ECONOMY Chap 2 : How economists learned to stop worrying and love mathematics

Introduction :

KOOPMANS : theory of humans behavior => how they make choice (need knowledge of the motifs and habits of consummers and of the profit)

Marginalists and Walras

Marginalist : ë hu research of pleasure + avoid pain

Walras

Woeld separate in 2 side + 2 type of fact

FACT :

NAturelle et inévitables/ fatames

Actions et volonté des hommes

Sciences

objet : fait naturel

Science pure et morale : objet = effet de la volonté humaine

Political ecomics as to be a science who study natural facts => biologique (action of produce and buy natural aspect (research of pleasure)

Political eco is a science and need to follow scientific methods

Idea of rationality + strategic behavior => people choose what is the best for them

Standards rationality and strategic interraction

An inquiry into the nature and causes of the wealth of nations

Soc is build around ind driven by their own interest

Good for the soc if everyone follow this rule

Marginalist idea :

Ind has an utility (seek for pleasure and try to avoid pain)

Pleasure : comsuption of differents goods and services

Ind have a taste(preference) and make choice about their consumption according to this preference

Ind experiences decreasing marginal pleasure from consuming additional units of goods

But contrainte of this seek of pleasure =>

Consumersis is contraint by it budgey

Worker maximises his wages under the constraint of the quatity of labour provided

Entreprenue maximes hsi profit under the contraint of cost

Cette recherhce en bénéfice des entrepreneurs et bénéfce des acheteurs se fait par l'équilibre des marchés

Equilibre quand : maximum satisfaction is reached for thr maximun quantity of buyers and sellets

An equilibrium is what is best for soc ( no rationing / no unsold goods)

La société dans son ensemble est un ensemble d'équilibres sur des marchés individuels équilibre

How can ind understand / anticipate what are other ind choice, desire, behavior ?

New theories during Cold War : John NASH

In order to determine their best behaviour, ind take into account other ind best behaviour

Ind anticipate the outcomes of the interactions with other ind

Rationality : doing the best choice for you and be aware of what other people will do to achieve their purpose

New branch in economy : Rational behaviour as strategic interaction

Nash / Allais/ Von Neumann

The Cowles Commission / The RAND corporation / The Office of Naval Research

based on mathematic

Human interaction is a game => basic blocks

Best response : strategiiie that is optimal for one player given the strategy actually played by other palyers or the belief of this players about other players's strategy choice

Equilibrium : a configuration where each player's strategy is his best response to the strategies of all other players

Players has no gain when deviating from given other players bes response

The prisoners dilemma"

2 crimianl interrogatd for a crime

2 possible action

Confess and have less prission

Deny

image

Pricing decisions

2 firm competiting in the same market

2 possibity

Superprofit with high taxes

Small profit with low prices

0 profit : when prices are highest than the competition

image

The mutual assured destruction

MAD

GF

Dvpt of thechnoand knowledge who will make sure that US/ URSS can defend from each other

In order toa void strike each side need :

Build an equivalent nuclear capacity

Build a second strike capabilities

Build capabilities to detect a fisrt strike

Can we put all human behaviour into rational strategic behaviour in mathematical form ?

Yes economics as an imperialism science Gary Backer

EX

Love and marriage can be explain by eco

Eco aspect of marriage

W + tâches ménagère répartion => aspect économqieu

Political implications

Bring back ack to liberalisme => neoliberalisme

When people do what is good for them => best for society =>

Need 0 intervention of gov

Milton and Rose Friedman => Free to choose

Yes economics as an imperialism science Gary Backer

utilisation par certains économistes d'outils et méthodes de la science économique pour analyser des objets traditionnellement analysés par d'autres sciences sociales

EX

Love and marriage can be explain by eco

Eco aspect of marriage

W + tâches ménagère répartion => aspect économqieu

relion

Conso de relion joue un rôle avec dieu => bonne conduite sinon enfer

Conso de biens relifgieux

Political implications

Bring back ack to liberalisme => neoliberalisme

When people do what is good for them => best for society =>

Need 0 intervention of gov

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Instrumentalism

Every time authority make bad choice with éco => crise = gov are responsable of depression

Inspiration for Regan and Tatcher

Wealthy people know what is best for them and what is best for soc by investing and create employement => 0 need intervention of gov

Critique : Hyposthèses irréalistes sur le comportement humain

Foi, love, political schoice => complex decisions

People have moral principles and ethics (they can endure pain for "what is right"

People can miscalculate thing

They bet on an uncertain futur (Keynes)

People have feelings, experience, emotions, passion => empèche leur jugement

People don't always do what is best for them

Positive Vs normative science

Positive

Description of what thing are

Objective V

Normative

What is desirable

What thing should be

Based on positive economics

Language scientic => use to designate a systematic and organized methods of reasoning

Substantive hypotheses => designed to abstract essential features from complex reality

Théeories : have a different assumption that are not exact from the descriptive representations of reality

Behavioural economics

Amos TVERSKY / Daniel KAHNEMAN => 80's new type of dialogue

Rethinking rationality

Description of human behavior is strategic / rational but exist biaises

Revelant when facing risky decisions and social interraction

Revelant expicialleil when we take risk and we deal with people

Biaises

Framing effect (effet de cadrage) : quand les gens sont confronté à al possibilité de perdre => prennent beaucoup moins de risque que l'inverse (exemble on dit qu'on va sauver 200 personnes ou que 400 vont mourrir)

Time inconsistency : les gens font des gens incohérent quznd le temps passe

Prospect theory : people attach to much importance to small numbers (look at probability and chance => people are optomosoc "what if" ... Ex : Loto

Heurisitc : people tend to simplify complex problems : bring to some kind of simplification to make the best choice

Confirmation bias : people tend to overlook/dismiss revelant information

Idea of strategic people is wrong

people who do what is good for them eand for soc

But people 0 able to do what is good for them

Policy implications : Libertarian paternalism and nudging

Richard THALER and Cass SUNSTEIN

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relion

Conso de relion joue un rôle avec dieu => bonne conduite sinon enfer

Conso de biens relifgieux