for government legislation to prevent such occurrences. Once the law is passed, everyone feels that the matter is settled.
Economists, however, do not see it this way. They believe that the passing of a law does not mark the end of the matter but rather the beginning of a new chapter. Humans are proactive; under this new law, everyone will have their countermeasures. Ultimately, the direction of events will differ significantly from our expectations, and it is these discrepancies that hold the most research value.
Economists are concerned about the harmful consequences of economic policies formulated out of good intentions. The connection between economics and natural sciences lies in its study of objective laws that are not subject to human will—economics is concerned with phenomena that contradict intentions, not those that align with them.
Human Nature | Are Humans Rational and Selfish?#
05 Lecture | Uncertainty, Evolution, and Economic Theory#
Economics needs to be built on a solid foundation, and the view that “humans are rational” is not robust, leading to debates between two major economists. Alchian published a lecture stating that survival depends on conditions, not rationality. This aligns with Darwin's theory of natural selection, applying an evolutionary perspective to economic issues, which is Alchian's contribution.
The debate over whether humans are rational has existed for a long time. Two economists once engaged in such a debate. One of them, Richard Lester, stated that through research, he found that entrepreneurs do things differently than economic theory suggests.
For example, when the proportion of employee wages rises, entrepreneurs do not reduce hiring, and product prices do not change significantly; entrepreneurs are not that sensitive to changes in costs. Only when the supply and demand relationship changes does the product price undergo significant changes. It is evident that entrepreneurs do not make decisions solely based on the optimization principles proposed by economists. The marginal analysis of costs and benefits in economic theory does not align with reality.
The other economist, Fritz Machlup, defended economics. He argued that although individuals may not understand economics or use calculators when making decisions, their actions unconsciously conform to the assumptions of economics and the principle of maximization.
He gave an example: when a person drives on the road, they sometimes accelerate, sometimes decelerate, sometimes change lanes, and sometimes overtake; of course, they do not calculate with a calculator, but in reality, they are following the principle of optimization.
The two economists held opposing views. So, when individuals make decisions, do they perform precise calculations, and do they adhere to the principle of rational self-interest?
The world is full of uncertainty; from a statistical perspective, as long as uncertainty exists, people cannot determine the so-called optimal solution, at best only an optimal probability range.
For instance, there are two investment options: one is high-risk, high-reward, and the other is low-risk, low-reward. Which one is better? Logically, they can be equivalent, and we cannot definitively say which is optimal. In real life, optimal solutions often do not exist. In fact, everyone living in this world is not pursuing the optimal solution but rather survival!
Alchian stated that economics is concerned with the conditions for survival: how an individual, an organization, or even a system survives and what conditions are necessary for survival. These are unrelated to whether humans are rational.
Alchian found a solid research foundation for economics—economics is concerned with the conditions for survival. In other words, economics studies under what circumstances individuals can survive, and how changes in conditions affect survival.
Game rules determine the probability of winning or losing.
06 Lecture | Adam Smith's View of Human Nature#
Is economics based on selfishness or morality? In "The Wealth of Nations," Adam Smith argues that humans are selfish, while in "The Theory of Moral Sentiments," he states that humans should have morals. So what choice should be made? Human nature is selfish, but it also possesses compassion and love, which diminishes with distance; helping strangers cannot rely solely on love but also requires market coordination. Small circles rely on love, while the larger world relies on the market.
“Each person does not need to care about social welfare; they do not know how to promote social welfare. They only need to care about themselves and pursue their own welfare. However, in pursuing their own welfare, an invisible hand transforms their efforts into a push for public good. This invisible hand allows their selfishness to promote social welfare.”
/- Adam Smith, "The Wealth of Nations"
Human nature is selfish but also possesses compassion and love
We must first clarify the publication order of "The Wealth of Nations" and "The Theory of Moral Sentiments." In fact, Smith first published "The Theory of Moral Sentiments" in 1759, and 17 years later, in 1776, he published "The Wealth of Nations." "The Theory of Moral Sentiments" contains Smith's entire theoretical framework, while "The Wealth of Nations" is just a part of it, despite being longer and more famous.
Smith's first point is that humans are selfish; those who are completely unselfish, who do not even love themselves, and who are self-destructive will not be respected in society.
Smith then states a second point: humans are not only selfish but also possess compassion, which is the ability to empathize with others. People consider others' happiness as part of their own happiness: your happiness is my happiness; your suffering is my suffering. This is an innate ability called “compassion,” which everyone possesses. Compassion implies love.
Smith's third point is that “human compassion rapidly diminishes as the distance between people increases.”
A person may exert their entire life’s effort but still find it difficult to win the favor of a few people, while in civilized society, they constantly need the cooperation and assistance of the majority. Other animals, upon reaching maturity, can almost all become independent and do not need assistance from other animals in their natural state. However, humans almost always need the assistance of their peers; relying solely on others' goodwill is impossible.
Our dinner does not come from the butcher, brewer, or baker's goodwill, but from their self-interested plans. We do not appeal to their altruism but rather to their self-interest. We do not say we have needs but rather that it benefits them.
Do not be overly calculating in family and friend circles regarding market rules, nor demand unrealistic compassion from strangers in the market.
/- Adam Smith
07 Lecture | The Story of the Pencil#
Although a pencil consists of only three parts—the barrel, the cap, and the lead—the materials and manufacturing processes involved are incredibly complex, connecting thousands of people together.
The Amazing Pencil
First, the materials for the pencil are very complex. The barrel is made from a type of wood called cedar; the paint on the barrel consists of six layers, containing complex components like nitrocellulose and synthetic resin; the lead contains not only graphite but also clay and talcum powder; the metal ring on the cap is said to be made of brass; the eraser inside is red, and the red pigment is said to be cadmium sulfide. All these materials come from various parts of the world.
Second, the manufacturing process is also very complex. Taking the lead manufacturing as an example: first, graphite and clay must be mixed in a specific ratio; then, the prepared materials are mixed in a machine and extruded into leads of a certain specification; next, they are heated, dried, and baked at high temperatures to achieve certain strength and hardness; finally, they undergo oil treatment to be completed. Just the lead manufacturing requires so many processes; if we delve deeper, how complex is the entire production process of a pencil? How many people have participated in the production of a pencil? 50? 100? 1000? No, it’s thousands upon thousands of people.
Because, in addition to producing the lead, the barrel and cap must also be produced. To produce the barrel, trees must be cut down; to cut down trees, steel is needed; to refine steel, mining is necessary; and miners need to eat. Workers not only need to eat but also drink coffee. To drink coffee, it must be transported from far away. Shipping requires shipbuilding, and so on. This entire process involves thousands of people and generations of effort.
The Market Forces Create the Pencil Myth
A pencil connects thousands of people together, and its magic lies in:
First, no one person possesses all the knowledge required to manufacture a pencil. This knowledge can never be concentrated in one person's brain, yet the pencil is produced. This is its first aspect of magic.
Second, each person involved in the production of the pencil does not know that their efforts will lead to the creation of a pencil; each person only does their part. Some people do not even know what a pencil is, and some do not need a pencil, yet their efforts contribute to the pencil's production.
Moreover, the people producing the pencil live in different corners of the world; they do not know each other, speak different languages, follow different religions, and may even despise each other. But that does not matter; they can cooperate to continuously produce pencils.
Even more astonishing is that although a pencil embodies the efforts of thousands of people and accumulates generations of knowledge, the price we pay to buy a pencil is minimal. You only need to work for about ten minutes to earn enough to buy several pencils.
What a marvelous phenomenon! Now, look at nature; does such a thing happen? No. What force enables such a miraculous occurrence? That is the market, the platform that allows thousands of strangers to cooperate.
This amazing pencil story was written by Leonard E. Read in an article titled "I, Pencil" (1958).
As Milton Friedman later said in the preface to "I, Pencil": Leonard E. Read's captivating "I, Pencil" has become a classic, and it truly deserves to be a classic. To my knowledge, no other literature succinctly, convincingly, and powerfully illustrates Adam Smith's "invisible hand"—the possibility of cooperation without coercion—like this article.
08 Lecture | Business is the Greatest Charity#
The World Bank's mission is to provide assistance to impoverished countries and help people escape poverty, yet after many years and significant financial and human resources, the results have been minimal, while the joint entertainment activities of the UK and the US have been quite effective. The reason for the vast difference in outcomes between the two is that business and charity are fundamentally different.
Four major reasons make charitable poverty alleviation ineffective:
- Lack of feedback mechanisms
- Principal-agent problems
- Mismatched delegation
- Dependency culture
Differentiated Treatment | Standards of Choice#
09 Lecture | Scarcity#
Scarcity is a fundamental fact, and economics is built upon scarcity.
“What kind of foundation should the edifice of economics be built upon to be most stable? The answer is: scarcity.”
Scarcity is a fundamental fact
We base economics on the foundation of “scarcity.” However, scarcity is not a hypothesis but a fundamental fact. Scarcity is a basic constraint that humanity has always faced; as long as we live in this world, we must confront it.
The meaning of scarcity is very broad; it refers not only to the lack of tangible assets like minerals, forests, and energy but also to the insufficiency of intangible assets like air, beauty, talent, attention, and time.
Here are two less noticeable examples. Geographical location is also scarce. When we look down from an airplane, we see vast lands and think land is infinite. However, all major cities—Beijing, Shanghai, Guangzhou, Shenzhen—appear as mere pinholes on a globe. If there is so much land, why do many cities still need to reclaim land from the sea? The reason is that while there may be plenty of land, geographical location is scarce.
Reasons for Scarcity
What causes scarcity? There are two reasons: first, what we want, others want too; second, human demands are constantly changing and upgrading.
Starting with the first reason, what we want, others want too. We often experience this when we go to a store looking for our favorite products and find their prices are the highest. What does this indicate? It indicates that what we like is likely liked by others as well.
The second reason is that human desires are limitless. When only wild vegetables are available, people want steamed buns; once they have steamed buns, they want meat and wine; once they have wine and meat, they want to stock up on steamed buns and wine to go catch seafood, and they want to use steamed buns, wine, and fish to support artists making movies. A certain mountaineer was criticized for using a helicopter to ascend part of Mount Everest because people were unwilling to dilute the honor of reaching the summit. This honor is man-made, and to compete for this man-made honor, one must spend time, energy, and money. It can be said that the more abundant the material, the more novel the demands.
010 Lecture | Choice and Discrimination#
When people make choices, discrimination arises. When discrimination occurs, the goal is not to eliminate it but to determine how to discriminate while also bearing the costs that come with it.
Since resources are always scarce, people must choose how to utilize limited resources; whenever a choice must be made, some standard of choice must be adopted; once a standard is established, it implies differential treatment, and differential treatment is discrimination.
Discrimination is Inevitable
The concepts of scarcity, choice, differential treatment, and discrimination are essentially unified; having one implies the existence of the other three. In other words, we cannot avoid discrimination; we can only confront it directly and further discuss under what circumstances people will discriminate, what the conditions for discrimination are, who will discriminate, and what the consequences of discrimination are, etc.
Discrimination and Reverse Discrimination
Efforts to eliminate discrimination can lead to new forms of discrimination, which we call reverse discrimination.
To avoid overtly disadvantaging whites, one must quietly favor blacks.
A Supreme Court Justice openly stated: “To treat people equally, we must treat them differently. We cannot, and dare not, allow the equal protection clause to perpetuate racial superiority.” This means that only by disadvantaging whites and favoring blacks can the outcome be fair. Another justice countered that judges who vote in favor of civil rights are actually staunch reverse racists.
The judges debate how to avoid discrimination, yet they seem to overlook that due to the existence of scarcity, discrimination is inevitable and unavoidable; any choice must involve discrimination.
Discrimination is not the problem; how to discriminate is the problem
First, since resources are scarce, schools must select students during admissions; choice is unavoidable, so discrimination is also unavoidable. Whether supporters or opponents of civil rights movements, no one can claim their position is neutral; everyone’s stance is biased.
Second, since discrimination is unavoidable, those who discriminate must bear the consequences of their discrimination.
Third, schools, as the entities conducting admissions, have the right to establish any discriminatory admission standards. Schools can diversify their admissions by accepting students from disadvantaged groups, even if their exam scores are slightly lower; they can also accept outstanding athletes, even if their exam scores are lower, as long as they benefit the entire group. Whether openly favoring disadvantaged groups or subtly doing so, schools must bear the consequences of their admissions and discrimination.
Fourth, besides schools, employers of graduates—who bear the consequences of these admissions policies—should have the right to obtain relevant information; whether a student was admitted due to athletic prowess, academic excellence, or characteristics of race or skin color. Employers should have the right to know.
The case of Bakke v. Regents of the University of California is a typical case, and we need to remember a point that most people easily forget: scarcity inevitably leads to discrimination. We should not ask whether to discriminate but rather how to discriminate.
011 Lecture | Every Discrimination Comes with a Cost#
Discrimination is essentially differential treatment; although discrimination is unavoidable, the more one discriminates against others, the greater the cost one must bear.
Those who discriminate against others must also pay a price.
/- Gary Becker, "The Economics of Discrimination"
Origins of Discrimination
Discrimination, or differential treatment, has two fundamental origins.
- Preferences
- Information asymmetry
The more one discriminates against others, the greater their own costs
People often generalize about Americans, Japanese, Koreans, etc. This is a form of discrimination based on generalization. However, understanding strangers comes with costs; generalization (discrimination) allows us to form initial impressions at the lowest cost.
Following this line of thought, we understand that the more severe the consequences of discrimination, the more motivated people will be to reduce it. If the consequences of discrimination are not severe, people will be more casual about discriminating against others.
When we do not have to pay a high price, we will indulge our habit of discrimination; when we must pay a high price, we will restrain our habit of discrimination.
012 Lecture | The Role of Discrimination and the Negative Consequences of Limiting Discrimination#
Discrimination is not necessarily a bad thing; reasonable discrimination can promote the economy, while if reasonable discrimination is prohibited by the government, it can lead to negative consequences.
The Discrimination Story of Southeast Asian Chinese
People generally believe that those who discriminate against others are relatively powerful. However, some have found that this is not always the case. For instance, Chinese people in America are a vulnerable group, yet they often prefer to discriminate against others. In many industries, such as gambling, retail, and finance, Chinese people tend to form their own circles and avoid outsiders. What is the reason behind this?
A Chinese female economist named Janet Landa provided a very insightful explanation.
Landa, a Chinese expatriate from Malaysia, grew up there. She noticed that locals often exhibited anti-Chinese behavior, one reason being that Chinese people tend to exclude non-Chinese when doing business.
To explore this further, Landa found a rubber plantation in the area, which was controlled by five major families from Fujian Province: the Chen, Li, Lin, Huang, and Yan families. She discovered that the emphasis on Confucian values among Chinese people was a way to calculate relationships, aiming to conduct credit ratings.
The local Chinese categorize people into seven ranks: the first rank is direct relatives; the second rank is distant relatives within the extended family; the third rank is people of the same clan or surname; the fourth rank is people from the same village; the fifth rank is people who speak the same dialect or other Chinese speakers; the sixth rank is other Chinese speakers; and the seventh rank is non-Chinese, including Europeans, Indians, and local Malaysians, etc.
After categorizing people into seven ranks, they have different terms when doing business, and the interest rates for loans vary accordingly.
The Efficiency Implications of Discriminatory Behavior
Landa's analysis revealed that the behavior of the Minnan people makes sense. Chinese people living in Malaysia face language barriers and are dependent on locals; if a borrowing situation arises where someone fails to repay, it is challenging to take legal action. Chinese people lack government connections and do not understand local laws, making it difficult for the formal judicial system to protect them, so they must rely on this distance calculation for self-protection.
In fact, this method not only does not reduce the profits of local Chinese businesses but can actually increase their efficiency. Because people from the same village or clan have their own moral constraints, relationships, and reputations, these can serve as guarantees for business credit.
Thus, discrimination can sometimes be very constructive.
The Civil Rights Movement: A Movement Against Discrimination
In the United States, various forms of discrimination exist, and the government has taken numerous measures to curb discrimination. The question is, what happens if the government prohibits reasonable discrimination?
Ten years ago, the U.S. experienced a subprime mortgage crisis. Around 2000, housing prices in the U.S. kept rising until they began to decline in 2006. By the fourth quarter of 2006, the phenomenon of people stopping mortgage payments became increasingly common. In 2008, the subprime mortgage crisis occurred.
Why did the subprime mortgage crisis happen? Some say it was due to the greed of capitalists. However, capitalists have always been greedy, and greed alone cannot explain the occurrence of the subprime mortgage crisis.
Others say it was the fault of financial innovation. Various assets and debts were packaged and sold by banks, creating long chains that led to information asymmetry between principals and agents, resulting in a financial crisis. However, bankers are usually astute and prudent; why is it that no other industry has merchants packaging and selling things, ultimately deceiving people?
The real reason is this: historically, the homeownership rate among Americans has been relatively low, partly because bankers are very cautious and do not lend easily, making it difficult for most Americans to afford homes. Starting in 1960, the U.S. began a vigorous civil rights movement aimed at correcting social injustices, supporting so-called vulnerable groups, and encouraging them to buy homes.
In 1991, data on commercial bank lending was made public, revealing that most loan recipients were white, while minorities and vulnerable groups had significantly lower chances of obtaining loans than whites. At this point, people felt that commercial banks had a strong tendency to discriminate against vulnerable groups.
By 1992, the Federal Reserve Bank of Boston released a so-called scientific statistical report claiming that after rigorous calculations, American commercial banks were indeed discriminating against vulnerable groups.
In reality, commercial banks, under competitive pressure, do not discriminate against vulnerable groups casually. If someone can repay a mortgage but the bank refuses to lend, wouldn’t that be a loss for the bank? However, the public did not believe this. After the report was released, a movement arose demanding that more loans be granted to vulnerable groups.
Government Coercion and Incentives Against Discrimination Lead to the Subprime Crisis
Commercial banks are business entities and will not casually relax lending conditions or take on undue risks. To encourage banks to lend, the government used both coercion and incentives.
The so-called coercion means that the government stipulated that if banks discriminate against vulnerable groups and it is verified, they will face hefty fines. The so-called incentives involve having two government-backed real estate companies—Fannie Mae and Freddie Mac—purchase commercial banks' mortgage contracts, effectively having the government bear all the lending risks.
Seeing that no matter how they lend, the government will ultimately cover it, banks naturally change their mindset and no longer conduct strict reviews of borrowers; instead, they encourage everyone to borrow.
When all banks do this, the housing market will naturally flourish in the short term. However, prudent banks know that these debts are toxic, so they package and sell these debts, passing the hot potato without knowing who will end up with the toxic asset. Banks also believe in the notion of “too big to fail”—the more debt, the broader the impact, and the government will not let you fail, so they proceed without hesitation.
The final result is the subprime mortgage crisis.
This crisis teaches us that in reality, discrimination often has its reasons, especially in a fiercely competitive market economy, where discrimination can also be efficient. If, for political reasons, the government attempts to change discrimination standards in the market, it may lead to adverse consequences.
Chapter 2: Costs - Don't Just Focus on Money#
The study and application of the concept of cost run throughout the entire economic system. Many economic masters have worked on the concept of cost, making lasting contributions, some even winning Nobel Prizes.
The concept of cost is profound and variable, largely because it is imagined by people. From the concrete to the abstract, from the individual to the group, from static to dynamic, economics has formed a series of different cost concepts.
Preference for Choice | The Maximum Value of What is Given Up#
013 Lecture | Defining Cost in One Sentence#
Using the story of a quarry to explain what cost is: cost is the maximum value given up among all choices, and sunk costs do not count as costs; cost looks forward, not backward.
Entrepreneurs are intermediaries in resource allocation.
When a resource has several options, the cost of the chosen option is the highest value among all the options that were given up. In short, cost is the maximum price forgone. (Cost is the best opportunity foregone.)
Sunk costs are not costs. We say that cost is the maximum price forgone, and if there is nothing to give up, there is no cost. Sunk costs refer to expenditures that have already occurred and cannot be recovered. When we cannot recover or give up something, there is no cost. Whenever we mention cost, we must look forward (to the future) rather than backward (to the past). Therefore, sunk costs are not costs.
We say that cost is the maximum price forgone, which is “the highest value among all the options that were given up,” but the question is, all the options that were given up are not realized, right? Since they are not realized, how do we know what we have given up?
To know what has been given up and how valuable those things are, we can only rely on imagination.
Chinese workers have two choices: either to manufacture socks or to manufacture airplanes. The cost of making socks is the value of the airplane forgone; the cost of making airplanes is the value of the socks forgone. So, for Chinese workers, which has a higher cost: making socks or making airplanes?
014 Lecture | Your Cost is Determined by Others#
Cost is the maximum price forgone, while negative feelings are not costs; your cost is also determined by others in society, including the scope of professions determined by others in society.
Negative feelings are not costs
It is a common mistake to consider negative feelings as costs.For example, if we want to build a swimming pool in our yard, there are many negative feelings during the process: hard work, fatigue, and a period of messiness, etc., but these are not the costs of building the swimming pool because nothing is being given up. Once the swimming pool is built, we can no longer set up a tent, and the cost of building the swimming pool is the value of the tent that we have given up.
We can clarify this concept with some simple numbers: if the positive feelings from the swimming pool are 100 points and the negative feelings are 70 points, then the net happiness value from the swimming pool is 30 points; while setting up a tent, we assume it brings a positive feeling of 50 points and a negative feeling of 10 points, so the tent gives us a net happiness value of 40 points.
At this point, we need to compare the net happiness value of the swimming pool (30 points) with that of the tent (40 points). In other words, the cost of building a swimming pool is the net happiness value of the tent (40 points) that we have given up, not the negative feelings of 70 points from building the swimming pool. Similarly, if we want to set up a tent, its cost is the net happiness value of the swimming pool (30 points) that we have given up, not the negative feelings of 10 points from setting up the tent.
In summary, the swimming pool and the tent are mutually costs; we should not view the effort of building the swimming pool or the effort of setting up the tent as the cost of building the swimming pool or the cost of setting up the tent.
Negative feelings are not our costs; only the maximum price we need to give up is the cost. And how great this cost is, what determines it?
Your cost is determined by others
Suppose I have a family-owned shop on Chang'an Street, specializing in tea eggs. My thought is that this shop is my property, and I do not need to pay rent, so the cost of running the tea egg business is almost zero. However, this idea is incorrect because cost is the maximum price forgone, not the rent of this shop.
Continuing to use this shop to sell tea eggs means giving up other possibilities, such as renting it out. If I insist on selling tea eggs, what I give up is the rent of this shop. The rent is determined by all other people in society; their views determine how much the location on Chang'an Street is worth, so it is determined by others in society that the cost of my insistence on selling tea eggs.
If someone is willing to pay 20,000 yuan to rent this shop, then the cost of insisting on selling tea eggs is 20,000 yuan; if someone is willing to pay 30,000 yuan, then the cost is 30,000 yuan. It has nothing to do with who owns the shop. The cost of insisting on selling tea eggs is only related to one factor: the maximum income forgone.
Your professional scope is determined by society
Today, people like to talk about “not forgetting their original intention,” but why is it so difficult to not forget one’s original intention?
Because when you had your “original intention,” the choices available may not have been many, making it easier to stick to it. However, as circumstances change and opportunities increase, it becomes increasingly difficult to maintain your original view, and the cost of doing so rises, meaning you have to give up more. Therefore, “not forgetting one’s original intention” is not an easy task.
Why? Because the cost of maintaining your “original intention” is the maximum price forgone, which is not determined by you but by others in society.
Let’s push this logic to the extreme. I ask you, who owns your life? Who decides how you spend your life? Who decides your profession today? You would certainly say: my life is mine, and I decide my profession, or my parents help me make decisions.
Really?
Economics does not see it this way. In fact, your life is similar to the shop selling tea eggs. Yes, you own your life, but how you spend your life and what purpose you use it for is determined by others in society.
Your choice of profession is largely influenced by others' views on various professions. If you could clearly become an excellent programmer, but you insist on making the study of "Dream of the Red Chamber" your lifelong career, then the maximum price you give up is the income from being a programmer. Can you bear it? You may not be able to.
In fact, when we are young, we spend a lot of time learning different courses and participating in various social practices to figure out which profession “can bring the greatest benefits, can maximally satisfy our interests, and has the lowest costs.”
You may think that the range of professions you can choose from is very broad, but think about it: can you choose those professions from 50 years ago? How about those from 100 years ago?
In fact, the professions you can choose today are just a very narrow range, which is the range of professions that most people recognize today. You must choose the one that maximizes your interest, minimizes your costs, and has the highest total income over a considerable period.
The economic view is: you own your life, but how your life is spent and how your profession is chosen is largely determined by others in society.
015 Lecture | Don't Just Focus on Money#
Monetary costs are not the entirety of costs; the markup earned by intermediaries makes goods cheaper, and corruption is also a form of institutional cost.
Monetary costs are not all costs. When making decisions, we must focus on total costs, not just money.
For example, when we go thrift shopping for cheap items, the monetary cost is relatively low, but the monetary cost is only part of the total cost. Although we pay less money, we spend more time, and the likelihood of buying counterfeit or inferior goods increases; these are all costs of thrift shopping. All these costs combined constitute the total cost of thrift shopping.
Similarly, if we live farther from the city center, rent will be lower, but we also spend more time, which must be factored into the cost; if we buy things at a 7–11 convenience store, the monetary cost is higher, but shopping there saves a lot of time and avoids many hassles, making the total cost potentially lower; if we pay for a subscription on the “Get” app, the monetary cost is certainly higher, but compared to free learning resources, the likelihood of obtaining valuable information is much greater, thus the total cost may actually decrease.
Economics tells us: even if statistical data is indeed accurate, showing that intermediaries earn 80-90% of the price of a one-yuan product, this percentage is already the minimum proportion earned by intermediaries. Due to competition among intermediaries, people can pay nine dimes for vegetables worth only one dime and buy them at a nearby supermarket, which is already the lowest cost people can pay under the current constraints.”
Once we understand this principle, let’s look at another special phenomenon of intermediaries—the price of medicines. In the past, we have seen many news reports about how corrupt intermediaries in the pharmaceutical industry indulge in extravagance and leisure; since the ultimate payer is the consumer, the behavior of intermediaries increasing costs can be said to be reckless and unrestrained.
However, if intermediaries could truly act without restraint, why wouldn’t they go all out and invite all their relatives and friends to lavish feasts? In fact, even corrupt individuals must be frugal and budget-conscious, managing to get things done within limited budgets. The costs of intermediary channels remain the lowest among all possible options.
Corruption is also a form of institutional cost, and it is one of the reasons for rising drug prices. However, even corrupt behavior is still subject to economic laws. The roots of corruption lie in inappropriate institutional loopholes, and to exploit these loopholes, corrupt individuals must still be budget-conscious.
Is there a way to lower drug prices? Certainly, the key is to reform the system, increase institutional flexibility, and broaden the supply channels for drugs, rather than relying solely on administrative orders. When supply increases, prices will decrease. Otherwise, focusing solely on intermediaries and rigidly reducing naturally occurring intermediary links may have the opposite effect, causing drug prices to rise instead of fall.
In most cases, intermediaries help us reduce total costs rather than increase them, and competition among intermediaries drives the total cost of logistics down to the lowest.
The Value of Resources | Rethinking Profit and Loss#
016 Lecture | Understanding Profit and Loss from a Cost Perspective#
Cost is the maximum price forgone; thus, the greater the price forgone, the greater the cost. Profit and loss are both unexpected; after an unexpected event occurs, resources must be revalued, while also seeking the reasons behind profit and loss to reduce or increase their costs, maximizing efficiency.
027 Lecture | The Marginal Revolution#
[[Marginal]] refers to the “new” brought about by the “new.”
[[Marginal cost]] is the additional cost incurred for producing one more unit of a product; [[Marginal revenue]] is the additional income generated by selling one more product; [[Marginal product]] is the additional output resulting from one more unit of input; [[Marginal utility]] is the additional enjoyment derived from consuming one more unit of a good.
[[Law of diminishing marginal utility]]: Over a unit of time, as the quantity of a certain good consumed increases, the additional enjoyment derived from consuming that good will eventually decline.
[[Marginal equilibrium]]: “Resources are limited; how can we most effectively utilize limited resources to achieve the highest utility? The solution is to allocate resources to different uses and ensure that the marginal utility obtained from these different uses tends to be equal; if there is inequality, then more resources should be continuously shifted to the uses with higher marginal utility until the marginal utility derived from this use declines to be equal to that of other uses. This is called the concept of marginal equilibrium. If a person does this, their total utility will reach its maximum.”