Thinking like a Political Economist
in the ordinary business of life
Paul Samuelson (1915-2009)
“I don’t care who writes a nation’s law - or crafts its advanced treatises - if I can write its economics textbooks.”
Economics is everywhere
Learning Economics as a Foreign Language
Ideology is everywhere
Gunnar Myrdal (1898-1987)
“...valuations are always with us... Disinterested research here has never been and can never be. Prior to answers there must be questions. there can be no view except from a viewpoint. In the questions raised and the viewpoint chosen, valuations are implied.” (1978)
Today
• Part I: What is the difference between the different economic schools of thought?
• Part II: What does it mean to think like an economist?
• Part III: What does it mean to think like a political economist?
PART I
The Ideological Landscape of Economics
Seven Samurai (1954)
The Ideological Landscape of Economics
Post-Keynesian
Institutional
Marxist
Feminist
Neoclassical
Classical
Ecological
Environmental
Sraffian
Austrian
Green
Anarchist
Gandhian
Shimomuran
Abenomics
Bionomics
Econophysics
Degrowth
Steady-State
new
Socioeconomics
Evolutionary
Ethonomics
Philonomics
Neuroeconomics
Happiness
Kudonomics
MainstreamMainline
ExperimentalClionomics
Econometrics
Political economyEconomic geography
Economic history
economic sociology
behaviouralNeoKeynesian
Complexity
Agent-based computationalRadical
monetarist
sustainability
Mainstream (or orthodoxy)
Heterodoxy
Marxian
Post-Keynesian
Institutional
FeministClassical
EcologicalSraffian
Austrian
Green
Gandhian
BionomicsDegrowthSteady-State
neoclassical
new keynesian
new behaviouralold behavioural
environmentalneuroeconomics
economic historyeconomic geography
economic sociology
econophysics
sustainability
new institutional
Mainstream
Heterodoxy
Neoclassical Economics
• Inspired by Jevons, Walras, Marshall
• Subjective theory of value
1. Micro > macro (methodological individualism)
2. The economy is made of rational and selfish individuals (no classes, only Homo Economicus)
3. Self-equilibrating markets, and invisible hand!
• High degree of precision and logical clarity because heavily mathematicalPaul Samuelson (1915 - 2009)
Individuals know what they are doing, so leave them alone - except when markets malfunction
1890
Marxian Economics
• Inspired by Marx but not the same as Marxism
• Labour theory of value and surplus
• The economy is made of classes
• Focus mode of production, and its power relations (‘historical materialism’)
• Criticise capitalism as a system!
• Study work, and technological innovation
Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress
Michel Aglietta (1938)
1867
Austrian Economics
• Inspired by Carl Menger, F. Hayek
• Only individuals choose (‘methodological individualism’), but they have limited rationality!
• The world is complex and uncertain
• Institutional frame matters (e.g. private property)
• Cost and utility are subjective!
• Prices economise on knowledge
• Markets are spontaneous orders, so free market is best
No one knows enough, so leave everyone alone.
Steve Horwitz (1964)
1870s
Institutional Economics
• Inspired by Thorstein Veblen, John Commons, Wesley Mitchell
• ‘evolutionary economics’ (Darwin)
• Focus on habits and institutions!
• Habit/Routine = non-deliberative propensity to engage in a previously adopted pattern of behaviour
• Institution = way of thought or action embedded in the habits of a group
• Agents are both producers and products of their circumstances
• Rationality is not given but shaped by the social environment
Individuals are products of their society, even though they may change its rules
Elinor Ostrom (1933-2012)
Early 1900s
Post-Keynesian Economics
• Inspired by Keynes
• The future is fundamentally uncertain!
• Government should take an active role
• Social conflict between classes!
• Macro > micro!
• Saving does not always equal investment
• Economic models have to be realistic!
• Money matters (it’s not neutral)
What is good for individuals may not be good for the whole economy
Steve Keen (1953)
1970s
• Inspired by Nicholas Georgescu-Roegen
• The economy as a subsystem of the planet; limits to growth
• Interdisciplinary (biomimicry)
• Follow the laws of thermodynamics, and acknowledges complexity
• End goals = sustainable scale + efficient allocation + fair distribution
• Development rather than growth
• Biocentrism; intra- and intergenerational justice
Herman Daly (1938)
Ecological EconomicsNature knows best; economists should spend more time in their gardens
1980s
Feminist Economics
• Inspired by Mary Wollstonecraft, J.S. Mill, Harriet Taylor Mill
• Denounce androcentrism in ME
• Focus not only on production, but on reproduction (unpaid labour)
• Logic of accumulation vs. logic of sustaining life
• Economic analysis should focus on gender; Institutional structures create gender inequality
• Econ. = the ‘provisioning of life’
Who do you think cooked Adam Smith’s dinner? Production is only the tip of the iceberg
Julie A. Nelson (1956)
1990s
POLITICAL ECONOMIST
Which school of thought is currently being understood as ‘mainstream economics’?
Monetarism
Keynesianism
Neoclassical economics
Post-Keynesian economics
If I criticise the assumption that individuals are fully rational, I am
likely to be…
A neoclassical economist
An heterodox economist
A orthodox economist
Which of the following schools does NOT acknowledge the existence of fundamental
uncertainty?
Ecological economics
Austrian economics
Neoclassical economics
Post-Keynesian economics
Which of the following schools seek to explain the functioning of the economy by looking at
routines and social rules?
Feminist economics
Austrian economics
Institutional economics
Marxian economics
Which of the following schools does not hold methodological individualism as a
core axiom?
Post-Keynesian economics
Austrian economics
Neoclassical economics
Which of the following axioms is NOT characterising the theories of the
neoclassical school?
Homo Economicus
Equilibrium
Spontaneous orders
Methodological individualism
Which of the following objectives is NOT part of ecological economist core principles?
Efficient allocation of resources
Equilibrium with natural ecosystems
Fair distribution of wealth
Optimal scale
Which of the following schools is likely to see its members described as libertarians?
Austrian economics
Post-Keynesian economics
Feminist economics
Marxian economics
Which of the following schools of thought is more likely to dismiss the occurrence of
unequal exchanges?
Ecological economics
Neoclassical economics
Marxian economics
Feminist economists argue that most of economic activity is rendered invisible by
mainstream economics.
True
Neoclassical economics
False
PART II
Thinking Like an Economist
A Beautiful Mind (2001)
1) People face trade-offs
The Matrix (1999)
Scarcity
• Resource = anything that can be used to produce something else
• Scarce resource = when there’s not enough of it to satisfy our wants
“People must make choices because resources are scarce”
2) The cost of something is what you give up to get it
Opportunity Cost• What is the cost of our decisions?
• As a result of scarcity, choices have to be made; the opportunity cost is the cost of those choices.
• Opportunity cost = the best alternative that has to be sacrificed when you choose to do something
“The opportunity cost of an item - what you must give up in order to get it - is its true cost”
3) Rational people think at the margin
The Gold Rush (1925)
Marginal Thinking• How do we make “how much” decisions?
• Marginal cost = the additional cost above what you’ve already incurred
• Marginal benefit = the additional benefit above what you’ve already received
“How much decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more or a little bit less of an activity.”
The Economic Decision Rule: Cost Benefit Analysis (CBA) if Mb > Mc, Do it!
- if Mc > Mb, Don’t do it!
2 laws:
1. Law of diminishing marginal utility: more is not always better
2. Law of increasing marginal cost: we always pick the low-hanging fruits first.
Marginal Thinking
Jaws (1975)
4) People respond to incentives
• Incentives are factors that encourage or discourage various types of behaviour, actions or activities.
“People usually respond to incentives, exploiting opportunities to make themselves better off.”
3 Types of incentives:
1. Financial (a tax)
2. Social (a law or custom)
3. Moral (feeling of guilt)
Incentives
5) There are gains from trade
Lords of War (2005)
• Why do the choices I make interact with the choices you make?
• Division of labour (specialisation) generate the gains from trade.
“There are gains from trade.”
• Same at the international level: Theory of Comparative Advantage (Ricardo)
Trade
WALL-E (2008)
6) Resources should be used
efficiently to achieve
society’s goals
• What does it mean to use resources efficiently?
• An economy’s resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better-off
• PARETO efficiency !
“Resources should be used as efficiently as possible to achieve society’s goals.”
Efficiency
7) Markets are usually a good way to organise economic activity
Casablanca (1942)
• Who control that resources are used efficiently?
• “If 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.” Adam Smith
“Because people usually exploit gains form trade, markets usually lead to efficiency.”
Invisible hand
(Adam Smith)
8) Government can sometimes improve market outcomes
Jurassic Park (1993)
4 sources of market failures:
1. Externality: the effects of a decision on a third party not taken into account by the decision maker (e.g. pollution)
2. Market power: the ability of a single entity to influence market prices (monopoly, monopsony)
3. Asymmetric information: some people have more info. than others
4. Public goods are usually badly handled by markets (railways, electricity, ecosystem services etc.)
“When markets don’t achieve efficiency, government intervention can improve society’s welfare.”
Market failure
POLITICAL ECONOMIST
!Which concept does the following quote illustrate: “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.”
A market failure
The law of increasing marginal cost
The invisible hand
Marginal thinking
!The law of decreasing marginal utility would justify not
watching a movie twice in a row?
Yes
The law of increasing marginal cost
No
!!!!
An externality is a side effect that is not properly taken into account by the existing market.
True
The law of increasing marginal cost
False
!!
Couch Surfing is a good example of improvement that abides by the Pareto efficiency principle?
True
The law of increasing marginal cost
False
!!!
Which of the of the following is NOT a source of market failure?
Monopsony
Oligopoly
Oligopsony
Anna is considering attending WILDE club at Kalmar with an entry price of 80kr. She estimates that the cost of
drinking inside the nation will total an additional 50kr. In order to attend the party, Anna will have to take time off from her part-time job at VDALA. She estimates that she
will lose 5 hours at work, at a wage of 40kr per hour. Anna's opportunity cost of attending WILDE club equals
80kr
330kr
200kr
130kr
!This is by far, the most meaningful and entertaining lecture I had in my entire life. Tim is an absolute economic rockstar!
100% True
The law of increasing marginal cost
False
PART III
Thinking Like a Political EconomistLucy (2014)Limitless (2011)
The Political Economist…
• …thinks in a pluralist way (theory, discipline, methodology)
• …is aware that ideology is everywhere
• …is ready to discuss economics for what it is - a political argument
"… the master-economist must possess a rare combination of gifts. (S)he must be mathematician, historian, statesman, philosopher – in some degree. (S)he must understand symbols and speak in words. (S)he must contemplate the particular in terms of the general, and touch abstract and concrete in the same fight of thought. (S)he must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his/her regard. (S)he must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.”