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.

1. Incentives
    a. Rewards
    b. Punishments
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

1. Incentives

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.

Examples: 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.

B. People do less of something when the penalty or cost increases.

Examples: 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.

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.

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.

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:

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 examples exist:

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 options away."

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.)

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 of dollars.

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 economic growth.

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 would 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.

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