Introductory Economics: Foundations

Before I get into simplifying the economy for clarification purposes by talking about households, I think I should address something I brought up in my previous post on economics. I said that the reason I studied economics was to answer certain questions I had about the world. What were these questions?

My first questions were not necessarily economic questions. The questions I had in my mind as a young and impressionable undergraduate were philosophical ones. What is the meaning of life? Why is there injustice in the world? Who has power? What is democracy? Why is there war and hate in the world? What should I do with my life? With my limited experience and understanding of the world, the best answers I could come up with any for any of these questions had to do with money, as in the instruction – follow the money. In other words, my intuition told me that if I could understand how the economy worked, I would be much closer to having answers to all the above philosophical questions that plague many a young and inquisitive mind.

My first college economic course was taught by a raving free market economic lunatic who would later host a conservative economic blog that brought him national prominence. He was a fascinating teacher and he instilled in me the economic notion that people operate according to what is in their best interest. This is a basic assumption in economics. Assumptions are important to economic thought and theory. Most of the underlying assumptions for economics, such as people make decisions based upon what is in their best interest, are not only conceivable, but are not overly objectionable. The assumptions that are taught in introductory economics are important because they form the mathematical foundations of a theory that is taught in upper level and graduate economic courses. I will go into these assumptions in greater detail in another post. Suffice it to say that the final outcome of this assumption of individuals making decisions according to what is in their best interests is homo-economicus or economic man.
Economic theory postulates a society populated by economic man; an entire population of identical actors making decisions that will maximize each of their happiness and the result of this is a society that is the most well off. The fin de siècle economist and social critic, Thorstein Veblen, described these economic actors called homo-economicus as “homogeneous globules of desire.”

Some of this may be familiar to those of you who have suffered through the introductory economics course while you were an undergraduate student. The mere mention of introductory economic classes to most individuals can bring a sense of insecurity. I have often heard statements such as, “the only course that I got a C in was Intro to Econ,” or “I don’t remember much from the class except how incomprehensible it was.”

Introductory Economics provides the first exposure to concepts such as supply and demand curves, general equilibrium, consumer and producer surplus, price elasticity, gains from trade, comparative advantage, prisoner dilemmas, externalities, perfect competition and other economic concepts that can be a trying and forgetful experiences. However, what often sticks in peoples minds from these courses are certain counter intuitive concepts that were apparently proved to the young student using the economic model introduced in these classes; i.e., minimum wage actually will end up hurting young and poor wage earners, restrictions on trade are detrimental to economy, or that taxes from the government will undoubtedly lower the overall welfare in society. The actual details of the proof are lost to most of us, but the enthusiasm of the instructor who introduced these concepts to many people remains and are vehemently trotted out as absolute proofs daily around the blogosphere today.

As we are bombarded with news reports about the falling stock market, unemployment figures and bank failures, I don’t think an understanding of economic theory is necessarily going to help us understand exactly why our economy has failed this time around, because there are no simple answers and economic theory is a simplification of a very complex process. However, there is a very important reason for getting a handle on exactly what the economic theory says and that is the fact that we should know enough to know when economists are basing their opinions on a theory that is a simplification and the conclusions drawn from these theories are not always applicable or helpful when dealing with real world problems. A famous economist from the past, Joan Robinson, once said, “the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.
Simplifying for the sake of understanding concepts is a very good thing, but we should also understand all the assumptions that underlie these models of simplification. The result of many people’s exposure to a limited set of neoclassical economic ideas is often fundamentalist maxims such as “government is awful and cannot do anything worthwhile,” “restrictions on trade are always bad for both importing nations and exporting nations,” and/or “raising the minimum wage will always lead to lowering the welfare of the least well off people in society.” People often believe they have discovered a Truth about the world after sitting through the introductory courses on economics and then want to go out and change the world to conform to the simple models they were introduced to in these classes often with the encouragement of professors or entire economic universities or think tanks espousing similar ideas at the expense of intellectual honesty.

Whenever you hear the cry from people or pundits that the we must have “free markets” or “lower taxes” or call any government program “socialist,” you can be sure that these people or pundits are informed by these simplified models in economics and are using them to their advantage. For there is one truth from economics that we can take away introductory economics that does provide light on individuals who describe themselves as “capitalists” and “free market activists” while calling those of us who criticize such fundamentalist beliefs “socialists.” These individuals are doing what we all do; they are operating according to what is in their own best interest because there is a hell of a lot of money at stake in the economy. I sometimes think we should all carry around certain moral assumptions when we are in possession of objective models that we are told provide us with scientific proof. Moral assumptions such as “power corrupts and absolute power corrupts absolutely,” and that wealth is the surest means for obtaining power, because there is nothing objective about those who ask for the freedom to do whatever they wish to do with their wealth regardless of the negative effects this may cause society. These people want money and power and they will do what ever it takes to obtain it and to hold on to it. This is the meaning and motivation behind many large and historical events we witness in the world that we place the label “evil” upon.

It looks like I will have to wait for households and a simplified model of economics for another day. Don’t worry, we will get to it. I’m not sure if will be the next post or one further down the line. Actually, I have no idea what the structure of format for all these posts on economics will look like. But, we will get to the nitty-gritty sooner of later.