Politics & Society

From Paul Krugman's MasterClass: Two Fundamental Principles of Economics

Written by MasterClass

Apr 23, 2019 • 3 min read

First—people respond to incentives. Second—each transaction has an equal give and take. Paul breaks down economic thinking into two main principles and teaches you the intricacies of each.

Topics include: Applying Principle 1: People Take Advantage of Incentives • Applying Principle 2: Every Sale Is a Purchase • The Parable of the Babysitting Co-op • Good Economics Can Be Beautiful


Preview of Two Fundamental Principles of Economics

This is an excerpt from Paul Krugman's MasterClass.

Most economic thinking comes down to just two principles. One is, $100 bills don't lie in the street very long. People will pick them up. In other words, people will take advantage of opportunities, people will respond to incentives. The other is every sale is also a purchase, things add up.

You cannot think of the economy as if it was just one individual who can sell more than he or she buys. The economy as a whole is by exactly as much as it sells. And that puts all kinds of constraints on the stories that you can tell.

As long as you adhere to those two rules, then you have a lot more freedom, then you have a lot of freedom to speculate and to try and tell stories.

Anytime somebody tells you a story about economics that implies that people are passing up really obvious opportunities to make themselves better off, you better ask are you sure? Really? Really, really? Because that's probably not going to be true. If I want a story about the price of land, that's actually one-- certainly the rent on land, that's a classic. That's David Ricardo 200 years ago.

He was thinking about farmers and landowners. And he said, just envision a country where there's good land, there's not so good land, there's worse land, he goes down. And that land will be cultivated in the order of its goodness. So what determines how much farmers get to keep of what they grow? And his answer was, well, it's what a farmer could grow on the worst piece of land actually under cultivation.

And you ask, why? Well, because suppose that a farmer demanded more than that on some of the better land, the landlord could always replace him with a farmer who was working on the worst land. Suppose that a landlord tried to pay the farmer less than he could get. Well, then some landlord who has land that isn't in use, that's just a little bit worse, could say, hey, come work for me.

And what the land rent story really does is, it says that what you get, to a first approximation in a market economy, what you get is what you add to the economy, not on average what people do, but what you personally-- what farmers get is what the last farmer adds to production. That turns out to be a pretty good story, not perfect story, but a pretty good story about income distribution.

It also is, by the way, it's a tremendously-- it's a tremendous argument for the amorality of economics. That is, what people get has nothing to do with justice. It just is. There's nothing that says this is what these people deserve to get. It's just how it works out.

That, itself, is an important part of economics. And saying that you can't easily just decree that it should be something different ain't going to work. There may be ways you can produce something you think is more just. But you need to think through very hard how you're going to make them work.

When we say that every sales a purchase, that applies to tons and tons of stuff. It applies t...

Reviews for Paul Krugman's MasterClass

I appreciate Paul's style, I argued with him through my screen and laughed at his humor. I changed my position on a few issues and had my position strengthened on others. Exactly what I was looking for . (sorry if I was harsh on his political slant before, I knew his position when I started this course). Thanks Paul! - Bryan W.

Krugman's a fascinating lecturer with a deep knowledge of the subject. I really enjoyed my time with him! - Jesse H.

Wonderful class. I particularly liked lesson 13, 14 and 18. Thank you. - Christina S.

Terrific! What a brilliant man with an amazing ability to make complex ideas accessible. Would be very grateful if you Masterclass would add more such overview courses on traditional subjects - world history, maybe Math? or at the very least mathematical thinking? Masterclass has been an amazing purchase overall. I'm a VERY satisfied customer :-) Cheers! - San