“The Economic Way of
Thinking”
10th Edition
by Paul Heyne, Peter Boettke,
and David Prychitko
PowerPoint Slides prepared by
Assistant Professor
Paul Harris
Camden County College
The Economic Way of Thinking 10e
©Prentice Hall 2003
1
Chapter Outline
Introduction
Recognizing Order
The Importance of Social Cooperation
How Does It Happen?
An Apparatus of the Mind
2
The Economic Way of Thinking 10e
©Prentice Hall 2003
Chapter Outline
Cooperation Through Mutual Adjustment
Rules of the Game
The Biases of Economic Theory
Biases or Conclusions?
No Theory Means Poor Theory
3
The Economic Way of Thinking 10e
©Prentice Hall 2003
Introduction
Is order prevalent in society?
How does an Economic system work
when it is functioning properly?
What mechanisms of social
coordination do we depend upon?
4
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.
5
The Economic Way of Thinking 10e
©Prentice Hall 2003
Recognizing Order
Thousands of diverse commuters
travel to work each day.
Each is expected to follow a set of
rules.
Traffic flows smoothly.
6
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.
7
The Economic Way of Thinking 10e
©Prentice Hall 2003
How Does It Happen?
How does society
determine the course
of actions necessary
to produce the goods
and services we enjoy?
8
The Economic Way of Thinking 10e
©Prentice Hall 2003
How Does It Happen?
Adam Smith (1723 - 1790)
Most people believed political rulers’
attention was necessary to sustain
society. Smith disagreed.
In1776 published An Inquiry into the
Nature and Causes of the Wealth of
Nations
Founder of Economics
9
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.
10
The Economic Way of Thinking 10e
©Prentice Hall 2003
An Apparatus of the Mind
Summary
All social phenomena emerge from
the actions and interactions of
individuals who are choosing in
response to expected benefits and
costs to themselves.
11
The Economic Way of Thinking 10e
©Prentice Hall 2003
An Apparatus of the Mind
Question
Does this assume people
are selfish,
materialistic,
and
shortsighted?
12
The Economic Way of Thinking 10e
©Prentice Hall 2003
An Apparatus of the Mind
Focus is on actions and interactions.
Actions emphasize economizing.
Economizing
Allocate resources in a way that allows
the economizer to derive whatever
s/he wants
Results from scarcity
Involves tradeoffs
13
The Economic Way of Thinking 10e
©Prentice Hall 2003
An Apparatus of the Mind
Economic theory assumes that :
People make
choices
based on
Expected
Benefits
and
Expected
Cost
14
The Economic Way of Thinking 10e
©Prentice Hall 2003
An Apparatus of the Mind
Economic Interactions
Problems
Are a Multiplicity of diverse
and even incommensurable
individual projects
15
The Economic Way of Thinking 10e
©Prentice Hall 2003
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?
16
The Economic Way of Thinking 10e
©Prentice Hall 2003
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 a man’s wants
which the produce
of his own labour
can supply.”
17
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.”
18
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.”
19
The Economic Way of Thinking 10e
©Prentice Hall 2003
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?
20
The Economic Way of Thinking 10e
©Prentice Hall 2003
Cooperation Through
Mutual Adjustment
Economizing actions
create alternatives
available to others.
Social
coordination
is a process of
continuing
mutual
adjustment.
21
The Economic Way of Thinking 10e
©Prentice Hall 2003
Cooperation Through
Mutual Adjustment
Example
Why don’t drivers on a freeway drive
in one lane?
22
The Economic Way of Thinking 10e
©Prentice Hall 2003
Cooperation Through
Mutual Adjustment
The net advantage determines people’s
actions.
Costs versus benefits
Money persuades!
23
The Economic Way of Thinking 10e
©Prentice Hall 2003
The Biases of Economic Theory
Economics focuses on choice.
Events result from people’s choices.
Only individuals choose.
24
The Economic Way of Thinking 10e
©Prentice Hall 2003
The Biases of Economic Theory
Individuals choose after weighing
benefits and costs.
Interactions assume some “rules of the
game.”
25
The Economic Way of Thinking 10e
©Prentice Hall 2003
Rules of the Game
Social interaction is directed and
coordinated by the rules participants
know and follow.
Poorly developed rules cause the game
to break down.
26
The Economic Way of Thinking 10e
©Prentice Hall 2003
Rules of the Game
Property rights are an example of rules
of the game.
Questions…
Why do people increasingly complain
about traffic jams?
Why isn’t something done?
27
The Economic Way of Thinking 10e
©Prentice Hall 2003
Biases or Conclusions?
Question…
Are the biases inherent in the economic
way of thinking really prejudices
instead?
We must begin somewhere.
28
The Economic Way of Thinking 10e
©Prentice Hall 2003
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.
29
The Economic Way of Thinking 10e
©Prentice Hall 2003
No Theory Means Poor Theory
Discovery of causal relationships
depends upon theory.
We observe a fraction of what we
“know.”
30
The Economic Way of Thinking 10e
©Prentice Hall 2003
No Theory Means Poor Theory
• Economic theory by itself cannot
answer any social questions.
• It must be supplemented with
knowledge from other sources.
31
The Economic Way of Thinking 10e
©Prentice Hall 2003
Next Chapter 2,
“Efficiency,
Exchange, and
Comparative
Advantage”
End of Chapter 1
32
The Economic Way of Thinking 10e
©Prentice Hall 2003