1. The Economic Way of Thinking 10e ©Prentice Hall 2003 1 “The Economic Way of Thinking” 10 th Edition by Paul Heyne, Peter Boettke, and David Prychitko PowerPoint Slides prepared by Assistant Professor Paul Harris Camden County College

2. The Economic Way of Thinking 10e©Prentice Hall 2003 2 Chapter Outline Introduction Recognizing Order The Importance of Social Cooperation How Does It Happen? An Apparatus of the Mind

3. The Economic Way of Thinking 10e©Prentice Hall 2003 3 Chapter Outline Cooperation Through Mutual Adjustment Rules of the Game The Biases of Economic Theory Biases or Conclusions? No Theory Means Poor Theory

4. The Economic Way of Thinking 10e©Prentice Hall 2003 4 Introduction Is order prevalent in society? How does an Economic system work when it is functioning properly? What mechanisms of social coordination do we depend upon?

5. The Economic Way of Thinking 10e©Prentice Hall 2003 5 Recognizing Order Rush hour traffic is an example of social cooperation. There are general rules that everyone is expected to obey. We tend to notice failures. We take successes for granted so much so that we aren’t even aware of them.

6. The Economic Way of Thinking 10e©Prentice Hall 2003 6 Recognizing Order Thousands of diverse commuters travel to work each day. Each is expected to follow a set of rules. Traffic flows smoothly.

7. The Economic Way of Thinking 10e©Prentice Hall 2003 7 The Importance of Social Cooperation Civilization depends upon cooperation. Thomas Hobbes (1588 - 1679) Contended that people’s commitment to self-satisfaction required force to keep them from attacking one another.

8. The Economic Way of Thinking 10e©Prentice Hall 2003 8 How Does It Happen? How does society determine the course determine the course of actions necessary of actions necessary to produce the goods to produce the goods and services we enjoy? and services we enjoy?

9. The Economic Way of Thinking 10e©Prentice Hall 2003 9 How Does It Happen? Adam Smith (1723 - 1790) Most people believed political rulers’ attention was necessary to sustain society. Smith disagreed. In1776 published An Inquiry into the Nature and Causes of the Wealth of Nations Founder of Economics

10. The Economic Way of Thinking 10e©Prentice Hall 2003 10 An Apparatus of the Mind John Maynard Keynes The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions. What is The Economic Way of Thinking?

11. The Economic Way of Thinking 10e©Prentice Hall 2003 11 An Apparatus of the Mind Summary All social phenomena emerge from the actions and interactions of the actions and interactions of individuals who are choosing in response to expected benefits and response to expected benefits and costs to themselves. costs to themselves.

12. The Economic Way of Thinking 10e©Prentice Hall 2003 12 An Apparatus of the Mind Question Does this assume people are selfish, are selfish, materialistic, materialistic, and andshortsighted?

13. The Economic Way of Thinking 10e©Prentice Hall 2003 13 An Apparatus of the Mind Focus is on actions and interactions. Actions emphasize economizing. Economizing Allocate resources in a way that allows the economizer to derive whatever s/he wants Results from scarcity Involves tradeoffs

14. The Economic Way of Thinking 10e©Prentice Hall 2003 14 An Apparatus of the Mind Economic theory assumes that : People make choices based on People make choices based on ExpectedBenefits andExpectedCost

15. The Economic Way of Thinking 10e©Prentice Hall 2003 15 An Apparatus of the Mind Economic Interactions Problems Are a Multiplicity of diverse and even incommensurable and even incommensurable individual projects individual projects

16. The Economic Way of Thinking 10e©Prentice Hall 2003 16 An Apparatus of the Mind Specialization (Division of Labor) Results from people’s economizing actions Is necessary to increase production. Question Will specialization without coordination work?

17. The Economic Way of Thinking 10e©Prentice Hall 2003 17 An Apparatus of the Mind Adam Smith referred to the Commercial Society, in his “Wealth of Nations” and said……Adam Smith referred to the Commercial Society, in his “Wealth of Nations” and said…… “It is but a very small part of a man’s wants part of a man’s wants which the produce which the produce of his own labour of his own labour can supply.” can supply.”

18. The Economic Way of Thinking 10e©Prentice Hall 2003 18 An Apparatus of the Mind Adam Smith and the Commercial Society “He supplies the far greater part of them by exchanging that surplus of them by exchanging that surplus part of the produce of his own labour, part of the produce of his own labour, which is over and above his own which is over and above his own consumption, for such parts of the produce consumption, for such parts of the produce of other men’s labour as he has occasion for.” of other men’s labour as he has occasion for.”

19. The Economic Way of Thinking 10e©Prentice Hall 2003 19 An Apparatus of the Mind Adam Smith and the Commercial Society “Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”

20. The Economic Way of Thinking 10e©Prentice Hall 2003 20 An Apparatus of the Mind Social coordination is highly complex. Question…… How are the parties involved in producing goods and services motivated to coordinate their activities? Social coordination is highly complex. Question…… How are the parties involved in producing goods and services motivated to coordinate their activities?

21. The Economic Way of Thinking 10e©Prentice Hall 2003 21 Cooperation Through Mutual Adjustment Economizing actions create alternatives create alternatives available to others. available to others.Socialcoordination is a process of is a process ofcontinuing mutual mutualadjustment.

22. The Economic Way of Thinking 10e©Prentice Hall 2003 22 Cooperation Through Mutual Adjustment Example Why don’t drivers on a freeway drive in one lane? Example

23. The Economic Way of Thinking 10e©Prentice Hall 2003 23 Cooperation Through Mutual Adjustment The net advantage determines people’s actions. Costs versus benefits Money persuades! The net advantage determines people’s actions. Costs versus benefits Money persuades!

24. The Economic Way of Thinking 10e©Prentice Hall 2003 24 The Biases of Economic Theory Economics focuses on choice. Events result from people’s choices. Only individuals choose. Economics focuses on choice. Events result from people’s choices. Only individuals choose.

25. The Economic Way of Thinking 10e©Prentice Hall 2003 25 The Biases of Economic Theory Individuals choose after weighing benefits and costs. Interactions assume some “rules of the game.”

26. The Economic Way of Thinking 10e©Prentice Hall 2003 26 Rules of the Game Social interaction is directed and coordinated by the rules participants know and follow. Poorly developed rules cause the game to break down.

27. The Economic Way of Thinking 10e©Prentice Hall 2003 27 Rules of the Game Property rights are an example of rules of the game. Questions… Why do people increasingly complain about traffic jams? Why isn’t something done?

28. The Economic Way of Thinking 10e©Prentice Hall 2003 28 Biases or Conclusions? Question… Are the biases inherent in the economic way of thinking really prejudices instead? We must begin somewhere.

29. The Economic Way of Thinking 10e©Prentice Hall 2003 29 Biases or Conclusions? We are always wrong to some extent. Every “true” statement leaves out a great deal that is also true and thus errs by omission.

30. The Economic Way of Thinking 10e©Prentice Hall 2003 30 No Theory Means Poor Theory Discovery of causal relationships depends upon theory. We observe a fraction of what we “know.” Discovery of causal relationships depends upon theory. We observe a fraction of what we “know.”

31. The Economic Way of Thinking 10e©Prentice Hall 2003 31 No Theory Means Poor Theory Economic theory by itself cannot answer any social questions.Economic theory by itself cannot answer any social questions. It must be supplemented with knowledge from other sources.It must be supplemented with knowledge from other sources.

32. The Economic Way of Thinking 10e©Prentice Hall 2003 32 End of Chapter 1 Next Chapter 2, “Efficiency, Exchange, and Comparative Advantage”