Economics, at its core, is the study of cause-and-effect relationships—analyzing how scarce resources, which have alternative uses, are allocated. Individuals respond to incentives, costs, and opportunity costs based on the subjective value each individual places on the choices they make. It is these choices that shape the outcomes we observe in society. Thomas Sowell reminds us, “Incentives are not just monetary—they include prestige, risk, fear, power, and pleasure. People respond to all of them.”
Therefore, economics is the study of choices and the incentives and costs of those choices in conditions of scarcity. The first lesson of economics is scarcity—there is never enough of anything to satisfy everyone’s unlimited wants. Our options, however, are not endless, and failing to understand this leads to poor decision-making and results. The options we have are often much more limited than we think, and we have to realize that whatever we do will be within the constraints of scarcity.
These choices reflect the subjective value each person places on different costs and benefits, as what is important or worth sacrificing for one individual may not be for another. Moreover, since value and costs are subjective only when an individual has full and complete ownership over his or her own self, choices, assets, etc., can the highest and most accurate subjective value can be placed upon anything.
The heart of economics lies in recognizing that there are trade-offs, not fantasies. Thomas Sowell taught us that “There are no solutions. There are only trade-offs.” Economics is often misunderstood as a dismal science, but as Thomas Sowell rightly pointed out, “Economics is not dismal. Life is dismal.” Life confronts us not with perfect outcomes, but with constrained options—“Life does not ask what we want. It presents us with options.” Every decision we make has costs, which are the price paid and all of the other opportunities we gave up in making that decision (trade-offs). Individuals make decisions based on the incentives or possible rewards and or pain avoided for making that decision.
Frédéric Bastiat emphasized that a good economist must look beyond the immediate and visible effects to consider the long-term and often unseen consequences. In order to understand the true costs of anything, you must know what you are giving up and the unseen consequences that are just as real as the seen consequences. “It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.”
This way of thinking is what Thomas Sowell considers “thinking past stage one.” Many people rely on stage-one thinking—focusing only on short-term, immediate results—without considering the ripple effects of their choices and actions. In order to make better decisions, we must develop the discipline to think beyond the first stage. Before making any economic or personal decision, Sowell urges us to ask three essential questions: “Compared to what? At what cost? What hard evidence do you have?”
These principles are not just economic truths—they are tools for thinking clearly in a world full of difficult choices. These principles help us understand ourselves and other individuals better as they explain human behavior and the consequences of decisions and actions. It is in following these principles that makes someone a true and effective economist. All of us should study and apply these principles as they will help guide, improve, and understand the decision-making process in our lives.
