Economic understanding vital
Economics provides a critical window into the workings of society. Without a grasp of economics, understanding social situations and making coherent normative recommendations are extremely difficult.
Such a claim needs unpacking.
By economics, I do not refer to a study on how society distributes its resources. Who is this society and how did it acquire all of these resources? Individuals own and control property within society, and it is naive, even in passive suggestion, to think there is an entity called "society" that stumbles around and divides up the economic pie.
Additionally, economics is more than a way of thinking or a toolbox that social scientists can apply if they wish. The economics that I refer to here is a unified science that embodies the search for causal relationships or laws, which explain the working of social coordinating mechanisms such as, but not limited to, prices, wages and interest rates.
With the buildup from an understanding of these economic relationships, one gains insight to existing social conditions. Economics allows us to understand how wealth and resources aren’t arbitrarily allocated. The intricacies of the multitude of causal relations allow for the creation of wealth in a rather precise way.
The price of a good is not random, but is based on a large number of factors, including resource availability, competition and demand. This has large ramifications for public policy. If many different elements go into determining the distribution of wealth or price of a good, the thought that governmental laws can simply exist without unintended consequences is foolish. Instead, intervention into the economy can easily upset the delicate and established balance, creating social havoc.
For instance, examine how prices and profits of a given industry send signals to entrepreneurs and investors to work toward the creation of new firms resulting in a boost in competition. This competition works to drive down prices.
With this primitive economic understanding, one can examine the medical industry. The industry is experiencing record profits and prices remain high. One would expect a massive inflow of investors starting new hospitals and new clinics, providing a wide variety of services, or an explosion of doctors and institutions to teach up-and-coming medical personnel. One would expect to see a wide quality of services reflecting different situations.
While we are seeing this to a limited degree, the creation of new doctors and hospitals are significantly restricted by government medical licensing. This results in difficulty in entering into competition that keeps prices high. Licensing, which was designed to help protect the consumer, ends up keeping prices high and out of reach to a large portion of the population.
This also can provide insight into why some in the current medical industry kick-up scenarios of hack doctors operating with rusty scissors when talk of relaxing licensing is brought up.
Clearly, this is not a complete economic analysis of the medical industry, but it shows how critical economic understanding is in relation to understanding a given social condition.
One might conclude high prices and high profits mean that evil capitalists are ravishing innocent consumers or call for the government to step up and deliver the consumer from the burden of high prices through price controls.
Gilson, a business sophomore, can be reached via [email protected].
Politicians, quick to rush to the aid of the consumer and denounce the evils of big business, frame the policy in moral terms and enact price ceilings. The policy backfires. The controls ultimately ensure that demand far surpasses supply.
It is critical to understand how prices are formed before denouncing this specific price, this wage, or this interest rate as unethical. An understanding of economic law, which will not bend to fist-wavers of justice no more than denouncing the law of gravity will make things float up, is critical of any successful attempt to change our social condition.