July/Aug 2005

ARTICLE TOOLS

Find similar articles E-mail this page

Economics is the science of understanding choice in conditions of scarcity. We have scarce resources available to us (even Bill Gates, for whom time rather than money is likely the most constraining factor, experiences scarcity) and must decide how to spend those resources. Should I work more to earn money for a vacation at the beach or spread my leisure over the course of the year? Should the country buy guns or butter? Should we invest more in the search for the perfect mate or marry our current sweetheart? Economics has given us powerful insights into all these specific questions and many more. We know that incentives matter, that higher prices mean lower demand and greater supply, and that markets are the most effective means of allocating goods and services to their highest valued uses.

Despite these successes, economic reasoning generally and markets in particular have been under attack for centuries for getting choices "wrong." An early wave of criticism, only now receding, centered on markets' inability to get prices "right." Religious critics argued (and some continue to do so) that market prices varied from the "just price" and that excessive interest charges constituted usury. Karl Marx attacked the market economy for its extraction of "surplus value" from workers. Communists in the early 20th century attempted to substitute central planning for market-determined outcomes; some attempted to do so by substituting administratively-set prices for market prices to "correct" the price mechanism. Even in predominantly market economies such as the United States, regulators have "adjusted" regulated prices to accomplish various ends-regulated utility prices, for example, traditionally included extensive subsidies for favorite ...