The five things economics majors should know…(a micro-economist’s perspective)

There has been huge criticism/debates on how economic teaching erred and what changes need to be made in the curriculum to avoid future Occupy Harvard cases. However, much of the debate has centered around changes needed in macro and financial world.

David Hemenway of Harvard School of Public Health writes this interesting paper in the recent edition of real-world economics review (a must read journal). He gives a micro-econ perspective on what he expects a econ major to know.

He cites five things he wishes econ grads (micro ones) should know:

I have been teaching microeconomics for more than four decades, and over the past months I have been seriously thinking about this question: “What are some of the most important things I would like economics majors to know before they graduate?” At first I was leaning to  such important and well-known ideas as opportunity cost, marginal analysis, moral hazard, externalities, and the prisoners’ dilemma game. Now I am leaning to important ideas that are  not well-covered in economic textbooks, and indeed are often omitted entirely. Five of the  ideas that I would recommend are:

1. people are not solitary creatures but social animals;
2. tastes are malleable and particularly so among children and adolescents;
3. there are lots of children and adolescents in the world (though few in economic textbooks);
4. retail purchasers rarely have detailed information about the products they buy:
5. large corporations (and other economic institutions) often have a substantial social and political power.

I am not claiming that economists do not occasionally write about these ideas, for economists write about virtually everything, but that these important ideas have not sufficiently made it into most economic textbooks. I will first discuss these ideas generally, and then with respect to an important market—the market for cigarettes.

The reasons for working on the five ideas are – economics is about figuring people:

Unlike most other social sciences, economics has a single basic model that is taught to all budding economists. Like all models, the microeconomic model abstracts from reality. The model has proven to be very powerful and useful, providing important insights and policy guidance, and raising economics to the “queen of the social sciences”—the only social science with a “Nobel Prize”. The assumptions of the model are its strengths—and also its limitations

Two of the basic assumptions of microeconomics are that (a) people are rational, and (b) tastes or preferences are exogenous—they are well-defined and stable, essentially God-given at birth. The advent of behavioral economics has been a breadth of fresh air for microeconomics and much of the focus has been on the rationality assumption, particularly the rationality of individuals (rather than of institutions). However, aside from a growing literature on the desire for social position, there has been less emphasis on the fact that people are social animals and the effect that society and culture have on how tastes are formed and how tastes change.

In the economic model, people are largely solitary creatures, with fixed tastes. We are basically Robinson Crusoe’s, each living on our own little island. Our major interaction with other humans is when we trade (including trading labor for goods). In other words, we are connected to each other primarily through markets. Economic theory in effect has, with mere punctuation changes, converted John Donne’s famous saying into “No! Man Is an Island.” However, in the real world, humans are not like bears. Bears are solitary animals. An adult male spends almost all of his life away from other bears, living and dying by himself. By contrast, wolves, dolphins, and primates like ourselves, are social animals. We live in societies, and we are dependent on others of our species for most of our health and happiness. Humans “are social not just in the trivial sense that we like company, and not just in the obvious sense that we each depend on others. We are social in a more elemental way: simply to exist as a normal human being requires interaction with other people.” (Gawande 2009).

How about applying all the five in cigarette industry?

A few years ago I read a fascinating history of the cigarette industry in the 20th century (Brandt 2007), written from a public health perspective. Because litigation against the industry forced it to reveal internal documents, there is probably more and better information about the behavior of cigarette companies than any other industry in the United States. The cigarette story can be used to illustrate these five ideas.

From a public health standpoint, tobacco-related diseases are the largest preventable burden of mortality in the United States, and will soon hold that unenviable position for the entire world. Were they a new product, it is doubtful that cigarettes would be allowed on the U.S. market. They not only cause a multitude of diseases to the smoker (over 400,000 deaths per year in the United States), but secondhand smoke significantly increases the risk of disease to others.

At the turn of the 20th century, cigarette smoking was widely considered a dirty habit, practiced by disreputable men and boys. Smoking was seen as a profound moral failing, and Henry Ford among others, vowed never to hire a cigarette smoker. A number of states even prohibited the sale of this noxious weed. All that would change in the next fifty years; by the mid-1950s half of American adults smoked cigarettes, and smoking was an integral part of the American lifestyle.

Super read..

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