Understand economics from scratch

Chapter 2 After understanding the ten principles of economics, you will graduate with a bachelor's degree - an introductory course by Harvard professor Mankiw (2)
The third is task incentives.Let individuals shoulder the heavy responsibility that suits their talents, and the society provides opportunities for individuals to achieve and develop, satisfying their ambition and sense of accomplishment.

The fourth is data incentives.Obvious data have an obvious impression on people and stimulate strong motivation.Data incentive is to reflect the behavior results of each person in the form of numerical comparison, so as to motivate the progress and spur the backward.

The fifth is to strengthen incentives.Affirmation of good behavior is positive reinforcement, so that it can continue to be maintained; negation and punishment of bad behavior is negative reinforcement, so that it can remember the lesson and never make the same mistake again.

In an organization, the introduction of incentives is essential.On the one hand, the incentive mechanism can mobilize everyone's enthusiasm for work; on the other hand, it can also increase team performance and achieve the goal of "win-win".The incentive mechanism can effectively control the behavior of "being a monk for a day and hit the clock for a day", which can make team members more energetic and efficient in their work.There is a famous saying: "People can only progress when they are chased and urged", which is also the importance of the incentive mechanism.

Comparative advantage: trade makes everyone better off

The first four of Mankiw's Ten Principles of Economics all involve individuals or individual choices, and they illustrate how individuals make their own decisions.The next five, six, seven and three principles describe how people trade.

Trade makes everyone better off, Mankiw's fifth principle of economics.

In today's world, trade has become commonplace.From small individuals to large countries, trade can be seen everywhere.Moreover, with the popularity of computer networks, e-commerce is also on the rise, and people's trade activities are faster and more frequent.It can be said that in today's global village, almost everyone has a direct or indirect connection with trade.

Through trade with other people, people can obtain a wide variety of goods and services at relatively low cost.Whether in farming, making clothes, or building a house, trade allowed each individual to specialize in what they were good at.

Let us look at an old and interesting example of the division of labor and trade, concerning the production of plush and wine in England and Portugal.

Before the division of labor, Britain and Portugal both had the same labor resources, for example, 200 people for production, but the production technology of the two countries was different.Please note that Table 1-1 does not say that the UK can produce 200 units of plush and 180 units of wine at the same time, but that 200 labor forces in the UK can produce 200 units of plush, or 180 units of wine, only one can be selected , but not both.If a country chooses to produce two products at the same time, for example, the United Kingdom produces plush and wine at the same time, due to the limited labor resources, there are only 200 laborers here, so it is impossible to produce 200 units of plush and 180 units of wine at the same time wine.The situation in Portugal is similar. A labor force of 200 people in Portugal can produce 160 units of plush, or 200 units of wine.

Britain has an absolute advantage in producing plush, so Britain should choose to specialize in the production and export of plush; while Portugal has an absolute advantage in producing wine, it should specialize in producing and exporting wine.In this way, assuming that there are only these two countries in the world, this is a simple arithmetic problem. We can calculate the output of two products in the world, 200 units of plush and 200 units of wine.This is the trade situation of absolute cost advantage proposed by Adam Smith, the originator of economics.

Let’s look again at David Ricardo’s trade case of comparative advantage.Ricardo believed that a country should fully produce and export the products it has a comparative advantage in, and not produce but import those products it has a comparative disadvantage in.Comparative advantage is actually easy to understand. Let’s look at the new production and trade situation below.

Now Portugal can produce 200 units of plush with a labor force of 240, compared to 160 units in the past.In this way, Portugal has an absolute advantage not only in the production of wine, but also in the production of plush, and Britain is at an absolute disadvantage in the production of both commodities.If according to Smith's point of view, will there still be trade between them?Won't.But in Ricardo's view, they trade.Because Britain has a comparative advantage in specialized production of wine, and Portugal also has a comparative advantage in specialized production of plush, so after the trade between the two parties, their respective conditions will still improve.This is the "lesser of two disadvantages" of comparative advantage. That is to say, if a country is at a disadvantage in the production of two products, it only needs to choose to specialize in the production of those products with relatively small disadvantages, and through export trade , can improve the welfare status of the country.

The above mentioned is traditional international trade, and with the continuous improvement of productivity, the level of the world economy is rising, and successful international trade can make the economic situation of each country better.For example, an agricultural country in Southeast Asia is rich in rice, while an industrial country far away in Europe has a well-developed precision machine tool industry.Two countries sit together and negotiate, and finally, the former exports rice to the latter and imports precision machine tools from the latter, and the result is that both countries can enjoy the benefits of rice and machine tools—this is the benefit of international trade .

The invisible hand: Markets are a great way to organize economic activity

Mankiw's sixth economic principle is "the invisible hand".

According to the Bible "Book of Bethlehem", Belshazzar, the king of Babylon, held a feast in the palace. While he was drinking, he suddenly showed a hand and wrote three mysterious words on the palace wall: "Mene", " Tikler", "Piles".Everyone was puzzled.The prophet Daniel said: "You are blaspheming the gods. For this reason, God released a hand and wrote these words. It means: 'Mini'-your kingdom has come to an end,'Tikle'-you Nothing in the scales, 'Piles'—thy kingdom is about to fall."

Inspired by this, Smith proposed the principle of "invisible hand".The meaning of this proposition: Everyone in society is trying to pursue personal satisfaction. Generally speaking, he does not try to improve the public welfare, and he does not know how much the public welfare he promotes. But in doing so, there is a " The "invisible" hand leads him to promote the good of society, and with greater effect than he really intends to promote it.This "invisible hand" is actually the fact that people consciously and spontaneously adjust their behavior according to the role of the market mechanism, and realize the maximization of consumption utility and profit.

In 1787, Adam Smith went to London to meet his faithful believer, the famous Prime Minister Peter in British history.Smith was the last to arrive at the meeting place, and when he entered the house, everyone rose to welcome him.Smith said: "Everyone, please sit down." Pete replied: "No, you sit down, we sit down again, we are all your students." The principle of "hand" was regarded as a classic by celebrities from all walks of life at that time.Even now, Smith's views remain central to modern economics.

For everyone, the market is an all-too-familiar place.When a person enters a supermarket to buy something, he enters a market, so to speak.To some extent, economics has developed along with the development of the market.

Imagine what our life would be like without the market?How do we get what we want, such as food, clothes, daily necessities, etc.Some people may ask: "I go to the market every day, including vegetable markets, clothing markets, etc., but I don't quite understand why it is a market instead of other similar methods to organize economic activities. What is so good about the market?"

The importance of the market lies in that it provides a mechanism for people to trade with each other, whether it is a company or an individual, and the incentives of prices and interests guide their respective choices. This is what we generally call market regulation.

Market regulation is like an invisible hand, and price is the tool used by the invisible hand to guide economic activities.

For example, if cabbage in the market sells for 2 yuan per catty, but radishes only sell for 1 cents per catty, farmers will decide to grow more cabbages, and the land originally used to grow radishes will also be used to grow cabbages. Three months later, a large amount of cabbage flowed into the market, but no one supplied radish.The excessive supply of cabbage caused its price to plummet to two cents a catty, while the price of radish rose sharply due to insufficient supply.At this moment, farmers will think that planting cabbage is not only unprofitable, but may even lose money, and planting radishes can bring more income.So farmers began to pull out cabbages and plant radishes instead. When a large number of radishes flooded into the market, they would also encounter the same market results as growing cabbages.Repeatedly, there will be a state of balance between supply and demand in the market.

On the surface, the above story is just the farmers' choice between radish and cabbage, but in fact, this is a kind of market regulation.Adam Smith wrote in the book: "He generally neither intends to promote the public interest, nor knows to what extent he himself promotes that interest. Since he would rather invest in the support of domestic industry than foreign industry, he only thinking of his own safety; and as he manages his estate in such a way as to maximize the value of its produce, he thinks only of his own interest. On this, as on many others, he suffers Guided by an invisible hand, to try to achieve an end which he did not intend to achieve. Nor is it harmful to society because it is not what he intended. His pursuit of his own interest often enables him to achieve more effectively promote the interests of society when it is intended."

Adam Smith used this "invisible hand" to introduce the importance of the market economy for economic activities, through decentralized, numerous individual decisions to conduct mutual transactions in the market, so that the interests of society can be promoted.The core advantage of the market economy is the competition mechanism. The competition mechanism brings "survival of the fittest", and the pressure of survival of the fittest drives everyone to work harder, so that the efficiency of the whole society will be improved, and more wealth will be created.

Of course, although market regulation is very important to economic activities, the market is by no means omnipotent, and "market failure" is common, which just shows that market regulation itself cannot effectively allocate resources.Mankiw asks in the book: Can the "invisible hand" of the market stop paper companies from polluting the environment?For the answer to this question, we next talk about Mankiw's seventh principle of economics: the government can sometimes improve market outcomes.

Government Intervention: Governments Can Sometimes Improve Market Outcomes

Mankiw's seventh principle of economics is that "governments can sometimes improve market outcomes."

Utopia is in chaos, the economy of the whole society is completely paralyzed, factories are closed, workers are unemployed, and people are helpless.At this time, the government decided to build public works and hired 200 people to dig a big hole.When 200 people are hired to dig a pit, 200 shovels need to be distributed; when the shovels are distributed, the enterprises that produce the shovels start working, and the enterprises that produce steel also start working; when the shovels are distributed, the workers have to be paid wages, and the food consumption industry also develops at this time Woke up.By digging pits, the consumption of the entire national economy is driven.The big hole was finally dug, and the government hired another 200 people to fill the big hole, which required another 200 shovels... In this way, the depressed market finally recovered a little bit.After the economy recovered, the government passed taxes, repaid the bonds issued when the pit was dug, and everything went back to business as usual.

This famous economic fable "digging a hole" comes from a book "The General Theory of Employment, Interest and Money" written by the British economist Keynes. Keynes derived the theory of government intervention through this fable.

As we all know, in the western economic circles before Keynes, people generally accepted the views of the classical school represented by Adam Smith, that is, in a market economy with free competition, the government only plays an extremely simple passive role—"night watchman" ".Under the influence of the market economy mechanism, the government should not be allowed to do anything that can achieve higher efficiency by relying on the market.State institutions only perform some essential tasks, such as protecting private property from encroachment, but never directly intervene in the operation of the economy.

However, it is inevitable that there will be some irregularities in the increasingly large economic system. When such abnormalities are enlarged, it will affect people's lives and the rapid development of the entire economic system.At this time, the government will stand in the interests of the public and coordinate with the economic development of the entire country.Economist Mankiw summed it up as: the government can improve market outcomes at a certain time.

Facts have proved that the market economy of free competition has led to serious wealth inequality, which has caused huge periodic economic shocks and sharp social conflicts. The global economic crisis that broke out from 1929 to 1933 was the result of the outbreak of the shortcomings of liberal economics.Therefore, government interventionists represented by Keynes surfaced.They pointed out that a prominent feature of the modern market economy is that the government no longer just plays the role of a "night watchman", but a "visible hand".The government must balance and adjust the major structural problems in the economic operation, which is the theory of government intervention.

(End of this chapter)