10 Economic Truths We Cannot Ignore

4. Money Is Worth More Today Than Tomorrow

The dollar I receive today is worth more than a dollar I’m promised sometime in the future. The dollar I get today is real, but the dollar I’m promised in the future will be worth less because of inflation, or I might not get it at all. After all, companies fold, people declare bankruptcy, or a lawsuit may wipe out my ability to collect. Also, the dollar I get today can be invested to create more dollars in the future.

5. Smart People Think at the Margin

A thinking person takes action only if the marginal benefit of the action exceeds the marginal cost. If a graduate degree is worth only another $2,000 per year at your job, but costs $35,000, it doesn’t take a rocket scientist to see that you’re going in the hole.

6. Compound Interest Is The Eighth Wonder Of The World

To think that a $1,000 investment (at 8 percent interest and compounded quarterly) when a child is born can be worth over $172,000 with NO other deposits when that child turns 65 really IS amazing. Put the power of compound interest to work FOR you rather than against you.

7. People Respond to Incentives

Whatever gets rewarded, gets done because behavior changes when costs or benefits change. Companies frequently ignore this truth and find that their incentive programs only cause people to perform in a way that will produce the incentive but still not produce the desired behavior.

8. Free Trade Makes Everyone Better Off

Imagine if all 50 states refused to trade with each other without tariffs, import/export quotas, or other barriers. The ability for all 50 states to trade with each other was one of the reasons the US became such an economic powerhouse. Free trade allows each person or nation to specialize in the activities he or she does best. By trading with others, people and nations can buy a greater variety of goods or services. Besides, nations who are trading partners have strong incentives to avoid wars with each other.

9. Markets Organize Economic Activity Better Than Bureaucrats

Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. Begin central planning by government bureaucrats and you get the opposite effect: inefficient allocation of resources, shortages, and surpluses. No one understands how best to spend money than the people directly affected by it.

“In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.” –Robert Long, The CATO Institute

10. Your Standard of Living Depends on Your Ability to Produce Results

Countries with productive workers creating a large quantity of desirable goods or services per unit of time enjoy a higher standard of living than nations with lower productivity. As a nation’s productivity grows, so does its average income. Individuals who can consistently produce desired results will always be in demand.

The beauty of truths, laws, and principles isn’t that they’re restrictive, it’s that once you understand how they work, you can use them to your advantage.

photo credit: randomduck

Note: this post was included in The Carnival of Personal Finance: Cyber Monday Edition at Mighty Bargain Hunter.