ECON 101: Economic Theory
In this issue we will cover chapter 2 of the book "How to Think about the Economy" by Per L. Bylund. It introduces the reader to what a theory is and why human action is the foundation of economic theory.
Bylund explains that a theory must be stringent down to first principles and cannot contradict itself. But it is just as important that the first principles and assumptions of the theory must be reasonable and sound. He gives the example of an engineer building a bridge. If the base assumption of the engineer is that paper is stronger than steel it does not matter how correct his math is. The base assumption is wrong and therefore the bridge will most likely be unstable.
The core of this chapter is to give an introduction to the concept of human action. Human action is purposeful behaviour and people act because they believe they will achieve something. It does not matter whether it is the "right way" or whether the goal itself is rational. Humans act because they believe they will be better off after achieving what they want to act upon. This concludes that actions a fundamentally causal. It is the believe that we can bring forth a specific change which leads us to act. This leads to following conclusions:
We also conclude that actors think their action is the best or only way to attain the outcome. Why else would they undertake the action? That they have not already done so suggests that they either were unaware of the possibility, lacked the means to act on it, or ranked other ends higher. All of these suggest scarcity – that there are insufficient means to satisfy all the wants held – and that the actor makes choices. That the actor must choose implies that he or she must make tradeoffs. In other words, the actor economizes. We can also conclude that human action is in fact always individual action motivated by some personally valued end and taken toward that end. Other individuals may have the same outcome in mind, and to be feasible an action might require collaboration, but this does not change the fact that each person acts. People may choose to act in concert, but those are individual choices. The group itself does not act. That four people collaborate to lift and move a piano does not mean that the group lifted the piano but that the four people coordinated their individual efforts toward that common end. In other words, economics is methodologically individualist.
Groups affect how people act but we can't know how, unless we consider that people within groups act. The people within groups may have different goals than the group, which leads to tensions. This is something we would not have considered if we had assumed that the group acts and not the individuals within.
Through the lens of human action we can also understand that everything is personal and hence value is subjective. We value things based on the level of satisfaction they give us. Valuation always depends on the situation we are in. A glass of water in Desert delivers more value compared to when sitting on the couch relaxing. Pricing of a good happens on the margins. In any situation, if we have three glasses of water each unit has less value than if we had two glasses, but also more than if we had four. Each additional glass adds less value and we value all glasses the same. The chapter closes with the following conclusion:
All economic phenomena—resource allocations, market prices, business cycles—are outcomes of human actions, which we know are always purposeful and economizing. The task for economics is therefore to understand the economy and everything it entails from the perspective of the ultimate cause: action.
It was hard to summarise an already short chapter so I worked a lot more with quotes from the book it self. Stay tuned for the next part and as always, stay humble and stack sats.
You can find the book here:
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