Economic literacy is key when it comes to managing your money well over a lifetime. Now, I don't mean that you should become a finance economist or a calculus wizard. But the case for economic literacy in the new economy is especially compelling. In our intensely competitive high-tech society, the traditional paternalism of the nation's major institutions, from business to government to education, is crumbling. Employers insist that their workers take more responsibility for their retirement arrangements and funding. Colleges count on parents and students to come up with more tuition dollars on their own. Individuals are increasingly expected to prepare themselves for rapid change and bear much of the risk from the upheavals in our economy.

My favorite definition of economics comes the British economist Alfred Marshall, who described the discipline as "the study of mankind in the ordinary business of life." Think about it. We're all amateur economists at work or at the neighborhood barbecue, talking about job opportunities, paying off credit card debt, and puzzling over the presidential candidates' latest proposal for shoring up Social Security or overhauling the health care system. Economic literacy implies a basic working knowledge of the concepts and language of everyday business activity and economic policy.

But there's more than that to economics. The essence of economics is tradeoffs, a bedrock idea captured by such expressions as "you can't have it all" or "there is no free lunch." For instance, one of the most important tradeoffs in stock market investing is between risk and return. But the risk and return tradeoff lies at the core of any financial decision, such as the rent-versus-buy decision or the purchase of a new or used car. The bottom line is that economic literacy will help you make better informed choices.

 


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