Birks – Mankiw 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