At the core of economics (especially economics teaching) is the idea that people are fundamentally rational, self-interested, utility maximising individuals who make decisions after logically considering all the relevant facts. As these people know best what’s best for themselves, these decisions are optimal for society. However, one of the newest and fastest growing school of thought is the Behavioural School which uses the insights of psychology to show that this simply is not the case. These insights are sometimes viewed only in isolation or glossed over as minor trivia. However, when you put all the different pieces together, you see that the conclusions are far reaching for how the economy operates. Continue reading “4 Ways We Are Not Rational And How It Affects Economics”
A common feature of macroeconomics is to run models assuming that individuals in the economy have inflation expectations. This flows naturally from assuming that they have rational expectations (can accurately predict the future and fully understand how the economy works). The standard reason for why we need inflation expectations is that during the 70s the government tried to trade off low unemployment in exchange for higher inflation. However, (so the story goes) people got wise to this trick and began to expect higher inflation and demand higher wages to compensate. As a result, government policy lost its effect and unemployment rose. Since then, economic modelling and discussions of unemployment and inflation must contain some provision for what consumers expect inflation to be. Continue reading “Do People Really Have Inflation Expectations?”
As I was standing in the queue to pay a rip off price for a pint to use as mixer for the naggin of whiskey in my coat pocket, I wondered how I could apply my knowledge of economics to the situation. Ireland is well known for its links to alcohol and as a student drinking is almost mandatory for me. So what is the economics of drinking?
Economics is divided into two sections, micro (focusing on individuals) and macro (focusing on the whole economy). However in universities the emphasis is heavily on micro to the extent that macro is often seen as simply micro on a larger scale. This is fundamentally wrong and ignores several points.
This focus ignores the fact that the best option for the individual is not always the best option for society as a whole. Continue reading “Macro Over Micro”