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“The Economic Way of Thinking” 11 th Edition

“The Economic Way of Thinking” 11 th 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

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“The Economic Way of Thinking” 11 th Edition

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  1. “The Economic Way of Thinking” 11th Edition Chapter 1 The Economic Way of Thinking

  2. Chapter 1 Outline • Introduction • Recognizing Order • The Importance of Social Cooperation • How Does it Happen • An Apparatus of the Mind

  3. 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

  4. 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?

  5. 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.

  6. Recognizing Order • Thousands of diverse commuters travel to work each day • Each is expected to follow a set of rules • Traffic flows smoothly

  7. 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.

  8. How Does It Happen How does society determine the course of actions necessary to produce the goods and services we enjoy?

  9. 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

  10. 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.

  11. 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.

  12. An Apparatus of the Mind • Question • Does this assume people are selfish, materialistic, and shortsighted?

  13. 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

  14. Expected Benefits and Expected Cost An Apparatus of the Mind Economic theory assumes that : People make choices under scarcity based on

  15. An Apparatus of the Mind The core problem for economic interactions is a multiplicity of diverse and even incommensurable individual projects.

  16. 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?

  17. 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.”

  18. 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.”

  19. 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.”

  20. 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?

  21. Cooperation Through Mutual Adjustment • Economizing actions create alternatives available to others. • Social coordination is a process of continuing mutual adjustment.

  22. Cooperation Through Mutual Adjustment • Example • Why don’t drivers on a freeway drive in one lane?

  23. Cooperation Through Mutual Adjustment • The net advantage determines people’s actions • Costs versus Benefits • Money persuades!

  24. 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.

  25. 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.

  26. 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

  27. The Biases of Economic Theory • Economics focuses on choice. • Events result from people’s choices • Only individuals choose.

  28. The Biases of Economic Theory • Individuals choose after weighing benefits and costs • Interactions assume some “rules of the game.”

  29. Biases or Conclusions? • Question • Are the biases inherent in the economic way of thinking really prejudices instead? • We must begin somewhere.

  30. 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.

  31. No Theory Means Poor Theory • Discovery of causal relationships depends upon theory. • We observe only a small fraction of what we “know.”

  32. 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

  33. 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

  34. 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

  35. END OF CHAPTER 1

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