Praxeology with Dr. T

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Chapter One The Economic Way of Thinking

Rush Hour Traffic • An example of social cooperation. • Each person has his own goal. • We trust that everyone will follow the rules that are well understood generally. • Traffic flows rather smoothly. • Is this how most people see it? • We often take successes for granted.

Social Cooperation • Civilization depends on cooperation. • The important question is: “How should cooperation be induced or brought about?” • Thomas Hobbes (1588-1679): • Without an overriding coercive authority to keep people from attacking one another, life would be “solitary, poor, nasty, brutish, and short.”

Social Cooperation • Adam Smith (1723-1790): • Published The Wealth of Nations in 1776. • Social cooperation could be attained without the heavy hand of a central authority if the general rules in society are well defined and understood. • People are guided as if by an “invisible hand” to cooperate with each other in order to get the most out of life.

What Is Economics? • John Maynard Keynes: • Not a set of conclusions. • It is a method, an approach, a way of thinking, an “apparatus of the mind.”

One Major Assertion • All social phenomena emerge from the actions and interactions of individuals who are constantly choosing in response to expected benefits and costs as perceived by them. • Economics is the theory of choice and its unintended consequences.

Weighing Costs & Benefits • Does the assertion that people weigh costs and benefits assume that people are selfish, materialistic, shortsighted, or greedy? • Not at all. • People just act in accordance with advancing projects in which they are interested. • People can be selfish, altruistic, or in-between.

Economic Theory Assumes: Expected Benefits People make choices based on & Expected Costs

The Core Problem for Economizers: • The multiplicity of diverse and incommensurable projects (choices) that people have.

Specialization (Division of Labor) • Because people have widely different relative strengths, they often decide to focus on one or two skills and tradewith others that have other relative strengths. • This specialization begins what Adam Smith called the “commercial society.”

From Adam Smith: “It is but a very small part of man’s wants which the produce of his own labour can supply.” • “He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.”

Social Coordination • Q: How are the parties involved in producing goods and services motivated to coordinate their activities? A:By convincing others that they will be better off if they cooperate with them. A:Economizing actions create options for others. • Social coordination is a process of continuing mutual adjustment.

Where Does Money Come In? • Considering all the complex details involved in exchange, money changes the net costs or benefits so that a given exchange is beneficial for both parties. • Money persuades!

Rules of the Game • Social interaction (economic exchange) is directed and coordinated by the rules participants know and follow. • Disputed, inconsistent, or unclear rules cause the game to break down.

Property Rights = Rules of the Game • A market exchange economy is based on private property rights. • People have the moral right to use their justly acquired property in ways they choose, as long as such action does not infringe on the like rights of others. • Exchange would be impossible without property rights.

Property Rights Encourage. . . • The effective use of existing resources. • The development of new resources. • New cost-cutting technologies. • The development of new talents and skills.

The Biases of Economic Theory • The Focus on Purposeful Choice. • Events result from people’s choices. • The Axiom of Action. • Only Individuals Choose. • Groups can’t make choices.

Biases or Not? • Our analysis must start somewhere. • We were not born yesterday. • Our minds are not empty from the start. • Every science has its biases.

A Word on Theory • When we observe two events happening together, what is the relationship? • Correlation or Causation? • In order to determine causation, we need some kind of theory that makes sense.

Any Limitations? • Economic theory by itself cannot answer any important social questions. • It must be supplemented with knowledge from other sources • History • Culture • Psychology • Social Institutions

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Praxeology with Dr. T