Economics 2010a Fall 2003 Ed glaeser Lecture 1
Economics 2010a Fall 2003 Ed Glaeser Lecture 1
1. Introduction a. General observations about economics Defining the Field i1. The Use of Economic Theory iii. Traditional ideas in economics b Choice Theory c. Rationality d Weak Axiom of Revealed Preference e. Application: Ultimatum Games
1. Introduction a. General Observations about Economics i. Defining the Field ii. The Use of Economic Theory iii. Traditional Ideas in Economics b. Choice Theory c. Rationality d. Weak Axiom of Revealed Preference e. Application: Ultimatum Games
Defining the Field-what do you think that economics is? (1) Subject Matter Based Definitions (2)UItra-pragmatic definitions( what economists do) (3)Methodology Based Definitions This much is certain a. Economics pretty much includes all topics related to human society Money supply, international trade, public finance, economic growth But also, fertility, crime, the marriage market hate terrorism riots This is a tremendous opportunity for us
Defining the Field—What do you think that economics is? (1) Subject Matter Based Definitions (2) Ultra-pragmatic definitions (“what economists do”) (3) Methodology Based Definitions This much is certain: a. Economics pretty much includes all topics related to human society. Money supply, international trade, public finance, economic growth. But also, fertility, crime, the marriage market, hate, terrorism, riots …. This is a tremendous opportunity for us
b. Economists at least like to think that the discipline follows Popperian scientific methods Stylized Facts Hypothesis Formation Testing Hypotheses Remember that Popper would tell you that hypotheses can only be proven false empirically, not proven true. This should keep us humble C. Hypothesis Formation- The Theory Step of this Process-In Economics this means using the language of Mathematics to formalize one's assumptions Why is this so valuable? Some critics of economics say that our models are too simplistic. We leave too many things out
b. Economists at least like to think that the discipline follows Popperian scientific methods Stylized Facts -> Hypothesis Formation -> Testing Hypotheses Remember that Popper would tell you that hypotheses can only be proven false empirically, not proven true. This should keep us humble. c. Hypothesis Formation— The Theory Step of this Process—In Economics this means using the language of Mathematics to formalize one’s assumptions. Why is this so valuable? Some critics of economics say that our models are too simplistic. We leave too many things out
That is true-we do leave many things out But it's better to be clear about an argument Failing to formalize a theory does not mean that you have been more general and holistic, it just means that you have been less rigorous Other social sciences have inevitably followed economics into formalization and the social scientists who have not, have had trouble. I think that early formalization gave economics a huge edge over sociology Economics does not have an edge in generating stylized facts-almost surely we are bad at this We also do not seem to have an edge at creativity For these reasons--it makes sense to be more aware of other disciplines
That is true—we do leave many things out. But it’s better to be clear about an argument. Failing to formalize a theory does not mean that you have been more general and holistic, it just means that you have been less rigorous. Other social sciences have inevitably followed economics into formalization and the social scientists who have not, have had trouble. I think that early formalization gave economics a huge edge over sociology. Economics does not have an edge in generating stylized facts—almost surely we are bad at this. We also do not seem to have an edge at creativity. For these reasons—it makes sense to be more aware of other disciplines
d. now things get more controversial. I would further say that any economic" model of the world needs to start with a formal description of decision-making agents These agents are usually people and sometimes firms-- Although modern theory of the firm has brought itself down to the individual as the unit of analysis Old style--Baumal and sales maximization of firms New style--model the agency problems that can cause individual managers to be empire builders
d. Now things get more controversial. I would further say that any “economic” model of the world needs to start with a formal description of decision-making agents. These agents are usually people and sometimes firms— Although modern theory of the firm has brought itself down to the individual as the unit of analysis. Old style—Baumal and sales maximization of firms. New style—model the agency problems that can cause individual managers to be empire builders
This distinguishes economics from mathematical social sciences that start with assumptions about aggregates, e.g. city population growth=f(city income) For what its worth, this claim also disqualifies mid 20th century macro-economics, which often began witl assumptions about the determinants of y, c, i and g The great triumph of post-Lucas macro-economics is in building macro on micro foundations The"rational expectations revolution was not really about expectations, and has much less policy content than is often thought. The important point is that it rests macro- economics on models that start with individuals
This distinguishes economics from mathematical social sciences that start with assumptions about aggregates, e.g. city population growth=f(city income). For what it’s worth, this claim also disqualifies mid 20th century macro-economics, which often began with assumptions about the determinants of Y, C, I and G. The great triumph of post-Lucas macro-economics is in building macro on micro foundations. The “rational expectations” revolution was not really about expectations, and has much less policy content than is often thought. The important point is that it rests macroeconomics on models that start with individuals
d. Now things get highly controversial. Does Economics need to assume that people maximize something, or that their preferences are stable, or that people think all that clearly Opinions differ. Read the introduction to Beckers Economic Approach to Human Behavior, where he makes a strong case for maximization lying at the core of economIcs as i will discuss in a second. i agree with this statement as a historical fact, i. e. most economists do rely maximization, and furthermore as a matter of good practice, maximization is much easier to work with than its alternatives
d. Now things get highly controversial. Does Economics need to assume that people maximize something , or that their preferences are stable, or that people think all that clearly. Opinions differ. Read the introduction to Becker’s Economic Approach to Human Behavior, where he makes a strong case for maximization lying at the core of economics. As I will discuss in a second, I agree with this statement as a historical fact, i.e. most economists do rely on maximization, and furthermore as a matter of good practice, maximization is much easier to work with than its alternatives
But philosophically--I dont think that maximization is necessary for work to be economics. You will have to decide this on your own A final point about the definition of the discipline Neville Keynes'(and Milton Friedman's)distinction of the field into positive and normative economics is useful Positive economics-why the world looks the way that it does Normative economics -how the world can be improved Both areas are necessary and sometimes merge perfectly but I for one, see my job description as trying to understand the world around me
But philosophically—I don’t think that maximization is necessary for work to be economics. You will have to decide this on your own. A final point about the definition of the discipline— Neville Keynes’ (and Milton Friedman’s) distinction of the field into positive and normative economics is useful. Positive economics—why the world looks the way that it does. Normative economics—how the world can be improved. Both areas are necessary and sometimes merge perfectly, but I for one, see my job description as trying to understand the world around me
What i hope that you will get out of this course? The ability to craft formal descriptions of the world around you that can then serve as a basis for empirical work As a theorist--ultimately theory tends only to be useful if it eventually leads downstream and helps us to craft hypotheses that can be tested(back to Popper) This doesnt mean that for a lot of great theory is pretty far from applications, but in the long run, it should be judged on the extent to which it adds to the great enterprise of understanding the world around us Arrow/Debreu etc. may look like they are far from data, but their framework served as underpinnings for far more applied work
What I hope that you will get out of this course? The ability to craft formal descriptions of the world around you that can then serve as a basis for empirical work. As a theorist—ultimately theory tends only to be useful if it eventually leads downstream and helps us to craft hypotheses that can be tested (back to Popper). This doesn’t mean that for a lot of great theory is pretty far from applications, but in the long run, it should be judged on the extent to which it adds to the great enterprise of understanding the world around us. Arrow/Debreu, etc., may look like they are far from data, but their framework served as underpinnings for far more applied work