Monday, May 23, 2005

Introductory econ lecture #1 

As requested, I'm including a few notes from each day of my crash course in introductory economics. I hope you will forgive me for not being more expansive, but this is a blog, after all.

This is the text for my course. It's in the 11th edition; the two latter co-authors signed onto the book only after Paul Heyne passed away in 2000. I found on the web this set of PowerPoint slides for the chapter if you are interested in flipping through them. They are thorough. As I mentioned in a comment, I am also having students read The Invisible Heart, authored by Russell Roberts of George Mason, who co-blogs with Don Boudreaux at Cafe Hayek.

What students should pick up by the end of the course is the power of incentives. We spend a good deal of time discussing the rules of the road which govern traffic. We know how cooperation on a freeway works because we observe (too often!) the times when it does not. Markets work so well that we take them for granted, and we do not see how they work. This is what makes economic conclusions surprising sometimes. We end up with unintended consequences of actions (as Bastiat points out in That which is seen), which is the type of story that thrills most economists to tell. We love the ironic (occasionally too much: we occasionally pass over a good, simple, true story in search of irony.)

Cooperation results from mutual adjustment. When we drive, we adjust to how others are driving: we tend to mimic others' speed; we tend to stay in lanes when others do; each driver seeks an advantage in getting where they want to go faster by reacting to others doing exactly the same thing. It helps to have rules of the road in traffic, to establish some parameters like speed or lanes through which traffic can pass.

Markets work the same way. Rules of the game exist, such as private property rights and the sanctity of contracts, that permit individuals to transact in a way that is mutually advantageous and allows them to capture the gains from transactions themselves. The aforementioned Boudreaux talks today about Zimbabwe, a place that doesn't work that way, and in which country citizens are trying some other way to transact because it is a natural act. The Mugabe government's attempts to squelch that natural desire to "truck, barter, and exchange" -- in Adam Smith's elegant words -- "is like a diseased and deformed baboon calling Charlize Theron ugly." Markets develop to reduce the costs of fulfilling that desire, to expand the circle of potential traders.

Last, we spend time discussing the view that individuals choose rationally. A corrolary of that is that things do not have a cost, only actions do. How does one get a beer? You can brew it, buy it, steal it, borrow it, charm a friend into giving you one. Each action has a different set of costs involved. You produce a beer using that action which is cheapest to you. Which, now that it's 6pm, sounds like a good idea to me.