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Useful Micro

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Jason Briggeman  at Productivity Shoc [2]k [2] disagrees with my claim [3] that the economic way of thinking isn’t terribly useful:

Did he really mean to say that understanding economics isn’t a
particularly useful investment of time and energy for most people, or
did he mean macroeconomics?  I agree wholeheartedly if it’s the
latter — and all of the examples he uses are macroeconomic, so maybe
that is what he meant.

All of us can benefit immensely from solid
microeconomic thinking as we "go about our lives, trying to do our
jobs".  Two simple examples:

  • To understand
    that each of the persons we meet is an individual who is out to choose
    from among the set of alternatives he/she faces that alternative which
    best suits his/her values, is a profound economic insight that can help
    us in our relationships with our bosses, coworkers, family members,
    girlfriends, etc. 
  • To correctly understand the concept of opportunity cost is to avoid not just the broken-window fallacy [4] of macroeconomics, but also the sunk-cost fallacy [5], which is absolutely vital to consistently making good decisions in everyday life.

Opportunity cost, consumer sovereignty, sunk costs are sunk and comparative advantage are all very useful.  Most of us, not all, learn these lessons from experience.  These lessons are intuitive.  (I know, comparative advantage is not intuitive, but its application to everyday life is fairly well-understood by most peopleā€”sometimes it’s better to hire someone to do something than to do it yourself.)  These insights are the source of the common complaint among some economics students that "economics is just common sense."  The complaint is correct.  Most of the underlying principles are common sense.  Not everyone has common sense.  Some struggle to learn its lessons.  But studying economics is not the main way that people live their lives using these principles.

It is the application of these principles, what I called "the economic way of thinking" that is not common sense.  The idea that things exist in the world that are the product of human action but not human design [6] is highly unintuitive to most people.  My claim is that understanding these phenomena, which is economics main gift to human understanding, makes you a more civilized person and a better voter which is lovely but has little direct, tangible personal benefit other than the satisfaction of understanding how the world works. (Incidentally, I call this micro, not macro.  I invite my co-host, Don Boudreaux to post on this distinction.)

Finally, a paraphrase of a quote I heard from Milton Friedman or that I heard attributed to him.  "Economics is easy.  All you have to remember is that people act in their own self-interest and demand slopes downward.  It’s applying these insights that’s hard."