At the end of the semester, I like to make a splash with students. For example, in my intermediate microeconomics course I put together a fun lecture. We have some laughs talking about models. We talk Rolling Stones songs like “you can’t always get what you want” (budget constraints) as well as Queen songs like “I want it all” (monotonicity).
We wax philosophical with Robert Frost’s “The Road Not Taken” about opportunity cost. We reiterate that the arguments in utility functions can be a richer set of desires than food and shelter. As Adam Smith says, “Man naturally desires not only to be loved, but to be lovely.” We emphasize that our models are simplified because good models try to get to the heart of the matter.
Sometimes models are dangerous. Like the “monkey illusion” we become so distracted we miss the heart of the matter. One prime example is how Samuelson continued to update the projection about when the USSR would surpass the US economy (check this out for more info) or Easterly’s depiction of the World Bank notion that if you build it, growth will come.
We discuss the importance of models, how they organize our thinking, the dangers of being too wed to a model but also the importance of empirical testing. We use MobLab in class to test our models as I’ve written about here. But, MobLab can’t give us an empirical test of all the important questions. We have to look elsewhere, out in the world to find evidence. One of my favorite examples of this are cross-border comparisons like East and West Germany, North and South Korea, Haiti and the Dominican Republic, etc.
I remind students that incentives matter. Economic institutions influence the costs and benefits of human action. When costs and benefits change, we expect for behavior to change. Throughout the semester we learned to formalize these ideas and they are not without consequence. As this New York Times piece discusses the work of Amartya Sen,
“Nature causes floods and droughts, but most societies have found ways to get food to those afflicted most of the time. Human folly causes famine, which occurs when those ways are blocked. Amartya Sen, a Harvard economist, argued that there has never been a serious famine in a country — even an impoverished one — with a democratic government and a free press. The press acts as a warning system and the pressures of democracy dissuade rulers from famine-producing policies.”
While economics is fun, interesting, and can be light-hearted, economics can also be deadly serious. The stakes of economic illiteracy are enormous.
Next week we go on to Part 2 where I pivot from this section of the end-of-semester talk to the applications of economic ideas to the everyday life of students.