Econ way of thinking

“The Economic Way of Thinking” 11th Edition
Chapter 1
The Economic Way of Thinking
Chapter 1 Outline
Introduction
Recognizing Order
The Importance of Social Cooperation
How Does it Happen
An Apparatus of the Mind
Chapter 1 Outline
Cooperation Through Mutual Adjustment
Rules of the Game
Property Rights as Rules of the Game
The Biases of Economic Theory
Biases or Conclusions?
No Theory Means Poor Theory
Introduction
Is order prevalent in society?
How does an economic system work when it is functioning properly?
What mechanisms of social cooperation do we depend upon?
Recognizing Order
Rush hour traffic is an example of social cooperation.
There are general rules that everyone is expected to obey.
We tend to notice failures.
We take successes for granted so much so that we aren’t even aware of them.
Recognizing Order
Thousands of diverse commuters travel to work each day
Each is expected to follow a set of rules
Traffic flows smoothly
The Importance of Social Cooperation
Civilization depends upon cooperation.
Thomas Hobbes (1588-1679)
Contended that people’s commitment to self-satisfaction required force to keep them from attacking one another.
How Does It Happen

How does society determine the course of actions necessary to produce the goods and services we enjoy?
How Does It Happen
Adam Smith (1723-1790)
Most people believed political rulers’ attention was necessary to sustain society.  Smith disagreed.
In 1776 published An Inquiry into the Nature and Causes of the Wealth of Nations.
Founder of Economics
An Apparatus of the Mind
What is The Economic Way of Thinking?
John Maynard Keynes
The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy.
It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.
An Apparatus of the Mind
Summary
All social phenomena from the actions and interactions of individuals who are choosing in response to expected additional benefits and costs to them.
An Apparatus of the Mind
Question
Does this assume people are selfish, materialistic, and shortsighted?
An Apparatus of the Mind
Focus is on actions, interactions, and consequences.
Actions emphasize economizing.
Economizing -  
Allocate resources in a way that allows the economizer to derive whatever he/she wants
Results from scarcity
Involves trade-offs
An Apparatus of the Mind
An Apparatus of the Mind

The core problem for economic interactions      is a multiplicity of diverse and even incommensurable individual projects.
An Apparatus of the Mind
Specialization (Division of Labor)
Results from people’s economizing actions.
Is necessary to increase production.
Question
Will specialization without coordination work?
An Apparatus of the Mind
Adam Smith referred to the Commercial Society in his “Wealth of Nations” and said…
“It is but a very small part of man’s wants which the produce of his own labour can supply.”
An Apparatus of the Mind
Adam Smith and the Commercial Society…
“He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.”
An Apparatus of the Mind
Adam Smith and the Commercial Society…
“Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”
An Apparatus of the Mind
Social coordination is highly complex
Question
How are the parties involved in producing goods and services motivated to coordinate their activities?
Cooperation Through Mutual Adjustment
Economizing actions create alternatives available to others.
Social coordination is a process of continuing mutual adjustment.
Cooperation Through Mutual Adjustment
Example
Why don’t drivers on a freeway drive in one lane?
Cooperation Through Mutual Adjustment
The net advantage determines people’s actions
Costs versus Benefits
Money persuades!
Rules of the Game
Economic systems and social interaction are directed and coordinated by the rules participants know and follow.
Disputed – inconsistent – unclear rules cause the game to break down.
Property Rights as Rules of the Game
Property rights are an example of rules of the game of social interaction.
A market exchange economy is based upon private property rights.
Socialist economies – private & public property rights.
Change away from socialism may be chaotic – i.e. Soviet bloc.
Property Rights as Rules of the Game
Clearly defined and enforced property rights…
Encourage the effective use of already existing scarce resources
Spark efforts to discover new resources
Innovate new cost-cutting technologies
Develop new talents and skills
The Biases of Economic Theory
Economics focuses on choice.
Events result from people’s choices
Only individuals choose.
The Biases of Economic Theory
Individuals choose after weighing benefits and costs
Interactions assume some “rules of the game.”
Biases or Conclusions?
Question
Are the biases inherent in the economic way of thinking really prejudices instead?
We must begin somewhere.
Biases or Conclusions
We are always wrong to some extent.
Every “true” statement leaves out a great deal that is also true and thus errs by omission.
No Theory Means Poor Theory
Discovery of causal relationships depends upon theory.
We observe only a small fraction of what we “know.”
No Theory Means Poor Theory
Economic theory by itself cannot answer any interesting or important social questions.
It must be supplemented with knowledge from other sources
History
Culture
Politics
Psychology
Social Institutions
Once Over Lightly
Economics is a theory of choice and its unintended consequences.
All social phenomena emerge from
Individuals’ actions and interactions
In response to expected benefits and costs
Once Over Lightly
Economizing
Individuals continually comparing
Expected additional benefits
Expected additional costs
Rules of the game are important as they influence our choices
Property Rights
END OF CHAPTER 1