The Economic Way of Thinking 10e

January 6, 2018 | Author: Anonymous | Category: Business, Economics
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“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

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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

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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

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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?

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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

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Recognizing Order Thousands of diverse commuters travel to work each day. Each is expected to follow a set of rules. Traffic flows smoothly.

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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

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How Does It Happen? How does society determine the course of actions necessary to produce the goods and services we enjoy?

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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

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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

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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

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An Apparatus of the Mind Question Does this assume people are selfish, materialistic, and shortsighted? 12 The Economic Way of Thinking 10e

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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

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An Apparatus of the Mind Economic theory assumes that :

People make choices based on

Expected Benefits

and Expected Cost 14

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An Apparatus of the Mind Economic Interactions Problems

Are a Multiplicity of diverse and even incommensurable individual projects

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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

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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

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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.”

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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.”

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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

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Cooperation Through Mutual Adjustment

Economizing actions create alternatives available to others.

Social coordination is a process of continuing mutual adjustment.

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Cooperation Through Mutual Adjustment

Example Why don’t drivers on a freeway drive in one lane?

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Cooperation Through Mutual Adjustment The net advantage determines people’s actions. Costs versus benefits Money persuades!

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The Biases of Economic Theory

Economics focuses on choice. Events result from people’s choices. Only individuals choose.

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The Biases of Economic Theory Individuals choose after weighing benefits and costs. Interactions assume some “rules of the game.”

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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.

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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?

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Biases or Conclusions?

Question… Are the biases inherent in the economic way of thinking really prejudices instead? We must begin somewhere.

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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.

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No Theory Means Poor Theory Discovery of causal relationships depends upon theory. We observe a fraction of what we “know.”

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No Theory Means Poor Theory • Economic theory by itself cannot answer any social questions. • It must be supplemented with knowledge from other sources.

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Next Chapter 2, “Efficiency, Exchange, and Comparative Advantage”

End of Chapter 1 32 The Economic Way of Thinking 10e

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