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.

Lately I have been thinking a lot about rationality and economics. In my Economics of the Family and Religion course I exhort students to take the approach, “crazy is lazy”. Like archeologists that brush away the dust from artifacts we should brush away the dust of human decision-making and find the rationality. This is especially useful when it comes to understanding observed patterns in religious practice across time and space. You don’t get very far with, “people are nuts”.

Humans make decisions on purpose. They weigh the costs and benefits of an action and make the choice that seems best to them given their available opportunities. Some students have struggled to integrate this message with their other classes. At FSU we have a deep bench of experimental and behavioral economists so there are ample opportunities for students to see courses with a more psychological approach.

In one famous study, Khaneman and Tversky manipulate whether there is a positive or negative frame on a treatment for a deadly disease. In the positive frame, there was a 33 percent chance that treatment could save the 600 people with the deadly disease. In the negative frame, there was a 66 percent chance the treatment could kill the 600 people with the deadly disease. Notice that both of those probabilities result in 200 people being saved. However, people were far more favorable to the positive frame (72%) compared to the negative frame (22%).

Then there are numerous other behavioral economics findings about seemingly small things that impact the decisions people make. For example, in research about bidding behavior psychologists Dan Ariely and Drazen Prelec and economist George Loewenstein passed out sheets of paper and had students write the last two digits of their social security number (SSN) at the top before they placed a bid for each item on a sheet. Students with SSN in the top 20 percent of the distribution bid 216 to 346 percent higher for the items compared to those with SSN in the bottom 20 percent.

We could go on. In the face of those kind of results, it is no wonder that students pause to reflect about how these findings fit into the larger corpus of economics. Are they useful observations to the extent they help us improve the predictions of our models? Are they damning demonstrations that cut out the heart of the economic approach?

Sometimes I remark to my students, “This is why economists don’t get invited to cocktail parties.” This post is about that.

From 2008 – 2011 I taught a course at Florida State called “Economics of Compassion”. It is a course co-designed with my mentor Mark Isaac. The class discusses historical and contemporary problems related to poverty, both at the domestic and international levels. Having heard about the course, the Social Justice Living Learning Community at Florida State wanted me to teach the course to their incoming freshman. 

It was quite different from other courses they were taking that seemed to talk in terms of solutions without regard for scarcity. My role was to put parameters on their utopia and get the students to think carefully about a couple questions related to issues they care about:

• Compared to what?
• What happens next?

The students seemed to like the class, but, for a committed group of people who want to change the world it was also quite a downer. It was a downer for them the same way economics is a downer for people at cocktail parties.

We start with scarcity. Scarcity is a fact of life. There are never enough resources to satisfy everyone and there will always be unmet desires. For the economist, the notion of trade-offs — you must give up one thing to get another — flow from this scarcity. It means that anytime a solution to a problem is attempted you are always giving something up.

For example, the death of George Floyd this summer sparked conversation about how to reduce police violence. One approaching to curbing this important social problem is to eliminate or reform qualified immunity (QI). This is a legal doctrine intended to protect police and others from frivolous lawsuits. The problem is that QI has made accountability extremely difficult. The logic of reforming QI is that doing so will increase accountability, raise the cost of police violence, and therefore lead to less police violence. That’s good economics.

But, remember there are trade-offs. In a new world where police are opened up to lawsuits, local government might need to increase police compensation to retain or attract qualified men and women. Where does the money come from? Can you reduce the number of police and/or will you have to raise taxes? There are other trade-offs too. Will police become more reluctant to enter dangerous neighborhoods? After all, there is a greater chance that inserting themselves into a risky situation will lead to financial ruin.

Moving from heavy to light. If you haven’t seen Yoram Bauman’s comedic schtick on Principles of Economics Translated, take five minutes and check it out here. As he illustrates, “economic profit” depends on alternatives: A Snickers bar valued at one dollar with no alternative implies an economic profit of $1. However, if the alternative was M&Ms that you value at 70 cents then your economic profit is 30 cents … Your profit from pursuing one course action declines as the value of the alternative increases.

By accounting for trade-offs the net benefit of a course of action goes down. When we bring up trade-offs in conversation, economists effectively eat into people’s mental profits for some course of action.

Another thing to consider, when you’re intervening, that intervention can sometimes have dramatic side effects that you didn’t even think about. You cannot merely move people around as if they’re pieces on a chessboard (head nod to Adam Smith).

For example, it is possible that eliminating qualified immunity leads to less police violence but more neighborhood violence overall if police decide not to insert themselves into situations that could be more costly. Beyond this hypothetical example I have been using, there are loads of other unintended consequences economists talk about.

Thinking in this way is the bread and butter of economists. This is how we see the world. But, don’t try this in social settings. As EconTalk host Russ Roberts once commented (this podcast), a pleasant picnic veered into chilly company when he pointed out someone’s proposed minimum wage could have negative employment effects. The others at the picnic started to inch away from him on the picnic blanket. At parties, I’ve had people talk about the idea that a tax won’t effect them because it is only on sellers, homeowners, etc. I’ve had to ask myself, “Is it worth it to bring up that the tax is likely to be passed through?”

So while my last couple posts sing the praises of economics, I should let you know, at cocktail parties people don’t like to think about scarcity, tradeoffs, and unintended consequences. Economists like to think about the seen and unseen. Many others, especially in social settings, would rather the unseen remain unseen.