Archive for the 'Philosophy' Category

Jan 28 2010

The best Econ rap… EVER!!

Econstories.tv – A new resource for Econ teachers and students, from Russ Roberts and John Papola

The long awaited rap video from George Mason University’s Russ Roberts featuring the theories of John Maynard Keynes and F. A. Hayek has been released at last!

We’ve heard some decent Econ raps before (remember “Demand, Supply” by Rhythm, Rhyme, Results?) But this song covers all bases in the predominant macroeconomic schools of thought. Keynes and Hayek are brought back to life and their theories pitted against one another in an all out liquor fueled debate on the streets of New York City.

The video was just released this week. It is packed full of theory from the Classical, supply-side school of macroeconomics (represented by Hayek) and the demand-side school (represented, of course, by Keynes). The video includes cameos from Fed chairman Ben Bernanke and Treasury Secretary Tim Geithner, whose role as bartenders filling Keynes glass reflects their role in the real economy at keeping the money supply and government spending at high levels, fueling economic booms and the eventual busts that result.

Stay tuned to this blog for more feedback on the video, including some graphical analysis and discussion questions for Macro teachers to use in class!

2 responses so far

Oct 27 2009

Homo Economicus – “Economic Man”: Guest Lesson for ZIS Theory of Knowledge classes

Homo Economicus, the “Economic Man” is the concept underlying most economic theories. It holds that all humans are purely self-interested, rational actors who have the ability to make judgments that fulfill their subjectively defined ends. In modern economic theory, the end man seeks is generally accepted to be increasing monetary well-being and material wealth.

Philosophical foundations of “homo economicus“:

Aristotle (350 BC):

Again, how immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser’s love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state.

  • What does Aristotle think about the interference of government in the private property rights of man?

Adam Smith (1776):

In almost every other race of animals, each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer: and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.

  • How does Smith believe the pursuit of individual self-interest can lead to benefits for society as a whole?

John Stuart Mill (1836)

What is now commonly understood by the term “economics” is not the science of speculative politics, but a branch of that science. It does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive; except those which may be regarded as perpetually antagonizing principles to the desire of wealth, namely, aversion to labor, and desire of the present enjoyment of costly indulgences. These it takes, to a certain extent, into its calculations, because these do not merely, like our other desires, occasionally conflict with the pursuit of wealth, but accompany it always as a drag, or impediment, and are therefore inseparably mixed up in the consideration of it.

  • According to Mill, labor is not something humans value for its own sake, but only because it allows us to do what?

Fredrick von Hayek (1930s):

We will benefit our fellow man most if we are guided solely by the striving for gain. For this purpose we have to return to an automatic system which brings this about, a self-directing automatic system which alone can restore liberty and prosperity.

  • How would Hayek respond to those who argue that the government’s role in society and the economy is to promote fairness and equality?

Are you a “homo economicus“? – The Golden Balls Game

The prize: $1 million

How to play:

  • Find an opponent from among your classmates.
  • You and your opponent have never met before today, never spoken to one another, and will never see nor speak to one another again after the game ends.
  • Since you do not know or care about your opponent, you must play this game with your own self-interest in mind, and assume that your opponent will play it with his or her self-interest in mind.
  • You have in front of you two folded pieces of paper. One says “SPLIT” and one says “STEAL”
  • You must decide which piece of paper to select, based on the following possible outcomes

The payoffs:

  • If both players decide to “split”, each player will take home $500,000.
  • If one player chooses to “split” and the other chooses to “steal” then the one who chooses to steel will take home $1 million, and the one who chose to split will get nothing
  • If both players choose to “steel”, both players go home empty handed.

Split

Steal

Split

Player 1: $500,000

Player 2: $500,000

Player 1: $1 million

Player 2: 0

Steal

Player 1: $0

Player 2: $1 million

Player 1: $0

Player 2: $0

Let’s play!

  • You only have one chance to play this game. Remember, you care only about yourself and should do what is best for you.
  • On the teacher’s command, reveal your decision to your opponent.
  • Take note of your payoff and report it to the teacher

Discussion:

  • What was the outcome of your game?
  • Was the outcome rational? Was it predictable?
  • Did the outcome reflect the concept of “homo economicus“? Were you and your opponents’ decisions purely self-interested and coldly rational, intended to maximize your OWN payoff?
  • Are you a homo economicus? What would homo economicus have done? Why?

Videos:

Golden Balls – the real gameshow: http://www.youtube.com/watch?v=p3Uos2fzIJ0&feature=player_embedded

[youtube]http://www.youtube.com/watch?v=p3Uos2fzIJ0&feature=player_embedded[/youtube]

  • Which player was more like homo economicus? Sarah or Steve?
  • Which player acts rationally? What makes it rational?
  • Which player acts irrationally? What makes it irrational?

“The Trap”: Intro to game theory and rational self-interest in politics and economics: http://www.youtube.com/watch?v=qzNcY-gZdiA&feature=related

[youtube]http://www.youtube.com/watch?v=qzNcY-gZdiA[/youtube]

  • John Nash’s Game Theory proved that “a system driven by selfishness did not have to lead to chaos”, that “there could always be a point of equilibrium in which everyone’s self-interest is perfectly balanced against each other”? How does such a theory support the concept of homo economicus?
  • What is the Prisoner’s Dilemma? “The rational choice is always to betray the other person.” What does this say about humans in society? Is government regulation needed to prevent constant betrayal by greedy, self-interested individuals? Or are constant betrayal and self-interest themselves capable of achieving a socially optimal outcome?

Noam Chomsky on the inefficiency of markets and the threat posed by de-regulation: http://www.youtube.com/watch?v=QPl27BO7fHE&feature=related

[youtube]http://www.youtube.com/watch?v=QPl27BO7fHE[/youtube]

  • What is the “externality” of financial market failure that Chomsky identifies?
  • Why is the failure of a financial market more worrisome than the failure of a market like that for used automobiles?
  • How does Chomsky feel about the de-regulation of financial markets? Does he think markets are always rational and efficient?

Modern applications of the concept of Homo Economicus:

  • Rational Expectations Theory (RET): This economic theory assumes that humans acting generally in their own self-interest will make rational decision based on the best available information. Therefore, it assumes that people (and therefore, markets, which are made up of rational people) do not make systematic errors when predicting the future.
  • Efficient Markets Hypothesis (EMH): Rooted in Rational Expectations Theory, which itself is rooted in the concept of homo economicus, EMH says that prices in markets, particularly financial markets (whose collapse has caused the today’s global economic crisis) represent the best possible estimates of the risks attached to the ownership of various financial assets (stocks, shares, bonds, etc…) Asset bubbles are therefore impossible, since “bubble” implies an irrational and unsustainable increase in the value of an asset which will ultimately “burst”. Markets are “self-correcting”, and the most effective tool for assuring economic stability is free markets, rather than government regulation or oversight.

Connecting the dots – from Homo Economicus to today’s Economic downturn:


The general acceptance of theories rooted in the concept of homo economicus led to the de-regulation of financial markets, which allowed money and resources to go whichever way the “market” (rational or not) determined.

  • During the last decade, the market decided that more and more money and resources should go towards particular assets, specifically the United States mortgage market (the market for new homes in the US).
  • As money flooded the US home mortgage market, it became cheaper and easier for Americans to get loans to build a home. GREAT, RIGHT?! Well, only until it came time to pay back those loans.
  • Trillions of dollars worldwide became tangled up in the US mortgage market, representing households’ savings from around the globe.
  • When Americans suddenly found their loans coming due, they found it hard to repay them due to adjustable interest rates and falling home price (supply had grown more rapidly than demand).
  • American and many Europeans began defaulting on their mortgages, meaning all that money that had been lent to home buyers literally disappeared.
  • Banks and financial markets faced a “liquidity crisis”, meaning they had no money.
  • Lending stopped to households, firms, and other banks , meaning spending on goods and services decreased, meaning jobs were lost and economies entered recession.
  • How could any of this have happened if the concept homo economicus and the economic theories based on the concept are correct? Are humans always rational, calculating, perfectly informed, self-interested beings acting purely in their own self-interest?

Conclusion: The concept of homo economicus has formed the basis for economic theories for centuries and for major macroeconomic policies over the last 30 years. Policies of “market liberalization” (freeing the market from the guiding, regulatory hands of government) have led to great prosperity, but even greater risk and volatility as irrational exuberance over asset prices has led to inefficient market outcomes, bubbles, and financial shocks plunging the “real” economies of the world into recession.

Perhaps a more complete understanding of humans is needed as the human science of economics enters a new era. The human as a cold, rational, calculating creature interested in only his own gain is an over-simplification, and forming theories and policies on such an assumption is dangerous. The future of economics must incorporate a more complete and complex understanding of human behavior if the economic crises of the last two years are to be avoided down the road.

7 responses so far

Feb 14 2009

Lest we forget… Milton Friedman on the power of free enterprise

Milton Friedman: “there is no alternative way so far discovered of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by the free enterprise system”

With all the talk of government spending, fiscal stimulus, nationalization of the financial industry, the “new new deal”, infrastructure, education, health, “job creation”, and on and on… I thought it wise to share this bit of wisdom from the greatest advocate of free markets of the last 100 years, Milton Friedman.

AP Economics teacher Michelle Hastings sent the link to this video to the AP Econ email list. Thanks, Michelle.

[youtube]http://www.youtube.com/watch?v=RWsx1X8PV_A[/youtube]

Discussion Questions:

  1. What is Friedman’s view of command economies?
  2. Does Friedman imply that “greed is good”? To what extent is greed an important component of free markets?
  3. Do you think Milton Friedman would support the current $800 billion fiscal stimulus package being debated in Washington right now? Why or why not?

7 responses so far

Nov 05 2008

Insights on trade from Martin Luther King, Jr.

Published by under Philosophy,Trade

Some profound insight on the interdependence of all men from Dr. Martin Luther King Jr:

“It really boils down to this: that all life is interrelated. We are all caught in an inescapable network of mutuality, tied into a single garment of destiny. Whatever affects one directly, affects all indirectly. We are made to live together because of the interrelated structure of reality. Did you ever stop to think that you can’t leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that’s handed to you by a Pacific islander. You reach for a bar of soap, and that’s given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that’s poured into your cup by a South American. And maybe you want tea: that’s poured into your cup by a Chinese. Or maybe you’re desirous of having cocoa for breakfast, and that’s poured into your cup by a West African. And then you reach over for your toast, and that’s given to you at the hands of an English-speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you’ve depended on more than half the world. This is the way our universe is structured, this is its interrelated quality. We aren’t going to have peace on Earth until we recognize this basic fact of the interrelated structure of all reality. ” Dr. Martin Luther King, Jr. 1967

4 responses so far

May 18 2008

Adam Smith on the China earthquake

Tim Schilling over at MV=PQ blog quotes Adam Smith, the father of economics, who over 200 years ago hypothesized about how the typical Westerner would respond to a catastrophic earth quake in China.

Smith’s observations of man’s moral sentiments form a sharp critique of our so-called humanity. Smith asks whether a man would willingly accept the deaths of millions in a far off land in order to prevent the slightest injury upon himself. If so, then what is it that motivates man to strive to relieve the suffering of the victims of disasters in far off places such as Sichuan Province in China and the Irrawaddy Delta in Mayanmar.

“Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connection with that part of the world, would be affected upon receiving intelligence of this dreadful calamity.

He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquility, as if no such accident had happened.

The most frivolous disaster which could befall him would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others?

It is not the soft power of humanity; it is not that feeble spark of benevolence which Nature has lighted up in the human heart that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.

It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves.

It is not the love of our neighbour; it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own
characters.”

Any thoughts?

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