Inspired by this year's Edge question ("What scientific term or concept ought to be more widely known?"), Bloomberg columnist Noah Smith enumerates five economic concepts that we would be well-served to familiarize ourselves with: "Endogeneity" (when you don't know whether something is a cause or effect); "Marginal versus average" (something can be good on average, but so bad at the margins that it's a net negative); "Present value and discounting" (how much would you sacrifice today for the promise of something great tomorrow?); "Conditional versus unconditional" (you can hedge a prediction by adding a condition: "Assuming Donald Trump loses the election, the biggest crisis we'll face is a continued transfer of wealth from the poor to the rich"); "Aggregate" (differentiating global effects from local ones: borrowing money reduces your personal net worth, but increases some one else's, so you're getting poorer, they're getting richer and in the aggregate, it's a wash -- governments need to think in aggregate, voters need to think in particular).
• Present value and discounting
Things that we will get in the future have value today. Stocks, bonds and other financial assets are the obvious cases, but there are many more. For example, working at Alphabet Inc. (Google) might not pay more than other companies, but the knowledge, skills and resume burnishing that you get from the job could lead to higher earnings down the line. Present value means trying to figure out how much some long-term thing is worth today. To find present value, you have to use discounting, which means you have to decide how much less you value things that come far in the future. The more you want things right now, the higher your discount rate is, and the lower the present value of things like college degrees or business investments that take a long time to pay off.
5 Economics Terms We All Should Use
(via Naked Capitalism)
(Image: Economics Books, Genericface, CC-BY-SA)
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