Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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At the end, what economists study?

I belong to the generation of people who attended their initial course in economics and in the very first class our professor told: "economy studies the allocation of scarce resources versus unlimited needs". What? That economist are the Good Samaritan who helps spread the crumbs in the voracious world of hungry wolves... ok, I'm exaggerating. The point is that the first texts I read about economy were about a perfectly behaved economy where people like many of my friends were out of the equation and only persons like the funny character of The Big Bang Theory TV series, Sheldon Cooper, can account about economic models.

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Some context, in Microeconomics many books imply that human behavior can be summarized in 3 axioms (at best): 1) more is better than less; 2) If I prefer coke to pepsi and pepsi to beer, coke is definitely better than beer and; 3) something is better than himself. Does this sound reasonable?... But of course yes; more is better than less? is crazy to think otherwise; does a coke better than a beer? sometimes yes; finally, something is better than himself?... please!

It turns out that under these axioms we studied human behavior for many generations. Therefore, we couldn't understand why some (or many) people did the opposite... in fact, we wondered why 99.9% of people didn't act as we anticipated (yes... again, I'm exaggerating) and our good Excel spreadsheets didn't work.

I spent good University years trying to define what I should be done in the future as an economist, with the passing of time and after a lot of literature, I found people like Rawls, Sen, Akerlof, among others, who showed me a different view of the economy, less exact but perhaps more entertaining. I began to see life in a different was and those things I want to share with you.

In principle economists don't knows many things, but in particular there is one thing that economics should don't know (at least in concept)... yes that's right, "should don't" ... that "thing" is to be a millionaire. In fact, we teach many subjects at university, but almost none of them relates to how to make money... What? I still remember when somebody asked me, "Mauri, I want to start a business and because you studied economics what you recommend me?" Mauri's face looked thoughtfully and tried to say something interesting, remembering monetary policy or fiscal policy courses.

Why economist shouldn't know how to make money? For economist, or better, the economic point of view of things is concerned about social welfare. We may ask about social cost and benefits about some policy because at the end, my dear reader, economics is a social science.

Welfare... nice concept, however, of difficult and complex implementation, because covers topics about justice, freedom, efficiency, equity, etc. that human being has been discussed since became aware of its existence. To try to explain myself I'll tell a personal anecdote that highlights the problem between justice and efficiency.

Some years ago a nice lady, whom use to help us with home tasks, told a remarkable story Months after the birth of her first child, she accidentally dropped him to the ground, she, fearing about her husband reaction didn't say nothing about the event and now the child has learning problems, with the second child everything was ok and now he's very normal. Because life is difficult she only can send to a private school to one, just one, of children. So, my dear reader, here's the question: Which child do you think the mother sent to the private school?... yes, the second one; because the lady is acted efficient but under some criteria, what she did may not be fair. Don't forget poor people tend to be very efficient, they know the value of one penny.

Studying human behavior then, is one of the central tasks of economists, because if we understand it (somehow) we can help improve their welfare. In the past it was attempted with mathematical models, especially topology (yes... can you imagine?), but now economists are knocking the doors of other equally tasty sciences, nice examples can be found in two excellent books: Economics and Psychology: A Promising New Cross -Disciplinary Field by Bruno Frey and Alois Stutzer and Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George Akerlof and Robert Shiller.

Understand reality (many statistics and models) is important, but also in important to wonder whether we are improving the quality of life of people. In this sense, a central task of economists is, perhaps, eliminate the "$" symbol and replace with one where social welfare is substantively.

I read what I wrote and I only see "blah, blah, blah..." so let me highlight one idea: economists know some things, making money is one of these... but maybe not the most important. If you can do that, please let me know.

Mauricio Medinaceli Monrroy

La Paz, July 26th, 2011

 

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