ECON1001E,F

1. ECON1001E,F Introduction

2. Course requirements • 3-hour lectures each week • One-hour tutorial (optional) each week; schedule to be announced soon • 3 assignments • 2 mid term tests (Saturday mornings of Oct 8 and Nov 12; time/date non-negotiable) • No make-ups for mid terms or final exam • He/she fails to attend a mid term with approved reasons will have the share of the mid term moved to the final exam • Final exam is cumulative

3. Requirements

4. Grade Distribution

5. Introduction • Macroeconomics versus Microeconomics • Tentative Nature of Economic Knowledge • The Assumption of “Economic Man”

6. What is Economics? • Studies inflation, unemployment, business cycle, economic growth, income inequality • Studies how a consumer’s decisions, a firm’s decisions, and a laborer’s decisions, etc. • Economics is the studies of how economy functions —macroeconomics versus microeconomics • Microeconomics provides foundation for us to understand macroeconomics • Note the tentative nature of economic knowledge

7. What is Economics? • On Oct 4, 2008, Alan Greenspan tried to explain to the Congress what had gone wrong with the financial markets over the past year. • “In other words,” a house representative said, “you found that your view of the world, your ideology, was not right. It was not working.”

8. What is Economics? • “Precisely,” replied Greenspan. ‘That’s precisely the reason I was shocked, because I had been going for forty years or more with very considerable evidence that it was working exceptionally well.” • “The whole intellectual edifice collapsed in the summer of last year,” he added. • Bottom line: we should treat our economic knowledge as tentative; should be wary of its limitation

9. In everyday life, the individual cares more about himself/herself than about others. Adam Smith (1723-1790) in his Wealth of Nations (1776) used “self-love” to describe this propensity. The Assumption of Economic Man

10. The Assumption of Economic Man • “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” • each participant in a competitive market is “led by an invisible hand to promote an end which was no part of his intention.”

11. In “Biographies of Money Makers” of his Records of the Historian (史记貨殖列傳 ) , SimaQian (司馬遷) wrote that: 天下熙熙，皆為利來；天下壤壤，皆為利往 夫千乘之王，萬家之侯，百室之君，尚猶患貧，而況匹夫編戶之民乎？ 人各任其能，竭其力，以得所欲，故物賤之徵貴，貴之徵賤 。各勸其業，樂其事，若水之趨下，日夜無休時。不召而自來，不求而民出之 The Assumption of Economic Man

12. The Assumption of Economic Man • Economic man, or Homo economicus — individuals are selfish, narrowly defined. • A good assumption for the studies of everyday life matters • A system that relies on unlimited sacrifice of most people for a long period of time is doomed to fail (communism; planned economy) • Mandated MPF will lead to employers forcing their employees to switch to become contractors. • Minimum wage…. • Market participants will find way to undermine regulations

13. Moral Sentiments • In reality, individuals are often altruistic, concerned about the well being of others • “If I am not for myself, who will be for me? If I am only for myself, what am I? If not now, when?” (Rabbi Hillel) • Individuals are concerned about fairness too • Prior to the Wealth of Nations (1776), Smith wrote the Theory of Moral Sentiment (道德情操论; 1759), in which he emphasized the importance of empathy or sympathy in human society.

14. Moral Sentiment • The following quote is from Wikipedia http://en.wikipedia.org/wiki/Adam_Smith#Teaching_career : • Smith published The Theory of Moral Sentiments(MS, in short) in 1759, embodying some of his Glasgow lectures. This work was concerned with how human morality depends on sympathy between agent and spectator, or the individual and other members of society. Smith defined “sympathy” as the feeling of moral sentiments….. Following the publication of MS, Smith became so popular that many wealthy students left their schools in other countries to enroll at Glasgow to learn under Smith.[18] After the publication of MS, Smith began to give more attention to jurisprudence and economics in his lectures and less to his theories of morals ……

15. Moral Sentiments • Why warning against the “economic man” assumption? • 1) It may turn good people into bad people. Economic students tend to be more selfish. • It also fails to attract students with strong ethnical feelings to study economics • “While my mom and kindergarten teachers taught me moral, my graduate economics tried to un-teach me,” Matthew Rabin, a Clark medalist at UC Berkeley • 2) Wrong policy prescription

16. Haifa’s day care center experiment • A fine was imposed on parents who were late picking up their children • Parents responded to the fine by doubling the fraction of time they arrive late. • When after 12 weeks the fine was revoked, their enhanced tardiness persisted unabated. • The fine seems to have undermined the parents’ sense of ethical obligation to avoid inconveniencing the teachers and led them to think of lateness as just another commodity they could purchase. • “Policies designed for self interested citizens may undermine ‘the moral sentiments’: evidence from experiments,” Science, 320 (2008) by Sam Bowles

17. Quote from Moral Sentiment

18. Take out for today • For macroeconomic issues, our understanding is limited • Even for microeconomic issues, the assumption of economic man (narrowly defined) is just a first step for analysis; should not be taken too seriously