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Sunday, September 28, 2008

Mandatory study of Economics

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Economics is fascinating. Economics is logical. Economics defines life.

My interest in Economics started soon after my brief exposure in final year of undergraduate study. Interest was strengthened with more through study of microeconomics, and introduction to game theory and columns of Tim Harford on Slate. Actually I must backtrack. After I read 'Freakonomics' and 'The Undercover Economist', I started reading Tim Harford's columns and I was (and am) firmly convinced that one thing a person should learn in life, along with science, is Economics. And by Economics I don't mean production frontiers and structure of oligopolies. I mean the fundamental principle that people respond to incentives and disincentives and changing these is best way to achieve desirable outcome rather than imposing rules, laws and prohibitions. And I strongly recommend both of Tim Harford's books (The Undercover Economist and 'Logic of Life'), to be read preferably in order, because they will tell you in very lucid and entertaining language, why Economics governs and explains life.

Economics explains as simple things as why don't-buy-petrol-one-day-to-teach-lesson-to-oil-companies emails are stupid to as complex as international trade. It tells you why some people don't mind paying small fortune so that few people make big fortune (also known as trade barriers or subsidy), why CEOs get paid so much more (not to motivate them but to their subordinates to lure of promotion), why racism can be rational, why insurance companies cannot make profit (because only people who know that they will need insurance buy insurance, known as adverse selection) and how birth-control changed the role of women and hence humanity forever. You will never see the world in same way again, ever. Unfortunately, exposing utter foolishness around you will also make you miserable. You will know that to induce a change, priorities must be aligned rather than merely banking on general appeal to goodness of heart.

In fact, I would go as far as to suggest that Economics should be mandatory in school curriculum from 8th class onwards. We can dispense with history, language or even mathematics, if need be.

Edit 07/01/2010: Whole of Economics can be summarized by the two most important takeaways: (1) Incentives matter (2) There is no such thing as free lunch.