Economists generally have a poor track record when it comes to making accurate predictions (eg, the vast majority of them missed the global meltdown which began in 2007), so it's easy to get discouraged and dismiss the whole field as pseudoscientific nonsense. But then there's also the nagging suspicion that there has to be *something* useful in there and, after all, we're perpetually affected by economic issues and can ignore them only at our peril.
In my opinion, this short course by Randall Bartlett does a surprisingly good job of sorting the wheat from the chaff, and showing that economics does indeed offer some tools which can help us make better decisions. Bartlett organizes these tools into categories of 6 principles, 3 core concepts, and then a bunch of other tools. I think it's more straightforward to just put all the tools in one toolbox, and here are the tools I found most noteworthy:
(1) People respond to incentives. This can help us predict behavior, and it also means that we can deliberately structure incentives in ways that foster better decisions at individual and/or social levels.
(2) Because resources are limited, all alternatives involve tradeoffs and opportunity costs. Identify them and factor them in when making decisions.
(3) Every interaction involves at least two sides. Consider all sides when making decisions.
(4) Recognize that our outcomes will be influenced by outside factors which can't be anticipated and/or controlled. Likewise, recognize that our decisions will have outcomes, including outcomes external to us ("externalities"), which can't be anticipated and/or controlled. In short, we live in an uncertain and complex world which no single individual or organization can control!
(5) The costs and benefits of alternatives should be evaluated "on the margin," which means relative to where we currently are (we rarely can or will start from scratch). An alternative will be an improvement on the status quo as long the marginal benefits exceed the marginal costs. We've optimized outcomes when no further change can yield greater benefits than costs (the "equimarginal principle"). On a social level, "Pareto optimality/efficiency" is the state where no one's situation can be further improved without harming someone else, though such a state isn't necessarily preferable or fair (eg, everyone could be at a comparably low or mediocre level, or the level of inequality could be unacceptable due to being out of proportion with merit or need).
(6) Having limited resources also means that we can never eliminate all risks and achieve perfect safety. The optimum level of safety needs to be determined by marginal analysis, accounting for estimates of probabilities for various possible outcomes. Also, most people tend to be risk averse, which means that they're more inclined to avoid a loss than obtain an equal gain, although there are also other people who actually enjoy risk.
(7) People will usually try to make rational decisions, according their understanding of situations and their subjective values and preferences. However, our understanding can be quite inaccurate, we're inherently subject to all sorts of irrational biases and heuristic shortcuts, and people can cheat (eg, "free riders"), all of which tends to bound or outright undermine rationality. Acquiring more information can help, but information gathering also has a cost, so there comes a point where the marginal benefit of additional information isn't worth the marginal cost (ie, there's such a thing as "rational ignorance"). Information gathering itself can be made more efficient by using aggregation resources (eg, social networking websites and prediction markets), but we need to beware of "information cascades" due to groupthink, as we see with market bubbles. We can also improve information gathering by consulting with specific people, but such people (even "experts") still have their limitations, and "information asymmetries" can occur when people have an incentive to withhold or distort information (eg, salespeople).
(8) Even when people rationally pursue their self-interest and play by the rules, there are "Prisoner's dilemma" situations in which the "invisible hand" doesn't work, and instead the result is that everyone is worse off (eg, environmental degradation due to "tragedy of the commons"); intervention by an external agent (eg, government), such as by structuring rules and incentives, is required to prevent this and at least move towards Pareto optimality.
(9) Money is generally worth more in the present than future for several reasons: inflation erodes the value of money, money available now can grow through investment, and money available now can be used for immediate gratification (as opposed to delayed gratification). But of course, there are still tradeoffs, since money spent now can't be used for investment.
Overall, this is an excellent course and I highly recommend it. Though short, it packs in plenty of useful content.
Lawrence Obisakin
S. Yoshida BS PhD JD
Timothy J Strunk
stephanie salemi
Camber