Introduction to Economics Basic introduction to what microeconomics and macroeconomics study. A bit on Adam Smith
Introduction to Economics
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- As we begin our journey into the world of economics,
- I thought I would begin with a quote from one of the most famous economists of all time,
- the Scottish philosopher Adam Smith.
- And he really is kind of the first real economist
- in the way that we view it now.
- And this is from his The Wealth of Nations,
- published in 1776, coincidentally, the same year as
- the American Declaration of Independence, and it's one of his most-famous excerpts.
- He generally indeed, he being an economic actor, neither intends to promote the public interest,
- nor knows how much he is promoting it.
- By directing that industry, so that the industry in control of that individual actor
- in such a manner, as its produce may be of the greatest value,
- he intends only his own gain.
- 'He intends only his own gain'.
- And he is in this, as in many other cases, led by an invisible hand
- to promote an end which was no part of his intention.
- And this term "the invisible hand" is famous.
- Led by an invisible hand to promote an end which was no part of his intention.
- He is saying, look, when individual actors just act in their own self-interest,
- that often in aggregate leads to things that each of those individual actors did not intend.
- Then he says: nor is it always the worst for society
- that it was no part of it.
- So, it was not necessarily a bad thing.
- By pursuing his own interest, he frequently promotes
- that of the society more effectually than when he really intends to promote it.
- So, this is really a pretty strong statement.
- It's really at the core of capitalism.
- And that's why I point out that it was published
- in the same year as the American Declaration of Independence,
- because obviously America, the Funding Fathers,
- they wrote the Declaration of Independence, the Constitution,
- that really talks about what it means to be a democratic country,
- what are the rights of its citizens.
- But the United States, with its overall experience of an American,
- is at least as influenced by the work of Adam Smith,
- by this kind of foundational ideas of capitalism.
- And they just both happened to happen around the same time.
- But this idea is not always that intuitive. Individual actors, by essentially pursuing
- their own self-interested ends might be doing more for society than
- than if any of them actually tried to promote the overall well-being of society.
- And I don't think that Adam Smith would say that it's always good
- for someone to act self-interested, or that it's never good for people to actually
- think about the implications of what they are doing in an aggregate sense,
- but he is saying that frequently .. frequently, this self-interested action
- *could* lead to the greater good. Could lead to more innovation.
- Could lead to better investment. Could lead to more productivity. COuld lead to more wealth,
- more, a larger pie for everyone.
- And now Economics is frequently .. and when he makes a statement, he is actually making
- a mix of micro-economic and macro-economic statements.
- Micro is that people, individual actors are acting out of their own self-interest.
- And the macro is that it might be good for the economy, or the nation as a whole.
- And so, now, modern economists tend to divide themselves into these two schools,
- or into these two subjects: microeconomics, which is the study of individual actors.
- Microeconomics .. and those actors could be firms, could be people, it could be households.
- And you have macro-economics, which is the study of the economy in aggregate.
- Macro-economics. And you get it from the words.
- Micro -- the prefix refers to very small things. Macro refers to the larger,
- to the bigger picture.
- And so, micro-economics is essentially how actors .. actors make decisions
- or, you could actually say 'allocations', allocations .. decisions or allocations.
- Allocation ..
- of scarce resources. And you hear the words scarce resources a lot
- when people talk about economics.
- And a scarce resource is one you don't have an infinite amount of.
- For example, love might not be a scarce resource. You might have an infinite amount of love.
- But a resource that would be scarce is something like food, or water, or money, or time, or labor.
- These are all scarce resources. And so microeconomics is how do people decide
- where to put those scarce resource, how do they decide where to deploy them.
- And how does that .. does that affect prices and markets, and whatever else.
- Macro-economics is the study of what happens at the aggregate to an economy.
- So, 'aggregate', what happens in aggregate to an economy, from the millions of individual actors.
- Aggregate economy. We now have millions of actors.
- And often focuses on policy-related questions.
- SO, do you raise or lower taxes. Or, what's going to happen when you raise or lower taxes.
- Do you regulate or de-regulate? How does that affect the overall productivity
- when you do this. So, it's policy, top-down .. 'top-down' questions.
- And in both macro- and micro-economics, there is especially in the modern sense of it,
- there is an attempt to make them rigorous, to make them mathematical.
- So, in either case you could start with some of the ideas, some of the philosophical ideas,
- so of the logical ideas, to say someone like Adam Smith might have.
- So, you have these basic ideas about how people think, how people make decisions.
- So, philosophy, 'philosophy' of people, of decision-making,
- in the case of micro-economics -- 'decision-making'
- And then you make some assumptions about it.
- Or you simplify it .. let me write this .. you simplify it.
- And you really are simplifying. You say "oh, all people are rational",
- "all people are gonna act in their own self-interest, or all people are going to maximize their gain",
- which isn't true -- human beings are motivated by a whole bunch of things.
- We simplify things, so we can start to deal with it kind of a mathematical way.
- SO you simplify it, so you can start dealing with it in a mathematical sense.
- So, this is valuable to clarify your thinking.
- It can allow you to prove things based on your assumptions.
- And so, you can start to visualize things mathematically, with charts and graphs
- and think about what would actually happen with markets.
- So it's very valuable to have this mathematical, rigorous, thinking.
- But at the same time, it could be a little bit dangerous, because you are making
- these huge simplifications, and sometimes the math might lead you to some very strong conclusions.
- Conclusions, which you might feel very strongly about, because it looks like you've proven them
- in the same way that you might prove relativity, but they were based
- on some assumptions that either might be wrong, or might be over-simplifications,
- or might not be relevant to the context that you're trying to make conclusions about.
- So it's very very very important to take it all with a grain of salt,
- to remember that it's all based on some simplifying assumption.
- And macro-economics is probably more guilty of it.
- In micro-economics you are taking these deeply complicated things that are
- the human brain, how people act and respond to each other, and then
- you are aggregating it over millions of people, so it's ultra-complicated.
- You've millions of these infinitely complicated people, all interacting with each other.
- SO, it's very complicated. Many millions of interactions, and
- fundamentally unpredictable interactions, and then trying to make assumptions on those,
- trying to make assumptions and then doing math with that --
- that could lead you to some conclusions or might be leading you to some predictions.
- And, once again, this is very important. This is valuable, it is valuable to make these mathematical models,
- with these mathematical assumptions for these mathematical conclusions,
- but it always need to be taken with a grain of salt.
- So, then you have a proper grain of salt, so that you are always focused on the true intuition.
- And that's really the most important thing to get from a course on economics.
- So you can truly reason through what's likely to happen,
- maybe even without the mathematics.
- I'll leave you with two quotes. And thse quotes are a little bit .. a little bit funny,
- but they're really I think helpful things to keep in mind,
- especially when you go deep into the mathematical side of economics.
- So, this right over here is a quote by Aflred Knopf, who was publisher in the 1900s.
- "An economist is a man who states the obvious in terms of the incomprehensible."
- And I'm assuming what he is talking about as the incomprehensible, he is referring to some of the 'mathy' stuff
- that you see in economics, and hopefully we're going to make this
- as comprehensible as possible.
- You'll see there is value in this.
- But it's a very important statement he is making.
- Oftentimes, it's taking a common-sense thing.
- It's taking something that's obvious .. that's obvious.
- And it's very important to always keep that in mind, to always make sure that
- you have the intuition for what's happening in the math,
- or to know when the math is going into a direction that might be strange
- based on over-simplifications or wrong assumptions.
- And then you have this quote here by Lawrence J. Peter,
- most famous for Peter's Principals, a professor at USC.
- "An economist is an expert know will know tomorrow why the things
- he predicted yesterday didn't happen today."
- And once again -- important to keep in the back of one's mind,
- because especially relevant to macro-economics, because in macro-economics
- there is always all sorts of prediction about the state of the economy:
- about what need to be done, about how long the recession will last, what will be the economic growth next year,
- what will inflation do ... and they often prove to be wrong.
- In fact, few economists even tend to agree on many of these things.
- And it's very important to realize that, because oftentimes when you are deep
- in the mathematics, economics might *seem* to be a science, like physics,
- but it's not a science like physics. It is open .. it is open to subjectivity,
- and a lot of that subjectivity is all around the assumptions that you choose to make.
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