What to read to understand how economists think

Economics has a reputation as a dry, heartless subject, full of boring equations. The reality is much more interesting. 

Thinking like an economist, as I see it, comprises two main features. The first is always to think about trade-offs. There is no such thing as a free lunch, as Milton Friedman said. When someone gets something, they almost always give something up in return. If you go out with your friends, you won’t have time to go to the gym. If an economy’s wages go up, dividends might go down, or inflation might go up. And so on. 

The second is to try, when possible, to put numbers on things. When we say that China’s lockdowns are “strict”, what do we actually mean? If you think “job quality is getting worse every year”, how are you going to measure that? 

Sometimes it is not easy to quantify ideas, but it’s always good to try. In The Economist’s coverage, we always try to remember these two lessons. Here are five books that should help you think in this way:

Capitalism and Freedom, by Milton Friedman. University of Chicago Press; 272 pages.

Ignore the fact that Friedman was an ultra-libertarian. It does not matter. Very often his arguments were plain wrong. That does not matter, either. This book is perhaps the best way to learn to think about trade-offs because that was how Friedman always thought about the world. 

For instance, consider minimum wages. Friedman accepts that the people who receive them take home more money. But then the trade-offs come streaming in. What, he asks, about the people who are now priced out of the labour market? 

Or take regulation of medicines. Unnecessary, he says. Yes, you may save some lives by insisting that pharmaceutical companies jump through hoops before taking a drug to market, as fewer dangerous drugs are sold. But those reviews will also cost lives, he says, by delaying the delivery of safe drugs to patients.

The Worldly Philosophers, by Robert Heilbroner. Touchstone; 368 pages (also Simon & Schuster).

In a cheerful, conversational style, Heilbroner takes the reader through the writings of the earliest economists, explaining why their ideas were so revolutionary. 

Adam Smith did not have much data to hand, but he put numbers to his arguments when he could. 

So did Karl Marx, who gathered data from newspapers and parliamentary reports. Marx was also a big believer in trade-offs – he argued, for instance, that the world had to endure capitalism in the short term in order, eventually, to reach a socialist utopia in the long term. 

David Ricardo tried to think through the trade-offs involved in economic activity – for instance, in his theory of comparative advantage.

Africa: Why Economists Get It Wrong, by Morten Jerven. Bloomsbury Academic; 176 pages (also Zed Books)

It is great to use numbers, but you have to be careful. This book, by a specialist in African economies, shows how important that is. 

A lot of economists plug data from Africa into huge statistical models, seeking to explain, for instance, why social trust is higher in one part of a country than another. But a lot of this research is based on shoddy data. 

For instance, in 2015, the GDP of South Sudan was either unchanged from the year before or shrank by 11%, depending on whether you believe the International Monetary Fund or the World Bank. 

One lesson from the book is to be upfront about the limitations of your data sources. Another is to try less fancy analysis – say, using descriptive statistics rather than attempting to tease out causality. This is less prestigious and less impressive, but it may produce results that are more likely to stand the test of time.

Capitalism, Alone, by Branko Milanovic. Harvard University Press; 304 pages.

This is the book to read if you want to understand why capitalism – and economists’ way of thinking –has triumphed the world over. 

By the beginning of the 1990s, it was clear that the capitalist system had defeated the communist one. Today, however, many people yearn to move to a new system, such as “millennial socialism”. 

A left-leaning scholar, Milanovic sympathises with these feelings. But ultimately, he finds many radical prescriptions unconvincing. A country that tried to de-marketise on the scale envisaged by socialists would, he says, be unstable and dissatisfied in other ways. 

Shifting towards a much shorter working week, for instance, would leave it poorer than its neighbours. For how long would people put up with that? 

Capitalism is far from perfect, his book shows, yet it is hard to shake the notion that it is the only system that broadly works.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, by

Steven D. Levitt and Stephen J. Dubner. HarperCollins; 352 pages.

This book is so famous that it seems a cliché to choose it, but if you haven’t read it, you really should.

Fundamentally, it is (again) about trade-offs. It goes through lots of fun examples, showing how policies can have unintended consequences. 

For example, when a nursery imposed a fine on parents who were late to pick up their kids, more parents started turning up late. The fine had inadvertently removed a moral disincentive for parents to be on time. They thought of it as a price. 

Other examples in the book include the question of why drug dealers live with their parents, and whether legalising abortion reduces crime. 

The book is not everyone’s cup of tea. Some of the studies discussed in it have been called into question. But the overall lesson is a useful one: incentives matter. 

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