McConnell Economics, Chapter 1

Ask your investment, budget, and other money related questions here
Post Reply
Posts: 485
Joined: Sat Jun 30, 2018 8:15 am

McConnell Economics, Chapter 1

Post by Jin+Guice » Sun Dec 01, 2019 10:54 pm

Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 1.

Posts: 121
Joined: Fri Jan 23, 2015 4:56 am
Location: the Netherlands

Re: McConnell Economics, Chapter 1

Post by Quadalupe » Wed Dec 04, 2019 3:22 pm

(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.

Posts: 5331
Joined: Fri Oct 18, 2013 9:03 am

Re: McConnell Economics, Chapter 1

Post by 7Wannabe5 » Fri Dec 06, 2019 4:22 pm

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.

Posts: 1990
Joined: Mon Sep 19, 2011 1:00 pm

Re: McConnell Economics, Chapter 1

Post by GandK » Sat Dec 07, 2019 11:09 am

I am deeply relieved this thread is not about Mitch McConnell's economics.

Posts: 581
Joined: Mon Aug 31, 2015 2:50 pm
Location: Midwest, USA

Re: McConnell Economics, Chapter 1

Post by SavingWithBabies » Sat Dec 07, 2019 9:55 pm

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?

Post Reply