Tuesday, August 01, 2006

What is Economics Good for Anyway?

This excerpt is taken from David Friedman's Price Theory textbook. It is available on line.


Looking at the title of this section, it may occur to you that it belongs in the first chapter of the book, not the last. As a believer in rational behavior, I should perhaps have explained to you why economics was worth learning before expecting you to spend a lot of time and trouble learning it. Unfortunately, if I had told you what economics was good for before you read the book, you might reasonably enough have dismissed my claims as no more than deceptive advertising. You may still conclude that, but at least you now have some evidence on which to base your conclusion.

There are at least four different reasons to learn economics. The first is that economists, in the process of developing a theory of human behavior based on rationality, have done quite a lot of useful thinking about how it is rational to behave. While we may know very little about what your objectives are or should be, we know quite a lot about how, given a set of objectives, they can best be attained. Once you understand concepts such as marginal cost, marginal value, sunk cost, and present value, you should find them to be useful tools in making decisions about how to organize your life. When you finally realize that you have invested six months of effort and heartache pursuing a member of the opposite sex who has no interest at all in you, you can sum up your situation--and reluctantly reach the correct conclusion concerning what to do about it--with the observation that "Sunk costs are sunk costs." When deciding whether to spend another few weeks looking for a better buy in a house or a car, you can put the issue more clearly by asking, not whether you have found the best possible buy, but whether the expected return from additional search is greater or less than its marginal cost.

A second reason to learn economics is in order to understand and predict the behavior of other people, especially the effects of the behavior of large numbers of people, in order to take account of it in planning your own life. This should be useful whether you are an investor trying to make money on the stock market, a general trying to keep his soldiers from running away, a homeowner trying to discourage burglars, or a student trying to predict future wages in different professions. In none of these cases will a knowledge of economics by itself be enough to answer your questions--you always need facts and judgment as well. But in all of those cases and many more, economics provides the essential framework within which knowledge and judgment can be combined to reach, perhaps, a correct conclusion--or at least a better conclusion than could be reached without economics.

A third reason to study economics may be that you expect to be a professional economist: someone employed to teach economics, to create economic theory, or to apply economic theory to questions that your employer wants answered. Obviously I believe that being an economist is an attractive profession; if I did not, I would be doing something else for a living. As a missionary, I hope some of you have come to the same conclusion. Of course, as an individual concerned with his rational self-interest, I hope that I have not persuaded enough of you to become economists to reduce my income significantly--or that if I have, you will have the consideration not to enter the field until after I have retired, or at least signed a long-term contract.

The fourth reason to learn economics is that it is fun. Once you understand the logic of economics, you can make sense out of elements of the world around you that you could not otherwise understand, which is entertaining as well as useful. You can also make the process of extracting a rational pattern from apparent chaos into a game played for its own sake--even in cases where it is likely enough that there is no pattern there to be extracted.

It may occur to you that I have omitted a fifth reason to learn economics, one that many textbooks would put first: to make yourself a better citizen and a better informed voter. It is true that understanding economics makes you much more likely to perceive correctly the consequences of actual or proposed government policy. But while that may be a good reason for me to teach you economics, it is not, unless you are quite an extraordinary individual, a good reason for you to learn it. In a society as large as ours, your vote, as I have pointed out several times, has a very small chance of affecting anything. If you are extraordinarily altruistic, the large number of people benefited by an improvement in government policy may balance, for you, the tiny chance that your actions will produce such an improvement. If you expect to be unusually influential--perhaps because your name is Kennedy or Rockefeller--you may conclude that the public benefit of making yourself an informed citizen justifies the cost. If neither is the case, it is unlikely that the effect on you of the public benefits produced by your improved understanding of economics will be worth the private costs.


Blogger The Legal Janitor said...

can I just say that I love your blog?

We need more economists, or at least people who can understand economics as it really is, rather than the A'Level mugging perspective.

5:26 PM  
Blogger a singapore economist said...

Yes, you can say it. Again and again and again...


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I really don't know much about economy but what I can say is that we need more economist with full knowlegde about it and try to improve our economy.

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Anonymous florida cpa said...

ok, first of all, im reading that book and its a little bit complicated but so much interesting!
second of all, its that we dont have economists because people hate maths ha ha, in my case love maths, but any way, interesting blog, love it

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