I think I’m beginning to understand part of the reason that some people lack an understanding of economics. Some people just cannot get past the logic and reasoning that comprise economic principles. This leads to frustration, dismissal, and a general “we’re getting nowhere” in conversation.
While on a message board, I found myself in a debate about “Economics 101.” My opponent believed that the economic world does not operate on the principles of basic economics. I asked about the validity of the laws of demand and decreasing marginal utility. According to this person, they only worked in theory, but not in practice. When challenged to come up with an example of either of these two concepts being incorrect, he replied:
Sure. The core of the law of demand. The law of demand states, in essence, “if all else is equal, the more the price rises, the lower the demand, and vice versa”.
There is no real circumstance where “if all else is equal” will ever be met. There is no real, actual, real-life good or service where all else is equal. Absolutely none. At all. Zero. None.
I’ve come across this view before. It came from someone who actually had a degree in economics. He was hung up on this idea of ceteris paribus, or “all other things being equal.” The incorrect interpretation of a ceteris paribus statement, as demonstrated by my debate partner above, is that if the condition of all else being equal does not exist, then demand rising with the falling of price is no longer true.
What the law of demand actually says is this: lowering the price of something will not decrease its demand and vice versa; however, price is not the only variable that influences demand. The previously stated relationship of price and demand will always hold true, but the other factors may push the demand in one direction or the other.
To more easily demonstrate this, consider the following mathematical equation:
A + B + C + D + E + F = X
The variable A has a direct relationship with X. If we hold all the other variables equal, increasing A will increase X and decreasing A will decrease X. Now, let’s make no assumptions about the other variables. If we increase the value of A, will the value of X also increase? We do not know because we do not know how the other variables are changing, but we cannot deny the fact that there is a direct relationship between A and X.
This idea can, of course, be applied elsewhere in the field of economics. In an article about free trade and the law of comparative advantage, Robert Murphy says:
The case for free trade is that, other things equal, a given country will be materially richer if its government doesn’t impose taxes on its own people when they buy foreign goods. As such, the proposition is not open to empirical testing. Those wishing to demonstrate that free trade does not bring a higher standard of living need to demonstrate the flaw in the argument for it; relying on historical episodes (in which many other variables can change) is an inconclusive test, and may lead the researcher to confuse correlation with causation.
This is a simple concept, but it is one that is lost on many people. The misunderstanding of this simple logic severely limits the ability to make accurate deductions based on simple economic principles. Even worse, it can cause someone to proclaim that a simple economic principle is not true and that it only works in theory, but not practice. Be mindful of this when debating as your opponent may simply be confused about basic logic.