Thinking like a Political Economist

in the ordinary business of life

Paul Samuelson (1915-2009)

“I don’t care who writes a nation’s law - or crafts its advanced treatises - if I can write its economics textbooks.”

Economics is everywhere

Learning Economics as a Foreign Language

Ideology is everywhere

Gunnar Myrdal (1898-1987)

“...valuations are always with us... Disinterested research here has never been and can never be. Prior to answers there must be questions. there can be no view except from a viewpoint. In the questions raised and the viewpoint chosen, valuations are implied.” (1978)

Today

• Part I: What is the difference between the different economic schools of thought?

• Part II: What does it mean to think like an economist?

• Part III: What does it mean to think like a political economist?

PART I

The Ideological Landscape of Economics

Seven Samurai (1954)

The Ideological Landscape of Economics

Post-Keynesian

Institutional

Marxist

Feminist

Neoclassical

Classical

Ecological

Environmental

Sraffian

Austrian

Green

Anarchist

Gandhian

Shimomuran

Abenomics

Bionomics

Econophysics

Degrowth

Steady-State

new

Socioeconomics

Evolutionary

Ethonomics

Philonomics

Neuroeconomics

Happiness

Kudonomics

MainstreamMainline

ExperimentalClionomics

Econometrics

Political economyEconomic geography

Economic history

economic sociology

behaviouralNeoKeynesian

Complexity

Agent-based computationalRadical

monetarist

sustainability

Mainstream (or orthodoxy)

Heterodoxy

Marxian

Post-Keynesian

Institutional

FeministClassical

EcologicalSraffian

Austrian

Green

Gandhian

BionomicsDegrowthSteady-State

neoclassical

new keynesian

new behaviouralold behavioural

environmentalneuroeconomics

economic historyeconomic geography

economic sociology

econophysics

sustainability

new institutional

Mainstream

Heterodoxy

Neoclassical Economics

• Inspired by Jevons, Walras, Marshall

• Subjective theory of value

1. Micro > macro (methodological individualism)

2. The economy is made of rational and selfish individuals (no classes, only Homo Economicus)

3. Self-equilibrating markets, and invisible hand!

• High degree of precision and logical clarity because heavily mathematicalPaul Samuelson (1915 - 2009)

Individuals know what they are doing, so leave them alone - except when markets malfunction

1890

Marxian Economics

• Inspired by Marx but not the same as Marxism

• Labour theory of value and surplus

• The economy is made of classes

• Focus mode of production, and its power relations (‘historical materialism’)

• Criticise capitalism as a system!

• Study work, and technological innovation

Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress

Michel Aglietta (1938)

1867

Austrian Economics

• Inspired by Carl Menger, F. Hayek

• Only individuals choose (‘methodological individualism’), but they have limited rationality!

• The world is complex and uncertain

• Institutional frame matters (e.g. private property)

• Cost and utility are subjective!

• Prices economise on knowledge

• Markets are spontaneous orders, so free market is best

No one knows enough, so leave everyone alone.

Steve Horwitz (1964)

1870s

Institutional Economics

• Inspired by Thorstein Veblen, John Commons, Wesley Mitchell

• ‘evolutionary economics’ (Darwin)

• Focus on habits and institutions!

• Habit/Routine = non-deliberative propensity to engage in a previously adopted pattern of behaviour

• Institution = way of thought or action embedded in the habits of a group

• Agents are both producers and products of their circumstances

• Rationality is not given but shaped by the social environment

Individuals are products of their society, even though they may change its rules

Elinor Ostrom (1933-2012)

Early 1900s

Post-Keynesian Economics

• Inspired by Keynes

• The future is fundamentally uncertain!

• Government should take an active role

• Social conflict between classes!

• Macro > micro!

• Saving does not always equal investment

• Economic models have to be realistic!

• Money matters (it’s not neutral)

What is good for individuals may not be good for the whole economy

Steve Keen (1953)

1970s

• Inspired by Nicholas Georgescu-Roegen

• The economy as a subsystem of the planet; limits to growth

• Interdisciplinary (biomimicry)

• Follow the laws of thermodynamics, and acknowledges complexity

• End goals = sustainable scale + efficient allocation + fair distribution

• Development rather than growth

• Biocentrism; intra- and intergenerational justice

Herman Daly (1938)

Ecological EconomicsNature knows best; economists should spend more time in their gardens

1980s

Feminist Economics

• Inspired by Mary Wollstonecraft, J.S. Mill, Harriet Taylor Mill

• Denounce androcentrism in ME

• Focus not only on production, but on reproduction (unpaid labour)

• Logic of accumulation vs. logic of sustaining life

• Economic analysis should focus on gender; Institutional structures create gender inequality

• Econ. = the ‘provisioning of life’

Who do you think cooked Adam Smith’s dinner? Production is only the tip of the iceberg

Julie A. Nelson (1956)

1990s

POLITICAL ECONOMIST

Which school of thought is currently being understood as ‘mainstream economics’?

Monetarism

Keynesianism

Neoclassical economics

Post-Keynesian economics

If I criticise the assumption that individuals are fully rational, I am

likely to be…

A neoclassical economist

An heterodox economist

A orthodox economist

Which of the following schools does NOT acknowledge the existence of fundamental

uncertainty?

Ecological economics

Austrian economics

Neoclassical economics

Post-Keynesian economics

Which of the following schools seek to explain the functioning of the economy by looking at

routines and social rules?

Feminist economics

Austrian economics

Institutional economics

Marxian economics

Which of the following schools does not hold methodological individualism as a

core axiom?

Post-Keynesian economics

Austrian economics

Neoclassical economics

Which of the following axioms is NOT characterising the theories of the

neoclassical school?

Homo Economicus

Equilibrium

Spontaneous orders

Methodological individualism

Which of the following objectives is NOT part of ecological economist core principles?

Efficient allocation of resources

Equilibrium with natural ecosystems

Fair distribution of wealth

Optimal scale

Which of the following schools is likely to see its members described as libertarians?

Austrian economics

Post-Keynesian economics

Feminist economics

Marxian economics

Which of the following schools of thought is more likely to dismiss the occurrence of

unequal exchanges?

Ecological economics

Neoclassical economics

Marxian economics

Feminist economists argue that most of economic activity is rendered invisible by

mainstream economics.

True

Neoclassical economics

False

PART II

Thinking Like an Economist

A Beautiful Mind (2001)

1) People face trade-offs

The Matrix (1999)

Scarcity

• Resource = anything that can be used to produce something else

• Scarce resource = when there’s not enough of it to satisfy our wants

“People must make choices because resources are scarce”

2) The cost of something is what you give up to get it

Opportunity Cost• What is the cost of our decisions?

• As a result of scarcity, choices have to be made; the opportunity cost is the cost of those choices.

• Opportunity cost = the best alternative that has to be sacrificed when you choose to do something

“The opportunity cost of an item - what you must give up in order to get it - is its true cost”

3) Rational people think at the margin

The Gold Rush (1925)

Marginal Thinking• How do we make “how much” decisions?

• Marginal cost = the additional cost above what you’ve already incurred

• Marginal benefit = the additional benefit above what you’ve already received

“How much decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more or a little bit less of an activity.”

The Economic Decision Rule: Cost Benefit Analysis (CBA) if Mb > Mc, Do it!

- if Mc > Mb, Don’t do it!

2 laws:

1. Law of diminishing marginal utility: more is not always better

2. Law of increasing marginal cost: we always pick the low-hanging fruits first.

Marginal Thinking

Jaws (1975)

4) People respond to incentives

• Incentives are factors that encourage or discourage various types of behaviour, actions or activities.

“People usually respond to incentives, exploiting opportunities to make themselves better off.”

3 Types of incentives:

1. Financial (a tax)

2. Social (a law or custom)

3. Moral (feeling of guilt)

Incentives

5) There are gains from trade

Lords of War (2005)

• Why do the choices I make interact with the choices you make?

• Division of labour (specialisation) generate the gains from trade.

“There are gains from trade.”

• Same at the international level: Theory of Comparative Advantage (Ricardo)

Trade

WALL-E (2008)

6) Resources should be used

efficiently to achieve

society’s goals

• What does it mean to use resources efficiently?

• An economy’s resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better-off

• PARETO efficiency !

“Resources should be used as efficiently as possible to achieve society’s goals.”

Efficiency

7) Markets are usually a good way to organise economic activity

Casablanca (1942)

• Who control that resources are used efficiently?

• “If is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Adam Smith

“Because people usually exploit gains form trade, markets usually lead to efficiency.”

Invisible hand

(Adam Smith)

8) Government can sometimes improve market outcomes

Jurassic Park (1993)

4 sources of market failures:

1. Externality: the effects of a decision on a third party not taken into account by the decision maker (e.g. pollution)

2. Market power: the ability of a single entity to influence market prices (monopoly, monopsony)

3. Asymmetric information: some people have more info. than others

4. Public goods are usually badly handled by markets (railways, electricity, ecosystem services etc.)

“When markets don’t achieve efficiency, government intervention can improve society’s welfare.”

Market failure

POLITICAL ECONOMIST

!Which concept does the following quote illustrate: “It is not

from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to

their own interest.”

A market failure

The law of increasing marginal cost

The invisible hand

Marginal thinking

!The law of decreasing marginal utility would justify not

watching a movie twice in a row?

Yes

The law of increasing marginal cost

No

!!!!

An externality is a side effect that is not properly taken into account by the existing market.

True

The law of increasing marginal cost

False

!!

Couch Surfing is a good example of improvement that abides by the Pareto efficiency principle?

True

The law of increasing marginal cost

False

!!!

Which of the of the following is NOT a source of market failure?

Monopsony

Oligopoly

Oligopsony

Anna is considering attending WILDE club at Kalmar with an entry price of 80kr. She estimates that the cost of

drinking inside the nation will total an additional 50kr. In order to attend the party, Anna will have to take time off from her part-time job at VDALA. She estimates that she

will lose 5 hours at work, at a wage of 40kr per hour. Anna's opportunity cost of attending WILDE club equals

80kr

330kr

200kr

130kr

!This is by far, the most meaningful and entertaining lecture I had in my entire life. Tim is an absolute economic rockstar!

100% True

The law of increasing marginal cost

False

PART III

Thinking Like a Political EconomistLucy (2014)Limitless (2011)

The Political Economist…

• …thinks in a pluralist way (theory, discipline, methodology)

• …is aware that ideology is everywhere

• …is ready to discuss economics for what it is - a political argument

"… the master-economist must possess a rare combination of gifts. (S)he must be mathematician, historian, statesman, philosopher – in some degree. (S)he must understand symbols and speak in words. (S)he must contemplate the particular in terms of the general, and touch abstract and concrete in the same fight of thought. (S)he must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his/her regard. (S)he must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.”