Rethinking Economics in a real world perspective
Lecture 1
The science of Economics can be defined as: the allocation of scarce resources. There are
three mechanisms in economics:
1) community
a) consent, sharing, cooperation
2) market
a) prices
3) politics
a) power, coercion, authority
In these three mechanisms are different levels, going from micro to macro:
- micro:
- households, individuals, firms
- macro:
- aggregated; countries, world market
- meso:
- certain demographics, demographic groups, sectors, cities
Neo-classic economics has a lot of faith in the market mechanism to allocate resources.
- micro-level: individuals are always rational, firm are subject to governments,
individuals when engaging in market is that they have full information
Lecture 2 Neoclassic
referring to neo-classical axioms
Questions:
What does efficiency imply with respect to resource allocation
- when resources are allocated to their highest use, to the highest utility. maximise
utility (optimum), away from this point you are wasting resources when wanting to
maximise welfare
- cannot make anyone better off without more costs/making someone
better off → this not meaning that people in this optimum are happy
can farmers be inefficient
- according to the assumption of the model, no. it assumes farmers have; full
information and best optimum of allocating resources. society could not be happy
with farmers, for instance in nitrogen case, but according model they are eff.
- if you would argue that farmers are inefficient, it would mean making assumptions
about behaviour
what about time
- neo-classical: time is a resource, there is an optimal allocation.
- However, in reatity spending a lot of time on something would increase your
demand/rate of return/utility. for instance listening more to music would in the end
increase your utility
what are z-goods
- goods that can explain utility but do not have a real price. fun is the good produced
from going to forexmaple the cinema. the z-good values this utility. it is the attribute
of a good: how does it look like, how does it taste etc. you can derive supply and
demand functions of this.
- how can we stimulate demand for something (in making policies)
how can countries sustain growth
, - By investing in technological change (increasing ‘A’), invest in education, knowledge,
research etc. here governance can influence, policies for more education/improving
education and applying research in policies/innovations
why is technological change so important
- in case of population growth, income per worker goes down (steady state goes down,
due to output per worker with same capital). to prevent this you need technological
development, to increase output per worker
does catching-up happen:
- catching-up does not happen in all countries because countries do not have
institutions in place that can provide catching up. changing your institutions is part of
catching up, but insitutions are external from the model. countries catching up with
respect to output to worker. based on existing knowledge you can upgrade, however
in model with respect to existing capital, going back to the steady state level
Literature
Literature
Stigler and Becker: De Gustibus non est Dispuntandum
Hypothesis: widespread and persistent human behaviour can be explained by a generalised
calculus of utility-maximising behaviour, without introducing the qualification “ tastes
remaining the same”. The authors assert that this traditional approach of the economist
offers guidance in tackling these problems and that no other approach of remotely
comparable generality and power is available. Maximisation of utility function
- Maximise commodities that they produce with market goods, their own time, their
skills etc. also called z-goods
- Z-goods have no market price since they are not sold but do have shadow prices,
determined by their costs of production
- Marginal utility of time increases by the increase of stock of the product (listening
music)
- Tastes are a product of experience and usually develop from an initial state of
vagueness to a state of refinement and stability, but once formed they may decay
and disintegrate
- Four classes of phenomena to be inconsistent with the stability of taste:
- Adiction, habitual behaviour, advertising and fashion
Chapter 1 Komlos
Humanistic economics: it implies the vision that a kinder and more just economic system is
possible, one that is embedded ina a truly democratic society that not only empowers people
but enables them to live their daily lives with less uncertainty, less fear etc. A meaningfull life
goes well beyond consumption and production. The puprose of any economic system ought
not to be growth for its own sake, but the efficient allocation of resources
Misconceptions in mainstream economy:
- humans are rational
- good have no quality dimension, so product choice is a no-brainer
- consumers have perfect information
Solow - a contribution to the theory of economic growth
,This paper is devoted to a model of long-run growth which accepts the Harrod-domar
assumptions except that of fixed proportion
Harrod-Domar Model: even for the long run the economic system is best balanced on a
knife-edge of equilibrium growth
- Natural rate of growth depends (in the absence of technological change) on the
increase of the labour force and the warranted rate of growth which depends on the
saving and investing habits of households and firms
- Long-run in terms of the multiplier, the accelerator, the capital coefficient
r = K/L → the ratio of capital to labour
- Solow argued that micro-economics lacked from this model and made the neo-
classical growth theory. with short-term tools looking at long-term economy
Stigler and Becker - De gustibus
The authors take categories of behaviour commonly held to demonstrate changes in tastes
or to be explicable only in terms of such changes and show both that they are reconcilable
with our assumption of stable preferences and that the reformulation is illuminating.
four classes of phenomena to be inconsistent with the stability of tastes: addiction, habitual
behaviour, advertising and fashions.
neo-classical vs classical economics
neo classical:
- Marshall,Menger, Stenley, Walras
- based on what people want and that determines how the resources
are allocated → based on (marginal) utility
- looking at the price equilibrium. factor income result of supply and demand
(market equilibirum)
- assumptions:
- agents behave rational: producers and consumers
- consumers maximise utility and producers profit
- consumers and producers act independently under full information
classical:
- factor income determined historical (Marx; entrepreneurs exploit labour)
- value of goods based on production costs (supply side), diminishing returns
Neo-classical economics: micro-level
All neo-classical models are based on these axioms. Only assumptions but no explanations.
therefore too limited.
De Gustibus non est Disputandum
It makes sense if we assume that preferences are stable versus preference changes. for
instance looking at drug consumption: their preferences have changed policies
- Stigler and Beckler argue that a much stronger model if preferences are stable.
According to them, stable preferences have a better explanatory model. this
assumes that households not maximise utilities with time and money (household
production = time and money to produce goods)
, - stable preference better model than the classic neo-classic utility
maximization
Harrod Domar model - knife-edge growth
- how to explain business cycles, H-D developed this model to answer this question
- economic policy can bring back economy to equilibirum
- Solow argued that micro-economics lacked from this model and made the neo-
classical growth theory. with short-term tools looking at long-term economy
lecture 3 behavioural economics
Literature
world bank report 2015
Three principles of human decision making (behavioral economy):
- people make most judgements and choices not deliberatively but automatically
(thinking automatically)
- framing or labelling effect in whcih assigning something to a category
influences how it is perceived
- how people act and think often depends on what others around them do and think
(thinking socially)
- individuals in a given society share a common perspective on making sense of the
world around them and understanding themselves (thinking with mental models)
Thinking automatically
people want to conform to social expectations and they do not have unchanging or arbitrary
changing tastes. Preference depends on the context and social institutions through which
individuals see the world. People have two systems of thinking; automatically and
deliberative. however, nearly all decisions are done automatically (intuitive).
Thinking socially
individuals are social animals that are influenced by social preferences, networks, identities
and norms. Human sociality (the tendency of people to be concerned with and and associate
with each other) adds a layer of complexity and realism to the analysis of human decision
making and behaviour. The design of institutions and the ways in which they organise
groups and use material incentives, can suppress or evoke motivation for cooperative tasks.
People often behave as conditional cooperators: individuals who prefer to cooperate as long
as others are cooperating. In most situations, people behave as conditional cooperators
rather than free riders.
Thinking with mental models
Mental models affect what individuals perceive and how they interpret what they perceive.
People do not draw on self-invented concepts but they use concepts, categories, identities,
prototypes, etc. from their communities (culture). For example, stereotypes affect the
opportunities available to people and shape processes. Finding ways to break this cycle
could increase the well-being of marginalised individuals. Research has found that poverty
imposes a cognitive tax. Therefore development policy can implement have highly cost-
effective behavioural interventions.
