Pakonomia

Behavioral Economics and Traditional Economics

2019-10-16T06:39:00.000-07:00

Behavioral Economics

Behavioral Economics is a new field of study or branch in economics. It especially deals with the question of the human decision-making process.

Behavioral Economics applies psychological methods to get insights and useful understanding of human behavior and their decisions choices and preferences.

As human behavior is the focal point of study in economics, it analyses choices and preferences of economic agents i.e., consumers and producers. Behavioral economics, on the other hand, provides better ways to help individuals make better choices and preferences.

Behavioral economics is based on the fact that humans are not rational and make poor choices. The theories we study in behavioral are developed to help individuals and policymakers to make better decisions and choices.

Behavioral Economics differs from Traditional Economics

The traditional economics assumes that all economic agents are rational and takes into account all available information. The economic agents perfectly perform cost and benefit analysis between alternative choices.

Behavioral economics seeks to explain that all humans are not rational and have no access to complete information. Their decision is based on their emotional responses and affected by their environment i.e., social and cultural factors.

The second assumption of traditional economics is that economic agents' decisions are based purely on their self-interest. in other words, they are selfish creatures (Homo economicus) and are motivated by their own wellbeing.

Behavioral Economics challenged this assumption of economics and argued that all decisions and behaviors are not influenced by the desire to maximize one's own interests, rather other social and psychological factors are in play.

Kahneman' Prospect Theory and Behavioral Economics

Daniel Kahneman and Amos Tversky challenged the basic assumption of expected utility theory and presented his theory of Prospect Theory. This theory is considered the foundation stone of all behavioral economics theories.

Daniel Kahneman was awarded the Nobel prize for his outstanding achievement in the field of economics for presenting the prospect theory.

Prospect theory explains that human choices or preferences are not absolute while doing a cost-benefit analysis. Rather, their choices are preferences are relative in different situations.

Predictably Irrational and Behavioral Economics

Predictably Irrational is a book by Dan Ariely, a behavioral economist, in which he challenged the assumption of making rational decisions. This book was published in 2008 in an attempt to better understand human behavior and decisions.

In Predictably Irrational, Dan Ariely challenged the rational choice theory and its assumptions. He advocated his arguments by taking and analyzing examples from real life that proved more authentic and insightful.

Richard Thaler and Behavioral Economics

Richard Thaler is another behavioral economist, who also won Nobel prize for his outstanding contribution in the field of behavioral economics. He won this Nobel prize for explaining how irrational human choices and decisions are.

Richard Thaler wrote a book, Nudge: Improving Decisions About Health, Wealth And Happiness, in which he presented his theory to help individuals and policymakers in making rational decisions and choices. He said that human makes poor choices humorously and every now and then.

In Misbehaving: The Making of Behavioral Economics, Richard Thaler was successful in getting the behavioral economics recognized worldwide. In this book, he satirically referred to the rational and logical choices as predicted by traditional economists.

Behavioral Economics is a deviation from traditional economics in the sense that it takes into account actual human behaviors. Humans have been regarded as Emotional Animals rather than rational animals. Their particular environment and their mental processes that shape their decisions are worth taking into account to better understand the decision-making of economic agents.

Trade war and recession

2019-10-07T06:00:00.003-07:00

The history of the trade war is as old as nations began to depend on each other for the provision of different goods and services. Every nation specializes in the production of specific goods and items and then exchange goods. This exchange of goods, trade, benefits both nations.

However, some nations are hurt by the trade and their local industry and labor need protection against foreign goods in order to grow and develop. These industries need protection as they cannot compete with foreign goods or products.

Trade theories in economics predict that when a larger nation imposes a tariff on imports, its terms of trade improve at the cost of reduced imports. However, if another nation retaliates and also imposes tariffs on the imports of larger nation, then both nations lose and no one gets benefits. Everyone is at a disadvantage as a result of a trade war.

The US has adopted a policy of mercantile who used to say that a nation grows only at the expense of other nations. They were staunch advocates of national interests and believed in economic nationalism. This is what the US doing right now to put forward its national interest and levy heavy tariffs against Chinese products.

Protectionist policy will not benefit in the long run as economics and history have revealed. It has deteriorated the terms of trade and slowed down the growth.

The main reason behind the recent trade war is the protectionist policy adopted by the US against Chinese imitated products that have flooded the US markets.

Moreover, this trade war will have a spillover effect on other economies and industries will be relocated. The workers will be laid off and the production cost will increase in other countries as well.

Recessions are periodic in nature and economic boom and bust cycles are part of economic activity and the business cycle.
Economic news is full of US-China trade wars, BREXIT, and the recession. This recession in news further lowers the confidence of consumers and investors.

US-China trade war has lowered business confidence and consumer confidence. This lower 'animal spirit' has slowed down economic performance. Everyone is in limbo about the economic recession.

Recent trade war and Brexit has deepened the speculations about the economic recession. Consumers have tightened their budget plans and delayed their spending plans.

Although the economic indicators are positive as Sahm unemployment indicator suggests that the probability of the recession is only 10%. on the other hand, the economic picture is not so much gloomy as wages are high and unemployment is at the 60-year lowest in the US. China is also performing well.

The United States is considered the most competitive economy. The US economy relies heavily on its high-tech innovations and products. China, on the other hand, imitates those products and produce them with cheap labor. These cheap products then compete with American products that have a higher cost.

To remain competitive, The US has to provide protectionism to its industry by levying high tariffs against Chinese products.

Greta Thunberg Effect: A Call For Immediate Climate Action

2019-09-29T05:36:00.000-07:00

Since the industrial revolution and technological development, economic activities have adversely affected the climate and natural habitat. A wide range of conferences and summits has shown the concerns of people to take climate action as soon as possible. Environmentalists and climate activists have taken to roads to put pressure on governments so that action can be taken on time. As Greta Thunberg said while speaking to the World Economic Forum (WEF) in Devos:

Our house is on fire. I am here to say our house is on fire. According to IPCC we are less than 12 years away from not being able to undo our mistakes

Greta Thunberg is a 16-year old Swedish teenager who is annoyed at the government and the economists for not doing anything about climate change. She founded the Fridays For Future, a school strike for climate, for demanding a halt in further global warming. In this international movement, many students from all over the world participate in climate strikes for demanding immediate action from the government for a safe and clean future. The global week for Future brought more than 4 million schoolchildren from around the world on the road.

Since then Greta Thunberg effect is growing in its intensity and in its popularity. This climate strike has led the voice of the young worried climate activists to the United Nations Climate Change Summit 2019 where she presented the concerns of the young generation about their future while delivering a fiery speech. UN Climate change Summit started with the Youth climate summit 2019.

This is the first step towards engagement of young activists for providing solutions and participate in the decision-making process.

Greta Thunberg effect has spread worldwide and attracted the attention of many world leaders to take immediate action against climate change.

Greta Thunberg asked the government criticized the government for just giving hope and not any solution for the climate. Moreover, she said that:

You have stolen my dreams and my childhood with your empty words.

She also demanded immediate action with a harsh and forceful tone and said that

The eyes of all future generations are upon you. And if you chose to fail us, I say We wll never forgive you. We will not let you get away with this. Right here, right now is where we draw the line.

Now it remains to see if the government from all over the world is able to hear the echoes of the young generations about climate action. Will they just deliver speeches or will they be able to take any solid and long-lasting action against the worsening climate situation. It remains to see what our elders are unable to take action, our teens would be able to do in the coming years.

Why Is Environmental Economics Important?

2019-09-21T14:23:00.001-07:00

Economics is an old term that has been derived from oikonomics which means political economics. Now it has changed its meanings as well as it is now widely known as Eco-nomics, which means environmental economics. Paul A. Samuelson said that economics is all about making the right choices or preferences for products. Similarly, economics has become about making the right choices about growth or consumption preferences that do not harm the environment in which we live. The environment provides us a shield from all harmful natural forces. So it is also important to save this caring environment that is ultimately the source of our own existence on this Earth. As Guy McPherson made a strong argument in favor of environmental protection in his blog post

If you think that the economy is more important than the environment, try holding your breath while counting your money

Professor Guy McPherson has rightly described that one nation cannot progress while destroying their own environment in which they live. One has to take a breath to live, similarly, the economy must be made green for its growth, development and a healthier nation. Environmental economics has become a crucial part of the policymakers as a society's wellbeing depends not on the higher incomes, but on the better health and eventually on the clean environment. The focus of economists has shifted from welfare to wellbeing. Moreover, Joseph E. Stiglitz represented the concept of Green GDP in which not only the consumption of produced goods is taken into account, but also the depletion of natural resources is added into it. He writes in his article that

Why focus on production of goods, rather than on health, education and environment?

As we all know economics is the study of the allocating the scarce resources that leads to efficiency in an economy. Similarly, environmental economics is related to allocating the resources in such a way that is not harmful to the environment. Environmental pollution is the result of economic activity. Industrialization and technological development has deteriorated the environment on a large scale. Deforestation, air pollution, water pollution, and climate change are all the result of economic activity. To combat all these environmental problems economists must develop policies that not only reduce environmental pollution but also increase the well being and happiness of people. Environmental economics can help in making important decisions by the government to reduce pollution.
Pollution is also a problem for economics framework in which a market works. All kinds of pollutions cause some externalities that lead to market failures. To avoid these market failures, government, economists and environmentalists must work in coordination in order to achieve sustainable growth. development and a happy economy.
Environmental economics is not limited to a closed economy, it is a trans-boundary problem. It crosses the borders and compels the governments of adjacent nations to work together to reduce pollution.
Environmental economics also has a great impact on the consumption behavior of people. It has changed the consumption pattern by inducing consumers to consume products that can be recycled and reused. Environmental-friendly products are encouraged and increase the welfare of people. Moreover, it has led people to use energy-efficient products and has driven the behavior of saving in using products, rather than in terms of income.

Is Economics a Dismal Science?

2019-09-15T23:35:00.000-07:00

Economics has been regarded as the dismal Science by Thomas Carlyle in the 19th century. There controversies among the social scientists about the origin of this term. The origin of this term is wrongly attributed to the Malthus' gloomy prediction about the growing population and depletion of resources by overpopulation. On the contrary, Thomas Carlyle coined this term to dismantle John Stuart Mill's idea9 0r assumption) of equal race. He proposed that all humans are the same and must be liberalized and given freedom and equal rights. He argued that all humans are the same in nature and share the same qualities in a broader sense. Thomas Carlyle argued that

a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.

---Occasional Discourse on the Negro Question

He also challenged the economic theories by refuting that

a rueful -- which find the secret of this universe in "supply and demand", and reduces the duty of human governors to that of letting men alone, is also wonderful.

---Occasional Discourse on the Negro Question

A skin-deep analysis discloses that economics was declared not because of the miseries of human on earth, but because of the neutrality of economists towards a particular race. Thomas Carlyle considered white people superior to black or African. He thought it the birth-right of white people to rule over the black people. On the other hand, Mill was a liberal and believed in the liberty of humans. With this background of the term, we can say that economics is a "soulful science" rather than a dismal. The economists advocated the natural freedom of humans and denounced the forced slavery by white people.

However, Mill was pessimistic about the ending of human misery or poor people on the earth.

Malthus's law of population and Ricardo's iron law of wages and law of diminishing returns --- the notion that using more and more labor to farm one acre would produce less and less extra output --- all dictated that populations would outrun resources and that the nation's wealth could be enlarged only at the expense of the poor, who were doomed to spend "the great gofts of science as rapidly as ... [they] got them in mere insensate multiplication of the common life." Government could do no more than create conditions in which enlightened self-interest and laws of supply and demand could work efficiently. . . . Mill and other founders of political. . . maintained that advances in productivity were of little or no benefit to the working classes. In their imaginary firms, produce trivity might grow by leaps and bounds, but wage never rose for long above some psychological maximum.

---Sylvia Nassar

Mill proposed that economics work on the principles of natural laws like gravity. There is nothing one can do to improve the living standard of the working class. What economists and government can do is bring some prosperity for a while, but it cannot end the human misery that is present in nature. The equilibrium level is the misery, some prosperity can bring disequilibrium for some time. But, it comes back to its natural level, misery, by the forces of nature. It is really not a "gay science" as it doesn't bring happiness in human life. In other words, we can say that it is a gay science for a short time, but a dismal science in its nature.

In the twenty-first century, why this term has been widely used by political economists and other social scientists. It is called a dismal not because of natural forces, but because of the failure of economists or policymakers to cope up with the needs of this generation of technological innovations.

Today, when we hear the term "the dismal science," it's typically in reference to economics' most depressing outcomes (e.g.: on globalization killing manufacturing jobs: "well, that's why they call it the dismal science," etc). In other words, we've tended to align ourselves with Carlyle to acknowledge that an inescapable element of economics is human misery.

---The Atlantic

Should we leave the economics to natural forces and live in a pessimist society?

Economics Myths And Misconceptions

2019-09-15T06:45:00.000-07:00

1. The Myth of 'Economics Deals With Money'

This is the biggest myth of Economics where it is considered that this social scientific discipline deals with only money, banking and employment. However, It is a "Social" science that deals with the economic "behavior" of people who make optimal choices and decisions. David Autor, Professor at MIT, has described two common misconceptions concerning Economics. One amongst those misconceptions is that Economics is a science of money. He describes that

Many think that economics is just about money. That's not true. It's about decision-making---how people make decsions and how individual decisions aggregate up to collective outcomes that are often very different from what people are individually seeking

---David Autor

2. 'In the Long run, We Are Dead', A Myth

The second myth of Economics is that the consequences of any economic policies are seen only in the short run. The long-run effects are ignored as John M. Keynes said that

In the Long Run, We are Dead

While Economics has been regarded as a complex evolving system by Stiglitz, who is an American economist. The consumption decisions made today by governments can burden future generations with high levels of debts. The decisions we make about the use of products can have serious implication on the environment and on the health of future generations. Although, this statement of Keynes was about the natural rate of output and unemployment. It cannot be applied to the current economic systems where growth takes into account sustainable development.

3. The Myth of Increase In Income

It is possible that a nation has a high level of income and high inflation rates. High inflation rates offset the benefit of increased income as the prices of all other goods has also increased by the same level. The increase in income will benefit you if the inflation rates are lower or the prices of other things have not changed and remained the same.

4. The Myth of Printing Money

In most of the countries, it is a misconception and a myth that the government prints money to pay off debs and to reduce the budget deficit. But this is not true. Print money means the creation of money by the banking sector through the loan creation process. Banks create, or in other words, print money by lending money to consumers or investors. Government prints money and coins only to facilitate banks to fulfill the demand of money by the account holders. Another form of printing money by the government is the Treasury Bills or Bonds. Otherwise, all the "Print Money" process is actually performed by the banks. The myth of printing money can be alleviated by using the term "Money Multiplier" that better represents this concept.

5. 'Economics Has No Practical Implication' Myth

One of the horrible myth of all social sciences is that Economics has no practical implications. It is only assumptions-based and restricted to class and a teacher. Nevertheless, It has vital and crucial practical implications as described by Professor Autor. It has practical implications in production lines, globalization, political economy and for consumer theories. Recently, It has made important progress in behavioral economics where psychology has been applied to analyze economic behavior.

6. The Myth of Cheap Labour

In this century where the world has become a global village, the assembly process in production has expanded to other countries whereever is low-cast labor. The cheap labor is not because their wages are lower or because of weak labor unions. The reason for cheap labor in these countries is that their labor is not efficient or have lower productivity levels. Developed countries have higher wage rates as a result of higher productivity levels and more efficient.

7. The Myth of the Philips Curve

The myth of the Philips Curve shows a trade-off between inflation and unemployment. On the contrary, the historical analysis does not support such inversion and trade-off between these two macro variables. The Philips curve violates the theory of wages where higher wage rate leads to unemployment. While the Philips Curve assumes that higher wage rates reduce unemployment with no empirical evidence. The Philips Curve has long been dead and it must be removed from the Economics books as it is a dead piece with no practical implications.

Economic Scientists Who Changed the Course of History

2019-09-15T00:40:00.006-07:00

1. Adam Smith (1723 - 1790)

Adam Smith is pronounced as the "Father of Economics" and the "Father of Capitalism". He gave the idea of capitalism to the world by suggesting that the wealth of nations is not measured by its stores of gold and silver. It must be measured by the total production of goods and services in a nation and by flourishing the commerce activities. Capitalism generally increases the overall wealth of a nation but it badly creates the acute distribution of wealth leading to inequality in a society. Moreover, capitalism has been the main source of unrest in many developing countries where globalization has led to the exploitation of resources and manpower. Although, capitalism has been declared dead by many researchers and Economists, we cannot deny the fact that economists have failed to provide an alternative to capitalism. Socialism is widely considered an alternative to capitalism. Many governments have been made by promising to bridle the capitalism and ensure the equal distribution of wealth. But, all of them failed to control capitalism.
Adam Smith also proposed the concept of division of labor that is applied in every field today to increase the efficiency and production on a mass scale. He also proposed that an economy can only prosper if it is based on the self-interested free-market economy (laissez-fair economic system).

2. Alfred Marshal (1842 - 1924)

Alfred Marshal is considered the 'Father of Neoclassism' and the 'marginalist' in his economic analysis. He provided the concept of consumer surplus, supply and demand(determination of output and price), the elasticity of demand, marginal utility and the cost of production. He projected how the output and prices are determined in a free-market that greatly changed the course of history. He also provided the concept of value and cost of production. He emphasized on the role of man rather than of wealth in economics. The marginal analysis has helped a lot in decision making in advertising, product-lines and production decisions

3. Karl Marx (1818 - 1883)

Karl Marx has a strong influence on the history of nations such as Russia. He proposed a classless society where resources are owned by the proletariat and he also proposed that capitalism is self-destructive in nature. He also presented the concepts of the labor theory of value, decreasing returns of profits and concentration of wealth. Although, Marx was failed in determining how the communism will work in a nation. He did not provide a framework for the execution of his ideas presented in "Das Capital" . He entirely changed the political landscape of the world. It divided the world that was poles apart in its ideologies i.e; Capitalists and communists. Many political wars are fought between capitalists and communists on a daily basis to end poverty, inequality and corporate culture.

4. John Maynard Keynes (1883 - 1946)

John Maynard Keynes supported the increased influence of government in economic policies. He opposed the classical ideas of 'invisible hand' and ' production creates its own demand'. These concepts led to the Great Depression of 1930. Kynes proposed the theory of increased governmental intervention and lower taxes to increase the consumption and thus demand for goods and services. Since then, government spending has been the main source of boosting national income in any economy. For the development of any country, the government should spend in order to increase economic activities and to boost the levels of employment and income and private spending.

5.Paul A. Samuelson

Paul Samuelson has been regarded as the "Founder of Modern Economics" who combined the concepts on neoclassicism and Keynesian. He proposed that a government can achieve a level of full employment by combining both fiscal and monetary policies. Today, no country is solely based on laissez-faire nor on full free-market economy, but a combination of these two economic systems. He presented the Economics in the garb of Mathematics and developed "Mathematical Economics" to analyze economic behaviors and decisions.

6. John Milton Friedman

Here is an American Economist now who opposed the Keynesian theory and supported the free market capitalism. He also proposed that the consumptiopn of households is a function of permanaent income rather than of current as proposed by J.M Keynes. He also proposed that price level depends on the supply of money and proposed the quatity theory of money. He included money in the picture of economics as the main source of economic analysis in the short and long run.

7. Richard H. Thaler

Alfred Marshal made the man central in Economics, while Richard H. Thaler made the analysis of human behavior possible by analyzing human psychology. He is the "Father of Behavioral Economics". He challenged the basic assumptions proposed by Adam Smith that every agent is selfish and have self-interests while making decisions. He projected that all humans are not rational and selfish, but altruistic in nature. He presented that decisions are influenced by the cognitive, social and cultural factors. He has truly diverted the economic theories from assumptions to reality. It has opened up new vistas for government to influence the behavior of people towards a particular direction through incentives and nudges. It will greatly empower the government to control the economic behavior of the population. The future generations will be more controlled and manipulated.

5 Economics Books that Every Young Economist must Read

2019-09-14T07:42:00.000-07:00

If you are a curious and aspiring student of Economics and want to know about the theories and the history of Economics, you must read the books suggested in this article. The books can offer you insight and a wider perspective on the way to use economic laws and policies in your daily life and how you can perceive the larger economies. How they work and how the economic systems and problems have changed over time from Adam Smith to Richard h. Thaler. To read such books you must be an Economics Enthusiast and an economic geek to draw advantages from reading such wittingly-written, thought-provoking and insightful books.

Here is that list of best books for young enthusiast Economists and economic geeks.

1. Freakonomics

It is a book completely different from traditional or standard Economics books. This book has been regarded by some people as pure genius due to its unconventional approach. According to Steven D. Levit and Stephen J. Dubner Economics is more concerned with the problems of actual-world as opposed to morality that deals with the ideal world. Additionally, you can notice a variety of case studies related to crime, public school teachers and parents in this freakish book. The main theme of this book is how the incentives can be used to influence the behavior of people in different fields to draw desirable results.

2. The End of Alchemy: Money, Banking and the Future of the Global Economy

An economic geek who has an interest in money, banking, and financial crisis, must read this book. This book discusses elaborately the problems within the banking sector and it also offers solutions while many of the traditional Economics books are obsessed only with the discussions of problems. Mervyn King is a British Economist and had been the former governor of the Bank of England. He has intelligently analyzed the banking system and recommended that the alchemy (functions of banking that are consistent in regular days, but fail when there is chaos or crisis) must be finished or abolished from banking systems to avoid more financial crisis.

3. Naked Economics: Undressing a dismal science

Naked Economics is a must-read for young Economists who have a vision and wish to try something great in Economics. This book is jam-packed with thrilling examples. The anecdotes really facilitate in understanding various myths related to trade tariffs and Human Development Index (HDI). Naked Economics is straightforward to grasp and is written in a comprehensive style. It's a layman's book or you can say that 'Economics for Dummies' as it explains the economic concepts in an exceedingly plain language. This book principally touches the ideas related to the free-market economy, free trade, and globalization. Naked Economics by Charles Wheelan is widely and globally appreciated and has been recommended to undress this dismal science.

4. Misbehaving: The Making of Behavioral Economics

Noble Laureate Richard H. Thaler has jolted the economic world with his radical ideas. He proposed his ideas that ruthlessly rejected the neoclassical assumptions of rational agents, utility maximization and self-interest. He projected that humans don't behave rationally in their own self-interest, while making decisions. Their decisions and preferences are largely influenced by noneconomic factors like culture, social, emotional and cognitive factors. He has described human behavior based on altruism rather on self-interest. This a good read for all those who wish to know development in Economics that are taking place in this century.

5. The Affluent Society

Every young and geek economist must read this bestselling book about the unconventional ideas on Economics and public policy. This book has challenged the traditional economic theories by arguing that classical theories were developed in an age of mass poverty and inequality whereas our economic systems are supported by advertisement creating the demand for superfluous things and products. The affluent society by John Kenneth Galbraith has vital implications for the modern Economists who are not obsessed with production but with the production of desire to produce more goods.