Economists and the way people behave: part 1

Economists are sometimes criticized for making assumptions
about human behavior. Sometimes these assumptions are
criticized as being unrealistic descriptions of how
people actually behave. Other times they are criticized
as encouraging antisocial behavior.

In order to evaluate these claims, we have to look at
how economists work at three levels:
society-wide, particular products, and individual people.
They also work in two modes: theoretical and empirical.

Society-wide analysis (macroeconomics)
considers questions such as
how many people are employed? What is total production?
How does changing taxes or government spending or
the amount of money affect employment, production, and prices?
This analysis is very hard because the economy is so
complicated, but some general predictions can be made
and tested.
In macroeconomics we need to make predictions about how
much people will spend and save, but we don’t look at which
particular products they buy.

If macroeconomic predictions are based on incorrect
behavioral expectations, then the result will be
economic predictions that are incorrect, but there
are also other reasons why predictions could be
incorrect because the economy is so complicated,

For the second level, we look at how society makes
decisions about allocating resources toward the
production of particular products. Some of these ideas
don’t rely on any assumptions about behavior.
Some key ideas are:

1. society faces tradeoffs;
2. there are more efficient and less efficient ways to
   produce things; and

3. average real wage equals average productivity.

At the individual level, economists make
some predictions about behavior that seem
reasonable. For example, if you have more of one product
you will attach less value to getting
still more of that product.
For example, if you have lots of clothes
but little food, you will
attach a lot of value to getting more
food but attach little
value to getting more clothes.

Economists have developed an abstract “utility maximizing”
model that clearly does not describe the way real people
make decisions. However, it may provide an approximate description
for this type of decision.
If you spend $5 for a sandwich, your actions indicate that
you value the sandwich more than you value the $5.
People make this type of decision intuitively all the time,
just as people intuitively
deal with physics all the time when they
ride a bike or throw or catch a ball.

One objection is that people can’t make optimal
decisions because they aren’t experts, but
for decisions about their own purchases
all they need to know
is their own personal preferences.

It’s harder for people to make decisions that involve time.
Almost everyone seems to lack some will power,
meaning their current self tends to act in ways that
their future self might object to.
Long-term savings decisions are complicated.

to be continued

……………..
–Douglas Downing
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