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viii Lessons for the Young Economist18. Sales and Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271Government Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271How Government Finances Its Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27919. Tariffs and Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287Mercantilism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287The General Case for Free Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293Import Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29920. The Economics of Drug Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305Drug Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305Drug Prohibition Corrupts Government Officials . . . . . . . . . . . . . . . . . . . . . . . 307Drug Prohibition Fosters Violence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314Drug Prohibition Reduces Product Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320Money Inflation vs. Price Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32521. Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325How Governments Make Prices Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329The Danger of Government Price Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33622. Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345Government Deficits and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345Government Debt and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350Government Debt and Future Generations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35323. The Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361The Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361How Governments Cause the Business Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . 363The Inevitable Bust Following an Artificial Boom . . . . . . . . . . . . . . . . . . . . . . . 368The Causes of Mass Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377

AcknowledgmentsThis book was launched in a meeting with Doug French and Jeff Tuckerof the Mises Institute. At every step in its writing, I consulted withZachariah Crossen, a history teacher who ran the sample chapters byhis own (junior high) students to make sure the tone and language werecorrect.Brian Shelley and Blake Stephenson provided useful feedback on anearly draft. Tim Terrell went through the entire manuscript and providedmany suggestions to improve it. Finally, I’d like to thank Sam Torode forthe artwork, which was not only done excellently but also quickly (becauseI didn’t give him much notice).ix

Part IFOUNDATIONS

Lesson 1Thinking Like an EconomistIn this lesson you will learn: What it means to “think like an economist.” The types of questions that economics can help explain. Why it is important for everyone to understand basic economics.Thinking Like an EconomistThis book is a manual for a new way of looking at the world. After youmaster the lessons contained within these pages, you will be able tounderstand events in ways that your untrained peers will miss. Youwill notice patterns that they will overlook. The ability to think like aneconomist is a crucial component of your education. Only with sound economic thinking will you be able to make sense of how the world works. Tomake responsible decisions regarding grand political ideas as well as youroccupation and mundane household finances, you must first decide to learnbasic economics.Creative and careful thinkers throughout human history have developed various disciplines for studying the world. Each discipline (or subject) offers its own perspective as history unfolds before us. For a completeeducation, the student must become acquainted with some of the most3

4 Lessons for the Young Economistimportant findings in each field. Economics has proven itself to be worthyof universal study. A well-rounded young adult will have studied not onlyalgebra, Dante, and photosynthesis, but will also be able to explain whyprices rise.Every subject you study will contain a mixture of knowledge that isdeemed important for its own sake, as well as practical applications thatmay prove useful in your daily life. For example, every student shouldhave a basic understanding of astronomy, since it illustrates the grandeurof the universe; but basic astronomy can also come in handy when guidinga wayward yachtsman who has lost sight of land. For a different example,consider mathematics. The study of advanced calculus is rewarding for itssheer elegance (though some students might consider the reward inadequate for the effort required!). But everyone needs to know basic arithmeticin order to function in society.We will see the same pattern holds in the subject of economics. It is,in a word, simply fascinating to learn that there are underlying principlesor “laws” that explain the operation of any economy, whether in ancientRome, the Soviet Union, or a county fair in Boise, Idaho. Yet economics alsohas much to offer in practical guidance of your daily life. Knowledge ofeconomics, by itself, will not make you rich, but it’s a good bet that ignoringthe lessons of this book will keep you poor.Economists look at the world in a unique way. Picture the crowds waiting to ride a popular amusement park roller coaster. A biologist surveyingthe scene might notice that people begin sweating as they approach theirturn to get onto the ride. A physicist might notice that the first hill has to bethe tallest. A sociologist might notice that the riders are arranged in groupsof the same ethnicity. And an economist might notice that the first and lastcars have much longer lines than the others, probably because people don’tlike waiting but they also prefer riding in the very front or the very rear.The economic perspective is not useful in every situation. On the soccerfield or at the prom, the lessons in this book will not prove as relevant. Butin your life you will encounter many situations of critical importance whenyour decisions will need to be informed by sound economics. It is not necessary for everyone to become an economist. It is important for everyone tolearn how to think like an economist.

Lesson 1: Thinking Like an Economist 5Is Economics a Science?In this book, we adopt the view that economics constitutes an independent science, just as surely as chemistry and biology are distinct fields ofstudy. As we go through the lessons in this book, we will do so scientifically,meaning that we will use an objective set of “tools” for our analysis, thatdo not rely on particular ethical or cultural assumptions. The principles orlaws of economics are the same, whether the economist is a Republican or acommunist, and whether he lives in New Zealand or Somalia.Warning! When we say economics is a science, we do not mean that weconduct experiments to test economic laws, the way a nuclear physiciststudies the results of smashing atoms in a particle accelerator. There areimportant differences between a social science such as economics, versus anatural science such as physics. We will explain this in more detail in Lesson2, but for now we simply want to caution you that basic economic principles can be discovered through mental reasoning. It wouldn’t make senseto go out and “test” the laws of economics, just as it doesn’t make sense touse a ruler to go out and “test” the various proofs that you might learn ina geometry class. The upshot of all this is that the lessons in this book willstand the test of time—there is no danger that a new experimental findingwill overturn them tomorrow. In practice, professional economists makeall sorts of conjectures, many of which turn out to be wrong. But the corebody of economic theory—the types of laws and concepts contained in thisbook—is not testable; it’s simply a way of viewing the world.Despite the possible confusion of economic science with a natural science, nonetheless we use the term science because it’s important to stressthat there really are objective laws of economics. When politicians ignorethe teachings of economics, their programs run into disaster—imagine thechaos if NASA ignored the laws of physics!The Scope and Boundaries of Economic ScienceIt’s a common misconception for people to think, “Economics is thestudy of money.” Yes, economics obviously has a lot to say about money,and in fact one of the basic purposes of economics is to explain the different

6 Lessons for the Young Economistprices—which are quoted in units of money—of various goods and services being sold in the market place.Contrary to this popular misconception, economics is broader than themere study of money. In its widest scope, economics can be defined as thestudy of exchanges. This would include all of the exchanges in a normal market setting, where the seller hands over a physical object or provides a service, and in return the buyer hands over the appropriate amount of money.But economics also studies cases of barter, where the traders exchangegoods or services directly with each other, without using money at all.Pushing it to the extreme, economics even has a lot to say about caseswhere a single, isolated person takes actions to improve his or her situation.This is often called “Crusoe economics,” after the fictional character Robinson Crusoe who was shipwrecked on an (apparently) deserted island.We will study Crusoe economics in Lesson 4. It will be clear that even anisolated person behaves “economically” because he takes what nature hasgiven him and exchanges the status quo for an environment that he hopeswill be more pleasant.The common theme running throughout all of the examples of exchangesis the concept of scarcity. Scarcity can be succinctly explained by theobservation that there are limited resources and unlimited desires. EvenBill Gates faces tradeoffs; he cannot literally do whatever he wants. If hetakes his wife out to a fancy restaurant, he has reduced his options (ever soslightly) and has diminished his ability to buy other things in the future.We can describe the situation by saying, “Bill Gates needs to economize onhis resources, because they are finite.”It is the universal fact of scarcity that gives rise to what people havetermed the “economic problem”: As a society, how should we decide whichgoods and services to produce, with the limited resources at our disposal?In Lesson 5, we will see how the institution of private property solves thisproblem. But it is scarcity that causes the problem in the first place.Warning! Economics does not study a hypothetical “economic man,”who cares only about acquiring material possessions or earning money.This is another common misunderstanding of what economics is all about.Unfortunately, there is some truth to this stereotype because many economists actually do build models of the economy that are filled with fictitiouspeople who are very selfish and will only act altruistically if they are forced

Lesson 1: Thinking Like an Economistto do so. But in this book, you will not be learning any theories of that flavor. Instead, the lessons in this book do not depend on people being pennypinchers; the laws we will develop in these pages apply to Mother Teresa asmuch as they apply to Donald Trump.Economic science, as taught in this book, does not tell workers that theyshould take whatever job pays the most money, nor does it tell businessowners that they must consider only financial issues when running theiroperations. These points will be made clearer during the subsequent lessons themselves, but we must stress up front that there is no “economicman” in the following pages; we are always discussing the principles thatexplain the choices of real people in the face of scarcity. The principlesinvolve the fact that people have desires in the face of limited resources, butthe principles are broad enough to cover people with any desires.The Economics of Real PeopleEconomics deals with the real actions of real men. Its [laws] refer neitherto ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo oeconomicus) nor to the statistical notion of an averageman. . . . Man with all his weaknesses and limitations, every man as he livesand acts, is the subject matter of [economics].—Ludwig von Mises, Human Action(Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. 646–47Economics studies and tries to explain how people make exchanges. Ashipwrecked sailor wants to “exchange” some sticks and two rocks for acrackling fire, while a missionary wants to “exchange” his leisure time fora grueling trip to a remote jungle where the residents have never seen aBible. A complete theory of exchanges must cover these types of cases too,not just the more familiar example of a broker exchanging 100 stock sharesfor 2,000. 7

8 Lessons for the Young EconomistWhy Study Economics?One reason to study economics is that it’s simply interesting. Whenyou stop and think about what happens every day in a modern economy, it should take your breath away. Consider the bustling metropolisof Manhattan: Millions of people work on this tiny island that is less than23 square miles in land area. Obviously there is not enough food producedon the island itself, to feed these hordes. At first some readers may notunderstand this claim—some of the finest restaurants in the world are inManhattan! But these exquisite restaurants rely on vendors to give themthe raw materials to produce their very expensive dishes. If invading Martians placed an impenetrable plastic bubble around Manhattan (with smallholes in the plastic to allow for ventilation), within two months hundredsof thousands of New Yorkers would be dead from starvation.Yet in the real world—where no Martian bubble obstructs trade—farmproduce, refined gasoline, and other items are shipped into Manhattan on adaily basis, allowing the inhabitants to not only eke out a bare survival, butactually to thrive. The workers on the tiny island of Manhattan transformthe materials at their disposal into some of the most highly valued goodsand services on the planet—think of the expensive jewelry, clothing, financial services, legal work, and Broadway performances “produced” in Manhattan. When you consider the incredible complexity of these processes,it is a wonder that its operation is normally so flawless that we take it forgranted. The lessons in this book will shed some light on how the marketeconomy achieves such feats, day in and day out.Another reason to study economics is that it will help you ma

And an economist might notice that the first and last cars have much longer lines than the others, probably because p