The Best Introductions To Economics

(MENAFN- ValueWalk) Nearly every aspect of our life is determined by economics, and yet it's easy to go through life understanding very little about it. Author and columnist Tim Harford (aka the 'Undercover Economist') introduces the best books to get you thinking like an economist.

by Avinash Dixit

by William Goetzmann

by David Friedman

by John Kay

by Sylvia Nasar

What is economics?

There are lots pithy definitions of economics, none of which I find very helpful. Think of it this way: it's a typical day. You wake up. Maybe it's in some luxurious house or maybe it's in a cramped place, having to share a space with lots of other people. You get up. You make yourself food. You have access to all these resources that, previously, would have been incredibly difficult to get. It would have taken hours of work to make breakfast. Now, you just grab the cereal out of the cupboard, the milk out of the fridge.

You go to work. Where do you work? How do you get there? Do you get stuck in traffic along the way? What's the infrastructure like? How much power do you have to defy your boss? What's the sort of work that you're doing? What services or products are you supplying to other people?

All of these everyday things—and I could just go on and on and on through the entire day—are the province of economics. So the choices that you have and how you make those choices, the resources that you have, how you go to work, how you make a living, this is all part of the economy, and economics is the study of the economy. That means it's the study of statistics and history, psychology, physics, and all kinds of other things. It's just a wonderful, wonderful subject, but it does defy easy definitions.

Given that it covers all these aspects of your life, you're presumably going to be at a big disadvantage if you don't know anything about economics in the modern world.

You could probably say that about all kinds of subjects, but I think having some grasp of economics does let you appreciate certain very interesting things about the way the world works and, in some circumstances, make better decisions.

A nice piece of intuitive economics that I heard from Martin Lewis, , was when he was speaking on a panel about trust in banking and regulating banking, and how bankers should behave.

'The choices that you have and how you make those choices, the resources that you have, how you go to work, how you make a living, this is all part of the economy, and economics is the study of the economy'

Martin Lewis said, 'What you have got to understand is banks are trying to get as much money as they can out of you. All businesses are trying to get as much money as they can out of you. That's how it works and you are trying to pay them as little money as possible for the services they supply. That's what I teach all my children. That's what we've all got to understand and the whole of the rest of this discussion everybody is having makes no sense.' I just thought, 'Yes! That's thinking like an economist.'

There is, to some extent, an adversarial relationship in the marketplace, but it doesn't necessarily work out badly. You can make better decisions as a shopper. You can make better decisions as a citizen, as a voter, possibly you can even make—since I once used to write a personal advice column—better decisions as a husband or wife or on the dating scene using economic ideas, too.

And yet, as you've pointed out, we've managed to make economics feel arid, narrow, and distant from everyday concerns. Why do you think that is when it is such a lively subject?

It was partly Irving Fisher's fault. So Irving Fisher—who we'll discuss later because he's one of the subjects of Sylvia Nasar's wonderful book—was a really, really fascinating character. He was interested in everything from Esperanto to vegetarianism, dietary reform to voting reform, world government to eugenics. A man of many, many enthusiasms.

But he was also a brilliant mathematician and in the 1910s and 20s he put economics on a path where everything could be turned into an equation. You could understand economic forces as though they were physical forces—like flows of water or the pull of gravity. That was enormously powerful. It really works very, very well. It doesn't work for everything, but it was so powerful that economists just said, 'Okay. We'll go with this.'

Then the problem is that as someone encountering economics for the first time—maybe because you're interested or you're an undergraduate—it's all these differential equations describing the balancing of forces and stocks and flows. It doesn't seem to reflect psychology. It doesn't seem to reflect history. It doesn't seem to really reflect anything physical about the world around us at all. I think that's a shame. I mean, obviously, the maths is a very powerful tool and, if you use it in the right way, it sheds light on all of these things, but if we start only with the maths, I think the subject does tend to seem rather sterile and abstract.

But you have to be good at maths to do an economics degree. There's no escaping that. Is there?

I didn't do an undergraduate economics degree, I did . There's even quite a lot of maths in that. As a post-graduate, there's an enormous amount of very abstract maths, which is beautiful. I never want to be seen as criticising maths. I love maths. But I did tend to find that the things that really grabbed my attention in economics were these interesting little examples of quirks of history or paradoxes or mysteries about the way the world worked. When I wrote my first book, those were the things I focused on.

Can psychology and history be represented in an equation? How would that work?

You can try. Economic historians tend to bring the maths in and economic psychologists tend to bring the maths in. Maths is a very powerful way of talking about the world, but there's an old joke that is sometimes applied to physicists and mathematicians. The punchline is, 'Imagine a perfectly spherical cow in a frictionless environment.' You can imagine what the setup of the joke is.

There is this sense that, sometimes, we are stripping away everything that's inconvenient in our models. There is a good reason for that, but the inconvenient stuff is a) really, really interesting and, b) potentially incredibly important. Sometimes it's okay to strip it away, but in the banking crisis, for example, it wasn't that the fundamental economic models were all wrong—it was that they were

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