I’ve been looking through Paul Krugman’s textbook Macroeconomics (Krugman and Wells, 4th edition, 2015) and came on Principle #2 – “The opportunity cost of an item—what you must give up in order to get it—is its true cost….The concept of opportunity cost is crucial to understanding individual choice because, in the end, all costs are opportunity costs. That’s because every choice you make means forgoing some other alternative.”
In this standard economics model, a central feature of capitalism gets swept under the rug or simply not mentioned, external costs. Many of the total costs of capitalist products are hidden from the pricing system, yet we all live with the consequences of the fact that capitalist markets require producers to socialize (externalize) as many costs as possible. Much of the history of the capitalist era is a struggle over who pays for these external costs. The capitalists wanted to continue to have someone else pay. Others began to push back.
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I ran across this somewhat longish article at NakedCapitalism.com. Even if you are not a 6th grader you will find this interesting. In part, Andrew Dittmer, who in fact has taught 6th graders, our author, points out that modern economics is based on certain assumptions that render much of the application of advanced mathematics in economics false, misleading, yet amazingly resistant to criticism by non-economists exactly because of the use of obscurantist fog of mathematics.
One of these assumptions is that players in a market have “perfect information” – this is summed up in action by Wikipedia as “Perfect information would practically mean that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events) , and therefore always make the best decision regarding purchases.” There has been plenty of criticism of this concept even by economists, yet this concept is still embedded. Another assumption is that people will be rational and strive to achieve well-being. Again borrowing from Wikipedia, “well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost. Note that this kind of “rationality” does not say that the individual’s actual goals are “rational” in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost.”
Dittmer devotes most of his attention to Samuelson’s assumption “ergodicity”. As near as I can make it out this asserts that no matter what happens in the world, everything will reach a point at which things stop changing. This is the equilibrium point. Kind of amazing. I will let you delve into Dittmer’s discussion. He is aiming at 6th graders so I only had to read through his article three times to get the gist. Maybe you will be quicker about it. Just keep in mind that these underlying assumptions are contributing to our current malaise. They have become the armamentarium of Wall St. and government bureaucrats.
Economics Debunked: Chapter Two for Sixth Graders