Answers from Jonathan on Economics Assumptions

1. Assumption: that people always choose to buy the cheapest product.

Wendy: In our marketing class we learned that price is only one aspect of the decision to buy something. Andy and I often choose to buy something that is not the cheapest product available for reasons such as where it is made or sold, or if our purchase helps someone we know to make a living. I think governments do this (choose to buy something more expensive for various reasons) as well as individuals.

Jonathan:This is an assumption for identical goods. A car sold by your best friend is not really the same as a car sold by the guy who murdered your mother. Altruism is something that people value. Unfortunately, governments often buy things from cronies (Haliburton) at the expense of taxpayers.



2. Assumption: that the ownership of stuff measures wealth or wellbeing.

Wendy:need I say more?

Jonathan: It doesn’t measure wellbeing and it only indicates relative wellbeing if people chose more wealth over less. We assume that people generally try to increase their wellbeing. There are also models of irrational people (think addicts), but that is more complicated and so most models just assume that each person knows what is in their best interest. Simplifying assumptions do not mean that we assume that people are rational. It is what people would do if they were rational. It is like models of physics that assume zero friction. Physicists know that there is friction, but models are simpler if we leave it out.



3. Assumption: that more consumerism is good or desireable.

Wendy: See #2

Jonathan: If people desire it and there are no externalities, then it is.



4. Assumption: that the rise of Global Production is good (same question as above, probably).

Wendy: See #2,3

Jonathan: Another kind of externality is a coordination problem like a prisoner’s dilemma situation where everyone is competing for status. If everyone would be better off with less production, but everyone just wants to get more than their neighbor, then everyone could be made worse off. I could draw it out for you sometime.



5. Assumption: that consumer goods (manufacturing) are equal or better in value to survival goods (food, water, fuel).

Wendy: This is not true in the case of any kind of upset or conflict. Trade can be cut off in a single day and then those countries that are dependant on export crops or manufacturing and importing food or fuel are suddenly vulnerable to starvation. This seems to happen often in the world.

Jonathan: It is a bit out of fashion these days, but this is captured by the concept of the diminishing marginal utility of wealth. I don’t think it happens often that disrupted trade causes starvation. War causes starvation whether people try to produce food self-sufficiently or not because it cuts production. A country that is always cut off from trade is much more likely to suffer from starvation because there will be problems every time there is normal fluctuation in the weather. Kenya is trying to set up a grain commodities market to prevent starvation due to fluctuations in local production.



6. Assumption: that if the amount of win outnumbers the amount of loss, the change is acceptable.

Jonathan: Unfortunately, some economists do sometimes subscribe to this theory! It is called the Bergson-Samuelson social welfare function.
A few of the rich could be winning in such large amounts that it seems to balance what could be a widespread loss amoung many people who started out with very little to begin with.

7. Assumption: that the situation in #6 will not be the probable cause of conflict or war in the world, or increase racism or class hatred.

Jonathan: No. However, sometimes this potential problem is ignored partly because it is harder to measure. Conflict is a well-understood problem from inequality and there are many others.



8. Assumption: that environmental concerns will eventually work themselves out by those wanting to make a profit off them.

Wendy: Is this an assumption of economics? If so, I don't see how any profit-based company would ever invest in something like the storage of Nuclear waste or other long-term environmental damage control, because the pay-back is not going to happen in our lifetime.

Jonathan: No. Externalities are perfectly-well understood by all economists. It is non-economist libertarians who tend to caricature us as being free-market fundamentalists. About 3/4 of economists vote Democratic however.



9. Assumption: that the best quality goods are always created through competition.

Wendy: Just look around a Wallmart, or any kind of new housing development. Good quality just doesn't win the battle.

Jonathan: No. Competition tends to promote cost reduction. Walmart and fancy department stores are arguably competing equally. They specialize in different niches though. In reality there is no perfect competition and there is no way to really objectively quantify the amount of actual competition in a market. Even a duopoly may face severe competition. Quality may even be increased through granting a monopoly. That is what the patent system is supposed to do.