For some reason some economists are listened to in good times and bad. Above all, in the bad times. For some other reason, a large part of the population has strong opinions on the matter. Which is extremely logical, the economic problems They have a concrete impact on people's lives.
Now, do families think like economists? Most likely yes, at least at the most basic level. The only difference is language and system.
When a father advises his son to study, because with a degree in hand he will obtain a better salary, he is intuitively referring to the theory of human capital. But the possibility of having a systematically related technical language allows order, reduces contradiction and favors learning.
The same happens with any other area of knowledge, from knowledge of medicine to the craft of building good craftsmanship, as knowledge becomes specific, common sense loses ground.
To bridge the gap, this first edition presents 6 ideas that they have an economist in their head when analyzing a topic. In a future edition, there will be more.
1- For a sincere economist, everything has a cost
At the heart of economic analysis beats a decision. It doesn't matter how spontaneous a person is considered. In the eyes of a good economist, everyone decides between at least two options.
When someone does “something,” they inevitably stop doing “something else.” And, of course, that decision comes at a cost.
Suppose that at work you are offered to extend the day to six hours on Saturdays, to be paid like any other work hour of -let's say- $100. Approximately $2400 monthly.
But it turns out that Saturday mornings are the only day he has free to play football. If you decline the job offer, you are revealing that the level of satisfaction from going to play is greater than the additional salary you could receive if you did not reject the offer.
That is, the net value of playing the Saturday game is – at a minimum – greater than that amount. It could even be an even larger amount, but definitely never less. The same applies for an example of decisions where money is not directly involved (watching Netlfix vs going for a walk), you just have to find some way to put a price on each activity.
In short, when a sincere economist evaluates alternatives he always thinks about the opportunity cost: the best alternative that is given up when making a choice or decision. That is, the value of the best unrealized option. This last point is very important.
If there are other options available, and generally there are, you only have to allocate the best option as an opportunity cost. Otherwise, if the value of all available options were imputed, any decision would become so onerous that it would be prohibitive, and the best default option would be to do nothing. Which ends up being a contradiction, because doing nothing would also be highly costly.
2- A good economist does not forget to take into account indirect effects
Suppose you are a benevolent dictator, in charge of a country that is definitely north of the 38th parallel. Like any ruler, you are concerned about the safety of your people, which is why you take actions to guarantee it, forcing a large part of the resources of his country's economy are allocated to the development of a nuclear program, and the rocket that allows the result obtained to be exported far away.
Also assume that after 10 years you manage to meet the objective. A new medal is invented, self-awarded and celebrated because the development was a success.
If the success of the program is measured accounting, that is, by discounting the resources directly used to obtain the greatest feeling of security, perhaps the result will be positive.
However, if the program is measured economically, in addition to discounting the opportunity cost mentioned above, its indirect effects.
For example, the reaction of other powers starting a new arms race, which ends up increasing the price of achieving a sense of security for that country. For the good economist, the movement of one variable (the nuclear program) impacts the movement of many other variables, not just the one that captures the expected result.
While this point seems trivial, it is not always understood that way. First, because the effect of the movement of a variable depends not only on it, but also on the context. And studying the context is much more complicated than reading a maxim on Twitter and taking a position at minute 5.
Second, because the analysis of the context can be partial (the positive effects of the program in the arms sector) or it can be general (the effects generated in the entire economy). Most of the time, a decision does not provide enough time for a general equilibrium analysis, which is why different partial scenarios are used.
But the good economist knows that the general context is what counts, even when some of its parts are ignored.
3- I don't know what I want, but I want it now
It is unacceptable for a little economist padawan to say something like that. If every decision is costly, then every costly good or action has a value. Now, what determines that value? Some kind of feeling, longing or anguish? In other areas of study, maybe yes.
An object that is inherited may have a special aura for the family that continues to keep it, but for the analysis of an economist who walks on the light side of the force, the value of all things lies in their relative scarcity or, in all case, in the information available on the relative scarcity of one thing.
In an ideal world of perfect and complete information, unlimited processing capacity, and under complete contracts with zero compliance cost; Market prices are those that reflect the relative scarcity of one good with respect to another. When the world turns out to be more complicated than the tools we invented to understand it, prices still remain a good source of information to understand the scarcity of a good, but not the only one.
But what information does the price of a good? The forces of supply and demand under a given institutional context. Taking a quick tour: the cost structure of the company that manufactures it, the cost structure of the companies with which it competes, the market power of each of these, the institutional scheme that orders and regulates that market, the power customers' purchasing habits, their preferences, various exogenous factors, among others.
As already seen, understood as an information system, prices are not perfect, but they concentrate so much information that it is difficult to discard them, at the cost of losing a large part of the analysis. And understanding how scarcity is determined and modified is an essential part of the economist's job.
4- What is desirable in the short term may be bad for the future (and vice versa)
Imagine that on December 24th every year Christmas is celebrated in your house. At the Argentine table, that generally means eating a lot, drinking a lot, sleeping little, and getting up the next day to continue eating even more.
Likewise, for some inexplicable climatic reason, there is usually summer weather at that time, which enhances the caloric diet of nougat, sweet bread, and similar foods.
This is not always the case, but for the purposes of the example we are going to consider Christmas dinner as something good. In the short term, it is an enjoyable bacchanal. In the rest of the year, there will be time to diet.
Let's think now what would happen if every three days a dinner was celebrated with the same intensity as Christmas. The family budget would decrease due to greater spending, but the income of families employed in the food and Christmas gift sector would increase.
Public health problems would multiply, although the effects would be seen in the long term. And possibly the population would be happier for a couple of years.
Thus, the happiness of one generation can be paid for by the next (and vice versa). Without going to extreme cases, the analysis of how they are distributed different effects over time of an action or a measure, is found in the economist's basic toolkit.
For analysis, the problem is that we all have a preference for the immediate, for the simple reason that the future is uncertain and complex.
The implications and ramifications of this fact have enormous consequences for economic activity. For example, a politician will structure different decisions, short or long term, depending on whether he can be re-elected or not.
In the case of a company, the incentives to invest (the decision to postpone current spending to bet on a probably greater future income) will require a very different range from that related to daily movements of its business activity, for example, a sporadic or seasonal increase in sales volume.
5- Many discussions and dilemmas are solved by measuring
The boiling point of water occurs at 100˚C. Past that point a change of state occurs. Nothing very new. But now suppose you want to make some tea. If you let the heat do its job, all advice is to remove the kettle at the first boil, at the exact point where the water begins to change.
What does all this have to do with the title? In which a large part of the discussions on current economic issues are interpreted as changes of state: taxes yes or taxes no, debt yes or debt no, inflation yes or no... and the list goes on among the large number of topics that parade through the evening news.
A huge number of problems go through how to measure certain economic fact and, if possible, how to calibrate the intensity of an intervention so that it achieves a socially desirable result. For this to work, it must be understood that all measurement is a convention.
The statistics that we read every day arise from a kind of contract on how a certain economic or social fact is defined and captured. If the basis of belief in the suitability of this procedure is not strong, the measurement does not achieve sufficient efficiency, regardless of whether it is correct and faithful to what it tries to capture.
But suppose there are no problems with that point, another problem immediately appears: measuring is expensive... although not so much anymore. Generally, those responsible for collecting measurements are the official statistics institutes, along with other agencies that produce information of this type. However, in recent years that situation has begun to change.
Technological change has favored the digitization of data that was previously carried on paper, as well as the massive reduction in storage and processing costs. But the winds of change are also blowing due to a greater demand for transparency demanded of public institutions, regardless of the level of government or agency.
In short, an economist uses data, and under this new scenario and the processing techniques that are being created; increasingly. Data is the raw material of applied analysis. Theories and models guide the questions, fill in the gaps and provide the basis for interpreting the results. But without data, they are a tool that works in a vacuum, good intentions, or fiction.
6- Incentives matter
“I want him to come here because he wants to, not because I'm going to pay him.” “He should have behaved differently, he doesn't see that it is prohibited.” “Taxi drivers never blink when they are about to turn.” Scenes from everyday life that are repeated, calls to duty that appeal to values that not everyone fulfills, culture in general.
Seen superficially, economic analysis is classified as cynical most of the time. A person who cares little about the values of others, who knows the price of everything and the value of nothing.
Let's see why this is not so. First of all, the crop it matters. If a decision beats at the heart of economic analysis, it is executed on the basis of the mental model offered by that culture, as well as the informal institutions (a type of game rules) that organize cooperation and exchange.
But it must be noted that they are one more component. Depending on the circumstances, values may not be decisive at an individual level, even though they may be decisive at a collective level (we will expand on this point in the next installment: don't miss it!).
What is the other element? The selfishness of the person making the decision. Does this mean that economists think that ethical or altruistic behaviors should not be taken into account? No, quite the opposite. An economist would tend to reward this type of behavior if it increased general well-being as a result.
But it is true that the economic analyst is crude when it comes to understanding behavior: it does not matter what is said or proposed, but rather what is actually done, and whether that action brings a benefit to the person who took it. It is on the basis of this mechanism that the Incentives matter in economic analysis.
Let's go back to an example. It doesn't matter how well the average citizen says he drives or what the law mandates. What matters is how it effectively drives, and what incentives should be provided in case a deviation from socially desirable behavior occurs.
On the positive side, a massive education campaign can be carried out (and resources spent massively) so that the average individual with a driver's license in some mysterious way ends up understanding the advantages of heroically blinking before turning or announcing a change of direction. lane, among other things.
Or, he can be punished indefinitely with fines that are large and prohibitive enough for him to understand and comply. It all depends on the context; and how expensive and effective the different incentives that can be administered are.
Summary, and what's to come
In this first installment, six basic ideas that are present in an economist's toolbox have been presented. Ideas that have been presented without a hierarchical order, but that are present at the base of practically any economic analysis.
They are part of foundation, are questionable - as when talking about selfishness - but they are useful and, for now, they appear resistant to the passage of time. Perhaps later they will no longer support the extensive edifice of knowledge that is built on them, but for the moment they remain the foundation.
But they are not the only ideas. As we promised before, we are missing a second installment (and as many as we conveniently need).
In the next note of Academic Bridge, some topics such as: the economic models are all false and it is good that it is so; Deep down the problem is culture, but a lot can still be done along the way; and many more. Until next time.