History of economic thought
What is economic thinking about
Petr Wawrosz
The term „economy“ or
„economics“
Term „economy“ or „economics“
• Word „economy“ comes from Greek word
„oikonomos“
• Oikonomos = one who manages a household.
• What does have the household and
economics common?
Household faces decision
• - which members of the household do which task
and what each member gets in return.
• Examples (economic question that a household
faces):
- Who cooks dinner?
- Who does the laundry?
- Who gets the extra dessert at dinner?
- Who gets to choose what TV show to watch?
• Household must allocate its scare resources
among its various member, taking into account
each member´s abilities, efforts and desires.
Society faces decision too
• Society must decide what jobs will be done
and who will do them.
• Economic question the society faces:
What goods will be produced?
How the goods will be produced?
Who will receive the produced goods?
• Economic as the science gives answer how the
different society solves above mentioned
problems and what solutions are better.
What is economic about
One of the definitions
• A person, household, some group (e.g. of food
gatherers or animals hunters), society have to
decide:
- how to allocate scare resources to produces
useful goods (goods satisfying human needs).
• Economics is the science which studies human
behavior as the relationship between ends and
scare means which have alternative uses (Lionel
Robbins, 1932).
Microeconomics and macroeconomics
• Micro = the branch of economics that focuses
on how human behavior affects the conduct
of affairs within narrowly defined units , such
as individual household or business firm.
• Macro = the branch of economics that focuses
on how human behavior affects outcomes in
highly aggregated markets, such as the market
for labor or consumers products.
Individual and collective choice
• Economics is about individual choice.
• People often group to form collective
organizations.
• Individual choices still underlie and direct the
decision made within organization.
Scarcity
• Fundamental concept of economics that indicates that
there is less of a good freely available from nature than
people would like.
• Scarcity does not mean poverty!
Scarcity – objective concept. Poverty subjective
concept.
• Scarcity leads to competitive behavior!
• Scarcity is „beyond“ basic economic questions!
Trade-offs
• People face trade-offs (as the consequence of
the scarcity):
- for what production the scare resources
should be used
- how the scare resources should be use (in
which technology)
- who should use scare goods.
• Trade-off between efficiency and equity.
Efficiency versus equity
• Efficiency =person (society) gets the maximum
benefits from scare resources (and use
minimum amount of resources).
• „The size of the pie“
• Equity = benefits are distributed fairly among
society´s member.
• „How the pie is divided“
Positive versus normative economics
• Positive economics: what is among economic
relationships.
• Normative economics: what ought to (should)
be.
• Normative economic views very often
influence our attitude toward positive
economic analysis.
Pareto-efficiency
• there is no way of improving the situation of
one person, without making that of another
person worse
• Example: Edgeworth´s box, PPF
Opportunity cost (OPC)
• OPC = whatever must be given up to obtain
some actions.
• When we decide how to use:
- some scare resources or good we must take
into account the utility (profit) from its
alternative use.
Some principles that is economics
based on
People are rational
• An economic subjects
- systematically and purposefully do their best
they can to achieve his/her objectives
- uses all available information
- weighs benefits and costs of each action
Rational people think at the margin
• Marginal change = small incremental
adjustment to a plan of action
• Rational subject compares marginal benefits
and marginal costs (benefits and costs of
additional activity).
• Marginal benefit depends on amount of units
that is available (water-diamond paradox)
People respond to incentives
• Incentives = something that induce a person
to act
• Examples: price, norms, law, behavior of other
people
• Change of incentives generate direct as well as
indirect effects.
• Example: G. Depardieu and his choice to give
up French citizenship.
Direct versus indirect effects
• Direct = visible, primary effects.
• Indirect = invisible, secondary effects
• Frederic Bastiat: „That Which Is Seen and That
Which Is Unseen“
Parable of the broken window
(http://en.wikisource.org/wiki/That_Which_Is_Se
en,_and_That_Which_Is_Not_Seen)
• See
http://www.youtube.com/watch?v=gG3AKoL0vEs
Trade can make everyone better one
• Absolute advantage
• Comparative advantage
• Marginal rate of substitution.
Country´s standard of living depends
on its ability to produce goods
• Productivity = amount of goods produced
from one unit of resources.
• If a society wants to be wealthy in long-run it
must increase its productivity.
The value of goods is subjective.
• Peoples, preferences differ.
• Example: the indifferent curve of gourmand and
the indifferent curve of person preferring clothes
(or the indifferent curve of skinflint and the
indifferent curve of spendthrift person).
• The good has no objective value!
• Economics does not place any inherent moral
judgment on value on one personal person´s
preference over another´s – in economics all
individual preferences are counted equally.
The middleman as a cost reducer
• Middleman = a person who buys and sells goods
or arranges trade.
• Middleman reduces transaction costs.
• Example: car dealer, a grocer, a stockbroker, a
realtor, a merchant
• Transaction cost = cost connecting with finding
part of contract, make a deal, solving problems of
contract (including enforcement of fulfillment).
The importance of property rights
• Property rights
• 1. the right to exclusive use the property (the
owner has sole possession control and use of the
property, including the right to exclude others).
• 2. legal protections against invasion from other
individual who would seek to use or abuse the
property without owner´s permission
• 3. the right to transfer, sell, exchange or mortgage
(lend) the property
The importance of property rights
• Private owners can gain by employing their
ownerships (resources) in ways that are
beneficial to others and they bear the
opportunity cost of ignoring the wishes of
others.
• Private owners have a strong incentive to care
for and properly manage what they own:
otherwise they lose the value of their
property.
The importance of property rights
• Private owners have an incentive to conserve
their property for the future, particularly if the
property is expected to increase in value.
• Private owners have an incentive to lower the
chance that their property will cause damage
to the property of others.
Some mistakes in economic
thinking
Ceteris paribus condition
• Ceteris paribus = other thing constant
• Economics very often supposes ceteris paribus
condition, however in dynamic world many
thing can happen and things can change.
Good intentions do not guarantee
desirable outcomes
• Intentions have direct and indirect effects.
Association is not causation
• Two effects occurred in same time can be
independent.
• Situation when effect A precedes effect B does
not necessarily mean that effect A causes
effect B.
The fallacy of composition
• The fallacy of composition: what is true for
one might not be true for all.
• Example:
- elasticity of individual and market demand or
supply curve
- Prisoner´s dilemma (arms race, duopoly race)
Prisoner´s dilemma
Centrally planned economies
versus Market economies
Main economic questions
• What goods will be produced?
How the goods will be produced?
Who will receive the produced goods?
• The questions can be solved through the
market (market economy) or through
government (centrally planned, planned
economy).
Centrally planned economies versus
Market economies
• There are generally 2 basic system how on the
society level the economic questions are
solved:
- centrally planned economy
- market economy
• Text na centrally and market economy
Centrally planned economy
• the government (or some other authority)
decides what will be produced (the set of the
goods, the amount of the specific goods), how
a good will be produced (which factors will be
used), which people will have rights to buy a
good (and in which amount, rationing).
Centrally planned economy
• Difficulties:
• see:
http://www.slideshare.net/Geckos/difficulties
-with-centrall-planned-economiespresentation
Market economy
• rely primarily on privately owned firms to
produce goods and how to produce them.
• Markets determine who receives the
produced goods.
• Firms must produces goods meeting the
wants of consumers (characteristics of a good,
its price …)
Market economy
• Market are usually a good way to organize
economic activity.
• However: market failures
- public goods, free rider, externalities, lack of
competition, information asymmetry, weak side
of the contract, protections of property rights and
voluntary contracts
• Some of the problems can be solved by market
no necessarily by government!
Government
• Government can sometimes improve market
outcomes.
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Allocation
Redistribution
Legislation and regulation
Macroeconomics outcome
The differences and similarities
between governments and markets
• Competitive behavior is present in both the
market and public sector!
(Similarity).
• What does e.g. politics or public-sector
employees compete for?
• Elective offices, Taxpayer dollars, higher
authority (power)
The differences and similarities
between governments and markets
• Both sectors face opportunity costs and tradeoffs.
(Similarity)
• Resources the government uses for one
purpose have alternative uses, in and out of
government!
The differences and similarities
between governments and markets
• Private-sector action is based on mutual
agreement, public-sector action is based on
majority rule!
(Difference).
• The minority must accept majority decision.
• The majority decision can be inefficient.
• Bus-stop example.
The differences and similarities
between governments and markets
• When collective decision are made, voters
must choose among candidates who
represent a bundle of position on issue.
(Difference).
• Average elected representative is asked to
vote on roughly 1000 different issues during
one year (in the USA).
The differences and similarities
between governments and markets
• Public-sector organization can break the
individual consumption-payment link.
(Difference)
• Sometimes people receive very large benefits
from the government even though they do not
pay any money.
• On the contrary individuals can be required to
pay dearly for a government program though
they derive any benefits.
The differences and similarities
between governments and markets
• Income and influence are distributed differently
in the each sector.
(Difference)
• Market: people who supply more highly valued
good have larger income.
• Government: one vote rule. However people who
have more money, persuasive skills,
organizational abilities can receive more benefits
from the political arena.
Different opinions on market and
government
• „Fight of the century“ (Keynes versus Hayek).
• See
http://www.youtube.com/watch?v=GTQnarz
mTOc
Some names
Some names
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Frederic Bastiat (1801 – 1850)
Francis Edgeworth (1845 – 1926)
Vilfredo Pareto (1848 – 1923)
John Maynard Keynes (1883 – 1946)
Lionel Robbins (1898 – 1984)
Friedrich August Hayek (1899 – 1992)
Paul Samuelson (1915 - 2009)
James Buchanan (1919 – 2013)