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Ideas and implications – Econlib



Ideas and Implications

Thomas Sowell often emphasizes the importance of thinking beyond the immediate and obvious impact of a particular economic policy and considering the larger implications. He even wrote an entire book dedicated to this idea – Applied economics: thinking beyond phase one. A similar and useful exercise for evaluating an idea is to really try to figure out what will happen next, but what that idea, if true, should mean for the current situation. Here are two common examples where this would come in handy.

First, some people believe that all the value a company generates for consumers and shareholders is generated by its employees. Meanwhile, the company’s owners don’t create or contribute value; they only siphon off the value created by employees, while paying employees less than the value they generate. If this is true, it has a pretty clear implication: business owners should be incentivized to hire as many workers as possible! After all, this insight means employees generate more value than they get paid, meaning maximizing the size of your workforce is a surefire way to maximize the money you can make. The very last What a greedy business owner would want to do is fire his employees – because if employees generate more value than they were paid, cutting jobs means the business owner will necessarily lose more than he gains. Yet we are often told that job cuts are themselves motivated by greedy entrepreneurs trying to do so increase their profits – which would be mathematically impossible in a world where all value is created by employees. The idea that greedy entrepreneurs pay their employees less than the value they generate and the idea that greedy entrepreneurs cut jobs to increase profits are contradictory – yet both ideas seem to fit in many minds at the same time.

Another common belief is that certain groups of people are discriminated against when obtaining car loans or mortgages. Sometimes this is supported by references to studies that essentially say, “We took our data and controlled for these seventeen different confounding variables, and found that all other similarly situated people with freckles and identical financial records were less likely to be approved for a mortgage.” than people without freckles.” Does this mean that people with freckles are discriminated against? Maybe. Or perhaps there are other relevant confounding variables that the study does not take into account. But if you are convinced that people with freckles are discriminated against, that has a clear implication for the current situation. We would expect people with freckles to have an unusually low rate of late payments or defaults. After all, the claim is that people with freckles must have disproportionately high financial security compared to people without freckles to qualify for equivalent loans, which necessarily means that the loans made to people with freckles must have a disproportionately low risk of default . Meanwhile, if there is a group that is reliably at disproportionately high risk of delinquency or default, that would mean that loan approval is actually disproportionately high. simple for that group, all else is equal. Also contradictory are the ideas that there are groups of people who need to be disproportionately well qualified to get a loan, but who are also disproportionately at risk of default. Yet these ideas are also often shared by people.

What are some other examples you can think of?