The Prisoner’s Dilemma is a famous application of game theory in which two prisoners are both better off cooperating with each other, but if one of them cheats, the other is better off cheating. Thus the dilemma. This model shows up in
Often ignored in mainstream economics, the concept of bribery is central to human systems: Given the chance, it is often easier to pay a certain agent to look the other way than to follow the rules. The enforcer of the rules is
A bottleneck describes the place at which a flow (of a tangible or intangible) is stopped, thus holding it back from continuous movement. As with a clogged artery or a blocked drain, a bottleneck in production of any good or service can
The usefulness of additional units of any good tends to vary with scale. Marginal utility allows us to understand the value of one additional unit, and in most practical areas of life, that utility diminishes at some point. On the other hand,
One of the marvels of modern capitalism has been the bookkeeping system introduced in Genoa in the 14th century. The double-entry system requires that every entry, such as income, also be entered into another corresponding account. Correct double-entry bookkeeping acts as a
These three concepts, along with other related ones, protect the creative work produced by enterprising individuals, thus creating additional incentives for creativity and promoting the creative-destruction model of capitalism. Without these protections, information and creative workers have no defense against their work
In chess, the winning strategy is usually to seize control of the middle of the board, so as to maximize the potential moves that can be made and control the movement of the maximal number of pieces. The same strategy works profitably
Another Scottish economist, Adam Smith, highlighted the advantages gained in a free-market system by specialization. Rather than having a group of workers each producing an entire item from start to finish, Smith explained that it’s usually far more productive to have each
The Scottish economist David Ricardo had an unusual and non-intuitive insight: Two individuals, firms, or countries could benefit from trading with one another even if one of them was better at everything. Comparative advantage is best seen as an applied opportunity cost:
Coined by economist Joseph Schumpeter, the term “creative destruction” describes the capitalistic process at work in a functioning free-market system. Motivated by personal incentives (including but not limited to financial profit), entrepreneurs will push to best one another in a never-ending game