Ten Things Debaters Should Know About Economics
This is a list of ten things that debaters should know about economics.
The purpose of this page is not to provide a full education in economics,
but to provide ammunition for debate rounds. I have written the items in
broad terms, so that the breadth of their applicability is apparent. As
many of the examples indicate, economic ideas can be used in a variety
of contexts (legal, political, moral, etc.) where you might not expect
to find them. Even when a debate is not about economics per se, the concepts
here may add an extra dimension to your argumentation.
2. Substitution Effects
3. Prices and Price Controls
4. The Third Party Buyer Effect
5. Moral Hazard
6. Restricting the Choice Set
7. Prisoners' Dilemma
8. Debts and Deficits
9. Keynes Is Dead
10. What Is Seen and What
Is Not Seen
There is one basic law of economics that is the foundation for all the
others: People respond to incentives. Though the law is simple, its applications
are nearly unlimited.
A. People do more of something when the reward increases. When you subsidize
something, you get more of it.
This last example, which is very controversial, illustrates an important
fact about incentives. While there is little doubt about the direction
in which rewards push behavior, the magnitude of the effect may
be very small or very large, depending on the situation. Some defenders
of state welfare programs have argued that the welfare payments for additional
children are too small to induce any measurable increase in child-bearing.
And indeed, studies have had a difficult time finding any such an effect
-- although one study, which looked at the effects of a New Jersey law
curtailing benefits for additional children, alleged to show that abortions
increased under the new policy. So the jury is out on whether welfare policy
has a significant impact on child-bearing.
Pharmaceutical companies invest more in research and development if patents
allow them to make higher profits from new drugs.
According to an old story, a small town in Italy was having a problem with
vipers. So the town council established a "viper bounty" to pay people
for bringing in dead vipers. The result was that people started breeding
vipers in their basements. (Think about the implications of this story
for gun buy-back programs.)
Americans who wanted to fight modern-day slavery in Africa founded a non-profit
organization that collects money to buy children out of slavery. The result
was that kidnappers started stealing even more children from their homes,
because the increased demand drove up the sale price of slaves.
Women may have more children when welfare payments are pegged to the number
of children they have.
B. People do less of something when the penalty or cost increases.
This last example raises, again, the issue of magnitude. If an activity
becomes more costly or dangerous, people will do less of it -- but how
much less? Obviously, the emergence of AIDS did not end all promiscuity.
It did, however, greatly increase the demand for condoms, and having multiple
sex partners waned in popularity. The incentive effect was present, but
perhaps not as large as some think it should have been.
When insurance policies cost more, people buy fewer of them.
If prison terms are increased for a crime, people are less likely to commit
If employment law requires employers to provide paid family leave, day
care, etc. for their employees, employers may respond by hiring fewer of
the workers most likely to make use of these benefits: women.
When people perceive sex as more dangerous (e.g., because AIDS is discovered),
they engage in less risky sexual behavior.
2. Substitution Effects
Although increasing the cost of an activity will generally cause people
to decrease how much they do it, they may simultaneously increase how much
they do something else. For example:
The tendency of people to substitute one activity for another is a major
source of unintended consequences, which can prove especially useful in
debate rounds. If you need to find potential harms of a new policy proposal
that penalizes some behavior, it is a good idea to ask how people may respond
by doing more of another, possibly less desirable, behavior.
Increasing the criminal penalties for the use of one drug (say, cocaine)
may induce people to switch to other drugs (like heroin).
In Japan, pornography laws prohibit photos that show pubic hair. Although
the intent of the laws was to ban hard-core photographs of human genitalia,
the result was that pornographers started producing more pornography with
shaved pubic areas.
Restricting access to one method of committing suicide may cause some people
to switch to other methods.
3. Prices and Price Controls
In a market economy, prices act as signals of scarcity. When the price
of something is high, that means it's more scarce -- that is, demand for
it is high relative to the supply. When the price of something is low,
then it's less scarce. By observing prices, consumers and producers can
choose their behavior to respond to scarcity. High prices induce producers
to switch from more scarce to less scarce resources, and they induce consumers
to switch from products and services that require more scarce resources
to products and services that require fewer.
Throughout history, governments have attempted to influence the market
with price controls, and they have met with almost universal failure. The
most common form of price control is a price ceiling, a maximum
price set below the market price. In response to a price ceiling, consumers
increase the quantity of the good they want to consume, while producers
reduce the quantity they are willing to supply. As a result, a shortage
emerges. Although the price ceiling may have been intended to benefit the
consumers, they will actually end up consuming less of the good in question.
Price ceilings also tend to breed corruption and blackmarkets, because
consumers are willing to pay much more than the law allows them to pay.
In the case of rent controls, potential apartment renters often pay "key
fees," rental agency fees, and even outright bribes to get access to the
reduced supply of housing units.
Rent controls, which place a cap on prices landlords can charge for rental
housing, lead to a reduction in the amount of rental housing available.
Price controls on gasoline in the 1970s resulted in long queues at the
gas pumps, as consumers lined up to get their share of the reduced quantity
of gasoline available.
The other form of price control is a price floor, a minimum price
set above the market price. In response to a price floor, producers will
increase the amount they are willing to supply, while consumers will reduce
the amount they are willing to buy. As a result, a surplus emerges. Often,
the government is then obliged to buy up the extra. Although price floors
are less common than price ceilings, they have often been used to prop
up prices in agricultural markets. Another example is the minimum wage,
which props up the price (wage) of labor, leading to a surplus of labor
(a.k.a. unemployment or underemployment).
4. The Third-Party Buyer Effect
"No, thank you, I don't want a cocktail. Oh, they're free? Then I'll have
two!" This is the third-party buyer effect. Whenever goods and services
are provided at zero cost to the buyer, consumption of that thing is likely
to rise dramatically unless limited in some other way. Examples:
When Canada first socialized its health care system, doctors' offices were
flooded with patients seeking treatment for the most minor of illnesses
(real and imagined), and doctors sent inflated bills to the government.
Eventually, the government sought to limit this practice by placing ceilings
on the prices doctors could charge, expecting that doctors would then start
limiting the number of patients they saw. Instead, doctors avoided the
price controls by decreasing the length of doctor visits and having patients
visit more often (because the price controls were set on a per-visit basis).
Health insurance companies know that customers will consume large quantities
of health services if the insurance company covers the full price; this
is one reason why many health insurance policies require copayments and
deductibles to be paid by patients.
Enrollment in colleges and universities increased rapidly after the enactment
of the G.I. Bill, government-subsidized student loans, and other programs
that lowered the price of education to students. (Note that the actual
price of education did not fall, only the price perceived by students.
The higher demand actually increased the real price of education.)
5. Moral Hazard
Moral hazard refers to the fact that people tend to engage in riskier behavior
when they are insured or shielded against the risk. When people have auto
insurance, for example, they tend to drive more recklessly. Numerous other
Federal flood insurance encourages people to continue building homes in
In the 1980s, the savings & loan industry was partially deregulated.
Many of the controls on allowed investments were eliminated, but the Federal
Savings & Loan Insurance Corporation (FSLIC) continued to guarantee
depositors against losses. As a result, S&Lís started investing in
more risky projects than normal, as part of a "heads we win, tails we break
even" strategy. The taxpayers picked up the tab.
"Every rental car is an SUV."
6. Restricting the Choice Set
In general, people choose what they perceive as the best option available
to them. Thatís true even if, perhaps especially if, all their options
suck. If you take away one of their options (this is known as restricting
the choice set), there are two possible outcomes: (1) It wasnít an option
they would have chosen anyway, in which case thereís no effect. (2) It
was an option they would have chosen, in which case they have to choose
an option they must have considered worse. So with few exceptions, restricting
someoneís choice set only makes them worse off. Example: Your opponent
says, "Prostitution is a terrible, demoralizing activity for the women
who do it." Your response: "Yeah, but apparently they consider it better
than the alternatives available to them, which might be starving or being
unable to support their families." Their reply: "So we should make better
alternatives available to them." Your rejoinder: "Okay, but thatís not
mutually exclusive. You can give people more options without taking other
7. The Prisonersí Dilemma
The prisonersí dilemma is a classic story about how individually rational
decisions can lead to a socially undesirable outcome.
Hereís the original story: There are two partners in crime who get arrested
by the police. The DA visits each prisoner and says the following: "If
you both stay quiet, weíll convict each of you on a minor offense, and
youíll get a year in jail. If both of you confess, youíll both get convicted
and get 10 years in jail. If you confess and your buddy stays quiet, then
youíll go free, and heíll go to jail for 15 years. And Iím making the very
same offer to him." Imagine youíre one of the prisoners. It turns out that
no matter what you think your partnerís going to do, it makes sense for
you to confess. Why? Because if heís staying quiet, you can avoid a year
in jail by confessing. And if heís confessing, you can reduce your sentence
from 15 years to 10 years by confessing. So you decide to confess. Your
partner, facing the same incentives, also confesses. So you both go to
jail for 10 years, even though youíd both have been better off if youíd
both stayed quiet.
There are various situations that can be characterized (more or less
accurately) as prisonersí dilemmas. They include:
Though there are many situations that are prisonersí dilemmas, there are
many more that are not. Debaters will sometimes throw around the term "prisonersí
dilemma" whenever they wish to assert that a socially undesirable outcome
will occur if people are left on their own. But a prisonersí dilemma has
very specific features, to wit: it must be the case that the "bad" action
is individually rational regardless of the choices of other individuals.
(See the original example: It makes sense to confess whether or not the
other guy does.)
Attempted cartel formation. Firms might like to agree to set high prices
and make big profits by squeezing the consumers. But if you think the other
firm is setting a high price, you can make even bigger profits by undercutting
his price and getting a huge market share. And the same goes for him, so
you both cheat on your agreement and set low prices. This is good for the
consumers, but bad for the firms trying to fix prices.
Public goods. A public good is a good that (a) you cannot exclude others
from using (or enjoying) once it has been provided, and that (b) can provide
benefits to additional people at zero cost. An example is national defense.
If we tried to provide this service privately, some people might try to
"free ride" off the contributions of others, since they would get the benefits
whether they payed or not. As a result, the service might not get provided,
or it might get provided at an inefficiently low level.
The "tragedy of the commons." When land and other resources are owned communally,
and no one can be excluded from using them, they are almost always abused
and destroyed. Why? Because the benefits of using the land are concentrated
on the person who uses it, while the costs (from overuse, degradation,
etc.) are spread over everyone. So people keep on using the land more,
even when the costs are greater than the benefits.
8. Debts and Deficit
These terms are often misused and confused. With respect to government
budgeting, they have the following meanings: The deficit is the
excess of expenditures over revenues in a single year. The debt
is the accumulation of all previous deficits not paid off. In other words,
the debt is a stock, like all of the water in a bathtub, while a deficit
is a flow, like the water currently flowing from the faucet into the bathtub.
This is important because even if deficits are zero (as theyíve allegedly
been in recent years for the federal government), the debt is still there.
Typically, the federal government runs a yearly deficit in the tens or
hundreds of billions of dollars, whereas the national debt is in the trillions
The problem with both debts and deficits is that they tend to drive
up interest rates. This is because the government is competing with private
borrowers for loans. The result is that government borrowing tends to crowd
out private borrowing. Much private borrowing is for the purpose of
making capital investments, so the long-run result of crowding out is reduced
9. Keynes Is Dead
The early-20th- century economist John Maynard Keynes advocated
a set of economic policy prescriptions that are now know as "Keynesianism."
The basic idea of Keynesianism (shorn of all the bells and whistles) is
that government can spend the economy out of a recession. It supposedly
works like this: The government spends a bunch of money on who knows what.
People receive that money as income. Then they spend a large chunk of that
income on other goods and services, and that money is someone elseís income.
Then they spend it on yet more goods and services, etc., etc. This is known
as the multiplier effect.
Although there are still some economists who support Keynesian policies,
itís important for debaters to realize that Keynesís theory is mostly dead
in the economics profession. The main reason Keynesian policy still gets
taught to undergrads is that, well, itís easy to teach and understand.
But that doesnít mean itís right. Better macroeconomic models are much
more sophisticated, and I canít fully describe them here. But the basic
flaw of Keynesianism is this: you have to ask where the governmentís money
comes from in the first place. It can either tax, borrow, or print money.
If the government taxes, then thatís less money in peopleís pockets, so
every dollar that the government spends is balanced by a dollar not spent
somewhere else. (Some Keynesians will say that taxpayers might choose to
save the money instead of spending it, which creates a "leakage." But saved
money is almost never just stuck in a mattress. Saved money gets lent out
by banks and used for investment.) If the government borrows, then it drives
up interest rates and crowds out private investment. And if the government
prints money, the value of the dollars people have goes down because of
inflation, so itís almost identical to a tax.
Even economists who still believe the Keynesian theory (or some modernized
form of it) generally regard it as a short-run theory. In the long
run, spending by the government cannot increase the wealth of the economy
unless government actually spends the money more efficiently than would
the private sector. The more important long-run issue is the crowding out
of private investment that follows from government deficits.
10. What Is Seen and
What Is Not Seen
This phrase was coined by the French journalist-economist Frederic Bastiat.
He used it to make the point that economic policies must be judged not
just by their obvious effects, but by their less obvious effects. The benefits
of a policy are almost always apparent, but the costs are often invisible
because they are what could have been Ė they are benefits we might
have had but didnít. Some examples will make the point better:
The reason we so often fail to see "what is not seen" is that it is what
have happened otherwise. It's easier to see what is than what might
have been. This is what most people, including many policymakers and debaters,
fail to consider.
Defense spending creates jobs for people in defense-related industries.
This is "what is seen." But any money spent on defense is money that could
have been spent on other programs or spent by taxpayers. They might have
used their money for clothes or movies or new housing. In these other areas,
jobs are lost or never created in the first place. This is "what is not
The minimum wage raises wages for the workers who get those jobs. This
is "what is seen." But the higher wages cause employers not to hire as
many new workers, and so some people go unemployed. This is "what is not
High tariffs protect the jobs of people in industries that face foreign
competition. This is "what is seen." But they also raise the prices of
goods to consumers, which means they donít have as much income to spend
on other things, and therefore other industries (wherever consumers would
have spent their income) donít hire as many people as they would have otherwise.
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