On the Same Page

Before each fall semester, UC Berkeley hands out a free book to all incoming freshmen. The rationale is to give freshmen a common thread to talk about and the opportunity to attend a few events on the subject. The book my year was a biography of Abraham Lincoln. It was pretty boring; I couldn’t get through it. I only know one person who read the entire book. It’s difficult getting people on the same page for something they don’t care about.

Luckily for this blog, the success rate for getting on the same page will be much higher. I present to you selected excerpts from David Friedman’s economics textbook so that we can get on the same page regarding the fundamental economic framework.

David, what is economics?

• Economics is that way of understanding behavior that starts from the assumption that people have objectives and tend to choose the correct way to achieve them.
• In order to do much with economics, one must strengthen this part of the assumption somewhat by assuming that people have reasonably simple objectives
• Since there is generally only one right way of doing things (or perhaps a few) but very many wrong ways, the “rational” behavior can be predicted but the “irrational” behavior cannot. If we predict this person’s behavior on the assumption that he is rational, we will be right half the time. If we assume he is irrational, we will almost never be right, since we still have to guess which irrational thing he will do. We are better off assuming he is rational and recognizing that we will sometimes be wrong.
• “Rationality” is simply the ability to get the right answer; it may be the result of many things other than rational thinking.

Interesting, why does it work?

• There are a number of reasons why the assumption of rationality may work better than one would at first think. One is that we are often concerned not with the behavior of a single individual but with the aggregate effect of the behavior of many people. Insofar as the irrational part of their behavior is random, its effects are likely to average out in the aggregate.
• A second reason why the assumption works better than one might expect is that we are often dealing not with a random set of people but with people who have been selected for the particular role they are playing.

So there we have the assumptions of objectives and rationality explained, and the reasons why economists use them. Any questions or disagreements, write a comment and let’s talk about it.