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econ434notes4 - History of Economic Doctrines Lecture 4 The...

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History of Economic Doctrines Lecture 4 The “Economic Way of Thinking” (See the link Behavioral Economics for substantial elaboration.) Standard Economic Assumptions 1. Human beings are self-interested. 2. Humans seek pleasure and try to avoid pain. 3. Human beings are rational and forward-looking. 4. Limited resources and choices imply that self-interest is a process of optimization. Self Interest and Rational Optimization? Self Interest: Naïve Egoism: U = U(x 1 , x 2 , …, x n ) … [xi = some good] Present Aim Rationality: U = U(X, Y) [vectors] Production and Resources: The creation of value (utility?) Labor / Land / Capital / Entrepreneurship The Nature of Reason 1. Choices are rational if we expect the consequences to be consistent with our goals. Goals that are inconsistent with each other may also be a symptom of irrationality. 2. Choices are irrational if we know them to be inconsistent with achieving our goals. 3. A behavior is a rational if, for example, it entails our tastes – preferences between chocolate and licorice, for example, or our aesthetic sensibilities. The conventional economists’ view of behavior : humans are rational and do the best they can with what they have. Mistakes are consequences of imperfect information and imperfect foresight.
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A DAM S MITH Theory of Moral Sentiments (1758) Suppose you sliced off your pinkie while buttering your toast tomorrow morning. If you then heard on the Today show that an earthquake had swallowed most of China, causing 1.3 billion deaths, which event would bother you more? Adam Smith (1723-1790), widely viewed as the founder of modern economics, had one answer. . . . loss of a little finger would keep the average European from sleeping through the night, but, provided he never saw them, he would snore most profoundly over the loss of millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own. Adam Smith, The Theory of Moral Sentiments , 1759 Smith went on to say that, nevertheless, most individuals would sacrifice their little fingers to save someone else’s life, primarily because we all like to think of ourselves as “good people.” But how much would we be willing to sacrifice? An arm or leg? Our own lives? Smith’s thinking was subtle, and seems based substantially on introspection. Although he was a lifelong bachelor, he pondered love in a number of dimensions. How selfish man may be supposed, there are evidently some principles in his nature, which interest him in fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. … What so great happiness as to be beloved, and to know that we deserve to be beloved? What so great misery as to be hated, and to know that we deserve to be hated? Adam Smith
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This note was uploaded on 01/12/2010 for the course ECON 434 taught by Professor Byrns during the Spring '09 term at UNC.

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econ434notes4 - History of Economic Doctrines Lecture 4 The...

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