Basic Economics: A Citizen's Guide to the Economy

These notes are old and were written while reading — they don’t necessarily reflect my current views.

He starts off with the price mechanism and points out how it is more efficient in allocating scarce resources than any other system known to man. He gives some nice examples of the effects of price fixing and other government interventions. He then goes on to say that this is still rational from the perspective of a democratic government, as people seem to be happy with it and it secures key voter groups. This of course is not solved by a dictatorship, as Acemoglu points out that there similar things need to be done in order to secure key supporters.

The question remains if this government intervention increases utility, as people are not aware of the disutility in spending power and lower standard of living? Is there a correlation between income and how people perceive this? Is there actual exodus of capital? Does this then ruin the interventionist states in the long run?

He makes an interesting point about market structure in lower income countries and that we should not assume inefficiencies just because our market structure is different. African farmers need e.g. more middle man to sell their crops. This is not inefficient, but just due to the smaller sizes of production and lower storage capabilities. Therefore, the middle man are efficient for the situation, even if they would not be here.

He makes an interesting point about monopolies, where he shows that the fear of underpricing to gain a monopoly position is highly overstated and never really happened before. We break up monopolies mostly because the charge prices that are too low, not because they charge prices that might hurt the consumers. It would in fact be a foolish strategy to price too low in order to gain market share just in the expectation that one might charge above market prices in the future. This plan is defiantly costly and can be easily crossed by: even one competitor remaining, substitute product, new market entries in the then so attractive market or government intervention. Why would anyone take that risk? They shouldn’t; they wouldn’t; they don’t.

Another rather interesting point was made about income distribution and how the official statistics are highly misleading. We divide the population in quantiles of the population and use these artificial entities as a unit of analysis. This shows a skewed picture of reality, as this implies that people stay in these groups, which is not at all the case. The movement between groups from year to year is enormous and has large correlations with age. Most of the lowest earners in the US in any given years live in houses that are worth >300k, as they make significant losses, while gaining in other years. Those are not really poor people, but their income numbers can be used to drastically decrease the average income of the bottom half (as it is largely negative), therefore a median might be the more appropriate measure. Furthermore, it is very uncommon for people to stay in a low income quantile. The vast majority of people starts out at the bottom in their twenties, get in the highest quantile at some point in their life and retire in the middle. Income distribution is much more a generational conflict than a class conflict.

He makes a very important point that GDP is a very imperfect measure. This is not important for economists, as everyone with a basic understanding of GDP (every economist) knows that, but for the people (looking at you Ms. Perez, Ms. Göbel) believe that economists care much about GDP.

The fact that when US states raise taxes, tax income decreases indicates that we are at least at peak efficiency taxation. The fact that lowering taxes in the US decrease taxes indicates that we are actually far above that.

Progressive income taxes miss their purposes, as they hit average people during their high earning years hardest, while genuinely rich people often pay lower effective tax rates, as they are more able to adapt their behavior (e.g. with investing; or due to the fact that they are self employed and control their payout instead of having to receive a check where the tax is already deducted).

In the end he goes over the history of economics, which is very well done.

Maybe look at Carl Menger and Alfred Marshall.