Birks – Mankiw 7th edn Chapter 1: Ten Principles of Economics
Mankiw, N. G. (2015) Principles of macroeconomics (7th ed.)
Principles of microeconomics (7th ed.)
Principles of economics (7th ed.)
Mason, OH: South-Western Cengage Learning.
Chapter 1 – Ten Principles of Economics
When reading the chapter, here are some aspects to consider:
- Mankiw gives ten points. The points could be considered as a way to give some findings early in the course. See it in the same way that people starting to learn a musical instrument are given simple tunes in the introductory sessions. Such tunes are quite limited, but they enable students to get some sense of accomplishment early on. Viewed according to this analogy, we might imagine that the issues are really far more complicated, but as general rules of thumb or insights the points may have some value.
- As a general rule, it is useful to be aware of the importance of framing. The process of framing refers to the way in which things are observed. It applies to any description or analysis, not just within economics. Framing has been described as involving selection, emphasis, exclusion and elaboration. In particular, note what is included and what is excluded. It shapes what we see, the problems that are identified and the policy suggestions that result. Society has been viewed in many different ways, with each framing giving a different picture. We could consider a society divided into classes, or ethnic groups, or by gender. The distribution of income and wealth would come across differently according to the groupings we select. History could be presented in terms of, for example, i) kings and queens, and dates of battles and wars, or ii) the lives of common people. Activity could be divided into public or private; market or non-market; work or leisure; employer, self-employed, employee; and so on.
Carr (2008 ), in a series of lectures on history presented in 1961, said that the historian did not look at the facts and draw conclusions. The historian selected from all the available information, deciding what to take as the facts, then using these to present an interpretation. The historian selected some information, emphasised some points over others, and elaborated on these to tell a story, while ignoring or excluding other information.
Historians are not the only ones to work in this way. Frequently, within a discipline, the framing is largely determined by prevailing conventions. Mainstream microeconomics emphasises markets and market failure, rational individuals maximising profit or utility, while macroeconomics uses standard components of aggregate expenditure and considers economic problems such as inflation, unemployment, and growth in overall output.
- Logic relates to proof, whereas rhetoric refers to persuasion. Much of the information that we see is designed to frame issues in a particular way. The reasoning may (and should) be internally consistent, but there may be other ways to select and use information. With a different framing, other issues and possible solutions might be identified. A critical assessment would include recognition of alternative possibilities. This is important when taking theoretical conclusions and expecting them to apply in the real world.
- The focus on scarcity has been questioned. In some wealthier societies, scarcity is generated through promotion of demand, as with some advertising, or with “planned obsolescence”.
- The first four principles are about “how people make decisions”. We could question whether this is how people actually do make decisions, or how, according to a particular body of theory, people should make decisions. Mankiw mentions equality. More refined analyses would use equity, which is a more complex concept. There is not always a trade-off between efficiency and equity. Provision of education and health care to children from low income households can improve both efficiency and equity.
- Opportunity cost (Principle 2) is VERY IMPORTANT. It underpins much advanced analysis of options and their values. It can be presented to refer to “the best alternative foregone”, or “the value of the best alternative foregone”. The latter is more complicated because it requires the specification of a monetary value. It is commonly presented as if a decision maker faces a choice from a set of available options. These options may not be independent of decisions of others, as with a group of people choosing a film or restaurant. Also, the nature of an activity may not be fully known at the time when a decision is being made (as when visiting a restaurant for the first time).
- Marginal thinking (Principle 3) is useful when small changes are possible and effects are also small. Many decisions are not of this form. Items and/or effects may be “lumpy”. A household might have one or two cars, but they cannot have 1.3726 cars. There is a big difference between completing only 95% of a degree and completing an entire degree.
- Benefits from trade (Principle 5) compare trade to no trade. This is not the same as considering how much trade should occur, and under what conditions. Benefits from trade also relate to a situation when all adjustments have been made. There can be large changes required in patterns of production, etc., moving from one situation to the other. These adjustments are not considered in “static analysis”, which is widely used in economics texts. This is an important aspect of the framing of this analysis.
- Note that we do not really face a choice between market and central control (assumed in Principles 6 and 7). In western economies governments are major employers and producers of goods and services. Also, large firms may have many internal transactions over stages of the production and distribution process. This in-house activity is not conducted through markets.
Carr, E. H. (2008 ). What is history? Harmondsworth: Penguin.
Commentary by Stuart Birks, 28 August 2014, last updated 3 July 2015
These “principles” are not exactly basic to the nature of economics which can clearly be stated according to two axioms (originally bu Henry George in 1879):
1. Man seeks to satisfy his needs with the minimum of exertion.
2. Man’s desires are unlimited.
A cynic might claim that we are both lazy and greedy when looked at in these terms, but in parallel it is equally true to claim that we both careful in the use of our limited energy and industrious it its application. Thus the combination of two opposite effects are what economics is really all about.
As a direct of applying these principles we find that our social system consists of a number of role-playing entities who are more suited to specialize and then to exchange the products of their labor. This the introduces the concept of competition so that the price (and productive cost) becomes the least possible.
This implies that Adam Smiths 3 factors of production (Land Labor and Capital) should be combined in the most efficient way possible and that any imbalance between their use is an indication of an imperfect system. Today, alas! we no longer think in these most basic terms about the principles by which society exists and consequently our subject has become very confused.
One would have to review a thorough cross cultural body of evidence to evaluate the two economic principles argued by David Harold Chester. The great US anthropologist, Marvin Harris, offered four bio-psychological constants applicable to all cultures. Regarding Chester’s principle #1 – minimum exertion, Harris states the following principle “People cannot be totally inactive, but when confronted with a given task, they prefer to carry it out by expending less rather than more energy” (Cultural Materialism: The Struggle for a Science of Culture. Page 63).
Principle 1 appears to be grounded in the cross cultural evidence. Regarding Principle 2, I am far less supportive of an assertion that “Man’s desires are unlimited”. Economically relevant desires result from behavior not fantasy. Such desires as behavior do not occur without consideration of cost, risk and uncertainty. Behavior emerges from the prior enculturation of individuals. Human desire may be endless, but it does not require economic processes or outcomes. Behavior is something learned and engendered through reproduction of each generation. Regarding the fundamental economic assertion of scarcity (to return to Mankiw) is not a required human economic condition. Rather, the phenomena of scarcity in our historic period is a structural outcome of exchange through markets. There could be many other economic systems built that do not mandate scarcity.
No economic system can escape the existential reality of time scarcity. With a zillion possible things we could do in response to multiple attractions and distractions, we have no choice in the matter of foregoing and neglecting 99.99..% of them and deciding on a highest priority time commitment. This time decision is an inescapable economic decision that each of us must make throughout our life. How do we (or should we) go about making this decision? Unfortunately there is a radical scarcity of economic texts that build theory from this ontological and ethical starting point.
I agree with what Mankiw used to explain related to the principles of economics. But those principles, in a nutshell, would not applied to the developing countries, as the pure theory of economics is a way long in those countries, where personal relationships are stronger than the financial relations. These relations are based on religion, caste, clan, language and culture. Hence, there should be more elaborate study is needed before compliation of the principles of economics, especially in the developing countries, where interrelationships of sectors with the society is more crucial and complicated.