Indispensable Economics Introduction to economics II

Sep 19, 2011

In our last article, we covered the fact that people make choices based on their values. The values are subjective to them. We stressed that this is not a denial of objective values, but it is a recognition that one must accept something as his own before he chooses it. Even green vegetables fall into this category.  They are good for you, and you need their nutrients, but how many kids, turn their nose up at them? In fact, even some adults reject them despite the fact that they know that they are part of a healthful diet. So, the truth is that people make choices based on what is in their heart, and it is not the job of the economist qua economist to comment on that.

Next, we have to realize that people’s values are ordinal not cardinal. This means that they are not able to be ranked as 1, 2, 3, etc., but at 1st, 2nd, 3rd, and so forth, that this ranking changes over time, either long or short.  Just before lunch, you may be hungry, and therefore, eating is ranked high in your value list.  After lunch, eating has fallen to the bottom of the list, but will rise in rank as the day goes on.  There are long and short term values.  One might say that the most important thing I want to do in my life is to become a lawyer, but right now I have a paper due tomorrow and I have to get it done. Both of these values are ranked first, but in different time schemes. There are related in that the immediate problem, doing the paper, is a means to accomplish the long term value.

When people act they not only act for an end, but they always act to improve their condition. rom shifting you position in a chair so that you will feel more comfortable, to changing jobs because you see more room for advancement, no one acts if there is not chance for betterment.  Acting, however, is based on the idea that the act is likely to improve one’s condition, so that a person must see an end and means to accomplish that end.  If you are in prison and you would like to escape to regain your freedom, but the prison is so well sealed that you cannot figure out a way out, you will not try to escape. Not to see any way to improve your lot in life, whether this perception is accurate or not, leads to despair. Persons who have a victim personality think that the whole world is against them and so they do not see any connection between their actions and their betterment.  The result is that they stop trying. Those people who live in poverty stricken countries, where there has been no economic improvement for a long time, despair of ever bettering their future.  But these cases are usually caused by either dictatorship, where the ruler drains any wealth from his people, or by constant civil war.  Political stability is necessary for economic improvement, because no one will try to fulfill their goals in the midst of serious uncertainty or danger.

What we usually call cost is called “opportunity cost” by economists. The cost of something is not the price one paid for it; it is the loss of the next best alternative, now made impossible by the choice of the first option.  Years ago there was an ad on television of a guy drinking something, perhaps a soda.  After finishing the drink, he his himself on the forehead and said: “I could have had a V-8,” referring to vegetable juice.  Since he bought and drank the soda, he cannot have the V-8, and the way the ad was set up, the opportunity cost of not having the vegetable juice was higher than the benefit of having the soda. 

Notice that the idea of money was not brought up so far.  Since economics is a science of human action, it is necessary to see the patterns of human action, prior to introducing money into the situation.  This leads us to consider things that go into benefit. True, money or income might be the motivation for someone to do something, but part of considering the cost of the action might be what are called “psychic benefits.”  Blessed Mother Theresa, knowing that she was pleasing God by showing his love to the least in his kingdom, did not make money taking care of the poorest of the poor, but received a psychic benefit greater than the very high cost to her in doing what she did.  She started by herself, in the very poorest part of Calcutta, living with the squalor in which these unfortunates lived, taking care of those who were dying, smelled badly, had diseases, could not feed themselves, were incontinent, and in the midst of all this she was persecuted by Hindu authorities and citizens who accused her of not allowing these people to find their Karma. 

This example aside, we are not disembodied souls, and the provisions for the body and those of the family are a necessary part of life. In addition, there is nothing in our faith that prohibits us from having labor saving devices, nor conveniences, such as air conditioners, which no one I knew had when I was a kid, or cars and such.  (We are not all capable of becoming Mother Theresa.)  The moral problem with this is not in the things themselves, being inanimate, but in the heart of the person.  As Blessed Pope John Paul II said, the problem is in a person’s defining himself by “having” not “being.”

Having said this, it is now time to go on to more of what makes a free market work; our next installment.