Econ25200F10Mtg2

Econ25200F10Mtg2 - Econ 25200 2nd Class Three Points...

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Econ 25200 -- 2 nd Class
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Three Points Importance of economics Proliferating sub-fields Disarray
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Possible Reactions Healthy and normal Build bigger, better models Explore limitations of economic science
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Law of the Instrument If the only thing you have is hammer, everything looks like a nail. (Maslow) Suggests hammers good, but can be overused Does not make sense if only one way of looking at world
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Neils Bohr “No! No! You are not thinking, you are just being logical!” Suggests more to thinking than “being logical”
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Standard Logic Three axioms -- Identity, Non-Contradiction, Excluded Middle Leaves no room for ambiguity, openness Cannot discuss blind spots, salience biases No unintended consequences
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Non-standard Logic Required for situations of ambiguity Allows consideration of blind spots, etc. Nothing to do with absolutism/relativism Nothing to do with objective/subjective
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Blind Spots Where formal structure is incapable of dealing with aspect of (potential) reality Examples: Particle physics and solidity Newtonian mechanics and relativity Ideal-market model and social interactions Ideal-market model and issues of power Science and miracles
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Salience Bias Tendency to draw attention to certain aspects of reality by foregrounding them Examples: Newtonian mechanics and “macro” objects Ideal-market model and individualism
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Unexpected Consequences When outcomes of policies are not what were predicted, often because policy- makers ignored dimension(s) of reality Examples LTCM and Russian market closures Tacoma narrows bridge collapse (1940) Financial collapse of 2007-2008
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Hubbard & O’Brien Three insights Three questions Positive versus normative economics Microeconomics versus Macroeconomics
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Three Insights People are rational People respond to economic incentives Optimal decisions are made at the margin
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Initial Comments Neither true nor false Purely circular definitions have no value Empirically, plenty of evidence of counterexamples
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What’s At Stake?
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