Beware of Economic Misconceptions
In my own experience, non-economists often have some natural economic misconceptions. Below, I will spell out some important misconceptions and the basic insights from economics needed to clear them up.
Unfortunately, trained economists are often eager to go beyond basic insights to theories that are more speculative. There are two ways that these “advanced” economic ideas can cause non-economists to fall back on their natural economic misconceptions. The “advanced” ideas can turn out to be unreliable, causing the economics profession to lose credibility, or the speculative theories themselves can serve to reinforce natural economic misconceptions.
One natural misconception is that prices are set by individuals, and in particular the individuals who run businesses. After all, most businesses have a price list for the goods and services that they offer.
This misconception shows up when people see business as inherently profitable, with complete power over its consumers. If profitability were a given, then no firm would ever fail. The power of any one business is constrained by other businesses competing for its customers.
