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What Is Our Children Learning? Part 2

(See Part 1 here).

Okay, we’ve made it through Mankiw’s Principle 1. Onward to:

Principle 2: The cost of something is what you give up to get it.

This sounds like plain common sense, but it’s actually not — Mankiw is talking about the economic idea of “opportunity costs,” which is a more exact way to think about costs. The point is that we shouldn’t analyze costs and benefits in isolation — we have to look at the costs and benefits of the alternatives as well. So, as Mankiw explains, including room and board in the cost of college can be misleading, because you have to eat and sleep either way.

Grade: B.

Nothing worldshaking, but it’s something the reader didn’t necessarily think as clearly about before.

Suggested replacement principle: None.

That was quick. Let’s try another:

Principle 3: Rational people think at the margin. Thinking at the margin means, for instance, taking into account how much of a thing you already have before you buy another. So you might decide that buying a family car is worth the cost if you already have one, but not if you already have three, even though the fourth is the same price as the first three were.

And here’s what Mankiw has to say about rationality:

Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.

That’s common sense, right? If your shoes have holes in them, you don’t buy an apple or a ranch, you buy new shoes.

But actually, we *do* buy things that have no rational connection to what we actually want. Think of how things are advertised to us. Yes, sometimes ads inform us that something exists, or that it’s cheaper in one store than in another. But often ads try to associate their products with an image that is designed to bypass our rational mind. And these ads work. So we go to McDonald’s at least in part because of the fun times they show in the commercials, even though we rationally know we’re only going to get “the drab reality of fried meat” (to quote my favorite line in Economix). Or we buy Mountain Dew for the image of thrills, and get no more thrills than we would have otherwise. Or we buy yogurt when we’re really looking for friends. This is not rational, and hundreds of billions of dollars of ad spending suggests that it’s not trivial either.

Even when we want something for rational reasons, there are many ways we don’t go about getting it in the most rational way (Daniel Kahneman’s Thinking Fast and Slow is a great source here). One big one I don’t think Kahneman mentions: We often think of our future selves in the same way we think of other people. So yeah, working out now will give me-in-the-future the big muscles that I want, but screw him. That ain’t rational, but it’s how we think.

Heck, have you ever done something stupid, knowing at the time it was stupid?  That ain’t rational either.

For that matter, assuming rationality ignores that rational thought takes energy. So we know that there’s no difference between $3.99 and $4.00 when we stop and think about it. But that missing penny still makes us more likely to buy, because who has the energy to stop and think about it every damn time? Instead we glance at the price, think “three dollars something,” and buy. Heck, it’s not even rational to spend time and effort thinking about it.

Economists are well aware that there’s a problem with always assuming that people are rational, and are exploring more ways where strict rationality doesn’t apply. Mankiw doesn’t even hint at that. So:

Grade:  C.

Suggested replacement principle: “It can be useful to assume that people are rational.” It’s not that assuming rationality is useless in all cases, it’s that Mankiw makes it sound like it’s how we should think about human behavior, and it just plain isn’t.

(As an aside, the contrast between economics and advertising is telling. Both disciplines deal with the same subject (how people make economic decisions), and in the 19th century both started from the prevailing idea that people were basically rational. So ads made rational appeals–product A is better or cheaper than product B. The ads often lied, but trying to mislead us with false information still assumes that we act rationally on that information.

But in the late 19th century, Freud showed some of the ways we’re not rational. And in the 20th century, led by Freud’s nephew Edward Bernays, advertisers learned to make image-based, emotional appeals to our irrational minds. Today, that’s what marketing is about — finding ways to make us love our iPhones rather than rationally compare them with Androids.

Meanwhile, economics went right on assuming people are rational.

The difference, I think, is that a new idea in economics is judged mostly on how elegantly it fits in with old ideas, which makes it pretty much impossible to move away from the old ideas (even as every other social science has managed it). By contrast, in advertising a campaign works — it motivates real people to make real economic decisions — or it doesn’t. And science, fundamentally, means checking your ideas against the real world, not against elegant intellectual structures people thought up centuries ago.

So advertising has changed, and economics hasn’t, because advertising is more scientific than economics.)

Anyway.

That’s all for today. Check in tomorrow for more.

 

On to the next post!

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