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60SecondAdventuresinEconomicsNumberone:TheInvisibleHandAneconomyisatrickythingtocontrol,andgovernmentsarealwaystryingtofigureouthowtodoit.Backin1776economistAdamSmithshockedeveryonebysayingthatwhatgovernmentsshouldactuallydoisjusttoleavepeoplealonetobuyandsellfreelyamongthemselves.Hesuggestedthatiftheyjustleaveself-interestedtraderstocompetewithoneanother,marketsareguidedtopositiveoutcomes“asifbyaninvisiblehand”.Ifsomeonechargeslessthanyou,customerswillbuyfromtheminstead,asyouhavetolowertheprice,oroffersomethingbetter.Whereverenoughpeopledemandsomething,theywillbesuppliedbythemarketlikespoiltchildren--onlyinthiscase,everyoneishappy.Laterfree-marketeerslikeAustrianeconomistFriedrichHayek,arguedthatthis“handsoff”approachactuallyworksbetterthananykindofcentralplan.Buttheproblemis,economiescantakealongtimetoreachtheir“equilibrium”,andmayevenstallalongtheway.Andinthemeantimepeoplecangetalittlefrustrated,whichiswhygovernmentsusuallyenduptakingthingsintotheirownmorevisiblehandsinstead.Number2:TheParadoxofThriftMuchlikeachildgettinghispocketmoney,oneofthebiggesteconomicquestionsisstillwhetherit’sbettertosaveorspend.Free-marketeerslikeHayekandMiltonFriedmansaythat,evenindifficulttimes,it’sbesttobethriftyandsave.Banksthenchannelthesavingsintoinvestment,innewplants,skillsandtechniquesthatletusproducemore.Andevenifthisnewtechnologydestroysjobs,wageswilldrop,andbusinesseshiremorepeoplesounemploymentfallsagain.Simple--Atleastinthelongrun.Butthena“live-fast-die-young”kindofchapcalledJohnMaynardKeynescheerfullypointedoutthat“inthelongrunwe’realldead”.So,toavoidthemiseryofunemployment,thegovernmentshouldinsteadspendmoneytocreatejobs.Whereasifthegovernmenttightensitsbeltwhenpeopleandbusinessesaredoingthesame,lessisspent,sounemploymentgetsevenworse.Thatistheparadoxofthrift.Soinsteadtheyshouldspendnowandtaxlaterwheneveryone’shappytopay.ThoughmakingpeoplehappytopaytaxwassomethingevenKeynesdidn’tsolve.NumberThree:ThePhillipsCurve.BillPhillipswascrocodilehunterandeconomistfromNewZealand,whospottedthat,whenemploymentlevelsarehigh,wagesrisefasterpeoplehavemoremoneytospend,sopricesgoup,andsodoesinflation.Andlikewise,whenunemploymentishigh,thelackofmoneytospendmeansthatinflationgoesdown.ThisbecameknownasthePhillipsCurve.Governmentsevensetpolicybythecurve,toleratingtheinflationwhentheyspentextramoneycreatingjobs.Buttheyforgotthattheworkerscouldalsoseetheeffectsofthecurve.So,whenunemploymentwentdown,theyexpectedinflationanddemandedhigherwages,causingunemploymenttogobackup,whileinflationremainedhigh--Whichiswhathappenedinthe1970s,whenbothinflationandunemploymentrose.Theninthe90s,umploymentdroppedwhileinflationstayedlow,whichallrathertookthebendoutofPhillips’curve.ButatleastpartofPhillips’troublesometrade–offliveson:whenfastergrowthandfullemploymentreturn,youcanbetinflationwillbealongtospoiltheparty.NumberFour:ThePrincipleofComparativeAdvantage.Whetheryouthinktheeconomiesworkbestifthey’releftalone,orthatgovernmentsneedtodosomethingtogetthemworking,theonethingthatcan’tbecontrolledistherestoftheworld.Fearofforeigncompetitiononceledcountriestotryandproduceeverythingtheyneeded,andimposeheavytaxestokeepoutforeigngoods.However,economistDavidRicardoshowedthatinternationaltradewouldactuallymakeeveryonebetteroff,bringinginoneofthefirstgreateconomicmodels.Hepointedoutthat,evenifacountrycanproduceprettymucheverythingatthelowestpossiblecost,withwhateconomistscallan“absoluteadvantage”,it’sstillbettertofocusontheproductsitcanmakemostefficiently.Thatsacrificetheleastamountofothergoods,andlettherestoftheworlddothesame.Byspecializing,theycanthenexportthesesurplusestoeachotherandbothendupbetteroff.Thisistheprincipleofcomparativeadvantages,andithaspersuadedmanycountriestosignuptofree-tradeagreements,butunfortunately,ittakeslongtimeforcountriestotradetheirwaytoprosperity.Andbecauseit’smucheasiertomovetowherethemoneyis,itincreasinglynotonlygoodsthatcrossborders,butpeoplewhichhassomewhatuprootedRicardo’theory.NumberFive:TheImpossibleTrinity.三元论Mostcountiestradewithoneanother,whichisusuallyprettygoodforallinvolved,butitdoesmeanit’sabigharderforeachtokeepcontrolofitsownfinances.Therearethreethingsthatgovernmentsareparticularlykeenon.Theyliketokeeptheexchangeratestable,sothatimportandexportpricesdon’tsuddenlyjumparound.Theyalsoliketocontrolinterestrates,sotheycankeepborrowershappy,withoutupsettingsavers.Andtheylikemoneyflowinandoutoftheircountry,withoutcausingtoomuchdisruption.Butthere’saproblem,whenyoutryalloftheseatonce.Sayforexample,theEurozonetriestoloweritsinterestrate,toboostinvestmentandreduceunemployment.Moneyflowsouttoearnhigherinterestrateseverywhere.Exchangerateslow,whichcausesinflation,sotheEurointerestrateisforcedbackupagain.Youcaneitherfixyourexchangerate,andletmoneyflowsfreelyacrossnationalborders,buthavenocontroloveryourinterestrates.Orcontrolyourinterestandexchangerates,butthenyoucan’tstopthecapitalflowinginandout.But,likeanoverzealoustriathlete,youcan’tdoallthreeatonce.NumberSix:RationalChoiceTheory.Ofallthethingstofactorinwhentorunninganeconom