The Most Useful Idea in Economics

Episode 963¹ of the Planet Money podcast asked a bunch of economists “What’s the most useful idea in economics?”

I like the three answers they led off with (concepts I use all the time): comparative advantage, opportunity cost, and marginal thinking.

Comparitive advantage is useful in deciding what and when to delegate, especially to someone who has less experience in a particular task. Yes, I might be able to do the job more quickly myself, but if I use the time to do something they can’t do—or that is inappropriate for them to do—that’s a win.

This of course is closely related to opportunity cost. There are loads of interesting ideas to explore, but finite resources. Every hour spent looking at Concept A is an hour not spent on Concept B, and there are always fewer hours in the budget than ideas that pass the bar of interesting-enough-to-warrant-attention. Asking myself “Doing this means not doing what else?” helps me to prioritize…especially at the margins.

I use marginal thinking in two main ways. An example of the first is realizing that the 100th hour studying Concept A is often not as valuable as the first hour thinking about Concept B, especially if that hour is enough to say that Concept B won’t work, or is far-enough out that there’s limited value in working on it now. Similarly, 200 hours improving the fidelity of a model to add a decimal point of precision is probably not as useful as the first 10 hours spent documenting assumptions and methdology.

The second way is understanding how a system’s architecture influences its fixed and marginal cost structure. Fixed vs. marginal costs is a topic Ben Thompson writes about frequently at Stratechery; specifically, that much of what’s made the internet so transformative is its ability to eliminate marginal distribution and transaction costs.

That same type of revolution is needed in space, where much of what we work on are bespoke, one-off (or at least low-production-rate) systems. To make space more affordable, we need more volume over which we can amortize our non-recurring engineering/effort/expenses, and we need systems that can be operated at lower margainal costs, so that we can afford to charge lower prices.