Economics of small changes

Consider the following three actions:

  1. I bury $20 in my back yard.
  2. I sell a pound of strawberries at a farmer’s market.
  3. I accept an engineering job I’m offered.

Each of these actions has some obvious local effects:

  1. I’m $20 poorer.
  2. I have some money; my customer has some strawberries and they won’t buy strawberries from anyone else.
  3. I have an engineering job; my employer has an engineer and will not hire anyone else.

But each of these actions also has a more subtle long-term effect:

  1. The value of a dollar is slightly increased; everyone else is slightly richer (or the government is slightly richer, depending on their monetary policy).
  2. The price of strawberries is slightly decreased; worldwide strawberry production will decrease to substantially offset my contribution (and those resources will be used for other things).
  3. Engineering salaries are slightly reduced.

These long-term effects are very small but affect a very large number of people. They are mediated by complicated chains of cause and effect with which I have no direct experience. There are many causal steps between burying money in the ground and my local supermarket decreasing the price of milk very slightly. This seems like a brittle picture of how the world works, which could well be completely inapplicable to the real world even if it applies to an idealized efficient market.

Nevertheless, I think that these indirect effects are quite robust in the face of uncertainty and non-ideal behavior. Read the rest of this entry »