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Home , Pareto efficiency

Thinking like a Political in the ordinaryEND business TIMES of life

Timothée Parrique, [email protected] is everywhere

“I don’t care who writes a nation’s law - or crafts its advanced treatises - if I can write its economics textbooks.”

Learning Economics as a Foreign Language (1915-2009) Ideology is everywhere

“...valuations are always with us... Disinterested research here has never been and can never be. Prior to answers there must be questions. there can be no view except from a viewpoint. In the questions raised and the viewpoint chosen, valuations are implied.” (1978)

Gunnar Myrdal (1898-1987) Today

• Part I: What is the difference between the different economic schools of thought?

• Part II: What does it mean to think like an economist?

• Part III: What does it mean to think like a political economist (in the end times)? PART I

Seven Samurai (1954)

The Ideological Landscape of Economics The Ideological Landscape of Economics

Philonomics classical Evolutionary Marxist Gandhian Mainstream Sraffian Mainline Post-Keynesian Feminist Ecological Agent-based computational Radical Ethonomics Clionomics Environmental Austrian Experimental Abenomics Kudonomics new Green sustainability Bionomics Shimomuran Institutional Happiness psychological Anarchist Complexity Steady-State Degrowth behavioural NeoKeynesian Neoclassical Modinomics monetarist Heterodoxy sustainability Marxian Mainstream (or orthodoxy) Green Ecological Bionomics new institutional Sraffian Degrowth Post-Keynesian new keynesian Steady-State

new behavioural old behavioural neoclassical Feminist environmental Classical neuroeconomics

Austrian Institutional

econophysics Gandhian

economic sociology economic history economic geography Mainstream

Heterodoxy 1890 Individuals know what they are doing, so leave them alone - except when markets malfunction

• Inspired by Jevons, Walras, Marshall

• Subjective theory of

1. Micro > macro (methodological individualism)

2. The economy is made of rational and selfish individuals (no classes, only )

3. Self-equilibrating markets, and invisible hand

• High degree of precision and logical Paul Samuelson (1915 - 2009) clarity because heavily mathematical

1867 Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress

• Inspired by Marx but not the same as Marxism

• Labour theory of value and surplus

• The economy is made of classes

• Focus mode of production, and its power relations (‘historical materialism’)

• Criticise capitalism as a system

• Study work, and technological Michel Aglietta (1938) innovation

1870s Austrian Economics No one knows enough, so leave everyone alone.

• Inspired by Carl Menger, F. Hayek

• Only individuals choose (‘methodological individualism’), but they have limited rationality

• The world is complex and uncertain

• Institutional frame matters (e.g. private property)

• Cost and are subjective

• economise on knowledge

• Markets are spontaneous orders, so free is best Steve Horwitz (1964)

1898 Individuals are products of their society, even though they may change its rules

• Inspired by , John Commons, Wesley Mitchell

• ‘’ (Darwin)

• Focus on habits and institutions

• Habit/Routine = non-deliberative propensity to engage in a previously adopted pattern of behaviour

• Institution = way of thought or action embedded in the habits of a group

• Agents are both producers and products of their circumstances

• Rationality is not given but shaped by the social (1933-2012) environment

1970s (1936) Post- What is good for individuals may not be good for the whole economy

• Inspired by Keynes

• The future is fundamentally uncertain

• Government should take an active role

• Social conflict between classes

• Macro > micro

• History matters Steve Keen (1953)

1980s (1966) Nature knows best; should spend more time in their gardens

• Inspired by Nicholas Georgescu-Roegen, Kenneth Boulding, Eugene & Howard Odum

• The economy as a subsystem of the planet; limits to growth

• Interdisciplinary (biomimicry)

• Follow the laws of thermodynamics, and acknowledges complexity

• End goals = sustainable scale + efficient allocation + fair

• Development rather than growth Herman Daly (1938) • Biocentrism; intra- and intergenerational

1990s Who do you think cooked ’s dinner? Production is only the tip of the iceberg

• Inspired by Mary Wollstonecraft, J.S. Mill, Harriet Taylor Mill

• Denounce androcentrism in ME

• Focus not only on production, but on reproduction (unpaid labour)

• Logic of accumulation vs. logic of sustaining life

• Economic analysis should focus on gender; Institutional structures create gender inequality Julie A. Nelson (1956) • Econ. = the ‘provisioning of life’

POLITICAL ECONOMIST Which school of thought is currently being understood as ‘’?

Neoclassical economics

Post-Keynesian Keynesianism economics If I criticise the assumption that individuals are fully rational, I am likely to be…

A neoclassical A orthodox economist economist

An heterodox economist Which of the following schools does NOT acknowledge the existence of fundamental ?

Neoclassical Ecological economics economics

Post-Keynesian Austrian economics economics Which of the following schools seek to explain the functioning of the economy by looking at routines and social rules?

Institutional Feminist economics economics

Austrian economics Marxian economics Which of the following schools does not hold methodological individualism as a axiom?

Post-Keynesian Neoclassical economics economics

Austrian economics Which of the following axioms is NOT characterising the theories of the neoclassical school?

Homo Economicus Spontaneous orders

Methodological Equilibrium individualism Which of the following objectives is NOT part of ecological economist core principles?

Efficient allocation of Fair distribution of resources wealth

Equilibrium with Optimal scale natural ecosystems Which of the following schools is likely to see its members described as libertarians?

Austrian economics Feminist economics

Post-Keynesian Marxian economics economics Which of the following schools of thought is more likely to dismiss the occurrence of unequal exchanges?

Ecological economics Marxian economics

Neoclassical economics Feminist economists argue that most of economic activity is rendered invisible by mainstream economics.

True False

Neoclassical economics PART II

A Beautiful Mind (2001)

Thinking Like an Economist 1) People face -offs

The Matrix (1999)

• Resource = anything that can be used to produce something else

• Scarce resource = when there’s not enough of it to satisfy our wants

“People must make choices because resources are scarce” 2) The cost of something is what you give up to get it

• What is the cost of our decisions?

• As a result of scarcity, choices have to be made; the opportunity cost is the cost of those choices.

• Opportunity cost = the best alternative that has to be sacrificed when you choose to do something

“The opportunity cost of an item - what you must give up in order to get it - is its true cost” The Gold Rush (1925)

3) Rational people think at the margin Marginal Thinking

• How do we make “how much” decisions?

• = the additional cost above what you’ve already incurred

• Marginal benefit = the additional benefit above what you’ve already received

“How much decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more or a little bit less of an activity.”

The Economic Decision Rule: Cost Benefit Analysis (CBA) if Mb > Mc, Do it! - if Mc > Mb, Don’t do it! Marginal Thinking

2 laws:

1. Law of diminishing : more is not always better

2. Law of increasing marginal cost: we always pick the low-hanging fruits first. 4) People respond to incentives

Jaws (1975) Incentives

• Incentives are factors that encourage or discourage various types of behaviour, actions or activities.

“People usually respond to incentives, exploiting opportunities to make themselves better off.”

3 Types of incentives:

1. Financial (a tax)

2. Social (a law or custom)

3. Moral (feeling of guilt) Lords of War (2005)

5) There are gains from trade Trade

• Why do the choices I make interact with the choices you make?

• Division of labour (specialisation) generate the gains from trade.

“There are gains from trade.”

• Same at the international level: Theory of Comparative Advantage (Ricardo)

6) Resources should be used efficiently to achieve society’s goals

WALL-E (2008) Efficiency

• What does it mean to use resources efficiently?

• An economy’s resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better-off

• PARETO efficiency

“Resources should be used as efficiently as possible to achieve society’s goals.” 7) Markets are usually a good way to organise economic activity

Casablanca (1942) Invisible hand

• Who control that resources are used efficiently?

• “If is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own .” Adam Smith

“Because people usually exploit gains form trade, markets usually lead to efficiency.” (Adam Smith) Jurassic Park (1993)

8) Government can sometimes improve market outcomes

4 sources of market failures:

1. : the effects of a decision on a third party not taken into account by the decision maker (e.g. pollution)

2. : the ability of a single entity to influence market prices (, )

3. Asymmetric information: some people have more info. than others

4. Public are usually badly handled by markets (railways, electricity, ecosystem services etc.)

“When markets don’t achieve efficiency, government intervention can improve society’s .” POLITICAL ECONOMIST Which concept does the following quote illustrate: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”

A market failure The invisible hand

The law of increasing Marginal thinking marginal cost The law of decreasing marginal utility would justify not watching a movie twice in a row?

Yes No

The law of increasing marginal cost An externality is a side effect that is not properly taken into account by the existing market.

True False

The law of increasing marginal cost Couch Surfing is a good example of improvement that abides by the Pareto efficiency principle?

True False

The law of increasing marginal cost Anna is considering attending WILDE club at Kalmar with an entry of 80kr. She estimates that the cost of drinking inside the nation will total an additional 50kr. In order to attend the party, Anna will have to take time off from her part-time job at VDALA. She estimates that she will lose 5 hours at work, at a of 40kr per hour. Anna's opportunity cost of attending WILDE club equals

80kr 200kr

330kr 130kr PART III

Limitless (2011) Lucy (2014) Thinking Like a Political Economist

The Political Economist…

• …thinks in a pluralist way (theory, discipline, methodology)

• …is aware that ideology is everywhere

• …is ready to discuss economics for what it is - a political argument … in the end times.

• Ecological and social uncertainty

• Crisis of imagination: “It’s much easier to imagine the end of the world than the end of capitalism.” Slavoj Zizek

• The world needs open-minded, imaginative, and intellectual courageous political economists. "… the master-economist must possess a rare combination of gifts. (S)he must be mathematician, historian, statesman, philosopher – in some degree. (S)he must understand symbols and speak in words. (S)he must contemplate the particular in terms of the general, and touch abstract and concrete in the same fight of thought. (S)he must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his/her regard. (S)he must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (1883-1946)