Peter Dorman - Microeconomics

The Evergreen State College, Olympia, WA, USA

Economists are certainly interested in the strategies people employ in order to make money, but the purpose of economics is not to help anyone do this more successfully. The vantage point of economics is not any particular individual and their material goals, but rather society as a whole. Economics is about what is beneficial for society in general. Whats good for any particular individual is not necessarily good for all of us as a group, and economics takes this distinction very seriously. Often economists are interested in interfering with the money-making plans of particular individuals or businesses in order to safeguard the interests of society.

A good example of this is the study of monopolya situation in which a single business controls all or most of a market. Monopoly can be very lucrative: get rid of your competitors and you can make higher profits. Economists are interested in the ways businesses exploit the power of monopoly, whether they raise prices and restrict options for consumers, or whether they engage in pre-emptive innovation and even price-cutting in order to discourage future competition. In this sense, they do study the money-making process. But the goal is not to make monopolists rich, since that can easily happen at the expense of society. Instead, the purpose of economic analysis is to anticipate how monopolists will use their power, what effect this will have on the rest of society, and therefore whether action should be taken to restrict this power or limit how it can be used. In their studies of these questions, economists should be guided by the desire to promote the well-being of all members of society and not just those who hold a monopolistic advantage.

To be honest, there is a germ of truth here: economists, as a group, are far more supportive of free markets than just about anyone else. They tend to be more pro-business, regarding profits as largely justified and beneficial. They are more likely than other academic specialists to question the desirability of regulations that limit the freedom of businesses to make money as they see fit. This hostility toward government often translates into a belief that supply and demand should govern economic outcomes, or that these forces are so powerful that it is not a good idea to stand in their way.

Most people, for instance, think its a good idea for the government to set a minimum wage, a bottom limit to the amount employers must pay their workers for an hours work. They think minimum wages contribute to fairness and reduce poverty. (People disagree on what this minimum should be of course, but not as often on the need for some minimum.) A high percentageperhaps as many as halfof economists, however, think there should be no such regulation of wages. In their view, if a worker is willing to work for a very low wage and an employer is willing to pay it, it would be unwise to interfere. The forces of supply (workers) and demand (employers) for labor should determine wage rates, and nothing else.

Nevertheless, it is much too sweeping to claim that economics is ever and always wedded to free markets. In situation after situation, economists are quite willing to support government or other forms of intervention in order to protect the interests of society from the actions of individuals in the marketplace. They do this because they believe that markets often fail ; in fact, much of economic theory consists of a careful analysis of the causes and consequences of this failure. Economists are more likely to support the ideal of a free market, but they are perfectly willing to withdraw this support when markets misfire. We will see many examples of this over the course of this text.

This is a case of language playing tricks on us. The common meaning of economizing is to make do with less; its a term were all familiar with. It is natural, then, to think that this has something to do with economics as well. There is just enough truth to the idea to make it really insidious; economists, after all, look for ways to cut unnecessary costs. But, as we will see, costs alone have no meaning in economicsthey matter only in the context of the benefits they make possible. No pain, no gain is as relevant to economics as it is to anything else: sometimes costs must be increased in order to take advantage of an opportunity. This is true for a business considering an investment possibility, or a student borrowing money to finance an education, or a country improving its infrastructure to stimulate new increases in productivity. Sometimes economizing is highly uneconomical.

There is another aspect to this myth that deserves mention. It is normal for businesses and individuals to look for ways to cut their costs by shifting them to others. Not every tax is paid or workplace injury reported; sometimes natural resources that belong to the entire society, such as clean air and clean water, are used without any compensation. When this happens, some peoples costs go down, but not necessarily the full cost to society. Since the perspective of economics is that of society as a whole, cost-shifting is not cost reduction at all. In other words, individual economizing may not be the same as social economizing, quite apart from the problem that benefits need to be considered as well as costs.