That’s an interesting way of looking at things…

Many many people regard microeconomics as just another way of looking at a situation. What they fail to understand is that microeconomic theory is the distillation of what actually happens, not of some sort of agenda. Microeconomics is often called “rational choice theory”. The only assumption that it really makes is that people, when faced with a decision about allocating scarce resources (time, money, etc.) will do what is best for them. That’s it, nothing else. From this one assumption, many consequences can be mapped out. Not all decisions are monetary in nature by the way. How to allocate time is a major one for all of us. Do I spend time with my kids or get the oil changed? Is my job satisfying? DO I volunteer my free time or dedicate myself to a hobby? In any case, there are some basic, intuitive results of this assumption. When costs rise, people don’t consume as much. When prices rise, suppliers rush to provide more (this happens with labor as well). When there is too much supply and not enough buyers, prices come down until the price is low enough to clear inventories. These concepts are not open to debate, they happen all the time and are infinitely repeatable.
Yet people still act as if this was just an economist’s viewpoint. It would be like denying the role of Chlorophyl in plants. “We all need Oxygen, it’s silly to think that plants need Co2, they’d die, they’d suffocate!” For some reason many people refuse to see the good that comes out of competition for goods and wages, they refuse to see the problems created by protectionism, and they insist that people in the economy are actually victims of some sort. There is a popular myth revolving around greedy corporations “running” the economy and taking advantage of us. People are not victims of the economy, they are the economy! Unfortunately, the real secret is that those corporations revolve around us…
Misconceptions about economics in the general population are widespread. What this really means is that misconceptions about how people make decisions are widespread. People assume that things work in a manner that could not be. Many policies that have the best intentions end up only harming us. A few examples off the top of my head are minimum wage laws, price controls, farm subsidies, mandatory union hiring, and tariffs on imports. If everyone in the world, or at least the policy makers, could firmly grasp the equivalent of two semesters of micro econ, the world would be a much more stable and wealthy place. SIGH, I know, just another type of utopian ideal…


2 replies on “That’s an interesting way of looking at things…”

I’m not picking on your eating habits here (because I can certainly relate) but I wanted an example. “Yesterday, I realized that I’ve let my “autopilot” dictate my consumption of food for a long time. I wait for it to tell me what to eat, and guess what? I usually don’t eat well and/or overeat because of it. I stopped and made myself decide what I was going to eat before I got to the food court. I know, sounds like a silly thing, but it was a revelation to me. It lead to me thinking about why I ate things that I knew were bad for me or ate too much knowingly.”

People do not do what is best for them. They do what is easiest or most immediately gratifying. Or what the Smiths do. If people did what was “best” no one would need to finance a car, prisons would be empty, and everyone could run a 8 minute mile.

Yeah, I was being a little loose with my terminology. People do what gives them the most satisfaction. Typically, the future is “discounted” against the present moment. That’s why people overeat (not that I know anything about that…:-), don’t finish school, or charge things on credit cards even though most people understand that long term they’d be better off not doing those things. Still, it is their decision and they’ll reap the rewards or suffer the consequences of their action and we should respect that. Morals, ethics, religion, cultural issues, and individual psychology will determine what gives the most satisfaction when. The key is that whatever they choose is important or satisfying to them and no one else can ever make those decisions as well.


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