Monday, October 19, 2015

An Interesting Discussion About The Kernals Of Economic Thinking

A biologist interviewed a a prominent economist and asked him several interesting questions about economics.  The answers that he provided went right to the heart of economics. They should be a part of everyone's thinking about economics.  The entire interview is well worth reading.  I have just selected bits of the discussion to pique your curiosity.

Every introductory textbook has a story about Adam Smith and his idea of the invisible hand which is a central idea in economics.  Smith lived in world that included monarchy and a powerful church that influenced everyone's behavior.  He and other philosophers during this period reacted against the overuse of authority; they were advocates for greater personal freedom.  It was common for nations to compete against their trading partners by limiting imports and expanding exports to other nations.  Smith pointed out that consumers preferred local products to imported products.  They acted in their self interest, but in doing so they benefited the national interest.  The perversion of Smith's idea is that greed is good since it is an expression of self interest and personal liberty which benefits everyone.  Smith clearly thought otherwise.  He believed that empathy, or sentiment for others, placed an important limit on the misuse of personal liberty. 

Efficiency is another fundamental idea that is pervasive in economics.  It is based upon the idea of scarcity. Scarce resource are required to produce the products and services that we desire.  We can enjoy more of these products and services if they can be produced more efficiently.  In a competitive market, efficient producers will prosper and less efficient producers will disappear.  The efficient use of resources to gain competitive advantage has been extended to the labor market in Europe.  Labor market flexibility has become more desirable in order to more efficiently use human capital. Wages must also be reduced to gain competitive advantage.  These neo-liberal ideas conflict with the extensive use of social welfare programs which have been popular in Europe.  Many believe that these programs reduce the incentive to work and that they drain resources from the private system.  There is a good discussion of these issues in the interview.

The interview also included comments on Milton Friedman, Hayec and other proponents of neo-liberal ideology.  Hayec an Friedman were advocates for liberalism but they had very different ideas about the topic.  Hayec is also described as a pretty nasty person. 

There is also a discussion about the origin and value of equilibrium theories which have a dominant role in economics. 

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