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"Genetic Basis To Fairness, Study Hints"
Source: The New York Times, September 18, 2003. In Chapter 4, we saw that a market economy relies upon the self-interested behavior of people trading goods and services in markets in order to determine what to produce, how to produce, and how to distribute these products. Adam Smith's invisible hand, which relies on price mechanisms and competition, keeps our greedy behavior in check. For example, business would like to charge exorbitant prices, but if competitors offer a product for cheaper, customers will search out the better bargain. Economic models focus on the selfish side of human behavior as the best way to bring about an efficient use of resources. What is efficient may not, however, seem "fair." We live in a mixed economy, not a purely market economy, because our society often balances concerns with economic efficiency with concerns about equity. This New York Times article, summarizing research in the science journal Nature, implies that this concern with fairness may be just as natural as acting on self-interest. The capuchin monkeys in this experiment evaluated trades according to an innate sense of fairness. Each made "inter-personal comparisons," meaning that she compared her gains to that of the other monkey. One monkey who received a cucumber refused to eat it because it was not as good as the grape received by her companion. According to the article, "protesting unfair treatment" may have a genetic basis common to all primates (including us)! The researchers conclude from this behavior that cooperation may be as important to the survival of a species as competition. Unless the distribution of the product is perceived as fair by all concerned, the social group may not prosper. The behavior of the monkeys may also help explain why the assumptions of consumer theory (Chapter 19) are hard to reconcile with our gut reactions to prices we think of as "too high." As your textbook explains at the end of the chapter, if you are really thirsty, you might pay a high price, perhaps $1.50, for a can of soda. In a free market economy, no one could force you to fork over the money. If you bought it, your behavior implies that it was worth the price to you at that moment. In the language of consumer theory, the marginal utility gained was at least the $1.50 you sacrificed to buy the soda. But, if the usual price for a soda was only $1.00 per can, you still might feel that the transaction was unfair, even though you made a decision to pay the higher price. In Chapter 15, you will learn about a school of economists called the economic behaviorists who are challenging the notion that humans are solely motivated by rational self-interest. How might our view of how economies work change if other psychological motivations were included in our theory? This is an important area of research for twenty-first century economists. Questions for Discussion:
"If Firmly Believed, The Theory That Self-Interest Is the Sole Motivator Appears to Be Self-Fulfilling"
Source: The New York Times, February 17, 2005. As you have been studying economics this semester, you have learned that economic models are based on assuming that self-interest is a primary motivation in economic behavior. According to the theory of the invisible hand (see Chapter 4), market mechanisms work to ensure an efficient allocation of resources. The "best" outcomes for society (if we accept efficiency and maximizing output as the best outcomes) will result from individuals acting rationally in competitive markets to pursue their own self-interest. In this article, economist Robert H. Frank argues that this is not always the case. Sometimes people hold other values besides self-interest and sometimes the rational, self-interested choice is not the most efficient. His anecdote about buying champagne in France is designed to illustrate his contention. The most efficient allocation of resources is to use the lower quality champagne in a mixed cocktail and save the good champagne for drinking plain. But, in this case, the lowest quality is not the cheapest. Frank, the American, acts rationally in purchasing the good champagne on sale. He purchases the champagne that yields the highest satisfaction (or marginal utility) compared with the price, just as predicted in Chapter 19. But the French wine merchant regards this decision as violating another important principle: aesthetics. By focusing on aesthetics as a principle of great importance in French culture, Frank is pointing out that our values are often influenced by our culture, education, and environment. This point is reinforced by his discussion of the behavior of economics majors. He cites studies that indicate studying economics—and learning about the beneficent outcomes of self-interested behavior—is correlated with less cooperative behavior. But were "selfishly" motivated students more likely to study economics anyway? Frank notes that the differences between economics students and those in other majors were greater when students had pursued their studies for a longer period of time. Does this mean that taking this class will make you a more selfish person? Hopefully not! It does mean that you should remember that principle of rational, self-interested behavior is a simplifying assumption used to predict likely economic outcomes. Real people are much more complicated and bring a variety of motivations and values to their economic interactions. Questions for Discussion
"In New Age Economics, It's More About the Experience Than Just About Owning Stuff"
Source: The New York Times, September 9, 2004. Consumption patterns have changed, as Americans consume more services (or "intangibles") than durable and nondurable goods. This trend was first identified in chapter 5 (see Figure 7 on page 107), but in Chapter 19 we learn a new economic concept that helps explain why it has occurred: diminishing marginal utility. While Chapter 19 emphasizes the diminishing marginal utility a consumer gets from one product such as a hamburger or a sweatshirt, "A New Trend in Spending" by economist Virginia Postrel focuses on broad categories of goods and services. She argues that Americans have so much "stuff" (goods) that they just don't get much satisfaction from more clothes, more electronics, more appliances, and more cars. So we have turned our attention to services, especially those services that offer novel experiences. Questions for Discussion
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