Richard N. Lorenc – Twelve Economic Concepts Everyone Should Know

When I tell people that I work at the Foundation for Economic Education, they sometimes ask: “What economic ideas should people understand?”

We at FEE have thought about this quite a lot for our articles, courses, seminars, and videos. We have distilled “economic thinking” into 12 key concepts. The following list has guided us internally for a few years, and I figure it’s now time to share it with the world.

1. Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.

2. Subjective value: The value of any good or service is determined by the individual human mind.

3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.

4. Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.

5. Incentives: Individuals act to maximize their own reward.

6. Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.

7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.

8. Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.

9. Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.

10. Action is purposeful: Each person makes choices with the intention of improving his or her condition.

11. Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.

12. Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.

You might think about all the ways and places these principles appear–as you shop, socialize, and plan your future. As we like to say, economics is everywhere!

Richard N. Lorenc


Richard N. Lorenc

Richard N. Lorenc is the Chief Operating Officer of FEE and serves as managing director of FEE’s Youth Education & Audience Research (“YEAR”) project to develop and promote new content and distribution techniques for free-market ideas.

This article was originally published on FEE.org. Read the original article.

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12 Responses to Richard N. Lorenc – Twelve Economic Concepts Everyone Should Know

  1. Confused Old Misfit

    For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.

    I would like you to show your work for this proposition.

  2. Rafe Champion

    This was also one of the items in the Roundup yesterday.

  3. Lem

    Love ’em all. Number 7 especially.

  4. Empire

    Rothbard from the link in the post:

    In short, there are no human rights that are separable from property rights. The human right of free speech is only the prop­erty right to hire an assembly hall from the owners, to speak to those who are willing to listen, to buy materials and then print leaf­lets or books and sell them to those who are willing to buy. There is no extra right of free speech beyond the property rights that we can enumerate in any given case. In all seeming cases of human rights, then, the proper course is to find and identify the property rights involved. And this procedure will resolve any appar­ent conflicts of rights; for prop­erty rights are always precise and legally recognizable.

  5. john

    Could you explain why quantitative easing is a bad idea please?

  6. Jannie

    13. In the race of life, always back self-interest; at least you know it’s trying

    Jack Lang

  7. Paul Farmer

    Good list but no 6 isn’t technically comparative advantage unless you take the word “cost” as meaning including opportunity costs. In the absence of this , he has really only described specialisation which in my view should be No 1 as it is the entire foundation of our economy along with property rights.

    The better way to express 6 is society is based on specialisation and division of labour, and that leads to gains both within a society through the mechanism of trade and by trading with other societies also as Riccardo extrapolated Smith’s idea to the world at large .

    Specialisation essentially results in a form of “absolute advantage” for an economic agent relative to a generalist. In the case stated, let someone else produce it and sell it to you if they can do it for a lower cost than you can do it.

    Comparative advantage is more than this but ….. It is the novel idea that Riccardo cottoned onto that even if a society, say Society A can produce all goods in a more technically efficient way than another society, say Society B, A should not be tempted to try and be all things to all people and produce both A & B, rather it still should focus exclusively on what it does best and let B do what they do best and then trade between the two, this maximizes overall output and gains for both parties through the combination of both specialization and trade.

    Returning to the cited example, it could be described as even if I can make a product for a lower cost than you ( so I have an absolute advantage) , I am still better off buying it from you, if I can instead use my time instead to make something else worth even more and sell that and then use those funds to buy all of whatever you are selling that I need.

  8. Andrew M.

    3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.

    The problem with that definition is that the opportunity cost of option #1 depends on whatever fanciful alternative scenario is used for option #2, so you can make the opportunity cost arbitrarily big or small just by free choice in a basically unconstrained variable. Opportunity cost is nonsensical at worst and confirmation bias at best.

    7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.

    Surely that is contingent upon technology rather than being an absolute truth. Could a single super-sized AI do the whole world’s production planning? Probably a few dozen Sci-Fi novels have been written about that, but has any serious economic paper been written about it?

  9. Barry 1963

    I’ll tie number 4 in with the current Australia Day controversy. Australia as we know it was created by government action. The British government financed and established the colony. A lassiez faire system used by the indigenous population was supplanted by an authoritarian state. Almost everything conservatives complain about happened on Australia Day, yet they still want to celebrate it. Weird!

  10. max

    “Australia as we know it was created by government action.” — correct
    “The British government financed and established the colony” — correct

    “A lassiez faire system used by the indigenous population” — incorrect

    Most indigenous communities were semi-nomadic, moving in a regular cycle over a defined territory, following seasonal food sources

    most Aboriginal Australians were hunter-gatherers and fishermen.

    Dispersing across the Australian continent over time, the ancient people expanded and differentiated into distinct groups, each with its own language and culture.More than 400 distinct Australian Aboriginal peoples have been identified

  11. Oh come on

    A lassiez faire system

    Just for future reference, you might want to ensure your spelling of whatever it is you’re asserting is correct, because it’s hardly unfair to assume that if you can’t even get the basics right, you probably don’t know a great deal of what it is you’re speaking of.

    Or are you referring to Soviet remakes of the Lassie movies?

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