On Economics

Desmond

McNeill

NATURAL SCIENCES HUMAN SCIENCES

Phenomenon being Studied*

Explanation Explanation / Interpretation (thin description) (thin/thick description) Reductionist Holist Agent Structure (physics) (ecology) (economics) (anthropology) Laboratory Field ….. Field (Where) Quantitative Qualitative Quantitative Qualitative (How) (Predominant

method)

* e.g a rainbow, a wink, a factory

• Economists have a special way of seeing the world.

• And they exert great influence over decision-makers that shape our daily lives.

 

• People (homo economicus: rational, self-interested, autonomous)

• Interpersonal relations (game theory)

• Institutions (markets)

• Decision-making (optimisation within constraints)

• Time (discounting)

• Nature (as a resource)

How economists think about:

• The law of demand: when prices rise (other things being equal) demand falls.

Supply and Demand

• Demand: aggregate across many individuals consumers

• Supply: aggregate across many individual firms

• Market: many buyers and sellers

• Equilibrium: the market ’clears’

• Use of diagrams/geometry (now replaced by algebra)

• Explaining consumer behaviour

Economic Models

• A consumer’s demand for a good X over a given time period (dX) is as follows:

• dX = f (PX, PR, y, T, E, A, Z)

•  where,

•  PX is the price of the good

• PR is the prices of other goods which are related to good X

• Y is the consumer’s income• T is the consumer’s taste for good X• E is the consumer’s expectations about future prices • A is advertising• Z is other relevant factors

Standard economic textbook theory.

 

•  it is an abstraction (hence the use of symbols)

• it simplifies (there are a limited number of explanatory variables)

• it limits the a explanatory variables to those which can be measured

About the model - Note:

• Well-established economists have long criticized standard economic theory. For example, Becker, a Nobel Prize winner:

•  • Economists ”have no useful theory of the

formation of tastes, nor can they rely on a well-developed theory of tastes from any other discipline in the social sciences, since none exists.” (Becker, 1976: 133)

•

2. Recent economic theory

• More recent theories are more sophisticated.

• For example, attempts have been made to study consumer choice as a ‘game’ in which the utility of an individual consumer derives not only from consumption but also from status.

• In terms of theory, the strength of the economic approach is its analytical rigour.

• But the fact that it reliant on quantifiable variables is a limitation: many variables are not quantifiable; and even for those that are, the data may not be very reliable.

• In terms of policy, the strength of the economic approach is that it offers a viable instrument.

• Thus, prices can be modified by policy-makers (if politically feasible);

• But other factors are less easy to modify.

• What would an economic model look like?

Rural-urban migration

• In the model, an equilibrium is reached when the expected wage in urban areas (actual wage adjusted for the unemployment rate), is equal to the marginal product of an agricultural worker. The model assumes that unemployment is non-existent in the rural agricultural sector. It is also assumed that rural agricultural production and the subsequent labor market is perfectly competitive.

Harris-Todaro Model

• People (homo economicus: rational, self-interested, autonomous)

• Interpersonal relations (game theory)

• Institutions (markets)

• Decision-making (optimisation within constraints)

• Time (discounting)

• Nature (as a resource)

How economists think about:

•  

• Because they believe the model is ‘true’?

•  

• Because it is tractable?

Why Economists think like this

Why Economists think like thisBecause they believe it is ‘true’Because it is tractable.

• Because they believe their theories are ‘true’?•  • Because they think that this an efficient basis for

decision-making?•  • Because economic instruments ‘work’?•  • Because they think it is defensible

Why policy-makers listen to them:

• “… our ethics drives our politics and our politics inform our economics”

 

• “When thinkling economics we don’t entertain doubts”

Dasgupta: Preface

• What is economics?

• “a point of view of the circumstances of living that gives prominence to the allocation of scarce resources – among contemporaries and across the generations” (12)

Dasgupta: Introduction

• Explanation, prescription, forecast. (7)

• Aggregation, averaging: millions of individual decisions: with unintended consequences (8)

• Making sense of the social world: Models (9)

• Quantification/mathematics: efficient, very few causal factors (9)