Probably the most common definition is “the science of allocating scarce resources to diverse ends.” [Michael] Watts offers Marshall’s definition: The study of mankind in the ordinary business of life. Neither of those is what I think of as economics. Still less is it the study of the economy, which I suspect would come closest to what most people think the word means.
To me, economics is that approach to understanding behavior that starts from the assumption that individuals have objectives and tend to take the acts that best achieve them. That is what economists mean by “rationality,” and it is the assumption of rationality that is, in my view, the distinguishing characteristic of economics. What I am looking for are works that tell us something interesting about the implications of that assumption.
Someone at some point suggested Orwell’s Down and Out in Paris and London. It is an interesting book, although much too long for my purposes. But what makes it interesting, economically speaking, is not the vivid picture of poverty in the period between the wars but particular details relevant to implications of rational behavior.
I can give, by memory, an example. Orwell observed waiters in a fancy Paris restaurant, out of sight of the diners, spitting in the dishes they were going to serve. In an idealized market context, the waiter would never spit in the dish unless the value to him of doing so was more than the disvalue to the patron he was serving, which is unlikely. But throw in the inability of either the patrons or the waiter’s employers to monitor the waiter’s behavior and any benefit to the waiter of expressing his hostility is a sufficient incentive to make him do it. That suggests the further point that, when you cannot monitor someone’s behavior, his preferences matter — you want the job he is doing for you to be done by someone whose preferences are close enough to yours so that he will want to do what you would want him to do — even if nobody is watching.
Economics is not the study of the economy. A picture of poverty, or unemployment, or wealth, or economic growth, however accurate and vivid, does not in itself teach you any economics. A story such as Poul Anderson’s “Margin of Profit,” which deals with a wholly fictional future, does, because it demonstrates in that world an important implication of rationality that holds in our world as well — that in order to prevent someone from doing something you do not want him to do it is not necessary to make it impossible, merely unprofitable.
David Friedman, “Thoughts on Literature, Economics and Education”, Ideas, 2017-05-01.
June 9, 2019
QotD: What is economics?
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