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 are already embedded in 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. You want to break free from the control of intuition and experience, understand the laws governing the operation of the economic society, overturn the common sense and fixed mindsets you have accumulated over the years, and respond appropriately to this society formed by a vast number of interconnected 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 expand your horizons, boost your confidence, and enhance your appreciation of theories.
Humanity faces four fundamental constraints: scarcity of goods, limited lifespan, 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 a POW Camp#
An article by Redford titled "Economic Organization in a POW Camp" discusses some economic activities that occurred in German POW camps during World War II, including price fluctuations, Gresham's Law, inflation, and deflation, suggesting that market economies adhere to economic laws, including China's market economy.
“The significant improvement in a POW'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 be created from nothing. And the bag of food that the pastor holds is proof of his ability to create happiness.”
Where there is trade, there are prices, and 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. To encourage wealth creation, society must develop positively, and behind fairness lies 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 and piled up 18 heaps of manure. After piling up the manure, they found it too heavy to move, so they went back to get a cart, planning to return the next day to transport it. However, they did not mark any of 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 intended to remove it. The patrol officer said he did not 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 and found 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 is the “Origin Theory.” Some argue that the true owner of the manure is the horse, as it produced it; one could further argue that the manure belongs to the horse's owner. But the problem is, the horse's owner abandoned ownership by leaving the manure on the road.
The second is the “Location Theory.” The defendant claimed that once the manure fell on the road, it became part of the road, which is public property, so anyone who sees it can take it. The plaintiff had the helpers pile the manure, which only changed its location, not its ownership, thus the manure did not belong to the plaintiff.
The third is the “Marking Theory.” Some argued in court that the key point is whether the plaintiff marked the manure; if not, they cannot blame others for taking it.
The fourth is the “Labor Theory.” The plaintiff insisted that the helpers spent effort piling the manure, so it should belong to the plaintiff.”
Any product of human labor is wealth; all wealth has an owner; and wealth with an owner is protected by law. One must respect others' wealth and cannot take it just because it is there. As long as there is such consensus, and this consensus becomes tradition, people in that 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, that village will become prosperous.
Respecting others' wealth, not taking advantage of opportunities, 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 the social moral norms can help reduce this consumption, the more wealth will accumulate in society.
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, because they are effective, they are 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 long-term societal 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 comparisons and choices; 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 forward. Supporters of the Broken Window Theory argue that destruction leads to progress; hardship fosters prosperity, and destruction itself is good.
This way of thinking is very common in society. Whenever society experiences disasters, whenever there are hurricanes, earthquakes, or tsunamis, some economists will stand up and say that while 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 realize that those mistakes were necessary for their 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 the elderly 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 workers without jobs. Thus, the prolonged working time of the elderly or overly advanced machines is detrimental to social development.”- Saving Resources
“Steven Levitt from the University of Chicago wrote a popular book called 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, thus 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 consumed 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 occurred, no human destruction happened, if people lived healthier lives, and machines were more advanced, the undamaged resources and saved time and labor could have been used to produce other more effective things; and if more plastic packaging were 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 applied to, and how much hidden benefit would arise from the additional resources spent. Understanding this issue requires a bit of imagination.
Of course, it is necessary to clarify that not everything invisible is more important than what is visible. Rather, it means that whenever we make decisions, we must fully consider those temporarily invisible, or even eternally invisible, factors.
04 Lecture | Distinguishing Wishes from Results#
Good intentions do not necessarily lead to good outcomes. Economics studies objective laws that are independent of human will and examines phenomena that contradict intentions.
“May God protect us from the attacks of friends—if the attack comes from enemies, we could at least 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 identifiable as good or bad. However, it is the thoughts wrapped in good intentions that are harder for us to recognize.”
Economics does not study the issue of “good people doing good things and bad people doing bad things,” but rather examines phenomena that contradict intentions. It asks why good intentions sometimes lead to bad outcomes. For example:
(1) The minimum wage system, originally intended to protect the poor, ultimately worsened their situation;
(2) The equal pay system, meant to protect the interests of vulnerable groups, ended up harming them;
(3) Welfare systems, designed to provide support for those without means, ultimately made their situations worse;
(4) Various laws protecting endangered species have resulted in fewer of 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 once a law is passed, it does not end the matter but rather introduces a new variable. Humans are proactive; under this new law, everyone will have their countermeasures. Ultimately, the direction of events will diverge significantly from our expectations, and it is these divergences that hold the most research value.
Economists are concerned about the harmful consequences of economic policies enacted with good intentions. The connection between economics and natural sciences lies in its study of objective laws that are independent of human will—economics focuses on phenomena that contradict intentions rather than 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 among two major economists. Alchian published a lecture stating that survival depends on conditions, not on rationality. This is also the perspective of Darwin’s theory of natural selection, applying evolutionary theory to economic issues, which is Alchian's contribution.
The debate over whether humans are rational has been ongoing for a long time. Two economists once engaged in such a debate. One was Richard Lester, who found through research that entrepreneurs do not operate as economic theory suggests.
For example, when the proportion of employee wages rises, entrepreneurs do not reduce hiring, nor do product prices change significantly; entrepreneurs are not very sensitive to changes in costs. Only when the supply-demand relationship changes does the price of the product change significantly. This shows that entrepreneurs do not always make decisions based on the optimization principles proposed by economists. The marginal cost-benefit analysis in economic theory does not align with reality.
The other economist, Fritz Machlup, defended economics. He argued that while individuals may not understand economics or calculate with a calculator when making decisions, their behavior unconsciously aligns with economic assumptions and the principle of maximization.
He illustrated that when a person drives, they sometimes accelerate, sometimes decelerate, sometimes change lanes, and sometimes overtake, without using a calculator, yet they are following the principles 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 filled with uncertainty. From a statistical perspective, as long as uncertainty exists, people cannot determine the so-called optimal solution; at most, they can identify an optimal probability range.
For instance, there are two investment options: one is high-risk, high-return, and the other is low-risk, low-return. 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 but merely survival!
Alchian stated that economics concerns 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 concerns the conditions for survival. In other words, economics studies the circumstances under which individuals can survive and how changes in conditions affect survival.
Rules of the Game Determine Winning Probabilities
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 be moral. So, what choice should be made? Human nature is selfish, but it also possesses compassion and love, which diminish with distance. Helping strangers cannot rely solely on love; market coordination is also necessary. Small circles rely on love, while the larger world relies on the market.
“Every individual, without needing to care about social welfare or knowing how to promote it, only needs to care for themselves and pursue their own welfare. However, in pursuing their own welfare, an invisible hand will turn their efforts into a promotion of public good. This invisible hand will allow their selfishness to drive improvements in social welfare.”
/- Adam Smith, "The Wealth of Nations"
Human nature is selfish, yet 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 only 17 years later, in 1776, did he publish "The Wealth of Nations." "The Theory of Moral Sentiments" contains Smith's entire theoretical framework, while "The Wealth of Nations" is only a part of it, despite being longer and more famous.
Smith's first point is that humans are selfish; those who are completely unselfish and do not even love themselves 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 in humans equates to love.
Smith's third point is that “human compassion rapidly diminishes as the distance between people increases.
A person may strive their entire life to gain the favor of a few, yet in civilized society, they constantly need the cooperation and assistance of the majority. Other animals can achieve independence upon reaching maturity, while humans almost always need the assistance of their peers. Simply relying on others' goodwill is not feasible.
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 express our needs but rather what benefits them.
Do not be overly calculative 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 Marvelous 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 is not just one layer but six, containing complex components like nitrocellulose and synthetic resins; the lead contains not only graphite but also clay and talc; 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 around the world.
Secondly, its manufacturing process is also very complex. Taking the lead manufacturing as an example: first, graphite and clay must be mixed in a certain ratio; then, the prepared materials are mixed in a machine and extruded into leads of specific sizes; next, they are heated, dried, and sintered at high temperatures to achieve certain strength and hardness; finally, they are treated with oil. Just the lead manufacturing involves 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, we also need to produce the barrel and the cap. To produce the barrel, trees must be cut down; to cut down trees, steel is needed; to refine steel, mining is necessary; miners need to eat. Workers not only need food but also coffee. To drink coffee, it must be transported from far away. For shipping, ships must be built, and to build ships... This reasoning continues, involving thousands of people and generations of effort.
The Market Forces Create the Pencil Myth
A pencil connects thousands of people together, and its marvel 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 marvel.
Secondly, each person involved in producing the pencil does not know that their efforts will lead to the creation of a pencil; each person merely does their part. Some may not even know what a pencil is, while others may not need a pencil, yet their efforts contribute to its production.
Moreover, the people producing the pencil live in different corners of the world; they do not know each other, speak different languages, practice different religions, and may even harbor mutual animosity. 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 for a pencil is minimal. You only need to work for about ten minutes to earn enough money to buy several pencils.
What a marvelous phenomenon! 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 marvelous story of the pencil 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 the meaning of 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 substantial 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 stark contrast in outcomes 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 is the most solid foundation for the edifice of economics? 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 obvious examples. Geographic location is also scarce. When we look down from an airplane, we see vast land, and it seems that land is infinite. However, all major cities—Beijing, Shanghai, Guangzhou, Shenzhen—are only as small as a pinhole 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 land may be abundant, geographic location is scarce.
Causes of Scarcity
What causes scarcity? There are two reasons: first, what we want, others want too; second, human needs are constantly changing and upgrading.
To discuss the first reason, what we desire, others desire as well. We often experience this when we go to a store looking for our favorite product, only to find that its price is at its highest. What does this indicate? It suggests 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 alcohol; once they have meat and alcohol, they want to stock up on steamed buns and alcohol to go catch seafood, and they want to use steamed buns, meat, and fish to support artists making movies. A certain mountaineer faced criticism 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 requires 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.
Due to the perpetual scarcity of resources, when people utilize limited resources, they must choose how to allocate them; whenever a choice must be made, some standard of selection must be adopted; once a selection standard is established, it implies differentiation in treatment, and differentiation in treatment is discrimination.
Discrimination is Inevitable
The concepts of scarcity, choice, differentiation, and discrimination are interconnected; the presence of 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 fairness be achieved. Another Justice countered that judges who support the civil rights movement are, in fact, 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 will inherently involve discrimination.
Discrimination is not the problem; how to discriminate is the problem.
First, since resources are scarce, schools must inevitably choose students during admissions; choice is unavoidable, thus discrimination is also unavoidable. Whether supporters or opponents of civil rights movements, no one can claim their stance is neutral; everyone’s position is biased.
Second, since discrimination is unavoidable, those who discriminate must bear the consequences of their actions.
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 overall group. Whether openly favoring disadvantaged groups or subtly doing so, schools must bear the consequences of their admissions and discrimination.
Fourth, beyond schools, employers of graduates, who are the bearers of 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 related to race or skin color. Employers should have the right to know.
The case of Bakke v. 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 differentiated treatment; although discrimination is inevitable, the more one discriminates against others, the greater the cost they must bear themselves.
Those who discriminate against others must also pay the price.
/- Gary Becker, "The Economics of Discrimination"
Origins of Discrimination
Discrimination, or differentiated 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 perspective is a form of discrimination. However, understanding strangers comes with costs; generalizing (discrimination) allows us to obtain preliminary 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 the costs of discrimination are low, people will indulge their discriminatory habits; when the costs are high, they will restrain their discriminatory tendencies.
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 prohibiting reasonable discrimination by the government can lead to negative consequences.
The Story of Discrimination Against Chinese in Southeast Asia
People generally believe that those who discriminate against others are relatively powerful. However, some have found that this is not always the case. For example, Chinese in America are a disadvantaged group, yet they often discriminate against others. In many industries, such as gambling, retail, and finance, Chinese tend to form their own circles and do not engage with outsiders. What is the reason for this?
A Chinese female economist, Janet Landa, provided a very insightful explanation.
Landa, a Chinese Malaysian, grew up in Malaysia. She noticed that locals often exhibited anti-Chinese behavior, one reason being that Chinese tended to exclude non-Chinese in business dealings.
To explore further, Landa found a rubber plantation in the area, which was controlled by five major families from Fujian, Quanzhou, and Yongchun. These five families are surnamed Chen, Li, Lin, Huang, and Yan. She discovered that the emphasis on Confucian values among the Chinese was a means of calculating relationships, aimed at credit rating.
The local Chinese categorized 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; the seventh rank is non-Chinese, including Europeans, Indians, and local Malaysians, etc.
After categorizing people into seven ranks, they had different terms for business dealings based on these ranks, and the interest rates for loans varied accordingly.
The Efficiency Implications of Discriminatory Behavior
Landa's analysis revealed that the practices of the Minnan people make sense. Chinese living in Malaysia face language barriers and are dependent on the goodwill of others; if a loan is not repaid, it is difficult to take legal action. Lacking connections with the government and understanding of local laws, the formal judicial system cannot protect them, so they must rely on this relational 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, all of which 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 typically shrewd and cautious; why is it that in other industries, no merchants package and sell items only to deceive people?
The real reason is this: historically, the homeownership rate in the U.S. 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 injustices in society, supporting so-called disadvantaged groups, and encouraging them to buy homes.
In 1991, data on lending from American commercial banks was made public, revealing that most loan recipients were white, while minorities and disadvantaged groups had significantly lower chances of obtaining loans. At this point, people felt that commercial banks had a strong tendency to discriminate against disadvantaged 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 disadvantaged groups.
In reality, commercial banks, under competitive pressure, do not discriminate against disadvantaged groups casually. If someone can repay a mortgage and the bank refuses to lend, that would be a loss for the bank. However, the public did not believe this. Following the release of the report, a movement arose demanding that more loans be granted to disadvantaged groups.
Government Coercion and Incentives Against Discrimination Led to the Subprime Mortgage Crisis
Commercial banks are business entities and will not casually relax lending standards or take on undue risks. To encourage banks to lend, the government employed both coercion and incentives.
The so-called coercion means that the government stipulated that if banks discriminate against disadvantaged groups and this is verified, they would face hefty fines. The so-called incentives involve having two government-backed real estate companies—Fannie Mae and Freddie Mac—purchase the mortgage contracts from commercial banks, effectively transferring all lending risks to the government.
Seeing that no matter how they lend, the government would back them, banks naturally changed their mindset, no longer conducting strict reviews of borrowers; instead, they encouraged everyone to borrow.
When all banks acted this way, the real estate market naturally thrived in the short term. However, the traditionally cautious banks knew that these debts were toxic, so they packaged and sold these debts, passing the hot potato without knowing who would end up with the toxic assets. Banks also believed in the notion of “too big to fail”—the more debt incurred, the broader the impact, and the government would not let them fail, thus they acted without restraint.
The final result was 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 the government alters the standards of discrimination for political reasons, 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 devoted significant effort to the concept of cost, making lasting contributions, some even receiving Nobel Prizes.
The reason the concept of cost is profound and ever-changing is that it is a product of human imagination. From the concrete to the abstract, from the individual to the collective, from static to dynamic, economics has formed a series of different cost concepts.
Preference in Choice | The Value of What is Given Up#
013 Lecture | Defining Cost in One Sentence#
Using the story of a quarry to illustrate what cost is: cost is the maximum value given up among all choices, and sunk costs do not count as costs; costs are about looking 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 paid for what is given up. (Cost is the best opportunity foregone.)
Sunk costs are not costs. We say that cost is the maximum price paid for what is given up, but if there is nothing to give up, then 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 paid for what is given up, which is “the highest value among all the options given up,” but the question is, all the options that were given up were not realized, right? Since they were not realized, how do we know what we gave up?
To know what was given up and how valuable those things were, 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 airplanes given up; the cost of making airplanes is the value of the socks given up. So, for Chinese workers, which is the higher cost: making socks or making airplanes?
014 Lecture | Your Costs are Determined by Others#
Cost is the maximum price paid for what is given up, while negative feelings are not costs; your costs are also determined by others in society, including the scope of your profession, which is also 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, the process of building the pool involves many negative feelings: hard work, fatigue, a period of mess, etc., but these are not the costs of building the pool because nothing is given up. Once the pool is built, we can no longer set up a tent, and the cost of building the pool is the value of the tent we gave up.
We can clarify this concept with a few 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 pool is 30 points; if we assume that setting up a tent brings 50 points of positive feelings and 10 points of negative feelings, then the tent gives us a net happiness value of 40 points.
At this point, we need to compare the net happiness values of the swimming pool (30 points) and the tent (40 points). In other words, the cost of building a swimming pool is the 40 points of net happiness value from the tent that we gave up, not the 70 points of negative feelings from building the pool. Similarly, when we set up a tent, its cost is the 30 points of net happiness value from the swimming pool that we gave up, not the 10 points of negative feelings from setting up the tent.
In summary, the swimming pool and the tent are mutually costs; we should not view the hard work of building the pool or the effort of setting up the tent as the costs of building the pool or the tent.
Negative feelings are not our costs; only the maximum price paid for what we need to give up is the cost. And how much this cost is, what determines it?
Your costs are determined by others
Suppose I have an ancestral shop on Chang'an Street that specializes in tea eggs. My assumption is that this shop is my property, so I do not need to pay rent, making my cost of running the tea egg business almost zero. However, this assumption is incorrect because cost is the maximum price paid for what is given up, not the rent of the shop.
Continuing to use this shop to sell tea eggs means giving up other possibilities, such as renting it out. By insisting on selling tea eggs, I forgo the rental income from 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 others in society who determine 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 intentions,” but why is it so difficult to do so?
Because when you had your “original intention,” the choices available were not as many, making it easier to stick to it. However, as circumstances change and opportunities increase, it becomes increasingly difficult to maintain your original views, and the costs of doing so rise, leading to more things being given up. Thus, “not forgetting one’s original intention” is not an easy task.
Why? Because the cost of maintaining your “original intention” is the maximum price paid for what is given up, and this 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 determines your profession today? You would certainly say: my life is mine, and I decide my profession, or my parents help me make that decision.
Really?
Economics does not see it this way. In fact, your life is analogous to the shop selling tea eggs. Yes, you own your life, but how you spend your life and what purposes you use it for are determined by others in society.
Your choice of profession is largely influenced by others' perceptions of 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 forgo is the income from being a programmer. Can you bear that? 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 us the greatest benefits, can maximally satisfy our interests, and has the lowest costs.”
You might think that the range of professions you can choose from is very broad, but consider the professions from 50 years ago—can you choose them now? What about those from 100 years ago?
In reality, the professions you can choose today are just a very narrow range, which is the range of professions that most people recognize and exist 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 perspective is: you own your life, but how you spend your life and how you choose your profession are 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 the entirety of 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 may spend more time, and the likelihood of buying counterfeit or inferior goods increases; these are all costs associated with thrift shopping. All these costs combined constitute the total cost of thrift shopping.
Similarly, if our residence is farther from the city center, the rent may be lower, but we also spend more time, which should be factored into the cost; if we buy items 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 overall cost decreases.
Economics tells us: even if statistical data is accurate, indicating that intermediaries earn 80-90% of the price of a one-yuan product, this percentage represents the minimum proportion that intermediaries can earn. Due to competition among intermediaries, people can pay nine mao for vegetables worth only one mao at the market, thus obtaining them at the lowest possible cost under 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 lavish lifestyles; since the ultimate payer is the consumer, the actions of intermediaries to inflate costs can seem reckless and unrestrained.
However, if intermediaries could act without restraint, why wouldn’t they invite all their relatives and friends to lavish feasts? In fact, even corrupt individuals must be frugal, managing costs and ensuring that things are done well within a limited budget. The costs of intermediary channels remain the lowest among all possible options.
Corruption is also a form of institutional cost and one of the reasons for rising drug prices. However, even corrupt behavior is still subject to economic laws. The root of corruption lies in inappropriate institutional loopholes, and to exploit these loopholes, corrupt individuals must still be cost-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. Increased supply will lead to lower prices. Otherwise, merely focusing 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 logistics costs to the lowest possible level.
The Value of Resources | Rethinking Profit and Loss#
016 Lecture | Understanding Profit and Loss from a Cost Perspective#
Cost is the maximum price paid for what is given up; thus, the greater the cost of what is given up, 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 minimize or maximize costs, thereby maximizing benefits.
027 Lecture | The Marginal Revolution#
[[Marginal]] refers to the “new” brought about by the “new.”
[[Marginal cost]] is the additional cost incurred for each additional unit of product produced; [[Marginal revenue]] is the additional income generated from selling one more product; [[Marginal product]] is the additional output resulting from each additional input; [[Marginal utility]] is the additional enjoyment derived from consuming one more unit of a good.
[[Law of Diminishing Marginal Utility]]: As the quantity of a certain good consumed increases over a unit of time, 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 method is to allocate resources to different uses and ensure that the marginal utility obtained from these different uses is approximately equal; if there is inequality, more resources should be continuously shifted to the uses with higher marginal utility until the marginal utility derived from that use declines to equal the marginal utility of other uses. This is called the concept of marginal equilibrium. If a person does this, their total utility will reach its maximum.”