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India! I dare you to be rich

Understand just this: The two iron laws of economics

There are many "laws" of economics (although rarely are they called by such a name).

The following two "laws", in my view, summarise the essence of the economic way of thinking:

Iron Law No. 1: THERE IS NO FREE LUNCH

Iron Law No. 2: INCENTIVES DRIVE BEHAVIOUR

If the people of India (and of the world) manage somehow to understand just these TWO "laws", India (and the world) will transform into a much happier and wealthier place.

I would even argue that these "laws" are FAR more powerful than the Golden Rule itself ("do unto others as you would have them do unto you"). The Golden Rule is frequently violated (including in the long run). These two laws, however, can never be violated during extended interaction.


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Sanjeev Sabhlok

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6 thoughts on “Understand just this: The two iron laws of economics
  1. ramesh

    Dear Sabhlok,
     
    I think you should add the 3rd Iron Law of economics as: And behaviour is bound by accountability and responsibility.
     
    I know it is implicit. But unless it is made explicit there is much chance for the mischief. And those who oppose 'liberty' will get a boost quoting this mischief, I think so much.

     
  2. Polevaulter Donkeyman

    Sanjeev–

    If you don’t mind I would like to recast your laws in the following form

    Law #1 — Incentives Matter aka Incentives Drive Behaviour
    Law #2 — Unintended consequences matter. Corollary: TANSTAFFL
    Law #3 — Prices are Information. Corollary: Governent interference in the market distorts prices and thus distorts/destroys information.

    Stolen shamelessly from the post and comments at http://econlog.econlib.org/archives/2011/09/the_best_thing.html

     
  3. Sanjeev Sabhlok

    Thanks, Ramesh and PD

    No doubt all your suggestions are valid.

    Ramesh
    behaviour is bound by accountability and responsibility

    This is, in my view, a corollary of “there is no free lunch”.

    PD
    Unintended consequences matter.

    This is subsumed under law 1 (there is no free lunch). The absence of free lunch is because of these unintended consequences.

    Finally: Prices are Information

    That is a subset of the second law (incentives drive behaviour). Prices [in the broader sense] contain information about incentives, and drive behaviour.

    I’ll include these corollaries accordingly, as part of the main laws.

     

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