In the Christian Bible, there is a stop for two builders. One built his house on stones, and the other on the sand:
“Everyone who hears these words of mine and acts would be like a clever man who built a house on a rock. It rained, it flooded, it blows, it blows the wind and it beats in the house, but it was based on the rock.
This concludes the famous sermon in the mountains that lay out what Jesus Christ must do to live a good life, become a good person, and worship God. Building on solid principles, life can withstand many things. In contrast, life built on unintegrated principles will collapse when bad times quickly fall apart.
The same applies to economic reasoning. ECON 101 (or ECON 211 organized at my university), the Principles of Microeconomics is a fundamental course. One thing I tell students is that all subsequent business courses are based on the first foundation. If they understand the basics, everything flows from it.
When I teach higher-level courses (international trade, money, banking), I always go back to principles and strengthen my assessment of the power of economic thinking at the principle level. I frame things from an incentive perspective. “Why are bonds traded at discounts when the coupon rate is below the market rate? You should not tell me mathematically… what are the incentives here?” These are the questions that appeal to me in my exams.
Basic knowledge is essential to understanding. Underestimating the basics makes economic relations easier to understand. You may not know the exact answer.
Mathematics is a useful tool, but when not combined with basic economics, the findings are unstable – like a construction for housing on the sand. Mathematical models may look nice, but they still fall apart when things change. We’re always watching this. In particular, experts like Michael Pettis and Oren Cass abandon their economic foundations and simply build buildings that rise above the sand, which collapse under scrutiny (see, for example, “Accounting Identity and Economic Theory of Albrecht.”
Even today, in a chaotic economic environment, I find it helpful to me to rely on the lessons I learned in ECON 101. They help me to rule out the noise and allow us to focus on the signal.
So, my advice to those who understand and really want to understand economics: Learn your basics. Building education on a solid foundation. When others try to fascinate flashy mathematics or logical conundrums, it helps to hold your eyes. If you can’t link to the Economic Foundation (or worse, you’ll sub-appeal like, “Econ 101 is too simple!”), you’ll start to look like you’re being shown.
