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McConnell Economics, Chapter 1

Posted: Sun Dec 01, 2019 10:54 pm
by Jin+Guice
Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 1.

Re: McConnell Economics, Chapter 1

Posted: Wed Dec 04, 2019 3:22 pm
by Quadalupe
(I started working on a summary here, anyone can edit! It's not complete, so feel free to edit/add things)

This chapter was intended to just set the stage, but it was already quite interesting. Consider very first couple of sentences:
Biologically, humans need only air, water food, clothing and shelter. But in contemporary society we also seek the many goods and services associated with a comfortable or affluent standard of living
This immediately reminded me of the Need/Wants section of the ERE book. According to economic theory, we have few needs and infinite wants. According to ERE, needs and wants are the same, only differing in degree, not kind. And one can i) learn to be effective in ones live vis-a-vis 'want realising' and ii) learn to be content with (much) less.

Things I have issues with
I have issues with two central claims in this chapter:

1. We have infinite wants
2. Humans pursue actions only because of their rational self interest.

Infinite wants
I feel like positing that all humans have infinite wants is very strong assumption to make. First of all, I think that some people can be very content with very little. Second, from this claim it would follow that no matter how many resources one person has, they would always covet more, since there are still many, many, many unfulfilled wants.

Rational Self Interest of Humans
I feel like this is just plain bogus. Kahneman and Tversky have done a lot of research into human biases, and well, we have tons of them. We do have some bounded rationality, within small, contained domains (things game theory deals with), but in general I'm not sure it flies.

However, assuming that we are not (completely) rational makes a lot of the analysis very hard to do. Not sure what the solution is.

Things I found interesting
There are some very interesting concepts defined in this chapter:

1. Opportunity Cost
2. Marginal Analysis
3. Economics as a scientific field

Opportunity Costs
The idea that by doing one thing you are not doing another thing is so simple, but mind blowing! From this follows that often the things we don't do is what causes us grief (or prevents us from being happy). It also works well together with the system theory motto that "you can never do just one thing" (since not-doing is also doing).

Marginal Analysis
The concept of comparing two situations relative to each other is also quite interesting (and related to opportunity costs). It reminded me of the concept of first increasing and then diminishing return of putting more effort into something (the famous S-curve).

Economics As a Scientific Field
I thought it was interesting that they made the argument that economics is similar to harder sciences like mathematics and physics. I get that you can have nice equations when you consider rational agents in a mostly static environment ('other things being equal assumption'), but I'm not sure how easy it is in reality to prove/disprove economic hypotheses in real life, since it's so hard to really isolate scenarios. But I feel this is more due to a lack of knowledge on my part of how research works in the 'softer' sciences.

Re: McConnell Economics, Chapter 1

Posted: Fri Dec 06, 2019 4:22 pm
by 7Wannabe5
Quadelupe wrote: economics is similar to harder sciences like mathematics and physics
Not so much. According to Steve Keen in "Debunking Economics", some of the central theories of economics are not even internally consistent. For instance, it has been shown that the aggregate (market consisting of more than one individual) demand curve can be represented by any continuous polynomial function;it does not have to only slope down. So, there may be more than one imaginary equilibrium point with no means to determine which is more optimal.

Also, to assume optimal social utility is achieved at intersection of supply and demand, it is necessary to assume merit-based income distribution. However, if there is any difference in consumption preferences among individuals, say one prefers cookies and the other prefers potato chips, a change in price structure such as bumper potato crop will effectively provide the chip eater with more disposable income at same level of utility vs. the cookie eater, yet this isn't accounted for in demand curve which relies on assumption that preferences are identical and identically proportional to income.

Re: McConnell Economics, Chapter 1

Posted: Sat Dec 07, 2019 11:09 am
by GandK
I am deeply relieved this thread is not about Mitch McConnell's economics.

Re: McConnell Economics, Chapter 1

Posted: Sat Dec 07, 2019 9:55 pm
by SavingWithBabies
I enjoyed the first chapter. I thought this sentence was interesting:
Instead, economics ultimately examines problems and decisions from the social, rather than the personal, point of view.
The "Pitfalls to Objective Thinking" was a nice review and it was interesting that within the "Fallacy of Composition" section, they ended with:
The fallacy of composition reminds us that generalizations valid at one of these levels of analysis may or may not be valid at the other.
It was also interesting to see the "we use the scientific method" balanced with the "Other-Things-Equal Assumption" needing to assume other things are equal/fixed within a comparison yet in reality they are not (example given was about the cost of a Pepsi -- market data to compare the price of the Pepsi will inherently have the price of those things it is being compared to also change yet for for analysis, it is easier to assume the variables/others are fixed). This was interesting to me because it talked about how much economics relies on data but that data/input is different from other fields where one can hopefully do a reproducible experiment. It basically seemed to set the stage for "we use the scientific method" however "we are not like other sciences due to ..." which leads to "less certain and less precise than those of laboratory science". I ended up appreciating that perhaps economics was more scientific than I had been led to believe in the past (although perhaps we have a biased source :)).

However, as a software developer, this sounded like a challenge:
The full scope of economic reality itself is too complex and too bewildering to understand as a whole.
I wonder how much the application of computing power to economics has changed the field?

Re: McConnell Economics, Chapter 1

Posted: Wed Dec 18, 2019 6:27 pm
by Jin+Guice
Sorry I'm late to the party y'all.

This Chapter outlines some basic concepts in economics. It introduces the consumer's budget constraint, the production possibilities curve, marginal analysis, the marginal benefit and marginal cost curves and the concept of utility. It also mentions some assumptions that are needed to make the economic model hold.



@Quaduple:

I really liked your commentary on the economics concepts introduced. I'll spill some beans and admit that I've completed the coursework for a PhD in economics. I think it's healthy to discuss the flaws in economics, especially in a place like this, but for learning the material it's better if you just take the assumptions as well, assumptions. A lot of of the assumptions are sort of obviously wrong or at least flawed*, but they are necessary for the model to work.

*If anyone else is super into economics these are potentially fighting words, so let's just consider this an opinion.

Personally I think it's important to keep an internal dialogue of skepticism when studying economics, even if you are accepting the assumptions to learn the model. Having come from the PhD world, the assumptions really do influence the culture of economists.

@SWB:

Computing power definitely advanced economics, although most of the heavy lifting that I experienced is using it to do empirical research, using larger data sets to run fancier statistical models. The accepted neo-classical model (which is what we are learning) was worked out before computers and uses mostly "relatively simple" calculus.



The problem is human behavior is hard to model. This is why economics is a "soft" science and why the book says it's too complex to fully explain. My understanding is that mathematics and the hard sciences operate on pretty basic assumptions about the world. Economic assumptions are much more easily debated. Kahnemen and Tversky are famous because they are (were) trained economists who rigorously tested economic assumptions and showed them to be flawed. Believe it or not (at least at the R1 university PhD level as of 2016) their work is still considered the last major theoretical break through in economics and it is still debated.

I guess the conclusion is while economics models its methods after the hard sciences, it doesn't have anything like gravity and it does have physics envy.


@7w5: Interesting, I don't see why those assertions are true. I will have to read that book.

Re: McConnell Economics, Chapter 1

Posted: Wed Dec 18, 2019 6:38 pm
by jacob
Jin+Guice wrote:
Wed Dec 18, 2019 6:27 pm
Having come from the PhD world, the assumptions really do influence the culture of economists.
Also the case if you come from the ecology field that has fundamentally different assumptions. Or physics where the habitual instinct is to focus on questioning/changing the assumptions and calculating the logical consequences of breaking them(*). Reading econ books always seem to cause a bit of cognitive dissonance for me, especially if it gets too dogmatic.

(*) Assuming the horse is spherical is a real thing ...

Re: McConnell Economics, Chapter 1

Posted: Thu Dec 19, 2019 10:05 am
by Riggerjack
I have issues with two central claims in this chapter:

1. We have infinite wants
2. Humans pursue actions only because of their rational self interest.
These are tough pills for everyone to swallow. Especially, when one has a novice's idea of what Economics is about. It's easier, if you think about what Economics was doing at the time those assumptions were made.

Today, we think of Economics as the Science of Money and Business. CPI, GDP, Fed rates, etc.

At the time these models (that require these assumptions) were made, Economics was addressing bigger issues. At that time, it was more the Science of How Society Chooses Who Gets What.

For questions that big, one needs to make models from very simple objects. Yes, Homo Economus is clearly a simple caricature of a human. But she has to be, because the human mind is finite. One can have scale or detail, but not both.

Re: McConnell Economics, Chapter 1

Posted: Thu Dec 19, 2019 11:16 am
by Campitor
Rational self interest isn't universally viewed the same way by economists. Rational self interest exists but that doesn't mean it's based off of logical assumptions or objective reasoning. Everyone has a different "mythology" of what is logical. This "mythology" drives their rational self interest. For example, a drug user values getting high over other alternatives; this behavior may not be logical but it's rational for a drug users that believes getting high is something desirable. Economist can be somewhat predictive of economic activity via this lens.

Economist may not be able to accurately model the economic choices and preferences for all drug users but in aggregate one can assume that most drug users will lean towards drug consumption to varying degrees.

Re: McConnell Economics, Chapter 1

Posted: Thu Dec 19, 2019 1:23 pm
by 7Wannabe5
@Jin+Guice:

I don't agree with everything Keen suggests, but some of his arguments are pretty interesting. Basically, his mathematical/logical argument based on the 'Sonnenschein-Mantel-Debreu conditions' results in Law of Demand only applying in situations of only one commodity and only one consumer.

I will abstain from commenting further on this thread until/unless I pick up a cheap copy of McConnell.

Re: McConnell Economics, Chapter 1

Posted: Thu Dec 19, 2019 6:20 pm
by Jin+Guice
Infinite wants can also be tempered in a few ways without fucking up the model. Economics assumes diminishing returns to everything so in practice the infinite wants assumption is tempered by the budget constraint plus your love of both heroin and cocaine. Once you have a certain amount of cocaine you'll switch over to heroin.

You can also say "infinite wants in the domain of interest." If you want to get fancy you can introduce a "satiation point," after which indifference curves become concave, which in this thread is basically the same thing as saying, just roll with this infinite wants to learn the model.

@Campitor: Rational self-interest in the model means that you will always take the better deal and you know what you want. Remember, basically all we care about from the individual consumer standpoint is decisions about what goods or services money is spent on. The rational self-interest assumption means that the consumer maximizes their utility when choosing between goods. From the economic perspective, if you spend all your money on drugs, that's your choice and it is rational.

An assumption that hasn't been introduced yet is "complete information." In reality information is almost never complete so it's hard to actually exercise your self-interest.

Even with this specific and narrow definition rational self-interest was shown to not hold in experiments by the early behavioral economists (circa 1970).

However, again you just need to assume for the model will work.



@7w5: I feel like we may have vaguely talked about this in an upper-level class. IIRC, we either didn't talk about it or the professor didn't fully grasp the argument.

I would encourage you to participate in this activity because I always value your input. This chapter was super basic though, and from what I can tell, everyone grasps the concepts. I think the outside the box discussion actually helps clarify them. Also I'm glad people are questioning the assumptions because the way economics is presented in textbooks only makes sense to someone who's never questioned anything about the status quo.




For econ only, if anyone is struggling I should be able to help clarify things or point you in the right direction. This will be less true with accounting and not true at all for finance.

Re: McConnell Economics, Chapter 1

Posted: Wed Apr 01, 2020 11:57 am
by white belt
I had a lot of similar thoughts about unlimited wants as other readers in this thread, but also understand the need to make assumptions for a complex model. One of the Buddhist vows is, "Desires are inexhaustible, I vow to put an end to them." I think this demonstrates that unlimited wants are fundamental to human nature. It may be possible to recognize them or control them, but they will always be there.

What struck me most while reading these basic concepts, is thinking of how much of society is economically illiterate. We hear that "more education is a good thing" and yet I suspect there are many college undergraduates who have never considered the opportunity costs and marginal utility of a college degree. I myself didn't really do that sort of analysis until reading about it in one of Jacob's blog posts.

Re: McConnell Economics, Chapter 1

Posted: Sat Jul 29, 2023 2:12 pm
by guitarplayer
I add my notes, sorry for the rambling. I am reading this book and will be adding to threads about next chapters. Happy to chat about things related to this.

Central to the economic perspective the the notion of scarcity. It is due to this notion that economic agents make choices and this also unlocks the mechanism of optimizing. Scarcity can be of anything, in the context of mainstream economics it is most often money. Scarcity of time is inevitable so long we hold the idea of time (-> YMOYL). Bentham smartly introduced the idea of some sort of fundamental measure to optimise and called it 'util'. This all encompassing unit sadly seems to have fallen out of the mainstream economics talk - now economists talk by large about money.

Economic agents choose from a range of opportunities. If we say that every opportunity has a value of some utils, then the opportunity cost is this value for each foregone opportunity. Naturally economic agents prefer to choose an opportunity with the highest amount of utils so that the opportunity cost of each of the remaining opportunities is less than the chosen one. The opportunity costs does not sum up assuming the opportunities are mutually exclusive i.e. cannot be done at the same time.

Marginal analysis is comparing potential opportunity costs of alternative opportunities given some initial conditions.

The Individual's Economizing Problem is better exposed generalized. Essentially is it a consequence of the condition of scarcity of resources (anything, money, time, skill, looks, brains, any commodity) - living a finite life on a finite planet. Contract this with utility, or 'utils'. The model mentions unlimited wants, because craving for more utils is built into the definition of an util. So long we entertain the idea of an util, we always want more of it. How to avert climate change, and then some more, as quickly and efficiently as possible - this is a problem of unlimited wants under conditions of scarcity.

ETA: One way to imagine how wants are unlimited is this. Take any want and draw a graph of how useful you find a bit more of it compared of how much you already have. So this is an x-of-y graph where x is the quantity of the want and y the utility. Such graph will often be of the inverted U shape. For example you eat something and then you are full and if you eat more you don't feel well anymore. So if you imagine all the possible wants you might have and their corresponding graphs, at any one time there will always be at least one graph where a bit more of the want will result in a bit more of utility. In the example of being full, the graph would be that of wanting to have a break from eating.

Budget line is also better seen as representing an abstract measure of utility rather than $ but I appreciate this is an intro textbook. Also, immediately it makes sense to think about n-dimensional space rather than two dimensional space to account for multiple opportunities. I think it should be possible to deal with this in martix form.

Regarding the production possibilities curve, this I align with the 80/20 rule as a mnemotechnique.

Also, expanding on the section 'A Growing Economy', it is possible to imagine preventing the production possibilities curve from shrinking rather than aiding its expansion - in fact some would argue this is a more likely scenario in the world of gradual energy descent. Also, 'goods for the future' and 'goods for the present' seems an arbitrary distinction. Candy is 'goods for the present' for the person buying the candy to eat it and 'good for the future' for candy manufacturer. Cracking stopping climate change is 'good for the future' for lots of folk and 'good for the present' for folk who have a good time trying to crack the problem.

Re: McConnell Economics, Chapter 1

Posted: Sat Jul 29, 2023 2:31 pm
by mathiverse
guitarplayer wrote:
Sat Jul 29, 2023 2:12 pm
Also, 'goods for the future' and 'goods for the present' seems an arbitrary distinction. Candy is 'goods for the present' for the person buying the candy to eat it and 'good for the future' for candy manufacturer. Cracking stopping climate change is 'good for the future' for lots of folk and 'good for the present' for folk who have a good time trying to crack the problem.
Your point is well taken, but I think the first example may not be quite right. I don't see in what sense you say the candy is a "good for the future" for the candy manufacturer. It won't increase its manufacturing capabilities in the future. Maybe you can explain it to me?

I do think you are right in that a single good can be both an investment in the future and the present. For example, flood control like a sea wall that might be both a good for the present if it stops recent flooding and a good for the future if it is built to stop more flooding than what currently occurs in anticipation of future flooding increases. Or buying a tool that let's you complete some job you needed to do right now, but that also opens up you capabilities for other jobs that aren't currently on your radar.

Re: McConnell Economics, Chapter 1

Posted: Sat Jul 29, 2023 3:52 pm
by guitarplayer
mathiverse wrote:
Sat Jul 29, 2023 2:31 pm
Your point is well taken, but I think the first example may not be quite right. I don't see in what sense you say the candy is a "good for the future" for the candy manufacturer. It won't increase its manufacturing capabilities in the future. Maybe you can explain it to me?
I would think like so: if we say that the main purpose of a firm is to generate profit, then the main 'good for the present' of a firm is profit, that is money. Then you can relax this condition to talk about generating employment etc. but you will not extend it to candies. For a candy producing firm, a candy is a means to its ends and hence a "good for the future".

ETA: In fact, for firm, maybe I stopped one step too early. For a firm, 'good for the present' or the 'consumption good' is in fact what the firm consumes: labour, land, capital and entrepreneurial ability.

The way I understand this distinction is as that between consumer goods and producer goods I think.

Re: McConnell Economics, Chapter 1

Posted: Sat Jul 29, 2023 8:03 pm
by ertyu
- the most important part about marginal analysis isn't that it compares opportunity costs but that it focuses on incremental change (partial derivatives - if we keep all else constant and X changes by 1, by how much will Y change?). This way of thinking is central to economic modeling and is often one of the things economists get flack about - e.g. one does not have to go very far down in the systems theory thread to see this way of thinking criticized; we adopt it to make real life complexity tractable but this doesn't change the fact that you can't "keep all else constant" in society and in life.

- about the "for the present"/"for the future" thing: this is also foundational to economics thinking. The main questions are, "how much consumption are you willing to forgo today so you can invest in productive capacity instead and expand your possibilities of consuming in the future" on the country level (PPC model) and "how much do i have to pay you to get you to postpone consumption to a year from now // how much are you willing to pay me so you can borrow from the future and consume today rather than tomorrow" (the discount rate). When countries make investment decisions (at least those w central planners such as the USSR and China) and when individuals make decisions on the timing of their consumption they are engaging in what is termed "intertemporal optimization"

Re: McConnell Economics, Chapter 1

Posted: Sun Jul 30, 2023 4:15 am
by guitarplayer
Thanks @ertyu, much appreciate your engagement.

For marginal analysis yes partial derivatives, exactly. I was trying to capture it by saying 'given some initial conditions'. Because as I see it, the incremental change is nevertheless that of the opportunity cost. The cost of foregone opportunities (plain example: of holding onto money) in relation to the chosen opportunity.

When I read this chapter, I aim to reduce the number of terms in thinking about it. And this is in general my strategy if possible. Looking ahead to chapter two, I would also lean towards trying to merge households and businesses in an overarching category with broader characteristics.

No doubt I will read about 'intertemporal optimization'.

Due to being highly intuitive / open minded, I don't mind at all experimenting with the model in was such as placing myself in a role of a business, government or a country, or the other way around. I also ask questions such as

'how a good for the future can be seen as a good for the present?'

So, 'expanding your possibilities of consuming in the future' seen as a 'good for the present'. In other words, good (for the present) to have options!

ETA: I might assume a role of a novice and swallow my thoughts going through the initial hurdles and exercises. Allow extensions and ideas later.

Re: McConnell Economics, Chapter 1

Posted: Mon Jul 31, 2023 1:39 am
by guitarplayer
Also to mention, this will not be a comprehensive summary of each chapter on my part but rather a collection of reflections and some summary. I hope to hold a constructive dialogue with folk, 'on the positive side of things' so to speak. Both in the sense that we would
- potentially encourage each other to expand, reflect further, transform points of view,
- talk about the exterior side of things (AQAL - thanks @grundomatic), so positive micro- and macro-economics without value judgements (interior AQAL) to not politicize the review.

P.S. In terms of Land, Labour, Capital and Entrepreneurial activity, it seems obvious that the idea of money as a store of value functions in societies but for now I take money to be mainly the medium of exchange and hence not part of Capital. Also, animated world is classed as part of Land whereas fungi, plants and animals can be seen as live players and hence entrepreneurs. But this is just a first chapter of a long learning curve so I go with it. I understand something along the lines of

Land*(Labour+Entrepreneurial_ability)=Capital.

Re: McConnell Economics, Chapter 1

Posted: Wed Aug 02, 2023 12:34 pm
by mathiverse
Demographics can help you predict where on the product possibilities curve a society is when the axes are labeled "goods for the future" and "goods for the present." Countries with demographics that show many children compared to adults spend more on "goods for the future" such as childcare and education, so you'd expect them to have a point on the curve closer to the "goods for the future" axis. Adult heavy demographics like we now see in many well developed countries results in a location in the PPC state space closer to the "goods for the present" axes, all other things equal. At the individual/family scale, we can also see this in the difference between people following a "Die With Zero" playbook versus people who want to amass generational wealth.

Re: McConnell Economics, Chapter 1

Posted: Wed Aug 02, 2023 12:41 pm
by guitarplayer
That is an interesting take @mathiverse!

I am reading now chapters 3-5 and had this thought yesterday or today how many developed nations with aging populations are subsidizing having children with cash handouts. Children (future adult taxpayers) seem to be locally seen as under supplied - market failure!